FINANCIAL STATEMENT
ANALYSIS
FALL 2025
PROFESSOR CHRISTINE CUNY
SUPPLEMENT:
FINANCIAL STATEMENT DETAIL
GETTING TO
KNOW
FINANCIAL
STATEMENTS
• TARGET FISCAL 2024 ANNUAL REPORT
• META FISCAL 2024 ANNUAL REPORT
ANNUAL REPORT
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 February 1, 2025
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 Number 1-6049
TARGET CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota
(State or other jurisdiction of incorporation or organization)
1000 Nicollet Mall, Minneapolis, Minnesota
(Address of principal executive offices)
41-0215170
(I.R.S. Employer Identification No.)
55403
(Zip Code)
Registrant’s telephone number, including area code: (612) 304-6073
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.0833 per share
TGT
New York Stock Exchange
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 Act. Yes o 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 every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and
"emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included
in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant as of August 2, 2024, was $64,152,450,257 based on the
closing price of $139.17 per share of common stock as reported on the New York Stock Exchange.
Total shares of common stock, par value $0.0833, outstanding as of March 5, 2025, were 455,576,464.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Target's Proxy Statement for the Annual Meeting of Shareholders to be held on June 11, 2025, are incorporated into Part III.
Table of Contents
Index to Financial Statements
TABLE OF CONTENTS
PART I
Item 1
Item 1A
Item 1B
Item 1C
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 9C
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Item 16
SIGNATURES
1
Business
Risk Factors
Unresolved Staff Comments
Cybersecurity
Properties
Legal Proceedings
Mine Safety Disclosures
2
9
18
19
21
22
22
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Reserved
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
23
24
25
37
38
68
68
69
69
Directors, Executive Officers and Corporate Governance
Executive Compensation
70
70
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
70
70
70
Exhibits, Financial Statement Schedules
Form 10-K Summary
TARGET CORPORATION
2024 Form 10-K
71
74
75
BUSINESS
Table of Contents
Index to Financial Statements
PART I
Item 1.
Business
General
Target Corporation was incorporated in Minnesota in 1902. Our corporate purpose is to help all families discover the
joy of everyday life. We offer our customers, referred to as "guests," fashionable, differentiated merchandise and
everyday essentials at discounted prices. We operate as a single segment designed to enable guests to purchase
products seamlessly in stores or through our digital channels. Since 1946, we have given 5 percent of our profit to
communities.
When used in this report, the terms "we," "our," "us," "Target," and the "Corporation" mean Target Corporation and
its subsidiaries, collectively, unless the context otherwise requires or indicates.
Strategy
Target delivers on our purpose of helping all families discover the joy of everyday life through our curated, multicategory assortment, outstanding value, and a team that’s centered on care for each other, our guests, and
communities. Our stores, digital experience, fulfillment services, and loyalty ecosystem also play a critical role in
differentiating Target and bringing our purpose to life.
Our strategy aims to expand Target’s relevancy in consumers’ lives and drive traffic, sales, and market share
growth. Core elements include:
• Delighting with newness, style, and value by strengthening our owned brands portfolio, curating leading
national brands, and expanding the breadth and depth of signature partnerships.
• Delivering value by providing everyday low pricing and leveraging promotions and our loyalty ecosystem,
Target Circle.
• Opening new stores, updating existing stores, and enhancing our digital experience to reach more
consumers and provide a reliably convenient, easy, and inspiring shopping experience.
• Transforming our supply chain for increased efficiency, speed, capacity, and reliability across our network.
• Being a favorite discovery destination by making it easy for consumers to discover Target’s products and
experiences across different channels and touchpoints, including our stores, our mobile app and website,
and social platforms.
• Expanding our capabilities, such as our Roundel advertising and Target Plus third-party digital marketplace
businesses, to leverage our assets and enhance the guest experience.
Our strategy defines how we’ll continue to differentiate Target, and we’ll seek to enable growth through:
• Our Team – A highly engaged and purpose-driven team.
• Consumer-Centricity – A deep understanding of consumers.
• Technology – A connected ecosystem of data, insights, and technology, including artificial intelligence.
• Efficiency – Simplifying work for our teams to make it easier to deliver a great guest experience.
• Sustainability – Resiliency in our business model.
TARGET CORPORATION
2024 Form 10-K
2
BUSINESS
Table of Contents
Index to Financial Statements
The vast majority of our Net Sales are generated by the sale of merchandise to customers. Our strategy continues
to leverage stores as fulfillment hubs, with stores fulfilling more than 96 percent of total Merchandise Sales in each
of the last three years, which provides convenience for our guests at a reduced fulfillment cost. In addition to
Merchandise Sales, we generate revenue from other sources, most notably advertising revenue and credit card
profit-sharing income. Note 2 to the Financial Statements provides more information.
Net Sales
(in billions)
2022
(52 weeks)
2023
(53 weeks)
2024
(52 weeks)
$109.1
$107.4
$106.6
$107.6
$105.8
$104.8
$1.8
$1.6
$1.5
Merchandise Sales
(in billions)
$107.6
$105.8
$104.8
$20.0
$19.4
$20.5
$87.6
$86.4
$84.3
2022
2023 (a)
2024
Stores Originated
(a)
3
Digitally Originated
2023 consisted of 53 weeks. The extra week in 2023 contributed $1.7 billion of Net Sales.
TARGET CORPORATION
2024 Form 10-K
BUSINESS
Table of Contents
Index to Financial Statements
Merchandise Sales by Fulfillment Channel
2022
2023
2024
97.6%
97.4%
96.7%
3.3%
2.6%
2.4%
Financial Highlights
For information on key financial highlights, see Part II, Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A).
Seasonality
A larger share of annual revenues traditionally occurs in the fourth quarter because it includes the November and
December holiday sales period.
Merchandise
The majority of our stores offer a wide assortment of general merchandise and food. Most of our stores larger than
170,000 square feet offer a variety of general merchandise and a full line of food items comparable to traditional
supermarkets. Our digital channels include a wide merchandise and food assortment, including many items found in
our stores, along with a complementary assortment sold by Target and third parties. We manage our business
across the six core merchandise categories shown below. Within categories, gross margins vary depending on the
type of merchandise.
Merchandise Sales by Category
2022
18%
2023
16%
18%
10%
2024
15%
18%
12%
17%
21%
12%
16%
17%
18%
16%
15%
TARGET CORPORATION
15%
23%
2024 Form 10-K
23%
4
BUSINESS
Table of Contents
Index to Financial Statements
Workplace Health and Safety
We strive to maintain a safe and secure work environment and have specific safety programs. This includes
administering a comprehensive occupational injury- and illness-prevention program and training for team members.
Working Capital
Effective inventory management is key to our ongoing success, and we use various techniques including demand
forecasting and planning and various forms of replenishment management. We achieve effective inventory
management by staying in-stock in core product offerings, maintaining positive vendor relationships, and carefully
planning inventory levels for seasonal and apparel items to minimize markdowns.
The Liquidity and Capital Resources section in MD&A provides additional details.
Competition
We compete with traditional and internet retailers, including department stores, off-price general merchandise
retailers, wholesale clubs, category-specific retailers, drug stores, supermarkets, direct-to-consumer brands, and
other forms of retail commerce. Our ability to positively differentiate ourselves from other retailers and provide
compelling value to our guests largely determines our competitive position within the retail industry.
Intellectual Property
Our brand image is a critical element of our business strategy. Our principal trademarks, including Target, our
"Expect More. Pay Less." brand promise, and our "Bullseye Design," have been registered with the U.S. Patent and
Trademark Office. We also seek to obtain and preserve intellectual property protection for our brands.
Geographic Information
Nearly all of our sales are generated within the U.S. The vast majority of our property and equipment is located
within the U.S. In addition to our administrative operations headquartered in the U.S., we perform additional
administrative functions in Bangalore, India, and perform global sourcing operations from offices in 12 countries,
predominantly in Asia and Central America.
Available Information
Our internet website is corporate.target.com. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, proxy statements, and amendments to those documents filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), are available free of
charge on the Investors section of our website (corporate.target.com/investors) as soon as reasonably practicable
after we file such material with, or furnish it to, the U.S. Securities and Exchange Commission (SEC). In addition,
the SEC maintains a website (sec.gov) that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. Investors should note that we currently announce
material information to our investors and others using filings with the SEC, press releases, public conference calls,
webcasts, or our corporate website (corporate.target.com). Information that we post on our corporate website could
be deemed material to investors. We encourage investors, the media, and others interested in us to review the
information we post on these channels. The information on our website is not, and shall not be deemed to be, a part
hereof or incorporated into this or any of our other filings with the SEC.
7
TARGET CORPORATION
2024 Form 10-K
BUSINESS
Table of Contents
Index to Financial Statements
Information About Our Executive Officers
Executive officers are elected by, and serve at the pleasure of, the Board of Directors. There are no family
relationships between any of the officers named and any other executive officer or member of the Board of
Directors, or any arrangement or understanding pursuant to which any person was selected as an officer.
Name
Title and Recent Business Experience
Age
Brian C. Cornell
Michael J. Fiddelke
Chair of the Board and Chief Executive Officer since August 2014.
Executive Vice President and Chief Operating Officer since February 2024. Executive
Vice President and Chief Financial Officer from November 2019 to October 2024.
Executive Vice President and Chief Commercial Officer since July 2024. Executive
Vice President and Chief Food, Essentials and Beauty Officer from January 2024 to
July 2024, Executive Vice President and Chief Food and Beverage Officer from
February 2021 to January 2024. Executive Vice President and Chief Marketing, Digital
& Strategy Officer from December 2019 to February 2021.
Executive Vice President and Chief Strategy and Growth Officer since July 2024.
Executive Vice President and Chief Growth Officer from February 2021 to July 2024.
Executive Vice President and Chief Merchandising Officer, Hardlines, Essentials and
Capabilities from January 2020 to February 2021.
66
48
Melissa K. Kremer
Jim Lee
Executive Vice President and Chief Human Resources Officer since January 2019.
Executive Vice President and Chief Financial Officer since September 2024. Prior to
joining Target, Mr. Lee held various leadership positions with PepsiCo, Inc., including
as Deputy Chief Financial Officer from November 2023 to September 2024, Senior
Vice President, Corporate Finance from October 2022 to November 2023, and Chief
Strategy and Transformation Officer and Senior Vice President, PepsiCo Beverages
North America, from February 2019 to October 2022.
47
50
Cara A. Sylvester
Executive Vice President and Chief Guest Experience Officer since May 2022.
Executive Vice President and Chief Marketing & Digital Officer from February 2021 to
May 2022. Senior Vice President, Home from March 2019 to February 2021.
47
Amy Tu
Executive Vice President, Chief Legal & Compliance Officer and Corporate Secretary
since August 2024. Prior to joining Target, Ms. Tu held various leadership positions
with Tyson Foods, Inc., including as President, International from October 2022 to
August 2024, Chief Administrative Officer from October 2022 to August 2023,
Executive Vice President and Chief Legal Officer and Secretary from October 2021 to
January 2023, Executive Vice President, General Counsel and Secretary from
November 2020 to October 2021, and Executive Vice President and General Counsel
from December 2017 to November 2020.
Executive Vice President and Chief Corporate Affairs Officer since October 2023.
Executive Vice President and General Counsel from May 2022 to October 2023.
Senior Vice President, Risk and Employee & Labor Relations from August 2020 to
May 2022. Senior Vice President, Enterprise Risk from September 2017 to August
2020.
57
Rick H. Gomez
A. Christina
Hennington
Matthew L. Zabel
TARGET CORPORATION
2024 Form 10-K
55
50
56
8
PROPERTIES
Table of Contents
Index to Financial Statements
Item 2.
Properties
Stores as of
February 1, 2025
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Stores
23
3
46
9
318
45
22
5
5
132
51
10
7
102
32
22
17
14
16
6
40
50
54
72
6
36
Retail Square
Feet
(in thousands)
3,153
504
6,080
1,165
37,707
6,361
2,872
699
342
17,694
6,827
1,446
725
12,328
4,186
3,008
2,385
1,575
2,195
741
5,055
5,559
6,300
10,310
743
4,690
Stores as of
February 1, 2025
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Total
Stores and Supply Chain Facilities as of February 1, 2025
Owned
Leased
Owned buildings on leased land
Total
(a)
7
14
18
10
52
10
107
54
4
65
15
19
78
4
21
5
31
157
17
1
60
38
7
38
3
Retail Square
Feet
(in thousands)
777
2,015
2,262
1,236
6,467
1,185
11,244
6,945
594
7,865
2,167
2,240
9,317
517
2,537
580
3,963
21,580
2,216
60
7,763
4,376
851
4,614
257
1,978
248,278
Stores
1,538
280
160
1,978
Supply Chain
Facilities (a)
39
25
2
66
Stores
Supply Chain Facilities includes distribution centers, sortation centers, and other facilities with a total of
68.5 million square feet.
We own and lease our corporate headquarters buildings and other office spaces in the Minneapolis, Minnesota,
area and elsewhere in the U.S. We also lease office space in other countries. Our properties are in good condition,
well maintained, and suitable to carry on our business.
For additional information on our properties, see the Capital Expenditures section in MD&A and Notes 10 and 17 to
the Consolidated Financial Statements.
21
TARGET CORPORATION
2024 Form 10-K
OTHER INFORMATION
Table of Contents
Index to Financial Statements
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is listed on the New York Stock Exchange under the symbol "TGT." We are authorized to issue
up to 6,000,000,000 shares of common stock, par value $0.0833, and up to 5,000,000 shares of preferred stock,
par value $0.01. As of March 5, 2025, there were 12,240 shareholders of record. Dividends declared per share for
2024, 2023, and 2022, are disclosed in our Consolidated Statements of Shareholders' Investment.
On August 11, 2021, our Board of Directors authorized a $15 billion share repurchase program with no stated
expiration. Under the program, we have repurchased 31.0 million shares of common stock for a total investment of
$6.3 billion. The table below presents information with respect to Target common stock purchases made during the
three months ended February 1, 2025 by Target or any "affiliated purchaser" of Target, as defined in Rule
10b-18(a)(3) under the Exchange Act.
Share Repurchase Activity
Total Number of
Shares Purchased
as Part of Publicly
Announced Programs
138.79
2,080,275
1,617,209
134.24
1,617,209
8,665,663,899
—
—
—
8,665,663,899
136.80
3,697,484
Total Number
of Shares
Purchased
Period
Dollar Value of
Shares that May
Yet Be Purchased
Under Publicly
Announced Programs
Average
Price
Paid per
Share
November 3, 2024 through November 30, 2024
Open market and privately negotiated purchases
2,080,275
$
$
8,882,754,044
December 1, 2024 through January 4, 2025
Open market and privately negotiated purchases
January 5, 2025 through February 1, 2025
Open market and privately negotiated purchases
Total
23
3,697,484
TARGET CORPORATION
$
2024 Form 10-K
$
8,665,663,899
OTHER INFORMATION
Table of Contents
Index to Financial Statements
Comparison of Cumulative Five Year Total Return
Target
S&P 500 Index
Current Peer Group
Previous Peer Group
350
300
Dollars
250
200
150
100
50
0
2/1/20
Target
S&P 500 Index
Current Peer Group
Previous Peer Group
1/30/21
1/29/22
1/28/23
2/3/24
2/1/25
Fiscal Years Ended
February 1, January 30, January 29, January 28, February 3, February 1,
2020
2021
2022
2023
2024
2025
$
100.00 $
166.91 $
203.29 $
160.71 $
143.24 $
139.81
100.00
117.25
141.87
132.47
164.06
202.59
100.00
138.80
145.52
123.79
168.93
229.60
100.00
138.82
145.50
123.76
168.88
229.53
The graph above compares the cumulative total shareholder return on our common stock for the last five fiscal
years with (i) the cumulative total return on the S&P 500 Index and (ii) the peer group consisting of 20 online,
general merchandise, department stores, food, and specialty retailers (Albertsons Companies, Inc., Amazon.com,
Inc., Best Buy Co., Inc., BJ's Wholesale Club Holdings, Inc., Costco Wholesale Corporation, CVS Health
Corporation, Dollar General Corporation, Dollar Tree, Inc., The Gap, Inc., The Home Depot, Inc., Kohl's Corporation,
The Kroger Co., Lowe's Companies, Inc., Macy's, Inc., Nordstrom, Inc., Rite Aid Corporation, Ross Stores, Inc., The
TJX Companies, Inc., Walgreens Boots Alliance, Inc., and Walmart Inc.) (Previous Peer Group), and (iii) a new peer
group consisting of the companies in the Previous Peer Group, but excluding Rite Aid Corporation, which filed for
bankruptcy protection and is no longer publicly traded (Current Peer Group). The Current Peer Group is consistent
with the retail peer group described in our definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on June 11, 2025, excluding Publix Super Markets, Inc., which is not quoted on a public stock exchange.
The peer group is weighted by the market capitalization of each component company. The graph assumes the
investment of $100 in Target common stock, the S&P 500 Index, and each Peer Group on February 1, 2020, and
reinvestment of all dividends.
Item 6.
[Reserved]
TARGET CORPORATION
2024 Form 10-K
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
Table of Contents
EXECUTIVE OVERVIEW & FINANCIAL SUMMARY
Index to Financial Statements
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
In 2024, we drove our strategy (as described on page 2) by investing in core strengths that deepened connection
with existing guests, while introducing innovations that further differentiated Target, unlocked new channels of
growth, and gave consumers more reasons to become loyal Target guests. During 2024, we
•
Continued to emphasize newness and differentiation across our assortment, including a steady flow of exclusive
products and designer collaborations, such as:
◦ 2,000 new wellness products introduced in January of 2025—600 of which were exclusive to Target;
◦ our exclusive official "Taylor Swift | The Eras Tour Book";
◦ our large assortment of exclusive Wicked products including Wicked Quenchers from Stanley;
◦ partnerships with celebrities such as Dwayne “The Rock” Johnson, Tom Holland, Jennifer Aniston,
Ashley Tisdale and more;
◦ the Diane von Furstenberg for Target collection;
◦ The Cuddle Collab limited-edition collection for pets and pet lovers; and
◦ a limited-time pickleball collection with tennis and lifestyle brand Prince;
Launched or expanded several owned brands, including dealworthyTM — our new low-price line of essentials —
and AudenTM, Cat & JackTM, GigglescapeTM, and up&upTM, with 11 of our owned brands exceeding $1 billion in
annual sales;
Expanded the selection of products available on our Target Plus digital marketplace;
Launched our reimagined Target Circle loyalty program to deliver an easier and more personalized shopping
and saving experience, including a free-to-join option and a paid membership for same-day delivery, as well as
the integration of Target Circle Card (formerly RedCard);
Continued to enhance our Roundel digital media products and services, including through a new self-service
buying tool, Roundel Media Studio, and experiential events integrated with marketing activities;
Invested in new artificial intelligence (AI) technology, including modernized AI-powered inventory management
systems and Store Companion, an AI-powered chatbot designed to make team members' jobs easier and
enhance the shopping experience;
Opened 23 new stores, many of which are full-size stores, reflecting our large-format focus and stores as hubs
strategy; and
Fulfilled over 65 percent of our digital sales through our same-day fulfillment options (Order Pickup, Drive Up,
and Same Day Delivery), which grew 7.7 percent compared to 2023, including double-digit percentage growth
in both Same Day Delivery and Drive Up.
•
•
•
•
•
•
•
Financial Summary
Fiscal 2024 included the following notable items:
•
•
GAAP and Adjusted diluted earnings per share were $8.86.
Net Sales were $106.6 billion, a decrease of $0.8 billion, or 0.8 percent, from the prior year, driven by one less
week in the current year.
Comparable sales increased 0.1 percent, driven by a 1.4 percent increase in traffic and partially offset by a 1.3
percent decrease in average transaction amount.
Operating income of $5.6 billion was 2.5 percent lower than the 53-week prior-year period.
•
•
25
TARGET CORPORATION
2024 Form 10-K
MANAGEMENT'S DISCUSSION AND ANALYSIS
Table of Contents
FINANCIAL SUMMARY
Index to Financial Statements
Earnings Per Share
2023 (a)
2024
GAAP diluted earnings per share
Adjustments
Adjusted diluted earnings per share
$
8.86 $
—
8.86 $
$
Percent Change
2024/2023
2023/2022
2022
8.94 $
—
8.94 $
5.98
0.03
6.02
(0.9)%
49.4 %
(0.9)%
48.6 %
Note: Amounts may not foot due to rounding. Adjusted diluted earnings per share (Adjusted EPS), a non-GAAP
metric, excludes the impact of certain items. Management believes that Adjusted EPS is useful in providing periodto-period comparisons of the results of our operations. A reconciliation of non-GAAP financial measures to GAAP
measures is provided on page 30.
(a)
2023 consisted of 53 weeks compared with 52 weeks in 2024 and 2022.
We report after-tax return on invested capital (ROIC) because we believe ROIC provides a meaningful measure of
our capital-allocation effectiveness over time. For the trailing twelve months ended February 1, 2025, after-tax ROIC
was 15.4 percent, compared to 16.1 percent for the trailing twelve months ended February 3, 2024. The calculation
of ROIC is provided on page 31.
Analysis of Results of Operations
Summary of Operating Income
(dollars in millions)
Net sales (a)
Cost of sales (b)
SG&A expenses (b)
Depreciation and amortization (exclusive of
depreciation included in cost of sales)
Operating income
(a)
(b)
(c)
$
$
2024
2023 (c)
106,566 $
107,412 $
76,502
77,828
21,969
21,462
2,529
5,566 $
2,415
5,707 $
Percent Change
2022
2024/2023 2023/2022
109,120
(0.8)%
(1.6)%
82,306
(1.7)
(5.4)
20,581
2.4
4.3
2,385
3,848
4.7
(2.5)%
1.3
48.3 %
In 2024, we changed the presentation of revenue in our Consolidated Statements of Operations,
consolidating the previous three-line format (Sales, Other Revenue, and Total Revenue) to a single line
labeled "Net Sales", which reflects all revenues (formerly Total Revenue). Note 2 to the Financial
Statements provides additional information. We believe this presentation better reflects our strategy, which
includes growing capabilities and business offerings that leverage Target's assets and competitive
strengths.
Refer to Note 3 to the Financial Statements for additional information about a reclassification of prior year
amounts to conform with current year presentation.
2023 consisted of 53 weeks compared with 52 weeks in 2024 and 2022.
Rate Analysis
(a)
Gross margin rate
SG&A expense rate (a)
Depreciation and amortization (exclusive of depreciation included in
cost of sales) expense rate
Operating income margin rate
2024
28.2 %
20.6
2023
27.5 %
20.0
2022
24.6 %
18.9
2.4
5.2
2.2
5.3
2.2
3.5
(a)
Reflects the impact of a reclassification of prior year amounts to conform with current year presentation.
Refer to Note 3 to the Financial Statements for additional information.
Note: Gross margin is calculated as Net Sales less Cost of Sales. All rates are calculated by dividing the applicable
amount by Net Sales. Previously our gross margin rate was calculated based only on Merchandise Sales. The
calculation change aligns with our 2024 transition to a single-line revenue presentation on our Consolidated
Statements of Operations, with prior period amounts updated to conform to the current year presentation. We also
updated prior period gross margin rates to conform to the current year calculations, which resulted in an
approximate 1 percentage point increase in our gross margin rate for both 2023 and 2022.
TARGET CORPORATION
2024 Form 10-K
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
Table of Contents
ANALYSIS OF OPERATIONS
Index to Financial Statements
A discussion regarding Analysis of Results of Operations and Analysis of Financial Condition for 2023, as compared
to 2022, is included in Part II, Item 7, MD&A to our Annual Report on Form 10-K for the year ended February 3,
2024.
Net Sales
Net Sales includes Merchandise Sales and revenues from other sources, most notably advertising revenue and
credit card profit-sharing income. Note 2 to the Financial Statements provides more information.
Merchandise Sales are net of expected returns, and our estimate of gift card breakage. Note 2 to the Financial
Statements defines gift card "breakage." We use comparable sales to evaluate the performance of our stores and
digital channels by measuring the change in sales for a period over the comparable, prior-year period of equivalent
length. Comparable sales include all Merchandise Sales, except sales from stores open less than 13 months or that
have been closed. Comparable sales measures vary across the retail industry. As a result, our comparable sales
calculation is not necessarily comparable to similarly titled measures reported by other companies. Digitally
originated sales include all Merchandise Sales initiated through mobile applications and our websites. Our stores
fulfill the majority of digitally originated sales, including shipment from stores to guests, store Order Pickup or Drive
Up, and Same Day Delivery. Digitally originated sales may also be fulfilled through our distribution centers, our
vendors, or other third parties.
Merchandise Sales growth – from both comparable sales and new stores – represents an important driver of our
long-term profitability. We expect that comparable sales growth will drive a significant portion of our total sales
growth. We believe that our ability to successfully differentiate our guests’ shopping experience through a careful
combination of merchandise assortment, price, convenience, guest experience, and other factors will over the longterm drive both increasing shopping frequency (number of transactions, or "traffic") and the amount spent each visit
(average transaction amount).
The extra week in 2023 contributed $1.7 billion to Net Sales.
Comparable Sales
Comparable sales change
Drivers of change in comparable sales
Number of transactions (traffic)
Average transaction amount
Comparable Sales by Channel
Stores originated comparable sales change
Digitally originated comparable sales change
Merchandise Sales by Channel
Stores originated
Digitally originated
Total
Merchandise Sales by Fulfillment Channel
Stores
Other
Total
2024
0.1 %
2023
(3.7)%
2022
2.2 %
1.4
(1.3)
(2.4)
(1.4)
2.1
0.1
2024
(1.6)%
7.5
2023
(3.5)%
(4.8)
2022
2.4 %
1.5
2024
80.4 %
19.6
100 %
2023
81.7 %
18.3
100 %
2022
81.4 %
18.6
100 %
2024
97.6 %
2.4
100 %
2023
97.4 %
2.6
100 %
2022
96.7 %
3.3
100 %
Note: Merchandise Sales fulfilled by stores include in-store purchases and digitally originated sales fulfilled by
shipping merchandise from stores to guests, Order Pickup, Drive Up, and Same Day Delivery.
27
TARGET CORPORATION
2024 Form 10-K
MANAGEMENT'S DISCUSSION AND ANALYSIS
Table of Contents
ANALYSIS OF OPERATIONS
Index to Financial Statements
Part I, Item 1, Business of this Form 10-K and Note 2 to the Financial Statements provides additional product
category sales information. The collective interaction of a broad array of macroeconomic, competitive, and
consumer behavioral factors, as well as sales mix, and transfer of sales to new stores makes further analysis of
sales metrics infeasible.
TD Bank Group offers credit to qualified guests through Target-branded credit cards: the Target Credit Card and the
Target MasterCard Credit Card (Target Credit Cards). Additionally, we offer a branded proprietary Target Debit Card
and Target Circle Card Reloadable Account. Collectively, we refer to these products as Target Circle Cards. Guests
receive a 5 percent discount on virtually all purchases when they use a Target Circle Card at Target. We monitor the
percentage of purchases that are paid for using Target Circle Cards (Target Circle Card Penetration) because our
internal analysis has indicated that a meaningful portion of incremental purchases on our Target Circle Cards are
also incremental sales for Target. For the years ended February 1, 2025, February 3, 2024, and January 28, 2023,
total Target Circle Card Penetration was 17.8 percent, 18.6 percent, and 19.8 percent, respectively. See the
Customer Loyalty Programs section within Item 1. Business on page 5 for information about the rebranding of
RedCards.
Gross Margin (GM) Rate
0.4%
0.8%
28.2%
27.5%
2023
GM
Rate
(0.5)%
Merchandising
Inventory Shrink
Supply Chain &
Digital Fulfillment
2024
GM
Rate
Our gross margin rate was 28.2 percent in 2024 and 27.5 percent in 2023. The increase reflected the net impact of
•
•
•
merchandising activities, including cost improvements which more than offset higher promotional and
clearance markdown rates, as well as growth in advertising and marketplace revenues;
lower book to physical inventory adjustments in 2024; and
higher supply chain & digital fulfillment costs due to new supply chain facilities coming online and an
increase in digital volume.
Selling, General and Administrative (SG&A) Expense Rate
Our SG&A expense rate was 20.6 percent in 2024, compared with 20.0 percent in 2023, reflecting the net impact of
cost increases across our business, including higher team member pay and benefits and higher general liability
expenses, partially offset by the benefit of lower store remodel-related expenses.
TARGET CORPORATION
2024 Form 10-K
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
ANALYSIS OF OPERATIONS & OTHER PERFORMANCE FACTORS
Table of Contents
Index to Financial Statements
Store Data
Change in Number of Stores
Beginning store count
Opened
Closed
Ending store count
2024
1,956
23
(1)
1,978
Number of Stores and
Retail Square Feet
Number of Stores
February 1,
2025
273
1,559
146
1,978
170,000 or more sq. ft.
50,000 to 169,999 sq. ft.
49,999 or less sq. ft.
Total
(a)
February 3,
2024
273
1,542
141
1,956
2023
1,948
21
(13)
1,956
Retail Square Feet (a)
February 1,
2025
48,824
195,050
4,404
248,278
February 3,
2024
48,824
192,908
4,207
245,939
In thousands; reflects total square feet less office, distribution center, and vacant space.
Other Performance Factors
Net Interest Expense
Net interest expense was $411 million for 2024, compared with $502 million for 2023. The decrease in net interest
expense was primarily due to an increase in interest income.
Provision for Income Taxes
Our 2024 effective income tax rate was 22.2 percent compared with 21.9 percent in 2023. The increase primarily
reflects lower discrete tax benefits compared to the prior year.
Numerous countries, including certain jurisdictions in which we operate, have enacted legislation to implement the
model rules of the Organization for Economic Cooperation and Development Pillar Two framework (Pillar Two),
which is designed to ensure large multinational enterprises are subject to a 15 percent global minimum tax on
income earned in each jurisdiction in which they operate. We do not expect the enacted rules, which will be
applicable to us in 2025, to materially impact our 2025 financial results.
Under the Pillar Two framework, any existing deferred tax assets not disclosed in our financial statements will not be
available for future use. Accordingly, we are disclosing the existence of gross tax loss carryforwards of $1.1 billion in
Canada and $0.2 billion in Luxembourg. The losses are deemed to have a remote possibility of realization;
therefore, a deferred tax asset and valuation allowance are not established.
29
TARGET CORPORATION
2024 Form 10-K
MANAGEMENT'S DISCUSSION AND ANALYSIS
Table of Contents
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
Index to Financial Statements
Reconciliation of Non-GAAP Financial Measures to GAAP Measures
To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share (Adjusted
EPS). This metric excludes certain items presented below. We believe this information is useful in providing periodto-period comparisons of the results of our operations. This measure is not in accordance with, or an alternative to,
generally accepted accounting principles in the U.S. (GAAP). The most comparable GAAP measure is diluted
earnings per share. Adjusted EPS should not be considered in isolation or as a substitution for analysis of our
results as reported in accordance with GAAP. Other companies may calculate Adjusted EPS differently than we do,
limiting the usefulness of the measure for comparisons with other companies.
Reconciliation of Non-GAAP
Adjusted EPS
2024
(millions, except per share data)
Net of
Tax
Pretax
GAAP diluted earnings per share
Adjustments
2023 (a)
Per Share
Amounts
$
Other (b)
—
—
Adjusted diluted earnings per share
8.86
—
$
Pretax
Net of
Tax
2022
Per Share
Amounts
$
—
—
8.86
8.94
—
$
Pretax
Net of
Tax
Per Share
Amounts
$
$
20
$
8.94
15
5.98
0.03
$
6.02
Note: Amounts may not foot due to rounding.
(a)
2023 consisted of 53 weeks compared with 52 weeks in 2024 and 2022.
(b)
Other items unrelated to current period operations, none of which were individually significant.
Earnings before interest expense and income taxes (EBIT) and earnings before interest expense, income taxes,
depreciation, and amortization (EBITDA) are non-GAAP financial measures. We believe these measures provide
meaningful information about our operational efficiency compared with our competitors by excluding the impact of
differences in tax jurisdictions and structures, debt levels, and for EBITDA, capital investment. These measures are
not in accordance with, or an alternative to, GAAP. The most comparable GAAP measure is net earnings. EBIT and
EBITDA should not be considered in isolation or as a substitution for analysis of our results as reported in
accordance with GAAP. Other companies may calculate EBIT and EBITDA differently, limiting the usefulness of the
measures for comparisons with other companies.
EBIT and EBITDA
(dollars in millions)
Net earnings
+ Provision for income taxes
+ Net interest expense
EBIT
$
$
+ Total depreciation and amortization
EBITDA
(a)
(b)
(b)
$
2024
2023 (a)
4,091 $
4,138 $
1,170
1,159
411
502
5,672 $
5,799 $
2,981
2,801
8,653 $
8,600 $
Percent Change
2022
2024/2023 2023/2022
2,780
(1.1)%
48.8 %
638
0.9
81.7
478
(18.1)
5.0
3,896
(2.2)%
48.8 %
2,700
6.4
3.8
6,596
0.6 %
30.4 %
2023 consisted of 53 weeks compared with 52 weeks in 2024 and 2022.
Represents total depreciation and amortization, including amounts classified within Depreciation and
Amortization and within Cost of Sales.
TARGET CORPORATION
2024 Form 10-K
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
Table of Contents
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
Index to Financial Statements
We have also disclosed after-tax ROIC, which is a ratio based on GAAP information, with the exception of the addback of operating lease interest to operating income. We believe this metric is useful in assessing the effectiveness
of our capital allocation over time. Other companies may calculate ROIC differently, limiting the usefulness of the
measure for comparisons with other companies.
After-Tax Return on Invested Capital
(dollars in millions)
Trailing Twelve Months
February 1,
2025
Numerator
Operating income
+ Net other income
EBIT
+ Operating lease interest (b)
- Income taxes (c)
Net operating profit after taxes
$
5,566 $
106
5,672
159
1,297
4,534 $
$
Denominator
Current portion of long-term debt and other borrowings
+ Noncurrent portion of long-term debt
+ Shareholders' investment
+ Operating lease liabilities (d)
- Cash and cash equivalents
Invested capital
Average invested capital (e)
February 1,
2025
$
$
$
After-tax return on invested capital
(a)
(b)
(c)
(d)
(e)
31
February 3,
2024 (a)
5,707
92
5,799
120
1,295
4,624
February 3,
2024
1,636 $
14,304
14,666
3,935
4,762
29,779 $
29,526 $
1,116 $
14,922
13,432
3,608
3,805
29,273 $
28,674
15.4 %
16.1 %
January 28,
2023
130
16,009
11,232
2,934
2,229
28,076
Consisted of 53 weeks.
Represents the add-back to operating income driven by the hypothetical interest expense we would incur if
the property under our operating leases were owned or accounted for as finance leases. Calculated using
the discount rate for each lease and recorded as a component of rent expense within Operating Income.
Operating lease interest is added back to Operating Income in the ROIC calculation to control for
differences in capital structure between us and our competitors.
Calculated using the effective tax rates, which were 22.2 percent and 21.9 percent for the trailing twelve
months ended February 1, 2025, and February 3, 2024, respectively. Includes tax effect of $1.3 billion
related to EBIT for each of the trailing twelve month periods ended February 1, 2025, and February 3, 2024,
and $35 million and $26 million, respectively, related to operating lease interest.
Total short-term and long-term operating lease liabilities included within Accrued and Other Current
Liabilities and Noncurrent Operating Lease Liabilities.
Average based on the invested capital at the end of the current period and the invested capital at the end of
the comparable prior period.
TARGET CORPORATION
2024 Form 10-K
MANAGEMENT'S DISCUSSION AND ANALYSIS
ANALYSIS OF FINANCIAL CONDITION
Table of Contents
Index to Financial Statements
Analysis of Financial Condition
Liquidity and Capital Resources
Capital Allocation
We follow a disciplined and balanced approach to capital allocation based on the following priorities, ranked in order
of importance: first, we fully invest in opportunities to profitably grow our business, create sustainable long-term
value, and maintain our current operations and assets; second, we maintain a competitive quarterly dividend and
seek to grow it annually; and finally, we return any excess cash to shareholders by repurchasing shares within the
limits of our credit rating goals.
Our year-end cash and cash equivalents balance increased to $4.8 billion from $3.8 billion in 2023. Our cash and
cash equivalents balance includes short-term investments of $3.9 billion and $2.9 billion as of February 1, 2025,
and February 3, 2024, respectively. Our investment policy is designed to preserve principal and liquidity of our
short-term investments. This policy allows investments in large money market funds or in highly rated direct shortterm instruments that mature in 60 days or less. We also place dollar limits on our investments in individual funds or
instruments.
Operating Cash Flows
Cash flows provided by operating activities were $7.4 billion in 2024 compared with $8.6 billion in 2023. The
operating cash flow decrease is primarily due to higher income tax payments and the combined impact of inventory
and accounts payable activity.
Inventory
Year-end inventory was $12.7 billion in 2024, compared with $11.9 billion in 2023. The increase in inventory levels
reflects
• earlier inventory receipts compared to the prior year, including to support merchandising strategies; and
• inventory investments in select merchandise categories to support sales growth and an improved in-stock
position.
TARGET CORPORATION
2024 Form 10-K
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
ANALYSIS OF FINANCIAL CONDITION
Table of Contents
Index to Financial Statements
Capital Expenditures
5.5
$0.6
$1.2
4.8
$0.7
$ (Billions)
$1.5
$0.5
Existing Store Investments
New Stores
Supply Chain
Information Technology and Other
2.9
$0.6
$0.6
$0.9
$3.2
$2.1
$0.7
$0.6
2022
2023
2024
Note: Amounts may not foot due to rounding.
Capital expenditures in 2024 reflect investments in our strategic initiatives, including investments in both stores and
in our supply chain, enhancing our capabilities and guest experience across stores and digital channels. The
decrease in capital expenditures in 2024 compared with 2023 primarily reflects a slowdown in store remodel
activities.
We expect capital expenditures in 2025 of approximately $4 billion to $5 billion, with the majority focused on store
assets, including both new stores and remodels, as well as continued investment in supply chain and technology
projects. We expect to open about 20 new stores during 2025 and to resume a faster pace of remodel activities
compared with 2024.
Dividends
We paid dividends totaling $2.0 billion ($4.44 per share) in 2024 and $2.0 billion ($4.36 per share) in 2023, a per
share increase of 1.8 percent. We declared dividends totaling $2.1 billion ($4.46 per share) in 2024 and $2.1 billion
($4.38 per share) in 2023, a per share increase of 1.8 percent. We have paid dividends every quarter since our
1967 initial public offering, and it is our intent to continue to do so in the future.
Share Repurchases
During 2024, we deployed $1.0 billion to repurchase shares. We did not repurchase any shares during 2023. See
Part II, Item 5, Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities of this Annual Report on Form 10-K and Note 20 to the Financial Statements for more information.
33
TARGET CORPORATION
2024 Form 10-K
MANAGEMENT'S DISCUSSION AND ANALYSIS
ANALYSIS OF FINANCIAL CONDITION
Table of Contents
Index to Financial Statements
Financing
Our financing strategy is to ensure liquidity and access to capital markets, to maintain a balanced spectrum of debt
maturities, and to manage our net exposure to floating interest rate volatility. Within these parameters, we seek to
minimize our borrowing costs. Our ability to access the long-term debt and commercial paper markets has provided
us with ample sources of liquidity. Our continued access to these markets depends on multiple factors, including the
condition of debt capital markets, our operating performance, and maintaining strong credit ratings. As of
February 1, 2025, our credit ratings were as follows:
Credit Ratings
Long-term debt
Commercial paper
Moody's
A2
P-1
Standard and Poor's
A
A-1
Fitch
A
F1
If our credit ratings were lowered, our ability to access the debt markets, our cost of funds, and other terms for new
debt issuances could be adversely impacted. Each of the credit rating agencies reviews its rating periodically, and
there is no guarantee our current credit ratings will remain the same as described above.
We have the ability to obtain short-term financing from time to time under our commercial paper program and credit
facilities. In October 2024, we obtained a new committed $1.0 billion 364-day unsecured revolving credit facility that
will expire in October 2025 and terminated our prior 364-day credit facility. This credit facility and our $3.0 billion
unsecured revolving credit facility that will expire in October 2028 provide a liquidity backstop to our commercial
paper program. No balances were outstanding under either credit facility at any time during 2024 or 2023. We did
not have any balances outstanding under our commercial paper program as of February 1, 2025 or February 3,
2024.
Most of our long-term debt obligations contain covenants related to secured debt levels. In addition to a secured
debt level covenant, our credit facilities also contain a debt leverage covenant. We are, and expect to remain, in
compliance with these covenants. Additionally, as of February 1, 2025, no notes or debentures contained provisions
requiring acceleration of payment upon a credit rating downgrade, except that certain outstanding notes allow the
note holders to put the notes to us if within a matter of months of each other we experience both (i) a change in
control and (ii) our long-term credit ratings are either reduced and the resulting rating is non-investment grade, or
our long-term credit ratings are placed on watch for possible reduction and those ratings are subsequently reduced
and the resulting rating is non-investment grade.
Note 15 to the Financial Statements provides additional information.
Future Cash Requirements
We enter into contractual obligations in the ordinary course of business that may require future cash payments.
Such obligations include, but are not limited to, purchase commitments, debt service, leasing arrangements, and
liabilities related to deferred compensation and pensions. The Notes to the Consolidated Financial Statements
provide additional information.
We believe our sources of liquidity, namely operating cash flows, credit facility capacity, and access to capital
markets, will continue to be adequate to meet our contractual obligations, working capital and capital expenditure
requirements, finance anticipated expansion and strategic initiatives, fund debt maturities, pay dividends, and
execute purchases under our share repurchase program for the foreseeable future.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates
and apply judgments that affect the reported amounts. In the Notes to the Consolidated Financial Statements, we
describe the significant accounting policies used in preparing the consolidated financial statements. Our
management has discussed the development, selection, and disclosure of our critical accounting estimates with the
Audit & Risk Committee of our Board of Directors. The following items require significant estimation or judgment:
TARGET CORPORATION
2024 Form 10-K
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
ANALYSIS OF FINANCIAL CONDITION
Table of Contents
Index to Financial Statements
Inventory and cost of sales:
The vast majority of our inventory is accounted for under the retail inventory
accounting method using the last-in, first-out method (LIFO). Our inventory is valued at the lower of LIFO cost or
market. We reduce inventory for estimated losses related to shrink and markdowns. Our shrink estimate is based on
historical losses and is adjusted to reflect results of actual physical inventory counts. We generally perform counts
at each location annually, with counts taking place throughout the year. A 10 percent increase or decrease in our
2024 year-end inventory shrink reserve would impact our cost of sales by approximately $150 million. Historically,
our actual physical inventory count results have shown our estimates to be reasonably accurate. Market
adjustments for markdowns are recorded when the salability of the merchandise has diminished. Salability can be
impacted by consumer preferences and seasonality, among other factors. We believe the risk of inventory
obsolescence is largely mitigated because our inventory typically turns in less than three months. Inventory was
$12.7 billion and $11.9 billion as of February 1, 2025, and February 3, 2024, respectively, and is further described in
Note 8 to the Financial Statements.
Vendor income: We receive various forms of consideration from our vendors (vendor income), principally earned
as a result of volume rebates, promotions, advertising allowances, and markdown allowances. Vendor income is
recorded as a reduction of cost of sales except in arrangements where the payment is a reimbursement of specific,
incremental, and identifiable costs and recorded as an offset to those costs. Vendor income earned can vary based
on a number of factors, including purchase volumes, sales volumes, and our pricing and promotion strategies.
We establish a receivable for vendor income that is earned but not yet received. Based on historical trending and
data, this receivable is computed by forecasting vendor income collections and estimating the amount earned. The
majority of the year-end vendor income receivables are collected within the following fiscal quarter, and we do not
believe there is a reasonable likelihood that the assumptions used in our estimate will change significantly.
Historically, adjustments to our vendor income receivable have not been material. Vendor income receivable was
$543 million and $513 million as of February 1, 2025, and February 3, 2024, respectively. Vendor income is
described further in Note 4 to the Financial Statements.
Long-lived assets: Long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. The evaluation is performed primarily at the store level.
An impairment loss is recognized when estimated undiscounted future cash flows from the operation and/or
eventual disposition of the asset or asset group are less than its carrying amount, and is measured as the excess of
its carrying amount over fair value. We estimate fair value by obtaining market appraisals, obtaining valuations from
third-party brokers, or using other valuation techniques. We recorded impairments of $68 million, $102 million, and
$66 million in 2024, 2023, and 2022, respectively, which are described further in Note 10 to the Financial
Statements.
Insurance/self-insurance:
We retain a substantial portion of the risk related to certain general liability, workers'
compensation, property loss, and team member medical and dental claims. However, we maintain stop-loss
coverage to limit the exposure related to certain risks. Liabilities associated with these losses include estimates of
both claims filed and losses incurred but not yet reported. We use actuarial methods which consider a number of
factors to estimate our ultimate cost of losses. General liability and workers' compensation liabilities are recorded
based on our estimate of their net present value; other liabilities referred to above are not discounted. Our workers'
compensation and general liability accrual was $772 million and $650 million as of February 1, 2025, and
February 3, 2024, respectively. We believe that the amounts accrued are appropriate; however, our liabilities could
be significantly affected if future occurrences or loss developments differ from our assumptions. For example, a
10 percent increase or decrease in average claim costs would have impacted our self-insurance expense by
$77 million in 2024. Historically, adjustments to our estimates have not been material. Refer to Part II, Item 7A,
Quantitative and Qualitative Disclosures About Market Risk, for further disclosure of the market risks associated
with these exposures. We maintain insurance coverage to limit our exposure to certain events, including network
security matters.
35
TARGET CORPORATION
2024 Form 10-K
MANAGEMENT'S DISCUSSION AND ANALYSIS
ANALYSIS OF FINANCIAL CONDITION & NEW ACCOUNTING PRONOUNCEMENTS
Table of Contents
Index to Financial Statements
Income taxes:
We pay income taxes based on the tax statutes, regulations, and case law of the various
jurisdictions in which we operate. Significant judgment is required in determining the timing and amounts of
deductible and taxable items, and in evaluating the ultimate resolution of tax matters in dispute with tax authorities.
The benefits of uncertain tax positions are recorded in our financial statements only after determining it is more
likely than not the uncertain tax positions would withstand challenge by taxing authorities. We periodically reassess
these probabilities and record any changes in the financial statements as appropriate. Gross uncertain tax positions,
including interest and penalties, were $454 million and $366 million as of February 1, 2025, and February 3, 2024,
respectively. Although we believe our tax positions are reasonable, the resolution of these matters could be
materially different from our assumptions, which would affect our consolidated results of operations and/or operating
cash flows. Income taxes are described further in Note 18 to the Financial Statements.
Pension accounting:
We maintain a funded qualified defined benefit pension plan, as well as nonqualified and
international pension plans that are generally unfunded, for certain current and former team members. The costs for
these plans are determined based on actuarial calculations using the assumptions described in the following
paragraphs. Eligibility and the level of benefits vary depending on each team member's full-time or part-time status,
date of hire, age, length of service, and/or compensation. The benefit obligation and related expense for these plans
are determined based on actuarial calculations using assumptions about the expected long-term rate of return, the
discount rate, compensation growth rates, mortality, and retirement age. These assumptions, with adjustments
made for any significant plan or participant changes, are used to determine the period-end benefit obligation and
establish expense for the next year.
Our 2024 expected long-term rate of return on plan assets of 7.00 percent was determined by the portfolio
composition, historical long-term investment performance, and current market conditions. A 1 percentage point
decrease in our expected long-term rate of return would increase annual expense by $40 million.
The discount rate used to determine benefit obligations is adjusted annually based on the interest rate for long-term
high-quality corporate bonds, using yields for maturities that are in line with the duration of our pension liabilities.
Our benefit obligation and related expense will fluctuate with changes in interest rates. A 1 percentage point
decrease in the weighted average discount rate would increase annual expense by $33 million.
Based on our experience, we use a graduated compensation growth schedule that assumes higher compensation
growth for younger, shorter-service pension-eligible team members than it does for older, longer-service pensioneligible team members.
Pension benefits are further described in Note 23 to the Financial Statements.
Legal and other contingencies: We believe the accruals recorded in our consolidated financial statements properly
reflect loss exposures that are both probable and reasonably estimable. We do not believe any of the currently
identified claims or litigation will materially affect our results of operations, cash flows, or financial condition.
However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling
were to occur, it may cause a material adverse impact on the results of operations, cash flows, or financial condition
for the period in which the ruling occurs, or future periods. Refer to Note 14 to the Financial Statements for further
information on contingencies.
New Accounting Pronouncements
We do not expect that any recently issued accounting pronouncements will have a material effect on our financial
statements.
TARGET CORPORATION
2024 Form 10-K
36
FINANCIAL STATEMENTS
INDEX
Table of Contents
Index to Financial Statements
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Management and Independent Registered Public Accounting Firm
39
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Financial Position
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Investment
42
43
44
45
46
Notes to Consolidated Financial Statements
Note 1
Summary of Accounting Policies
Note 2
Net Sales
Note 3
Cost of Sales and Selling, General, and Administrative Expenses
47
47
48
49
50
50
50
51
51
52
52
52
53
53
54
55
55
56
59
61
61
61
63
63
67
68
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
Note 14
Note 15
Note 16
Note 17
Note 18
Note 19
Note 20
Note 21
Note 22
Note 23
Note 24
Note 25
Consideration Received from Vendors
Advertising Costs
Fair Value Measurements
Cash and Cash Equivalents
Inventory
Other Current Assets
Property and Equipment
Other Noncurrent Assets
Supplier Finance Programs
Accrued and Other Current Liabilities
Commitments and Contingencies
Commercial Paper and Long-Term Debt
Derivative Financial Instruments
Leases
Income Taxes
Other Noncurrent Liabilities
Share Repurchase
Share-Based Compensation
Defined Contribution Plans
Pension Plans
Accumulated Other Comprehensive Loss
Segment Reporting
TARGET CORPORATION
2024 Form 10-K
38
FINANCIAL STATEMENTS
REPORTS
Table of Contents
Index to Financial Statements
Report of Management on the Consolidated Financial Statements
Management is responsible for the consistency, integrity, and presentation of the information in the Annual Report. The consolidated financial
statements and other information presented in this Annual Report have been prepared in accordance with accounting principles generally
accepted in the United States and include necessary judgments and estimates by management.
To fulfill our responsibility, we maintain comprehensive systems of internal control designed to provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with established procedures. The concept of reasonable assurance is based upon
recognition that the cost of the controls should not exceed the benefit derived. We believe our systems of internal control provide this reasonable
assurance.
The Board of Directors exercised its oversight role with respect to the Corporation's systems of internal control primarily through its Audit & Risk
Committee, which is comprised of independent directors. The Committee oversees the Corporation's systems of internal control, accounting
practices, financial reporting and audits to assess whether their quality, integrity, and objectivity are sufficient to protect shareholders'
investments.
In addition, our consolidated financial statements have been audited by Ernst & Young LLP, independent registered public accounting firm, whose
report also appears on this page.
Brian C. Cornell
Chair of the Board and Chief Executive Officer
Jim Lee
Executive Vice President and Chief Financial Officer
March 12, 2025
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Target Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Target Corporation (the Corporation) as of February 1, 2025
and February 3, 2024, the related consolidated statements of operations, comprehensive income, shareholders' investment and cash flows for
each of the three years in the period ended February 1, 2025, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation
at February 1, 2025 and February 3, 2024, and the results of its operations and its cash flows for each of the three years in the period ended
February 1, 2025, 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) (PCAOB), the
Corporation's internal control over financial reporting as of February 1, 2025, 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 March
12, 2025 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the
Corporation’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits
included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for
our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated
or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit
matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
39
TARGET CORPORATION
2024 Form 10-K
FINANCIAL STATEMENTS
REPORTS
Table of Contents
Index to Financial Statements
Valuation of Vendor Income Receivable
Description of
the Matter
At February 1, 2025, the Corporation’s vendor income receivable totaled $543 million. As discussed in Note 4 of the
consolidated financial statements, the Corporation receives consideration for a variety of vendor-sponsored programs, which
are primarily recorded as a reduction of cost of sales when earned. The Corporation records a receivable for amounts earned
but not yet received.
Auditing the Corporation's calculation of vendor income receivable was especially challenging due to the inputs required in the
vendor receivable model, which include, among others, forecasted vendor income collections and the time period over which
the collections have been earned. As a result of the high volume of transactions processed by the Corporation and used in
estimating these inputs, auditing the vendor income receivable requires extensive audit effort to address the completeness and
accuracy of the information used in the receivable model.
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Corporation’s
vendor income receivable process, including controls over the inputs described above.
To test the estimated vendor income receivable, we performed audit procedures that included, among others, testing the
completeness and accuracy of inputs used in the receivable model by verifying for a sample of the vendor-sponsored
programs, the nature and source of the inputs used and the terms of the contractual agreements. We recalculated the amount
of the vendor income earned based on the inputs and the terms of the contractual agreements. In addition, we recalculated the
time period over which the vendor income collections had been earned to assess the accuracy of management’s inputs used
in the model. We also performed sensitivity analyses of inputs to evaluate the significance of changes in the receivable that
would result from changes to the inputs. Finally, we performed audit procedures over the vendor income collections
subsequent to the balance sheet date to support the vendor income receivable at year end.
/s/ Ernst & Young LLP
We have served as the Corporation's auditor since 1931.
Minneapolis, Minnesota
March 12, 2025
TARGET CORPORATION
2024 Form 10-K
40
FINANCIAL STATEMENTS
REPORTS
Table of Contents
Index to Financial Statements
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our chief executive officer and
chief financial officer, we assessed the effectiveness of our internal control over financial reporting as of February 1, 2025, based on the
framework in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework). Based on our assessment, we conclude that the Corporation's internal control over financial reporting is effective
based on those criteria.
Our internal control over financial reporting as of February 1, 2025, has been audited by Ernst & Young LLP, the independent registered public
accounting firm who has also audited our consolidated financial statements, as stated in their report which appears on this page.
Brian C. Cornell
Chair of the Board and Chief Executive Officer
Jim Lee
Executive Vice President and Chief Financial Officer
March 12, 2025
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Target Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Target Corporation’s internal control over financial reporting as of February 1, 2025, 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). In our opinion, Target Corporation (the Corporation) maintained, in all material respects, effective internal control over financial
reporting as of February 1, 2025, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated statements of financial position of the Corporation as of February 1, 2025 and February 3, 2024, the related consolidated
statements of operations, comprehensive income, shareholders' investment and cash flows for each of the three years in the period ended
February 1, 2025, and the related notes and our report dated March 12, 2025 expressed an unqualified opinion thereon.
Basis for Opinion
The Corporation’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 Report of Management on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Corporation's internal control over financial reporting based on our audit. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 12, 2025
41
TARGET CORPORATION
2024 Form 10-K
FINANCIAL STATEMENTS
Table of Contents
Index to Financial Statements
Consolidated Statements of Operations
(millions, except per share data)
Net sales
Cost of sales
Selling, general, and administrative expenses
Depreciation and amortization (exclusive of depreciation included in cost
of sales)
Operating income
Net interest expense
Net other income
Earnings before income taxes
Provision for income taxes
Net earnings
Basic earnings per share
Diluted earnings per share
Weighted average common shares outstanding
Basic
Diluted
Antidilutive shares
$
$
$
$
2024
106,566 $
76,502
21,969
2023
107,412 $
77,828
21,462
2022
109,120
82,306
20,581
2,529
5,566
411
(106)
5,261
1,170
4,091 $
8.89 $
8.86 $
2,415
5,707
502
(92)
5,297
1,159
4,138 $
8.96 $
8.94 $
2,385
3,848
478
(48)
3,418
638
2,780
6.02
5.98
460.4
461.8
0.5
461.5
462.8
2.1
462.1
464.7
1.1
Note: 2023 consisted of 53 weeks compared with 52 weeks in 2024 and 2022.
See accompanying Notes to Consolidated Financial Statements.
TARGET CORPORATION
2024 Form 10-K
42
FINANCIAL STATEMENTS
Table of Contents
Index to Financial Statements
Consolidated Statements of Comprehensive Income
(millions)
Net earnings
Other comprehensive income / (loss), net of tax
Pension benefit liabilities
Currency translation adjustment and cash flow hedges
Other comprehensive income / (loss)
Comprehensive income
$
2024
4,091 $
2023
4,138 $
2022
2,780
$
22
(20)
2
4,093 $
(23)
(18)
(41)
4,097 $
(113)
247
134
2,914
Note: 2023 consisted of 53 weeks compared with 52 weeks in 2024 and 2022.
See accompanying Notes to Consolidated Financial Statements.
43
TARGET CORPORATION
2024 Form 10-K
FINANCIAL STATEMENTS
Table of Contents
Index to Financial Statements
Consolidated Statements of Financial Position
February 1,
2025
(millions, except footnotes)
Assets
Cash and cash equivalents
Inventory
Other current assets
Total current assets
Property and equipment
Land
Buildings and improvements
Fixtures and equipment
Computer hardware and software
Construction-in-progress
Accumulated depreciation
Property and equipment, net
Operating lease assets
Other noncurrent assets
Total assets
Liabilities and shareholders' investment
Accounts payable
Accrued and other current liabilities
Current portion of long-term debt and other borrowings
Total current liabilities
Long-term debt and other borrowings
Noncurrent operating lease liabilities
Deferred income taxes
Other noncurrent liabilities
Total noncurrent liabilities
Shareholders' investment
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders' investment
Total liabilities and shareholders' investment
$
$
$
$
February 3,
2024
4,762 $
12,740
1,952
19,454
3,805
11,886
1,807
17,498
6,735
38,752
8,917
3,710
1,185
(26,277)
33,022
3,763
1,530
57,769 $
6,547
37,066
8,765
3,428
1,703
(24,413)
33,096
3,362
1,400
55,356
13,053 $
6,110
1,636
20,799
14,304
3,582
2,303
2,115
22,304
12,098
6,090
1,116
19,304
14,922
3,279
2,480
1,939
22,620
38
6,996
8,090
(458)
14,666
57,769 $
38
6,761
7,093
(460)
13,432
55,356
Common Stock Authorized 6,000,000,000 shares, $0.0833 par value; 455,566,995 shares issued and outstanding
as of February 1, 2025; 461,675,441 shares issued and outstanding as of February 3, 2024.
Preferred Stock Authorized 5,000,000 shares, $0.01 par value; no shares were issued or outstanding during any
period presented.
See accompanying Notes to Consolidated Financial Statements.
TARGET CORPORATION
2024 Form 10-K
44
FINANCIAL STATEMENTS
Table of Contents
Index to Financial Statements
Consolidated Statements of Cash Flows
(millions)
Operating activities
Net earnings
Adjustments to reconcile net earnings to cash provided by operations:
Depreciation and amortization
Share-based compensation expense
Deferred income taxes
Noncash losses / (gains) and other, net
Changes in operating accounts:
Inventory
Other assets
Accounts payable
Accrued and other liabilities
Cash provided by operating activities
Investing activities
Expenditures for property and equipment
Proceeds from disposal of property and equipment
Other investments
Cash required for investing activities
Financing activities
Additions to long-term debt
Reductions of long-term debt
Dividends paid
Repurchase of stock
Shares withheld for taxes on share-based compensation
Stock option exercises
Cash required for financing activities
Net increase / (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental information
Interest paid, net of capitalized interest
Income taxes paid
Leased assets obtained in exchange for new finance lease liabilities
Leased assets obtained in exchange for new operating lease liabilities
2024
$
$
$
Note: 2023 consisted of 53 weeks compared with 52 weeks in 2024 and 2022.
See accompanying Notes to Consolidated Financial Statements.
45
TARGET CORPORATION
2024 Form 10-K
2023
2022
4,091 $
4,138 $
2,780
2,981
304
(180)
26
2,801
251
298
94
2,700
220
582
172
(854)
(308)
1,008
299
7,367
1,613
(85)
(1,216)
727
8,621
403
22
(2,237)
(624)
4,018
(2,891)
3
28
(2,860)
(4,806)
24
22
(4,760)
(5,528)
8
16
(5,504)
741
(1,139)
(2,046)
(1,007)
(99)
—
(3,550)
957
3,805
4,762 $
—
(147)
(2,011)
—
(127)
—
(2,285)
1,576
2,229
3,805 $
2,625
(163)
(1,836)
(2,646)
(180)
4
(2,196)
(3,682)
5,911
2,229
615 $
1,055
319
758
605 $
374
104
1,027
449
213
224
329
FINANCIAL STATEMENTS
Table of Contents
Index to Financial Statements
Consolidated Statements of Shareholders' Investment
(millions)
January 29, 2022
Net earnings
Other comprehensive income
Dividends declared
Repurchase of stock
Share-based compensation
January 28, 2023
Net earnings
Other comprehensive loss
Dividends declared
Share-based compensation
February 3, 2024
Net earnings
Other comprehensive income
Dividends declared
Repurchase of stock
Share-based compensation
February 1, 2025
Common Stock Additional
Accumulated Other
Stock
Par
Paid-in
Retained
Comprehensive
Shares Value
Capital
Earnings
Loss
Total
471.3 $ 39 $
6,421 $
6,920 $
(553) $ 12,827
—
—
—
2,780
—
2,780
—
—
—
—
134
134
—
—
—
(1,931)
—
(1,931)
(12.5)
(1)
119
(2,764)
—
(2,646)
1.5
—
68
—
—
68
460.3 $ 38 $
6,608 $
5,005 $
(419) $ 11,232
—
—
—
4,138
—
4,138
—
—
—
—
(41)
(41)
—
—
—
(2,050)
—
(2,050)
1.4
—
153
—
—
153
461.7 $ 38 $
6,761 $
7,093 $
(460) $ 13,432
—
—
—
4,091
—
4,091
—
—
—
—
2
2
—
—
—
(2,080)
—
(2,080)
(7.2)
(1)
—
(1,014)
—
(1,015)
1.1
1
235
—
—
236
455.6 $ 38 $
6,996 $
8,090 $
(458) $ 14,666
We declared $4.46, $4.38, and $4.14 dividends per share for the twelve months ended February 1, 2025,
February 3, 2024, and January 28, 2023, respectively.
See accompanying Notes to Consolidated Financial Statements.
TARGET CORPORATION
2024 Form 10-K
46
FINANCIAL STATEMENTS
NOTES
Table of Contents
Index to Financial Statements
Notes to Consolidated Financial Statements
1. Summary of Accounting Policies
Organization - We are a general merchandise retailer selling products to our guests through our stores and digital
channels.
We operate as a single segment that includes all of our operations, which are designed to enable guests to
purchase products seamlessly in stores or through our digital channels. Nearly all of our revenues are generated in
the United States (U.S.). The vast majority of our long-lived assets are located within the U.S.
Consolidation - The consolidated financial statements include the balances of Target Corporation and its
subsidiaries after elimination of intercompany balances and transactions. All subsidiaries are wholly owned.
Use of estimates - The preparation of our consolidated financial statements in conformity with U.S. generally
accepted accounting principles (GAAP) requires management to make estimates and assumptions affecting
reported amounts in the consolidated financial statements and accompanying notes. Actual results may differ
significantly from those estimates.
Fiscal year - Our fiscal year ends on the Saturday nearest January 31. Unless otherwise stated, references to
years in this report relate to fiscal years, rather than to calendar years. Fiscal 2024 ended February 1, 2025, and
consisted of 52 weeks. Fiscal 2023 ended February 3, 2024, and consisted of 53 weeks. Fiscal 2022 ended
January 28, 2023, and consisted of 52 weeks. Fiscal 2025 will end January 31, 2026, and will consist of 52 weeks.
Accounting policies - Our accounting policies are disclosed in the applicable Notes to the Consolidated Financial
Statements.
47
TARGET CORPORATION
2024 Form 10-K
FINANCIAL STATEMENTS
Table of Contents
NOTES
Index to Financial Statements
2. Net Sales
Merchandise sales represent the vast majority of our revenues. We also earn revenues from a variety of other
sources, most notably advertising revenue and credit card profit-sharing income.
Net Sales
(millions)
Apparel and accessories (a)
Beauty (b)
Food and beverage (c)
Hardlines (d)
Home furnishings and décor (e)
Household essentials (f)
Other merchandise sales
Merchandise sales
Advertising revenue
Credit card profit sharing
Other
Net sales
(a)
(b)
(c)
(d)
(e)
(f)
$
$
2024
16,505 $
13,173
23,828
15,784
16,699
18,614
217
104,820
649
576
521
106,566 $
2023
16,485 $
12,538
23,899
16,162
17,760
18,746
213
105,803
522
667
420
107,412 $
2022
17,646
11,092
22,918
17,739
19,463
18,483
247
107,588
404
734
394
109,120
Includes apparel for women, men, young adults, kids, toddlers, and babies, as well as jewelry, accessories,
and shoes.
Includes skin and bath care, cosmetics, hair care, oral care, deodorant, and shaving products.
Includes dry and perishable grocery, including snacks, candy, beverages, deli, bakery, meat, produce, and
food service (primarily Starbucks) in our stores.
Includes electronics, including video games and consoles, toys, sporting goods, entertainment, and
luggage.
Includes bed and bath, home décor, school/office supplies, storage, small appliances, kitchenware, greeting
cards, party supplies, furniture, lighting, home improvement, and seasonal merchandise.
Includes household cleaning, paper products, over-the-counter healthcare, vitamins and supplements, baby
gear, and pet supplies.
Merchandise sales – We record almost all retail store revenues at the point of sale. Digitally originated sales may
include shipping revenue and are recorded upon delivery to the guest or upon guest pickup at the store.
Merchandise sales do not include sales tax because we are a pass-through conduit for collecting and remitting
sales taxes. Generally, guests may return national brand merchandise within 90 days of purchase and owned and
exclusive brand merchandise within one year of purchase. Sales are recognized net of expected returns, which we
estimate using historical return patterns and our expectation of future returns. As of February 1, 2025, and
February 3, 2024, the liability for estimated returns was $172 million and $170 million, respectively.
We routinely enter into arrangements with vendors whereby we do not purchase or pay for merchandise until the
merchandise is ultimately sold to a guest. Under the vast majority of these arrangements, which represent less than
5 percent of consolidated sales, we record revenue and related costs gross. We concluded that we are the principal
in these transactions for a number of reasons, most notably because we 1) control the overall economics of the
transactions, including setting the sales price and realizing the majority of cash flows from the sale, 2) control the
relationship with the customer, and 3) are responsible for fulfilling the promise to provide goods to the customer.
Merchandise received under these arrangements is not included in Inventory because the purchase and sale of this
inventory are virtually simultaneous.
Revenue from Target gift card sales is recognized upon gift card redemption, which is typically within one year of
issuance. Our gift cards do not expire. Based on historical redemption rates, a small and relatively stable
percentage of gift cards will never be redeemed, referred to as "breakage." Estimated breakage revenue is
recognized over time in proportion to actual gift card redemptions.
TARGET CORPORATION
2024 Form 10-K
48
FINANCIAL STATEMENTS
Table of Contents
NOTES
Index to Financial Statements
Gift Card Liability Activity
(millions)
Gift card liability (a)
(a)
(b)
February 3,
2024
$
1,162
Gift Cards
Issued During
Current Period
But Not
Redeemed (b)
$
878
Revenue
Recognized
From
Beginning
February 1,
Liability
2025
$
(831) $
1,209
Included in Accrued and Other Current Liabilities.
Net of estimated breakage.
Guests receive a 5 percent discount on nearly all purchases and receive free shipping at Target.com when they use
their Target Debit Card, Target Credit Card, Target MasterCard or Target Circle Card Reloadable Account
(collectively, Target Circle Cards).
Target Circle program members earn Target Circle Rewards on various transactions. As of February 1, 2025, and
February 3, 2024, deferred revenue of $19 million and $117 million, respectively, related to our Target Circle
program was included in Accrued and Other Current Liabilities.
Advertising revenue – Primarily represents revenue related to advertising services provided via our Roundel digital
advertising business offering. Roundel services are classified as either Net Sales or as a reduction of Cost of Sales
or Selling, General, and Administrative (SG&A) Expenses, depending on the nature of the advertising arrangement.
Notes 3 and 5 provide additional information about items included in Cost of Sales and SG&A Expenses.
Credit card profit sharing – We receive payments under a credit card program agreement with TD Bank Group (TD).
Under the agreement, we receive a percentage of the profits generated by the Target Circle credit card receivables
in exchange for performing account servicing and primary marketing functions. TD underwrites, funds, and owns
Target Circle credit card receivables, controls risk management policies, and oversees regulatory compliance.
Other – Includes commissions earned on third-party sales through our Target Plus third-party digital marketplace,
Shipt membership and service revenues, rental income, Target Circle 360 membership revenue, and other
miscellaneous revenues.
3. Cost of Sales and Selling, General, and Administrative Expenses
The following table illustrates the primary items classified in each major expense category:
Cost of Sales
Merchandising cost of sales, including
• Merchandise costs
• Payment term cash discounts
• Import costs
• Freight expenses associated with moving
merchandise from our vendors to and between our
distribution centers and our retail stores
• Vendor income that is not reimbursement of
specific, incremental, and identifiable costs
• Markdowns
• Inventory shrink
Supply chain and digital fulfillment costs, including
• Compensation and benefits costs associated with
operating our supply chain facilities
• Outbound shipping expenses associated with sales to
our guests
• Compensation and benefit costs associated with
shipment of merchandise from stores
• Depreciation associated with supply chain facilities
Selling, General, and Administrative Expenses
Compensation and benefit costs for stores and
headquarters, except ship from store costs classified
as cost of sales
Occupancy and operating costs of retail and
headquarters facilities
Advertising, offset by vendor income that is a
reimbursement of specific, incremental, and
identifiable costs
Pre-opening and exit costs of stores and other facilities
Credit cards servicing expenses
Costs associated with accepting third-party bank issued
payment cards
Litigation and defense costs and related insurance
recoveries
Other administrative costs
Note: The classification of these expenses varies across the retail industry.
49
TARGET CORPORATION
2024 Form 10-K
FINANCIAL STATEMENTS
Table of Contents
NOTES
Index to Financial Statements
In 2024, we reclassified certain expenses related to our advertising and third-party digital marketplace business
offerings to conform to the current year presentation. The reclassifications increased Cost of Sales by $92 million
and $77 million for 2023 and 2022, respectively, with equal and offsetting decreases to SG&A Expenses. These
reclassifications had no impact on Net Sales, Operating Income, Net Earnings, or Earnings Per Share.
4. Consideration Received from Vendors
We receive consideration for a variety of vendor-sponsored programs—such as volume rebates, promotions, certain
advertising activities, markdown allowances, and for our compliance programs—referred to as "vendor income."
Additionally, under our compliance programs, vendors are charged for merchandise shipments that do not meet our
requirements (violations), such as late or incomplete shipments. Vendor income is recorded as a reduction of Cost
of Sales except in arrangements where the payment is a reimbursement of specific, incremental, and identifiable
costs and recorded as an offset to those costs within SG&A Expenses.
We establish a receivable for vendor income that is earned but not yet received. Based on historical trending and
data, this receivable is computed by forecasting vendor income collections and estimating the amount earned. The
majority of year-end vendor income receivables are collected within the following fiscal quarter, and we do not
believe there is a reasonable likelihood that the assumptions used in our estimate will change significantly. Note 9
provides additional information.
5. Advertising Costs
Advertising costs consist primarily of digital advertisements and media broadcast. Digital advertising costs are
generally expensed as incurred when the consumer engages with the advertisement through clicks or views, while
media broadcast costs are generally expensed at first showing or distribution of the advertisement. Advertising
costs, net of vendor reimbursements, are recorded in SG&A Expenses and were $1.5 billion in 2024, $1.4 billion in
2023, and $1.5 billion in 2022.
6. Fair Value Measurements
Fair value measurements are reported in one of three levels based on the lowest level of significant input used:
Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs, other than quoted prices
included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).
Financial Instruments Measured on a Recurring Basis
(millions)
Assets
Short-term investments (a)
Prepaid forward contracts (b)
Liabilities
Interest rate swaps (c)
Interest rate swaps (c)
(a)
(b)
(c)
Measurement
Level
Classification
Fair Value as of
February 1, February 3,
2025
2024
Cash and Cash Equivalents
Other Current Assets
Level 1 $
Level 1
3,893
23
Other Current Liabilities
Other Noncurrent Liabilities
Level 2
Level 2
—
125
$
2,897
25
3
123
Carrying value approximates fair value because maturities are less than three months.
Initially valued at transaction price. Subsequently valued by reference to the market price of Target common
stock.
Valuations are based on observable inputs to the valuation model (e.g., interest rates and credit spreads).
See Note 16 for additional information on interest rate swaps.
TARGET CORPORATION
2024 Form 10-K
50
FINANCIAL STATEMENTS
Table of Contents
NOTES
Index to Financial Statements
Significant Financial Instruments Not Measured at Fair Value (a)
(millions)
Long-term debt, including current portion (b)
(a)
(b)
As of February 1,
As of February 3,
2025
2024
Carrying
Fair
Carrying
Fair
Amount
Value
Amount
Value
$ 13,904 $ 12,953 $ 14,151 $ 13,467
The carrying amounts of certain other current assets, commercial paper, accounts payable, and certain
accrued and other current liabilities approximate fair value due to their short-term nature.
The fair value of debt is generally measured using a discounted cash flow analysis based on current market
interest rates for the same or similar types of financial instruments and would be classified as Level 2.
These amounts exclude commercial paper, unamortized swap valuation adjustments, and lease liabilities.
7. Cash and Cash Equivalents
Cash equivalents include highly liquid investments with an original maturity of three months or less from the time of
purchase. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card
transactions. These receivables typically settle in five days or less.
Cash and Cash Equivalents
February 1, February 3,
(millions)
2025
2024
Cash
$
276 $
288
Receivables from third-party financial institutions for credit and debit card transactions
593
620
Short-term investments
3,893
2,897
Cash and Cash Equivalents (a)
$
4,762 $
3,805
(a)
We have access to these funds without any significant restrictions, taxes, or penalties.
As of February 1, 2025, and February 3, 2024, we included book overdrafts of $157 million and $173 million,
respectively, in Accounts Payable and $8 million and $10 million, respectively, in Accrued and Other Current
Liabilities.
8. Inventory
The vast majority of our inventory is accounted for under the retail inventory accounting method (RIM) using the
last-in, first-out (LIFO) method. Inventory is stated at the lower of LIFO cost or market. Inventory cost includes the
amount we pay to our suppliers to acquire inventory, freight costs incurred to deliver product to our distribution
centers and stores, and import costs, reduced by vendor income and cash discounts. Supply chain operating costs,
including compensation and benefits, are expensed in the period incurred. Inventory is also reduced for estimated
losses related to shrink and markdowns. The LIFO provision is calculated based on inventory levels, markup rates,
and internally measured retail price indices, and was $183 million and $153 million as of February 1, 2025, and
February 3, 2024, respectively.
Under RIM, inventory cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the
inventory retail value. RIM is an averaging method that has been widely used in the retail industry due to its
practicality. The use of RIM will result in inventory being valued at the lower of cost or market because permanent
markdowns are taken as a reduction of the retail value of inventory.
51
TARGET CORPORATION
2024 Form 10-K
FINANCIAL STATEMENTS
NOTES
Table of Contents
Index to Financial Statements
9. Other Current Assets
Other Current Assets
(millions)
Accounts and other receivables
Vendor income receivable
Prepaid expenses
Other
Other Current Assets
February 1,
February 3,
2025
2024
$
998 $
891
543
513
226
201
185
202
$
1,952 $
1,807
10. Property and Equipment
Property and equipment, including assets acquired under finance leases, is depreciated using the straight-line
method over estimated useful lives or lease terms if shorter. We amortize leasehold improvements purchased after
the beginning of the initial lease term over the shorter of the assets' useful lives or a term that includes the
remaining initial lease term, plus any renewals that are reasonably certain at the date the leasehold improvements
are acquired. Total depreciation expense, including depreciation expense included in Cost of Sales, was $3.0 billion,
$2.8 billion, and $2.7 billion for 2024, 2023, and 2022, respectively. For income tax purposes, accelerated
depreciation methods are generally used. Repair and maintenance costs are expensed as incurred. Facility preopening costs, including supplies and payroll, are expensed as incurred.
Estimated Useful Lives
Buildings and improvements
Fixtures and equipment
Computer hardware and software
Life (Years)
8-39
2-15
2-7
We review long-lived assets for impairment when performance expectations, events, or changes in circumstances—
such as a decision to relocate or close a store, office, or distribution center, discontinue a project, or make
significant software changes—indicate that the asset's carrying value may not be recoverable. We recognized
impairment losses of $68 million, $102 million, and $66 million during 2024, 2023, and 2022, respectively. For asset
groups classified as held for sale, measurement of an impairment loss is based on the excess of the carrying
amount of the asset group over its fair value. We estimate fair value by obtaining market appraisals, obtaining
valuations from third-party brokers, or using other valuation techniques. Impairments are recorded in SG&A
Expenses.
11. Other Noncurrent Assets
Other Noncurrent Assets
(millions)
Goodwill (a)
Company-owned life insurance investments, net of loans (b)
Pension asset
Other
Other Noncurrent Assets
(a)
(b)
February 1,
February 3,
2025
2024
$
631 $
631
540
483
121
57
238
229
$
1,530 $
1,400
No impairments were recorded in 2024, 2023, or 2022 as a result of the annual goodwill impairment tests
performed.
Note 22 provides more information on company-owned life insurance investments.
TARGET CORPORATION
2024 Form 10-K
52
FINANCIAL STATEMENTS
Table of Contents
NOTES
Index to Financial Statements
12. Supplier Finance Programs
We have arrangements with several financial institutions to act as our paying agents to certain vendors. The
arrangements also permit the financial institutions to provide vendors with an option, at our vendors' sole discretion,
to sell their receivables from Target to the financial institutions. A vendor’s election to receive early payment at a
discounted amount from the financial institutions does not change the amount that we must remit to the financial
institutions or our payment date, which is up to 120 days from the invoice date.
We do not pay any fees or pledge any security to these financial institutions under these arrangements. The
arrangements can be terminated by either party with notice ranging up to 120 days.
Our outstanding vendor obligations eligible for early payment, which are included within Accounts Payable on our
Consolidated Statements of Financial Position, do not represent actual receivables sold by our vendors to the
financial institutions, which have historically been lower.
Confirmed Obligations Outstanding
(millions)
Vendor obligations eligible for early payment
February 3,
2024
$
3,398
Invoices
Confirmed
During the
Year
$
13,806
Confirmed
Invoices Paid
During the
February 1,
Year
2025
$
(13,538) $
3,666
13. Accrued and Other Current Liabilities
Accrued and Other Current Liabilities
(millions)
Wages and benefits
Gift card liability, net of estimated breakage
Real estate, sales, and other taxes payable
Dividends payable
Current portion of operating lease liabilities
Income tax payable
Workers' compensation and general liability (a)
Interest payable
Other
Accrued and Other Current Liabilities
(a)
53
February 1, February 3,
2025
2024
$
1,597 $
1,535
1,209
1,162
708
827
510
508
353
329
334
113
211
192
126
122
1,062
1,302
$
6,110 $
6,090
We retain a substantial portion of the risk related to general liability and workers' compensation claims. We
estimate our ultimate cost based on analysis of historical data and actuarial estimates. General liability and
workers' compensation liabilities are recorded at our estimate of their net present value. Note 19 provides
the noncurrent balance of these liabilities.
TARGET CORPORATION
2024 Form 10-K
FINANCIAL STATEMENTS
NOTES
Table of Contents
Index to Financial Statements
15. Commercial Paper and Long-Term Debt
Debt Maturities
Weighted-Average Interest February 1, February 3,
Rate at February 1, 2025
2025
2024
—% $
— $
1,000
2.7
4,671
4,666
4.1
3,965
3,221
6.8
938
937
4.0
1,089
1,088
3.8
1,120
1,119
3.9
2,121
2,120
13,904
14,151
(125)
(126)
2,161
2,013
(1,636)
(1,116)
$
14,304 $
14,922
(dollars in millions)
Due 2024
Due 2025-2029
Due 2030-2034
Due 2035-2039
Due 2040-2044
Due 2045-2049
Due 2050-2054
Total notes and debentures
Swap valuation adjustments
Finance lease liabilities
Less: Amounts due within one year
Long-term debt and other borrowings
Required Principal Payments
(millions)
Total required principal payments
2025
2026
2027
2028
2029
Thereafter
$
1,500 $
2,000 $
97 $
81 $
1,000 $
9,324
In September 2024, we issued $750 million of unsecured debt with a fixed rate of 4.5 percent that matures in
September 2034.
We obtain short-term financing from time to time under our commercial paper program. There was no commercial
paper outstanding at any time during the year ended February 1, 2025, or as of February 3, 2024. During the year
ended February 3, 2024, the maximum amount outstanding was $90 million, and the average daily amount
outstanding was $1 million, at a weighted average annual interest rate of 4.8 percent.
In October 2024, we obtained a new committed $1.0 billion 364-day unsecured revolving credit facility that will
expire in October 2025 and terminated our prior 364-day facility. We also have a committed $3.0 billion unsecured
revolving credit facility that will expire in October 2028. No balances were outstanding under our credit facilities at
any time during 2024 or 2023.
Substantially all of our outstanding borrowings are senior, unsecured obligations. Most of our long-term debt
obligations contain covenants related to secured debt levels. In addition to a secured debt level covenant, our credit
facilities also contain a debt leverage covenant. We are, and expect to remain, in compliance with these covenants,
which have no practical effect on our ability to pay dividends.
16. Derivative Financial Instruments
Our derivative instruments consist of interest rate swaps used to mitigate interest rate risk. As a result, we have
counterparty credit exposure to large global financial institutions, which we monitor on an ongoing basis. Note 6
provides the fair value and classification of these instruments.
Under our swap agreements, we pay a floating rate equal to the daily Secured Overnight Financing Rate (SOFR)
compounded over six months and receive a weighted average fixed rate of 2.8 percent. The agreements have a
weighted average remaining maturity of 4.5 years. As of February 1, 2025, and February 3, 2024, interest rate
swaps with notional amounts totaling $2.20 billion and $2.45 billion were designated as fair value hedges, and all
were considered to be perfectly effective under the shortcut method during 2024 and 2023.
55
TARGET CORPORATION
2024 Form 10-K
FINANCIAL STATEMENTS
Table of Contents
NOTES
Index to Financial Statements
Effect of Hedges on Debt
(millions)
Long-term debt and other borrowings
Carrying amount of hedged debt
Cumulative hedging adjustments, included in carrying amount
Effect of Hedges on Net Interest Expense
(millions)
Gain (loss) on fair value hedges recognized in Net Interest Expense
Interest rate swaps designated as fair value hedges
Hedged debt
Gain on cash flow hedges recognized in Net Interest Expense
Total
February 1,
2025
$
2024
$
$
February 3,
2024
2,069 $
(125)
2023
1 $
(1)
23
23 $
2,316
(126)
2022
(52) $
52
24
24 $
(151)
151
4
4
17. Leases
We lease certain retail stores, supply chain facilities, office space, land, and equipment. Leases with an initial term
of 12 months or less are not recorded on the Consolidated Statements of Financial Position; we recognize lease
expense for these leases on a straight-line basis over the lease term. We combine lease and nonlease components
for new and reassessed leases.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to
50 years or more. The exercise of lease renewal options is at our sole discretion. Certain leases also include
options to purchase the leased property. The depreciable life of leased assets and leasehold improvements are
limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of
exercise. We use our incremental borrowing rate based on the information available at the commencement date in
determining the present value of lease payments.
Certain of our lease agreements require reimbursement of real estate taxes, common area maintenance, and
insurance, as well as rental payments based on a percentage of retail sales over contractual levels, and others
include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material
residual value guarantees or material restrictive covenants.
We rent or sublease certain real estate to third parties. Our lease and sublease portfolio consists mainly of
operating leases with CVS Pharmacy Inc. (CVS) for space within our stores.
TARGET CORPORATION
2024 Form 10-K
56
FINANCIAL STATEMENTS
Table of Contents
NOTES
Leases
(millions)
Assets
Operating
Finance
Total leased assets
Liabilities
Current
Operating
Finance
Noncurrent
Operating
Finance
Total lease liabilities
(a)
(b)
(c)
57
February 1,
2025
Classification
Operating Lease Assets
Property and Equipment, Net (a)
February 3,
2024
$
3,763 $
1,557
3,362
1,470
$
5,320 $
4,832
Accrued and Other Current Liabilities
$
Current Portion of Long-term Debt and Other Borrowings
353 $
136
329
119
3,582
2,025
6,096 $
3,279
1,894
5,621
Noncurrent Operating Lease Liabilities
Long-term Debt and Other Borrowings
$
Finance lease assets are recorded net of accumulated amortization of $857 million and $743 million as of
February 1, 2025, and February 3, 2024, respectively.
Lease Cost
(millions)
Operating lease cost (a)
Finance lease cost
Amortization of leased assets
Interest on lease liabilities
Sublease income (c)
Net lease cost
(a)
Index to Financial Statements
Classification
SG&A Expenses (b)
$
2024
641 $
2023
550 $
2022
467
$
146
77
(15)
849 $
136
71
(20)
737 $
133
68
(19)
649
Depreciation and Amortization (b)
Net Interest Expense
Net Sales
2024, 2023, and 2022 include $132 million, $115 million, and $101 million, respectively, of short-term and
variable lease costs.
Supply chain-related amounts are included in Cost of Sales.
Sublease income excludes rental income from owned properties of $48 million in 2024, and $49 million for
each of 2023 and 2022, which is also included in Net Sales.
TARGET CORPORATION
2024 Form 10-K
FINANCIAL STATEMENTS
Table of Contents
NOTES
Index to Financial Statements
Maturity of Lease Liabilities
(millions)
2025
2026
2027
2028
2029
Thereafter
Total lease payments
Less: Interest
Present value of lease liabilities
(a)
(b)
Operating
Finance
(a)
Leases
Leases (b)
$
510 $
205 $
507
203
497
204
469
206
430
204
2,800
1,824
$
5,213 $
2,846 $
1,278
685
$
3,935 $
2,161
Total
715
710
701
675
634
4,624
8,059
Operating lease payments include $777 million related to options to extend lease terms that are reasonably
certain of being exercised and exclude $186 million of legally binding minimum lease payments for leases
signed but not yet commenced.
Finance lease payments include $245 million related to options to extend lease terms that are reasonably
certain of being exercised and exclude $128 million of legally binding minimum lease payments for leases
signed but not yet commenced.
Lease Term and Discount Rate
February 1,
2025
February 3,
2024
11.8
13.9
12.0
14.6
4.51 %
3.88 %
4.22 %
3.69 %
Weighted average remaining lease term (years)
Operating leases
Finance leases
Weighted average discount rate
Operating leases
Finance leases
Other Information
(millions)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
TARGET CORPORATION
2024 Form 10-K
2024
$
490 $
76
139
2023
479 $
70
147
2022
364
63
100
58
FINANCIAL STATEMENTS
Table of Contents
NOTES
Index to Financial Statements
18. Income Taxes
Earnings before income taxes were $5.3 billion, $5.3 billion, and $3.4 billion during 2024, 2023, and 2022,
respectively, including $1.1 billion, $1.2 billion, and $1.3 billion earned by our foreign entities subject to tax outside
of the U.S.
Tax Rate Reconciliation
Federal statutory rate
State income taxes, net of the federal tax benefit
International
Excess tax benefit related to share-based payments
Federal tax credits
Other
Effective tax rate
Provision for Income Taxes
(millions)
Current:
Federal
State
International
Total current
Deferred:
Federal
State
International
Total deferred
Total provision
59
$
$
TARGET CORPORATION
2024 Form 10-K
2024
21.0 %
3.7
(1.1)
(0.1)
(0.8)
(0.5)
22.2 %
2023
21.0 %
3.8
(1.3)
(0.3)
(0.8)
(0.5)
21.9 %
2022
21.0 %
3.0
(2.1)
(1.6)
(1.5)
(0.1)
18.7 %
2024
2023
2022
1,013 $
236
101
1,350
556 $
208
97
861
(84)
33
107
56
(184)
2
2
(180)
1,170 $
256
43
(1)
298
1,159 $
501
82
(1)
582
638
FINANCIAL STATEMENTS
Table of Contents
NOTES
Index to Financial Statements
Net Deferred Tax Asset / (Liability)
(millions)
Gross deferred tax assets:
Accrued and deferred compensation
Accruals and reserves not currently deductible
Self-insured benefits
Deferred occupancy income
Lease liabilities
Other
Total gross deferred tax assets
Gross deferred tax liabilities:
Property and equipment
Leased assets
Inventory
Other
Total gross deferred tax liabilities
Total net deferred tax liability (a)
(a)
February 1,
2025
$
$
February 3,
2024
423 $
260
207
109
1,600
50
2,649
392
256
180
118
1,468
92
2,506
(2,830)
(1,425)
(484)
(203)
(4,942)
(2,293) $
(3,015)
(1,276)
(500)
(187)
(4,978)
(2,472)
$10 million and $8 million of the balances as of February 1, 2025, and February 3, 2024, respectively, is
included in Other Noncurrent Assets.
We file a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. The U.S.
Internal Revenue Service (IRS) is currently auditing certain aspects of the U.S. federal income tax returns for years
2021 through 2023 and has completed exams for years 2020 and prior. With few exceptions, we are no longer
subject to state and local or non-U.S. income tax examinations by tax authorities for years before 2019.
Reconciliation of Gross Unrecognized Tax Benefits
(millions)
Balance at beginning of period
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Balance at end of period
$
$
2024
352 $
118
22
(36)
(23)
433 $
2023
233 $
128
8
(13)
(4)
352 $
2022
125
115
21
(23)
(5)
233
If we were to prevail on all unrecognized tax benefits recorded, the amount that would benefit the effective tax rate
was $206 million, $161 million, and $107 million as of February 1, 2025, February 3, 2024, and January 28, 2023,
respectively. In addition, the reversal of accrued interest and penalties would also benefit the effective tax rate.
Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During
2024, 2023, and 2022, we recorded an expense / (benefit) from accrued interest and penalties of $13 million, $6
million, and $(4) million, respectively. As of February 1, 2025, February 3, 2024, and January 28, 2023, total
accrued interest and penalties were $21 million, $14 million, and $7 million, respectively.
It is reasonably possible that the amount of the unrecognized tax benefits with respect to our other unrecognized tax
positions will increase or decrease during the next twelve months; however, an estimate of the amount or range of
the change cannot be made at this time.
TARGET CORPORATION
2024 Form 10-K
60
FINANCIAL STATEMENTS
Table of Contents
NOTES
Index to Financial Statements
19. Other Noncurrent Liabilities
Other Noncurrent Liabilities
(millions)
Deferred compensation
Workers' compensation and general liability
Deferred occupancy income (a)
February 1,
February 3,
2025
2024
$
628 $
576
561
458
388
419
Income and other taxes payable
Pension benefits
Other
Other Noncurrent Liabilities
(a)
$
338
31
169
2,115 $
272
33
181
1,939
To be amortized evenly through 2038.
20. Share Repurchase
We periodically repurchase shares of our common stock under a board-authorized repurchase program through a
combination of open market transactions, accelerated share repurchase arrangements, and other privately
negotiated transactions with financial institutions.
Share Repurchase Activity
(millions, except per share data)
Total number of shares purchased
Average price paid per share (a)
Total investment (a)
(a)
$
$
2024
7.2
141.72 $
1,015 $
2023
—
— $
— $
2022
12.5
211.57
2,646
Amounts include applicable excise tax and commissions.
21. Share-Based Compensation
We maintain a long-term incentive plan for key team members and non-employee members of our Board of
Directors. This plan allows us to grant equity-based compensation awards, including stock options, stock
appreciation rights, performance share units, restricted stock units, restricted stock awards, or a combination of
awards (collectively, share-based awards). The number of unissued common shares reserved for future grants
under this plan was 24.1 million as of February 1, 2025.
Compensation expense associated with share-based awards is recognized on a straight-line basis over the required
service period and reflects estimated forfeitures. Share-based compensation expense recognized in SG&A
Expenses was $307 million, $255 million, and $224 million, and the related income tax benefit was $66 million, $56
million, and $52 million, in 2024, 2023, and 2022, respectively.
61
TARGET CORPORATION
2024 Form 10-K
FINANCIAL STATEMENTS
NOTES
Table of Contents
Index to Financial Statements
Restricted Stock Units
We issue restricted stock units and performance-based restricted stock units generally with 3-year cliff or 4-year
graduated vesting from the grant date (collectively restricted stock units) to certain team members. The final number
of shares issued under performance-based restricted stock units is based on our total shareholder return relative to
a retail peer group over a 3-year performance period. We also regularly issue restricted stock units to our Board of
Directors, which vest quarterly in the year they are granted and are settled in shares of Target common stock upon
departure from the Board. The fair value for restricted stock units is calculated based on our stock price on the date
of grant, incorporating an analysis of the total shareholder return performance measure where applicable. The
weighted average grant date fair value of restricted stock units was $165.21, $160.91, and $208.80 in 2024, 2023,
and 2022, respectively.
Restricted Stock Unit Activity
Total Nonvested Units
Restricted
Grant Date
Stock (a)
Fair Value (b)
3,796 $
171.61
2,477
165.21
(377)
171.47
(1,347)
167.39
4,549 $
169.59
February 3, 2024
Granted
Forfeited
Vested
February 1, 2025
(a)
(b)
Represents the number of shares of restricted stock units, in thousands. For performance-based restricted
stock units, assumes attainment of maximum payout rates as set forth in the performance criteria. Applying
actual or expected payout rates, the number of outstanding restricted stock units and performance-based
restricted stock units as of February 1, 2025, was 4.47 million.
Weighted average per unit.
The expense recognized each period is partially dependent upon our estimate of the number of shares that will
ultimately be issued. As of February 1, 2025, there was $429 million of total unrecognized compensation expense
related to restricted stock units, which is expected to be recognized over a weighted average period of 2.5 years.
The fair value of restricted stock units vested and converted to shares of Target common stock was $225 million,
$213 million, and $321 million in 2024, 2023, and 2022, respectively.
Performance Share Units
We issue performance share units to certain team members that represent shares potentially issuable in the future.
Issuance is based upon our performance, generally relative to a retail peer group, over a 3-year or 4-year
performance period on certain measures primarily including sales growth, after-tax return on invested capital, and
earnings per share growth. The fair value of performance share units is calculated based on our stock price on the
date of grant. The weighted average grant date fair value of performance share units was $164.92, $162.54, and
$216.63 in 2024, 2023, and 2022, respectively.
Performance Share Unit Activity
Total Nonvested Units
Performance
Grant Date
Share Units (a) Fair Value (b)
1,494 $
182.98
753
164.92
(146)
175.94
(271)
179.31
1,830 $
177.15
February 3, 2024
Granted
Forfeited
Vested
February 1, 2025
(a)
(b)
Represents the number of performance share units, in thousands. Assumes attainment of maximum payout
rates as set forth in the performance criteria. Applying actual or expected payout rates, the number of
outstanding performance share units as of February 1, 2025, was 0.87 million.
Weighted average per unit.
TARGET CORPORATION
2024 Form 10-K
62
FINANCIAL STATEMENTS
Table of Contents
NOTES
Index to Financial Statements
25. Segment Reporting
Our Chief Operating Decision Maker—our Chief Executive Officer—monitors our consolidated operating income
and net earnings to evaluate performance and make operating decisions. We operate as a single segment that
includes all of our operations, which are designed to enable guests to purchase products seamlessly in stores or
through our digital channels. Virtually all of our consolidated revenues are generated in the United States. The vast
majority of our properties and equipment are located within the United States.
Business Segment Results
(millions)
Net sales
Cost of sales
Merchandising cost of sales (a)
Supply chain and digital fulfillment costs (a)
Total cost of sales
Selling, general and administrative expenses
Depreciation and amortization (exclusive of depreciation included in
cost of sales)
Operating income
Net interest expense
Net other income
Earnings before income taxes
Provision for income taxes
Net earnings
(a)
$
$
$
2024
106,566 $
2023
107,412 $
2022
109,120
68,884
7,618
76,502
21,969
70,652
7,176
77,828
21,462
74,436
7,870
82,306
20,581
2,529
5,566 $
411
(106)
5,261
1,170
4,091 $
2,415
5,707 $
502
(92)
5,297
1,159
4,138 $
2,385
3,848
478
(48)
3,418
638
2,780
Note 3 provides a description of Merchandising Cost of Sales and Supply Chain and Digital Fulfillment
Costs.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Controls and Procedures
Changes in Internal Control Over Financial Reporting
During the most recently completed fiscal quarter, there were no changes which materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report, we conducted an evaluation, under supervision and with
the participation of management, including the chief executive officer and chief financial officer, of the effectiveness
of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the
Securities Exchange Act of 1934, as amended (Exchange Act). Based upon that evaluation, our chief executive
officer and chief financial officer concluded that our disclosure controls and procedures are effective at a reasonable
assurance level. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange
Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in
reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by us in reports filed under the
Exchange Act is accumulated and communicated to our management, including our principal executive and
principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions
regarding required disclosure.
TARGET CORPORATION
2024 Form 10-K
68
ANNUAL REPORT
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, 2024
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 Number: 001-35551
__________________________
Meta Platforms, Inc.
(Exact name of registrant as specified in its charter)
__________________________
Delaware
20-1665019
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
1 Meta Way, Menlo Park, California 94025
(Address of principal executive offices and Zip Code)
(650) 543-4800
(Registrant's telephone number, including area code)
__________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Stock, $0.000006 par value
Trading symbol(s)
META
Name of each exchange on which registered
The Nasdaq Stock Market LLC
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 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 (Exchange Act) 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions
of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to
previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers
during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2024, the last business day of the registrant's most recently completed second fiscal
quarter, was $1,103 billion based upon the closing price reported for such date on the Nasdaq Global Select Market. On January 24, 2025, the registrant had 2,189,898,148 shares of Class A common
stock and 343,761,117 shares of Class B common stock outstanding.
Meta Platforms, Inc.
Form 10-K
TABLE OF CONTENTS
Page
3
4
Note About Forward-Looking Statements
Limitations of Key Metrics and Other Data
PART I
Item 1.
Business
6
Item 1A.
Risk Factors
14
Item 1B.
Unresolved Staff Comments
49
Item 1C.
Cybersecurity
49
Item 2.
Properties
50
Item 3.
Legal Proceedings
51
Item 4.
Mine Safety Disclosures
56
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
57
Item 6.
[Reserved]
58
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
59
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
79
Item 8.
Financial Statements and Supplementary Data
81
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
123
Item 9A.
Controls and Procedures
123
Item 9B.
Other Information
123
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
124
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
124
Item 11.
Executive Compensation
124
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
124
Item 13.
Certain Relationships and Related Transactions, and Director Independence
124
Item 14.
Principal Accountant Fees and Services
124
PART IV
Item 15.
Exhibit and Financial Statement Schedules
125
Item 16.
Form 10-K Summary
127
Signatures
128
2
Table of Contents
PART I
Item 1. Business
Overview
Our mission is to build the future of human connection and the technology that makes it possible.
We build technology that helps people connect and share, find and build communities, and grow businesses. Our products enable people to connect and
share with friends and family through mobile devices, personal computers, virtual reality (VR) and mixed reality (MR) headsets, augmented reality (AR), and
wearables. We also help people discover and learn about what is going on in the world around them, enable people to share their experiences, ideas, photos,
videos, and other content with audiences ranging from their closest family members and friends to the public at large, and stay connected everywhere by
accessing our products. Meta is moving our offerings beyond 2D screens toward immersive experiences like augmented, mixed, and virtual reality to help build
the next computing platform. Our vision does not center on any single product, but rather an entire ecosystem of experiences, devices, and new technologies.
While the metaverse is in the very early stages of its development, we believe it will become the next computing platform and the future of social interaction.
Across our work, we are innovating in artificial intelligence (AI) technologies to build new experiences that help make our platform more social, useful,
and immersive. Our AI investments support initiatives across our products and services, helping power the systems that rank content in our apps, our discovery
engine that recommends relevant content, the tools advertisers use to reach customers, the development of new generative AI experiences, and the tools that
make our product development more efficient and productive. For example, Meta AI is an assistant that's available across our apps, on Ray-Ban Meta AI
glasses and on the web. It's designed to help people learn, get things done, create content, and connect with others to make the most of every moment.
We report financial results for two segments: Family of Apps (FoA) and Reality Labs (RL). Currently, we generate substantially all of our revenue from
selling advertising placements on our family of apps to marketers, which is reflected in FoA. Ads on our platform enable marketers to reach people across a
range of marketing objectives, such as generating leads or driving awareness. Marketers purchase ads that can appear in multiple places including on Facebook,
Instagram, Messenger, and third-party applications and websites. RL generates revenue from sales of consumer hardware products, software, and content.
We invest in our business based on our company priorities. In 2025, we intend to focus on several key investment areas: generative AI, our discovery
engine, the metaverse and wearables, Threads, monetization of our products and services, platform integrity and community support, and infrastructure
capacity.
The majority of our investments are directed toward developing our family of apps. In 2024, 79% of our total costs and expenses were recognized in
FoA and 21% were recognized in RL. Our FoA investments were $75.25 billion in 2024 and include expenses relating to headcount, data centers and technical
infrastructure as part of our efforts to develop our apps and our advertising services. We are also making significant investments in our metaverse and
wearables efforts. This includes developing virtual, mixed, and augmented reality devices, software for social platforms, neural interfaces, and other
foundational technologies. Our total RL investments were $19.88 billion in 2024 and include expenses relating to headcount and technology development
across these efforts. These are fundamentally new technologies that we expect will evolve as the next computing platform develops, and many products may
only be fully realized in the next decade. Although it is inherently difficult to predict when and how the next computing platform will develop, we expect our
RL segment to continue to operate at a loss for the foreseeable future, and our ability to support our efforts to build the next computing platform is dependent
on generating sufficient profits from other areas of our business. We expect this will be a complex, evolving, and long-term initiative. We are investing now
because we believe this is the next chapter of the internet and will unlock monetization opportunities for businesses, developers, and creators, including around
advertising, hardware, and digital goods.
6
Table of Contents
Family of Apps Products
•
Facebook. Facebook helps give people the power to build community and bring the world closer together. It's a place for people to share life's
moments and discuss what's happening, nurture and build relationships, discover and connect to people with shared interests, and create economic
opportunity. They can do this through Feed, Reels, Stories, Groups, Marketplace, and more.
•
Instagram. Instagram brings people closer to the people and things they love. Instagram Feed, Stories, Reels, Live, and messaging are places
where people and creators can connect and express themselves through photos, video, and private messaging, and discover and shop from their
favorite businesses.
•
Messenger. Messenger is a simple yet powerful messaging application for people to connect with friends, family, communities, and businesses
across platforms and devices through text, audio, and video calls.
•
Threads. Threads is an application for text-based updates and public conversations, where communities come together to discuss topics of interest.
People can connect directly with their favorite creators and others who love the same things or build a loyal following of their own to share their
ideas, opinions, and creativity with the world.
•
WhatsApp. WhatsApp is a simple, reliable, and secure messaging application that is used by people and businesses around the world to
communicate and transact in a private way. Within WhatsApp we launched WhatsApp Channels, a one-to-many broadcast service designed to help
people follow information from people and organizations that are important to them.
Reality Labs Products
Many of our Reality Labs investments are directed toward long-term, cutting edge research and development for products that are not on the market
today and may only be fully realized in the next decade. This includes exploring new technologies such as neural interfaces using electromyography, which lets
people control their devices using neuromuscular signals, as well as innovations in AI and hardware to help build next-generation interfaces. In the near term,
we are continuing to develop early metaverse and wearables products and experiences that help people feel connected, anytime, anywhere.
Our metaverse efforts include our VR, MR, and social platform initiatives. Our current product offerings in VR include our Meta Quest devices, as well
as software and content available through the Meta Horizon Store, which enable a range of social experiences that allow people to defy physical distance while
engaging in gaming, fitness, entertainment, and more. To drive greater adoption and acceptance of VR we have introduced MR capabilities, which allow users
to experience the immersion and presence of VR while still being grounded in the physical world, through our Meta Quest devices.
Our wearables efforts include our AR initiatives. We have continued to advance our roadmap to include additional AI-enabled offerings such as the RayBan Meta AI glasses, which feature Meta AI, our advanced conversational assistant, as well as other features such as hands-free interaction. As we continue our
long-term efforts to bring AR glasses to market, in 2024 we also unveiled our Orion prototype, a pair of true AR glasses that overlay content on top of the
physical world. It does this with an industry-leading field of view and in glasses form factor for comfortable wear.
In general, while all of these investments are part of our long-term initiative to help build the next computing platform, our metaverse efforts also
include notable shorter-term projects developing specific products and services to go to market, whereas our wearables efforts are primarily directed toward
longer-term research and development projects. For example, in 2025, we expect to spend approximately 50% of our Reality Labs operating expenses on our
wearables initiatives, and the remaining 50% on our metaverse initiatives. We apply significant judgment in estimating this expense breakdown as there are
certain shared costs across product lines, and our expectations are subject to change, including as the next computing platform and our business strategies
evolve. In particular, we regularly evaluate our product roadmaps and make significant changes as our understanding of the technological challenges and
market landscape and our product ideas and designs evolve.
7
Table of Contents
Competition
Our business is characterized by innovation, rapid change, and disruptive technologies. We compete with companies providing connection, sharing,
discovery, and communication products and services to users online, as well as companies that sell advertising to businesses looking to reach consumers and/or
develop tools and systems for managing and optimizing advertising campaigns. We face significant competition in every aspect of our business, including, but
not limited to, companies that facilitate the ability of users to create, share, communicate, and discover content and information online or enable marketers to
reach their existing or prospective audiences. We compete to attract, engage, and retain people who use our products, to attract and retain businesses that use
our free or paid business and advertising services, and to attract and retain developers who build compelling applications that integrate with our products. We
also compete with companies that develop and deliver consumer hardware and augmented, mixed, and virtual reality products and services. We also expect to
face additional competition as we introduce or acquire new products, as our existing products evolve, or as other companies introduce new products and
services, including as part of efforts to innovate through the development and application of AI and other new technologies as well as efforts to develop the
metaverse.
Technology
Our product development philosophy centers on continuous innovation in creating and improving products that are social by design, which means that
our products are designed to place people and their social interactions at the core of the product experience. As our user base grows, as engagement with
products like video, VR, and MR increases, and as we deepen our investment in new technologies, our computing needs continue to expand. We have designed
and built our own data centers and key portions of our technical infrastructure, and a substantial portion of our technical infrastructure is also provided by third
parties. Our ability to provide and continue to innovate our products and services depends on the continued availability of components, power, and network
capacity.
We make significant investments in technology both to improve our existing products and services and to develop new ones, as well as for our marketers
and developers. We are also investing in protecting the security, privacy, and integrity of our platform by investing in both people and technology to strengthen
our systems against abuse. Across all of these efforts, we are making significant investments in AI initiatives, including generative AI, to, among other things,
recommend relevant content across our products through our AI-powered discovery engine, enhance our advertising tools and improve our ad delivery,
targeting, and measurement capabilities, and to develop new products as well as new features for existing products.
We also believe in the power of open source innovation and have released our Llama models, consisting of state-of-the-art foundation models that are
available for researchers and developers to use and build upon. By making our Llama models openly available, we aim to accelerate AI research and
development, improve our own products, and to foster collaboration and innovation within the broader tech community.
Sales and Operations
The majority of our marketers use our self-service ad platform to launch and manage their advertising campaigns. We also have a global sales force that
is focused on attracting and retaining advertisers and providing support to them throughout the stages of the marketing cycle from pre-purchase decisionmaking to real-time optimizations to post-campaign analytics. We work directly with these advertisers, as well as through advertising agencies and resellers.
We operate offices in more than 90 cities around the globe, the majority of which have a sales presence. We also invest in and rely on self-service tools to
provide direct customer support to our users and partners.
For our RL products, our sales and operations efforts utilize third-party sales channels such as retailers, resellers, and our direct-to-consumer channel,
Meta.com. These efforts are focused on driving consumer and enterprise sales and adoption of our Meta Quest portfolio of products and Ray-Ban Meta AI
glasses.
Marketing
Historically, our communities have generally grown organically with people inviting their friends to connect with them, supported by internal efforts to
stimulate awareness and interest. In addition, we have invested and will continue to invest in marketing our products and services to grow our brand and help
build community around the world.
8
Table of Contents
Intellectual Property
To establish and protect our proprietary rights, we rely on a combination of patents, trademarks, copyrights, trade secrets, including know-how, license
agreements, confidentiality procedures, non-disclosure agreements with third parties, employee disclosure and invention assignment agreements, and other
contractual rights. In addition, to further protect our proprietary rights, from time to time we have purchased patents and patent applications from third parties.
We do not believe that our proprietary technology is dependent on any single patent or copyright or groups of related patents or copyrights. We believe the
duration of our patents is adequate relative to the expected lives of our products.
Government Regulation
We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, many of which are still
evolving and being tested in courts, and could be interpreted in ways that could harm our business. These laws and regulations involve matters including
privacy, data use, data combination, data protection and personal information, the provision of our services to younger users, biometrics, encryption, rights of
publicity, content, integrity, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, data localization and storage,
data disclosure, AI and machine learning, electronic contracts and other communications, competition, protection of minors, consumer protection, civil rights,
accessibility, telecommunications, product liability, e-commerce, taxation, economic or other trade controls including sanctions, anti-corruption and political
law compliance, securities law compliance, and online payment services. The introduction of new products, expansion of our activities in certain jurisdictions,
or other actions that we may take may subject us to additional laws, regulations, or other government scrutiny. In addition, these U.S. and foreign laws and
regulations may impose different obligations from each other and create the potential for significant fines to be imposed.
These U.S. federal and state, EU, and other international laws and regulations, which in some cases can be enforced by private parties in addition to
government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws
and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate, and may be interpreted and applied
inconsistently from jurisdiction to jurisdiction and inconsistently with our current policies and practices. For example, regulatory or legislative actions or
litigation concerning the manner in which we display content to our users, moderate content, provide our services to younger users, or are able to use data in
various ways, including for advertising, or otherwise relating to content that is made available on our products, have in the past and could in the future
adversely affect user growth and engagement, affect the manner in which we provide our services, or adversely affect our financial results, including by
imposing significant fines that increasingly may be calculated based on global revenue. In the United States, in 2023, the U.S. Supreme Court heard oral
argument in a matter in which the scope of the protections available to online platforms under Section 230 of the Communications Decency Act (Section 230)
was at issue, but it ultimately declined to address Section 230 in its decision. In addition, there have been, and continue to be, various other litigation
concerning, and state and federal legislative and executive efforts to remove or restrict, the scope of the protections available to online platforms under
Section 230, and any such changes may increase our costs or require significant changes to our products, business practices, or operations, which could
adversely affect our business and financial results.
We are also subject to evolving laws and regulations that dictate whether, how, and under what circumstances we can transfer, process or receive certain
data that is critical to our operations, including data shared between countries or regions in which we operate and data shared among our products and services.
If we are unable to transfer data between and among countries and regions in which we operate, or if we are restricted from sharing data among our products
and services, it could affect our ability to provide our services, the manner in which we provide our services or our ability to target ads, which could adversely
affect our financial results. For example, in 2016, the European Union and United States agreed to a transfer framework for data transferred from the European
Union to the United States, called the Privacy Shield, but the Privacy Shield was invalidated in July 2020 by the Court of Justice of the European Union
(CJEU). In addition, the other bases upon which Meta relies to transfer such data, such as Standard Contractual Clauses (SCCs), have been subjected to
regulatory and judicial scrutiny. For example, the CJEU considered the validity of SCCs as a basis to transfer user data from the European Union to the United
States following a challenge brought by the Irish Data Protection Commission (IDPC). Although the CJEU upheld the validity of SCCs in July 2020, on May
12, 2023, the IDPC issued a Final Decision concluding that Meta Platforms Ireland's reliance on SCCs in respect of certain transfers of European Economic
Area (EEA) Facebook user data was not in compliance with the European General Data Protection Regulation (GDPR). The IDPC issued an administrative fine
of EUR €1.2 billion as well as corrective orders requiring Meta Platforms Ireland to suspend the relevant transfers and to bring its processing operations into
compliance with Chapter V GDPR by ceasing the unlawful processing, including storage,
9
Table of Contents
of such data in the United States. We are appealing this Final Decision and it is currently subject to an interim stay from the Irish High Court. Separately, on
March 25, 2022, the European Union and United States announced that they had reached an agreement in principle on a new EU-U.S. Data Privacy Framework
(EU-U.S. DPF). On October 7, 2022, President Biden signed the Executive Order on Enhancing Safeguards for United States Signals Intelligence Activities
(E.O.), and on June 30, 2023, the European Union and the three additional countries making up the EEA were designated by the United States Attorney General
as a "qualifying state" under Section 3(f) of the E.O. On July 10, 2023, the European Commission adopted an adequacy decision in relation to the United
States. The adequacy decision concludes that the United States ensures an adequate level of protection for personal data transferred from the European Union
to organizations in the United States that are included in the "Data Privacy Framework List," maintained and made publicly available by the United States
Department of Commerce pursuant to the EU-U.S. DPF. The implementation of the EU-U.S. DPF and the adequacy decision are important and welcome
milestones, and we have implemented steps to comply with the above corrective orders following engagement with the IDPC. The EU-U.S. DPF replaces two
prior adequacy frameworks which were invalidated by the CJEU. A further invalidation of the EU-U.S. DPF by the CJEU could create considerable uncertainty
and lead to us being unable to offer a number of our most significant products and services, including Facebook and Instagram, in Europe, which would
materially and adversely affect our business, financial condition, and results of operations.
We have been subject to other significant legislative and regulatory developments, which together with proposed or new legislation and regulations
could significantly affect our business in the future. For example, we have implemented a number of product changes and controls as a result of requirements
under the GDPR, and may implement additional changes in the future. The GDPR also requires submission of personal data breach notifications to our lead
European Union privacy regulator, the IDPC, and includes significant penalties for non-compliance with the notification obligation as well as other
requirements of the regulation. The interpretation of the GDPR is still evolving, including through decisions of the CJEU, and draft decisions in investigations
by the IDPC are subject to review by other European privacy regulators as part of the GDPR's consistency mechanism, which may lead to significant changes
in the final outcome of such investigations. We also face potential enforcement from European privacy regulators other than the IDPC, including where those
regulators consider they must act urgently or where they believe their concerns relate only to data processing undertaken in their individual jurisdiction. As a
result, the interpretation and enforcement of the GDPR, as well as the imposition and amount of penalties for non-compliance, are subject to significant
uncertainty, and as it evolves, could potentially have a negative impact on our business and/or our operations. In addition, Brazil, the United Kingdom, and
other countries have enacted similar data protection regulations imposing data privacy-related requirements on products and services offered to users in their
respective jurisdictions. The California Consumer Privacy Act, as amended by the California Privacy Rights Act (CCPA), also establishes certain transparency
rules and creates certain data privacy rights for users, including limitations on our use of certain sensitive personal information and more ability for users to
control the purposes for which their data is shared with third parties. Other states have proposed or enacted similar comprehensive privacy laws that afford
users with similar data privacy rights and controls. These laws and regulations are evolving and subject to interpretation, and resulting limitations on our
advertising services, or reductions of advertising by marketers, have to some extent adversely affected, and will continue to adversely affect, our advertising
business. Some states have also proposed or enacted laws specifically focused on the privacy rights and controls for users under 18 years old and their parents
or guardians. Like comprehensive privacy laws, these laws are evolving and subject to interpretation, and may restrict our ability to offer certain products and
services provided to all or certain cohorts of users in those states, adversely affecting our advertising business. In Europe, evolving interpretation of the
ePrivacy Directive's requirements regarding the use of cookies and similar technologies may lead to regulators imposing specific measures in the future which
could directly impact our use of such technologies. In addition, the ePrivacy Directive and national implementation laws impose additional limitations on the
use of data across messaging products and include significant penalties for non-compliance. Changes to our products or business practices as a result of these
or similar developments have adversely affected, and may in the future adversely affect, our advertising business. For example, in response to regulatory
developments in Europe, we announced plans to change the legal basis for behavioral advertising on Facebook and Instagram in the European Union, European
Economic Area, and Switzerland from "legitimate interests" to "consent," and in November 2023 we began offering users in the region a "subscription for no
ads" alternative. We are engaging with regulators on our consent model, including regarding compliance with requirements under the GDPR, Digital Markets
Act (DMA), and EU consumer laws. For example, in March 2024, the European Commission opened formal proceedings regarding the compliance of our
"subscription for no ads" model with requirements under the DMA, and it issued preliminary findings in July 2024, reflecting its preliminary view that our
model does not comply with such requirements, and indicated that it will conclude its investigation in March 2025. In addition, the European Data Protection
Board has published an opinion on the operation of such models under GDPR and European consumer protection organizations have raised concerns regarding
our compliance with consumer protection laws. In response to these developments, in November 2024, we began offering users in the European Union,
European Economic Area, and Switzerland who elect to continue using our services free-of-charge, supported by ads, an option to see less personalized ads,
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which are expected to be less relevant and effective than our premium ad offerings. These or any similar developments in the future may negatively impact our
user growth and engagement, revenue, and financial results.
Similarly, there are a number of legislative proposals or recently enacted laws in the European Union, the United States, at both the federal and state
level, as well as other jurisdictions that could impose new obligations or limitations in areas affecting our business. For example, the DMA in the European
Union imposes restrictions and requirements on companies like ours, including in areas such as the combination of data across services, mergers and
acquisitions, and product design. The DMA also includes significant penalties for non-compliance, and its key requirements are enforceable against designated
gatekeeper companies as of March 2024. The DMA has caused, and may in the future cause, us to incur significant compliance costs and make changes to our
products or business practices. The requirements under the DMA will likely be subject to further interpretation and regulatory engagement. Pending or future
proposals to modify competition laws in a number of jurisdictions could have similar effects. Further, the Digital Services Act (DSA), which started to apply to
our business as of August 2023, imposes certain restrictions and requirements for our products and services, subjects us to increased compliance costs, and
includes significant penalties for non-compliance. The interpretation and enforcement of the DMA and the DSA, as well as the imposition and amount of
penalties for non-compliance, are subject to significant uncertainty. In addition, some countries, such as the UK, India, and Turkey, are considering or have
passed legislation implementing data protection requirements, new competition requirements, or requiring local storage and processing of data or similar
requirements that could require substantial changes to our products, increase the cost and complexity of delivering our services, cause us to cease the offering
of our products and services in certain countries, and/or result in fines or other penalties. New legislation or regulatory decisions may restrict our ability to
collect and use information about minors or also limit our advertising services or our ability to offer products and services to minors in certain jurisdictions. For
example, several U.S. states, including Arkansas, Utah, Texas, California, and Florida, among others, have passed laws restricting our ability to offer services to
minors without parental consent or otherwise limiting the services that we can provide to minors. While enforcement of a number of these statutes (or parts of
them) has been enjoined as a result of legal challenges to them, it is possible that the decisions to enjoin these statutes may be overturned, the injunctive orders
may expire, and certain statutes are coming into effect that may not be subject to injunctions. Should enforcement of one or more of these statutes not be
enjoined, we may not be able to comply with certain of these statutes by their respective effective dates. We may face similar challenges in light of recent
legislation in Australia which imposes a social media ban for users under 16 years old that is expected to be effective by December 2025, requiring certain
social media companies to take reasonable steps to ensure under 16 year olds do not create user accounts. Legislative proposals and evolving interpretation of
existing laws in Europe, Asia-Pacific, and other jurisdictions may also subject us to new requirements relating to allegedly fraudulent or illegal activities by
third parties on our platform, which could cause us to incur significant compliance costs or make changes to our products or business practices, and could
subject us to additional fines and penalties or liability for losses to users or other third parties in such transactions.
We are and expect to continue to be, the subject of investigations, inquiries, data requests, requests for information, actions, and audits by government
authorities and regulators in the United States, Europe, and around the world, particularly in the areas of privacy, data use, data combination, and data
protection, including with respect to processing of sensitive data, data from third parties, data for advertising purposes, data security, minors, data subject
rights, safety, law enforcement, consumer protection, civil rights, content and content moderation, use of our platform for illegal, illicit, or otherwise
objectionable activity, competition, AI, and machine learning. We are also currently, and may in the future be, subject to regulatory orders or consent decrees,
including the modified consent order we entered into with the U.S. Federal Trade Commission (FTC), which took effect in April 2020 and, among other things,
required us to significantly enhance our practices and processes for privacy compliance and oversight. The FTC also continues to monitor us and our
compliance with the modified consent order and initiated an administrative proceeding against us, which we are challenging at the agency and in federal court,
that alleges deficient compliance and violations of the Children's Online Privacy Protection Act (COPPA), the COPPA Rule, and Section 5 of the Federal Trade
Commission Act and seeks changes to our business. If we are unsuccessful in our challenge to the FTC's action and the agency imposes its proposed order in its
current form, we would be subject to significant limitations, including on our ability to launch new and modified products or use data of users under 18 years
old. Orders issued by, or inquiries or enforcement actions initiated by, government or regulatory authorities could cause us to incur substantial costs, expose us
to civil and criminal liability (including liability for our personnel) or penalties (including substantial monetary remedies), interrupt or require us to change our
business practices in a manner materially adverse to our business (including changes to our products or user data practices), result in negative publicity and
reputational harm, divert resources and the time and attention of management from our business, or subject us to other structural or behavioral remedies that
adversely affect our business.
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Item 1A. Risk Factors
Certain factors may have a material adverse effect on our business, financial condition, and results of operations. You should consider carefully the risks and
uncertainties described below, in addition to other information contained in this Annual Report on Form 10-K, including our consolidated financial statements
and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that
we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our
business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of our
Class A common stock could decline, and you could lose part or all of your investment.
Summary Risk Factors
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our
business, financial condition, results of operations, cash flows, and prospects. These risks are discussed more fully below and include, but are not limited to,
risks related to:
Risks Related to Our Product Offerings
•
our ability to add and retain users and maintain levels of user engagement with our products;
•
the loss of, or reduction in spending by, our marketers;
•
reduced availability of data signals used by our ad targeting and measurement tools;
•
ineffective operation with mobile operating systems or changes in our relationships with mobile operating system partners;
•
failure of our new products, or changes to our existing products, to attract or retain users or generate revenue;
Risks Related to Our Business Operations and Financial Results
•
our ability to compete effectively;
•
fluctuations in our financial results;
•
unfavorable media coverage and other risks affecting our ability to maintain and enhance our brands;
•
our ability to build, maintain, and scale our technical infrastructure, and risks associated with disruptions in our service, catastrophic events, and
crises;
•
operating our business in multiple countries around the world;
•
litigation, including class action lawsuits;
•
acquisitions and our ability to successfully integrate our acquisitions;
Risks Related to Government Regulation and Enforcement
•
government restrictions on access to Facebook or our other products, or other actions that impair our ability to sell or deliver advertising, in their
countries;
•
complex and evolving U.S. and foreign privacy, data use, data combination, data protection, content and content moderation, competition, youth,
safety, consumer protection, advertising, and other laws and regulations, including the General Data Protection Regulation (GDPR), Digital
Markets Act (DMA), Digital Services Act (DSA), Artificial Intelligence Act (EU AI Act), and the UK Digital Markets, Competition and
Consumer Act (DMCC);
•
the impact of government investigations, enforcement actions, and settlements, including litigation and investigations by privacy, consumer
protection, and competition authorities, among others;
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•
other events or factors, including those resulting from war, incidents of terrorism, pandemics, and other disruptive external events, or responses to
these events.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of
equity securities of many technology companies. We are currently subject to securities litigation in connection with our platform and user data practices and the
misuse of certain data by a developer that shared such data with third parties in violation of our terms and policies; the disclosure of our earnings results for the
second quarter of 2018; a former employee's allegations and release of internal company documents beginning in September 2021; and the disclosure of our
earnings results for the fourth quarter of 2021. We may experience more such litigation following future periods of volatility. Any securities litigation could
subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.
The dual class structure of our common stock has the effect of concentrating voting control with our CEO and certain other holders of our Class B
common stock; this will limit or preclude your ability to influence corporate matters.
Our Class B common stock has ten votes per share and our Class A common stock has one vote per share. Holders of our Class B common stock,
including our founder, Chairman, and CEO, together hold a majority of the combined voting power of our outstanding capital stock, and therefore are able to
control the outcome of all matters submitted to our stockholders for approval so long as the shares of Class B common stock represent at least 9.1% of all
outstanding shares of our Class A and Class B common stock. This concentrated control will limit or preclude your ability to influence corporate matters for the
foreseeable future.
Transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions,
such as certain transfers effected for estate planning or charitable purposes. The conversion of Class B common stock to Class A common stock will have the
effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If, for example,
Mr. Zuckerberg retains a significant portion of his holdings of Class B common stock for an extended period of time, he could, in the future, continue to control
a majority of the combined voting power of our outstanding capital stock.
Our status as a "controlled company" could make our Class A common stock less attractive to some investors or otherwise harm our stock price.
Because we qualify as a "controlled company" under the corporate governance rules for Nasdaq-listed companies, we are not required to have a majority
of our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function. In the future we could
elect not to have a majority of our board of directors be independent or not to have a compensation committee or an independent nominating function.
Accordingly, should the interests of our controlling stockholder differ from those of other stockholders, the other stockholders may not have the same
protections afforded to stockholders of companies that are subject to all of the corporate governance rules for Nasdaq-listed companies. Our status as a
controlled company could make our Class A common stock less attractive to some investors or otherwise harm our stock price.
Delaware law and provisions in our certificate of incorporation and bylaws could make a merger, tender offer, or proxy contest difficult, thereby depressing
the trading price of our Class A common stock.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a
change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes
an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our current certificate of incorporation and
bylaws contain provisions that may make the acquisition of our company more difficult, including the following:
•
until the first date on which the outstanding shares of our Class B common stock represent less than 35% of the combined voting power of our
common stock, any transaction that would result in a change in control of our company requires the approval of a majority of our outstanding
Class B common stock voting as a separate class;
•
we currently have a dual class common stock structure, which provides Mr. Zuckerberg with the ability to control the outcome of matters
requiring stockholder approval, even if he owns significantly less than a majority of the shares of our outstanding Class A and Class B common
stock;
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support informed risk-based decision-making and prioritization of cybersecurity countermeasures and risk mitigation strategies. Our risk mitigation strategies
include a broad variety of technical and operational measures, as well as annual cybersecurity and privacy training for all of our employees.
In addition, we maintain specific policies and practices governing our third-party security risks, including our third-party assessment (TPA) process.
Under our TPA process, we gather information from certain third parties who contract with Meta and share or receive data, or have access to or integrate with
our systems, in order to help us assess potential risks associated with their security controls. We also generally require third parties to, among other things,
maintain security controls to protect our confidential information and data, and notify us of material data breaches that may impact our data.
Our board of directors has oversight of our strategic and business risk management and has delegated cybersecurity risk management oversight to the
audit & risk oversight committee of our board of directors (Audit & Risk Oversight Committee). Our Audit & Risk Oversight Committee is responsible for
ensuring that management has processes in place designed to identify and evaluate cybersecurity risks to which the company is exposed and to implement
processes and programs to manage cybersecurity risks and mitigate cybersecurity incidents. The privacy & product compliance committee of our board of
directors (Privacy & Product Compliance Committee) oversees risks related to privacy and data use, including overseeing compliance with our comprehensive
privacy program. Management is responsible for identifying, assessing, and managing material cybersecurity risks on an ongoing basis, establishing processes
to ensure that such potential cybersecurity risk exposures are monitored, putting in place appropriate mitigation measures, maintaining cybersecurity policies
and procedures, and providing regular reports to our board of directors, including through the Audit & Risk Oversight Committee and Privacy & Product
Compliance Committee.
Our Chief Information Security Officer (CISO), Guy Rosen, leads our cybersecurity program and oversees teams across the company supporting our
security functions of identify, prevent, detect, respond, and recover. These teams are comprised of personnel with a broad range of experience across the private
and public sectors, the technology industry, and different geographic regions. Mr. Rosen has two decades of experience in various cybersecurity, software
development, product management, and other technology-related roles. Mr. Rosen has served in a number of significant leadership roles at our company since
2013, including oversight of security, safety, and integrity initiatives, and was appointed as our CISO in 2022. Prior to joining our company, Mr. Rosen served
in senior leadership, engineering, and operational roles across technology organizations.
Our cybersecurity teams monitor the prevention, detection, mitigation, and remediation of cybersecurity incidents through a variety of technical and
operational measures, and regularly report to our CISO. Our CISO is part of the senior management team at the company and regularly updates the Audit &
Risk Oversight Committee on the company’s cybersecurity program, including cybersecurity risks, incidents, and mitigation strategies.
In 2024, we did not identify any cybersecurity threats that have materially affected or are reasonably likely to materially affect our business strategy,
results of operations, or financial condition. However, despite our efforts, we cannot eliminate all risks from cybersecurity threats, or provide assurances that
we have not experienced undetected cybersecurity incidents. For additional information about these risks, see Part I, Item 1A, "Risk Factors" in this Annual
Report on Form 10-K.
Item 2. Properties
Our corporate headquarters are located in Menlo Park, California. As of December 31, 2024, we owned and leased approximately 11 million square feet
of office and building space for our corporate headquarters and in the surrounding areas, which included approximately two million square feet of unoccupied
office and building space that we plan to either sublease, early terminate, or abandon related to our facilities consolidation restructuring efforts. We also owned
and leased approximately 62 acres of land to be developed to accommodate anticipated future growth.
In addition, we have offices in more than 90 cities across North America, Europe, the Middle East, Africa, Asia-Pacific, and Latin America. We own
27 data center locations globally and we also lease some data centers at selected locations.
We believe that our facilities, which are used by both reportable segments, are adequate for our current needs.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our Class A common stock is trading on the Nasdaq Global Select Market under the ticker symbol 'META'.
Our Class B common stock is not listed on any stock exchange nor traded on any public market.
Holders of Record
As of December 31, 2024, there were 2,931 stockholders of record of our Class A common stock, and the closing price of our Class A common stock
was $585.51 per share as reported on the Nasdaq Global Select Market. Because many of our shares of Class A common stock are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. As of December 31,
2024, there were 24 stockholders of record of our Class B common stock.
Dividend Policy
Beginning in February 2024, our board of directors declared a quarterly cash dividend of $0.50 per share to the holders of our Class A and Class B
common stock. RSUs granted on or after March 1, 2024 under our 2012 Equity Incentive Plan (Amended 2012 Plan), which was most recently amended in
May 2024, are entitled to dividend equivalent rights. During the year ended December 31, 2024, total dividend and dividend equivalent payments were $4.38
billion and $691 million for Class A and Class B common stock, respectively.
Subject to legally available funds and future declaration by our board of directors, we currently intend to continue to pay a quarterly cash dividend on
our outstanding common stock. The declaration and payment of future dividends is at the sole discretion of our board of directors after taking into account
various factors, including our financial condition, operating results, available cash, and current and anticipated cash needs.
See Note 13 — Stockholders' Equity in the notes to the consolidated financial statements included in Part II, Item 8, "Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K for additional information regarding dividends.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We had no share repurchase activity for the three months ended December 31, 2024.
Recent Sale of Unregistered Securities and Use of Proceeds
Recent Sale of Unregistered Securities
None.
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Stock Performance Graph
This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwise
subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Meta Platforms, Inc. under the Securities
Act of 1933, as amended, or the Exchange Act.
The following graph shows a comparison of the cumulative total return for our Class A common stock, the Dow Jones Internet Composite Index
(DJINET), the Standard & Poor's 500 Stock Index (S&P 500) and the Nasdaq Composite Index (Nasdaq Composite) for the five years ended December 31,
2024. The annual changes for the five-year period shown in the graph assumes that $100 was invested in our common stock and each index at the market close
on the last trading day for the fiscal year ended December 31, 2019, and that all dividends were reinvested. The stock price performance of the following graph
is not necessarily indicative of future stock price performance.
Item 6. [Reserved]
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the
related notes included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. In addition to our historical
consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual
results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those
discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Part I, Item 1A, "Risk Factors." For a discussion of limitations in the
measurement of our Family metrics, see the section entitled "Limitations of Key Metrics and Other Data" in this Annual Report on Form 10-K.
To supplement our consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the
United States (GAAP), we present revenue on a constant currency basis and free cash flow, which are non-GAAP financial measures. Revenue on a constant
currency basis is presented in the section entitled "—Revenue—Foreign Exchange Impact on Revenue." To calculate revenue on a constant currency basis, we
translated revenue for the full year 2024 using 2023 monthly exchange rates for our settlement or billing currencies other than the U.S. dollar. For a full
description of our free cash flow non-GAAP measure, see the section entitled "—Liquidity and Capital Resources—Free Cash Flow."
These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and
presented in accordance with GAAP. These measures may be different from non‑GAAP financial measures used by other companies, limiting their usefulness
for comparison purposes. Moreover, presentation of revenue on a constant currency basis is provided for year-over-year comparison purposes, and investors
should be cautioned that the effect of changing foreign currency exchange rates has an actual effect on our operating results. We believe these non-GAAP
financial measures provide investors with useful supplemental information about the financial performance of our business, enable comparison of financial
results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to key metrics
used by management in operating our business.
Executive Overview of Full Year 2024 Results
Our mission is to build the future of human connection and the technology that makes it possible.
Our financial results and key Family metrics for 2024 are set forth below. Total revenue for 2024 was $164.50 billion, an increase of 22% compared to
2023, due to an increase in advertising revenue. Revenue on a constant currency basis would have increased 23% compared to 2023. Ad impressions delivered
across our Family of Apps in 2024 increased 11% year-over-year, and our average price per ad increased 10% year-over-year.
Income from operations for 2024 was $69.38 billion, an increase of $22.63 billion, or 48%, compared to 2023, driven by an increase in advertising
revenue, partially offset by an increase in costs and expenses. The increase in costs and expenses was mainly due to increases in operational expenses related to
our data centers and technical infrastructure and employee compensation, partially offset by lower restructuring and legal-related costs.
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Consolidated and Segment Results
We report our financial results for our two reportable segments: Family of Apps (FoA) and Reality Labs (RL). FoA includes Facebook, Instagram,
Messenger, WhatsApp, and other services. RL includes our virtual, augmented, and mixed reality related consumer hardware, software, and content.
Family of Apps
Reality Labs
Year Ended
December 31,
2024
Total
Year Ended
December 31,
2023
% change
133,006
22%
70,135
7%
62,871
39%
2024
Year Ended
December 31,
2023
% change
2024
2023
% change
134,902
22%
88,151
8%
46,751
48%
(in millions, except percentages)
Revenue
Costs and expenses
Income (loss) from
operations
Operating margin
$
162,355
$
75,246
$
87,109
54 %
$
$
2,146
$
19,875
$
47 %
(17,729)
$
(826)%
1,896
13%
18,016
10%
(16,120)
(10)%
$
164,501
$
95,121
$
69,380
(850)%
42 %
$
35 %
•
Net income was $62.36 billion, with diluted earnings per share (EPS) of $23.86 for the year ended December 31, 2024.
•
•
Capital expenditures, including principal payments on finance leases, were $39.23 billion for the year ended December 31, 2024.
Share repurchases of our Class A common stock were $29.75 billion and total dividend and dividend equivalent payments were $5.07 billion for the year
ended December 31, 2024.
•
Cash, cash equivalents, and marketable securities were $77.81 billion as of December 31, 2024.
•
Long-term debt was $28.83 billion as of December 31, 2024.
•
Effective tax rate was 12% for the year ended December 31, 2024.
•
Headcount was 74,067 as of December 31, 2024, an increase of 10% year-over-year.
Dividend
Beginning in February 2024, we declared and paid four quarterly cash dividends, including dividend equivalents, totaling $2.00 for each share of
common stock during the year ended December 31, 2024. Total dividends and dividend equivalents paid were $4.38 billion and $691 million for Class A and
Class B common stock, during the year ended December 31, 2024, respectively.
Family of Apps Metrics
•
•
•
Family daily active people (DAP) was 3.35 billion on average for December 2024, an increase of 5% year-over-year.
Ad impressions delivered across our Family of Apps increased by 11% year-over-year in 2024.
Average price per ad increased by 10% year-over-year in 2024.
Developments in Advertising
Substantially all of our revenue is currently generated from advertising on Facebook and Instagram. We rely on targeting and measurement tools that
incorporate data signals from user activity on websites and services that we do not control, as well as signals generated within our products, in order to deliver
relevant and effective ads to our users. Our advertising revenue has been, and we expect will continue to be, adversely affected by reduced marketer spending
as a result of limitations on our ad targeting and measurement tools arising from changes to the regulatory environment and third-party mobile operating
systems and browsers.
In particular, legislative and regulatory developments such as the General Data Protection Regulation, including its evolving interpretation through
decisions of the Court of Justice of the European Union, ePrivacy Directive, European Digital Services Act, Digital Markets Act, and U.S. state privacy laws
including the California Consumer Privacy Act, as amended by the California Privacy Rights Act, have impacted our ability to use data signals in our ad
products, and an increasing
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number of laws have been introduced limiting or prohibiting the provision of our services to younger users. We expect these and other developments will have
further impact in the future. As a result, we have implemented, and we will continue to implement, whether voluntarily or otherwise, changes to our products
and user data practices, which reduce our ability to effectively target and measure ads and may negatively impact our advertising revenue and user engagement.
For example, in response to regulatory developments in Europe, we announced our plans to change the legal basis for behavioral advertising on Facebook and
Instagram in the European Union, European Economic Area, and Switzerland from "legitimate interests" to "consent," and began offering users in the region a
"subscription for no ads" alternative. We subsequently began offering users in the region who elect to continue using our services free-of-charge, supported by
ads, an option to see less personalized ads, which are expected to be less relevant and effective than our premium ad offerings. We are engaging with regulators
on our consent model. In addition, mobile operating system and browser providers, such as Apple and Google, have implemented product changes and/or
announced future plans to limit the ability of websites and application developers to collect and use these signals to target and measure advertising. For
example, in 2021, Apple made certain changes to its products and data use policies in connection with changes to its iOS operating system that reduce our and
other iOS developers' ability to target and measure advertising, which has negatively impacted, and we expect will continue to negatively impact, the size of
the budgets marketers are willing to commit to us and other advertising platforms.
To mitigate these developments, we are continually working to evolve our advertising systems to improve the performance of our ad products. We are
developing privacy enhancing technologies to deliver relevant ads and measurement capabilities while reducing the amount of personal information we
process, including by relying more on anonymized or aggregated third-party data. In addition, we are developing tools that enable marketers to share their data
into our systems, as well as ad products that generate more valuable signals within our apps. More broadly, we also continue to innovate our advertising tools
to help marketers prepare campaigns and connect with consumers, including developing growing formats such as Reels ads and our business messaging ad
products. Across all of these efforts, we are making significant investments in artificial intelligence (AI), including generative AI, to improve our delivery,
targeting, and measurement capabilities. Further, we are focused on driving onsite conversions in our business messaging ad products by developing new
features and scaling existing features.
We are also engaging with others across our industry to explore the possibility of new open standards for the private and secure processing of data for
advertising purposes. We believe our ongoing improvements to ad targeting and measurement are continuing to drive improved results for advertisers.
However, we expect that some of these efforts will be long-term initiatives, and that the legislative, regulatory and platform developments described above will
continue to adversely impact our advertising revenue for the foreseeable future.
In addition, we maintain advertising policies to protect the security and integrity of our platform and comply with global content, security, and integrity
obligations. Our ongoing efforts to enhance enforcement against ads and marketers which violate our advertising policies adversely affect our revenue, and we
expect that the continued enhancement of such efforts will have an impact on our revenue in the future, which may be material.
Other Business and Macroeconomic Conditions
Other global and regional business, macroeconomic, and geopolitical conditions also have had, and we believe will continue to have, an impact on our
user growth and engagement and advertising revenue. In particular, we believe advertising budgets have been pressured from time to time by factors such as
inflation, high interest rates, and related market uncertainty, which has led to reduced marketer spending. While we saw improvement in business and
macroeconomic conditions in recent periods, continued business, macroeconomic, and geopolitical uncertainty remains, which could impact our financial
results in future periods.
In addition, competitive products and services have reduced some users' engagement with our products and services. We are investing in Reels and in AI
initiatives across our products, including our AI-powered discovery engine to recommend relevant content, which we have already seen results in improved
user engagement and monetization of our products. However, we continue to face competition from other products and services within certain demographics,
in particular younger users. In addition, while Reels is growing in usage, it monetizes at a lower rate than our Feed and Stories products and we expect it will
continue to monetize at a lower rate for the foreseeable future. We also have seen fluctuations and declines in the size of our active user base in one or more
regions from time to time due to geopolitical conditions, which have adversely affected our user growth and engagement. These trends adversely affected
advertising revenue in 2024, and we expect will continue to affect our advertising revenue in the foreseeable future.
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Trends in Our Revenue by User Geography
We calculate our revenue by user geography based on our estimate of the geography in which ad impressions are delivered, virtual and digital goods are
purchased, or consumer hardware products are shipped. The geography of our users affects our revenue and financial results. Our revenue in regions such as
United States & Canada and Europe is relatively higher primarily due to the size and maturity of those online and mobile advertising markets, and ad
impression growth is primarily in geographies that monetize at lower rates, such as Asia-Pacific and Rest of World. In 2024, revenue increased by 18% in
United States & Canada, 26% in Europe, 22% in Asia-Pacific, and 31% in Rest of World, in each case relative to 2023.
-
Ad Revenue
Non-Ad Revenue
Note: Non-advertising revenue includes RL revenue generated from the delivery of consumer hardware products and FoA Other revenue, which consists of revenue from WhatsApp Business
Platform, Meta Verified subscriptions, net fees we receive from developers using our Payments infrastructure, and revenue from various other sources.
Our revenue by user geography in the charts above is geographically apportioned based on our estimation of the geographic location of our users when they perform a revenue-generating
activity. This allocation differs from our revenue disaggregated by geography disclosure in Note 2 — Revenue in our consolidated financial statements included in Part II, Item 8, "Financial
Statements and Supplemental Data" where revenue is geographically apportioned based on the addresses of our customers.
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Trends in Our Family Metrics
The numbers for our key Family metrics, our DAP and average revenue per person (ARPP), do not include users on our other products unless they
would otherwise qualify as DAP based on their other activities on our Family products.
Trends in the number of people in our community affect our revenue and financial results by influencing the number of ads we are able to show, the
value of our ads to marketers, as well as our expenses and capital expenditures. Substantially all of our daily active people (as defined below) access our
Family products on mobile devices.
•
Daily Active People (DAP). We define a daily active person as a registered and logged-in user of Facebook, Instagram, Messenger, and/or WhatsApp
(collectively, our "Family" of products) who visited at least one of these Family products through a mobile device application or using a web or
mobile browser on a given day. We do not require people to use a common identifier or link their accounts to use multiple products in our Family, and
therefore must seek to attribute multiple user accounts within and across products to individual people. Our calculations of DAP rely upon complex
techniques, algorithms, and machine learning models that seek to estimate the underlying number of unique people using one or more of these
products, including by matching user accounts within an individual product and across multiple products when we believe they are attributable to a
single person, and counting such group of accounts as one person. As these techniques and models require significant judgment, are developed based
on internal reviews of limited samples of user accounts, and are calibrated against user survey data, there is necessarily some margin of error in our
estimates. We view DAP as a measure of engagement across our products. For additional information, see the section entitled "Limitations of Key
Metrics and Other Data" in this Annual Report on Form 10-K.
------
Note: We report the numbers of DAP as specific amounts, but these numbers are estimates of the numbers of unique people using our products and are subject to statistical variances and
errors. While we expect the error margin for these estimates to vary from period to period, we estimate that such margin generally will be approximately 3% of our worldwide DAP. At our
scale, it is very difficult to attribute multiple user accounts within and across products to individual people, and it is possible that the actual numbers of unique people using our products may
vary significantly from our estimates, potentially beyond our estimated error margins. For additional information, see the section entitled "Limitations of Key Metrics and Other Data" in this
Annual Report on Form 10-K. Beginning in the fourth quarter of 2023, our Family metrics no longer include Messenger Kids users.
Worldwide DAP increased 5% to 3.35 billion on average during December 2024 from 3.19 billion during December 2023.
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•
Average Revenue Per Person (ARPP). Our Family of Apps (FoA) revenue represents the substantial majority of our total revenue. We define ARPP as
our FoA revenue during a given quarter, divided by the average of the number of DAP at the beginning and end of the quarter.
ARPP:
$10.68
$9.47
$10.42
$10.93
$12.33
Ad Revenue
$11.20
$11.89
$12.29
$14.25
Non-Ad Revenue
Note: We updated our definition of ARPP beginning in the first quarter of 2024 and have recast ARPP in prior periods for comparative purposes.
Our annual worldwide ARPP in 2024, which represents the sum of quarterly ARPP during such period, was $49.63, an increase of 15% from 2023.
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Trends in Our Ad Impressions and Average Price Per Ad
•
Ad Impressions. Our advertising revenue is generated by displaying ad products on Facebook, Instagram, Messenger, and third-party mobile
applications. Impressions are considered delivered when an ad is displayed to a user.
Note: Our ad impressions growth by user geography in the charts above is geographically apportioned based on our estimation of the geographic location of our users when an ad impression
is delivered.
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•
Average Price Per Ad. We calculate average price per ad as total advertising revenue divided by the number of ads delivered.
Note: Our average price per ad growth by user geography in the charts above is geographically apportioned based on our estimation of the geographic location of our users when an ad
impression is delivered.
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provision is subject to change due to economic, political and other conditions and significant judgment is required in determining our ability to recognize our
net deferred tax assets.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on
examination by the taxing authorities based on the technical merits of the position. These uncertain tax positions include our estimates related to uncertainties
with our research and development tax credits that are based on an assessment of whether our available documentation corroborating the nature of our activities
supporting the tax credits will be sufficient. Similarly, our estimates for transfer pricing have been developed based upon analyses of appropriate arms-length
prices. Although we believe that we have adequately reserved for our uncertain tax positions (including net interest and penalties), we can provide no assurance
that the final tax outcome of these matters will not be materially different, as significant judgment is required in evaluating and estimating our provision for
income taxes. We make adjustments to these reserves in accordance with the income tax accounting guidance when facts and circumstances change, such as the
closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such
differences will affect the provision for income taxes in the period in which such determination is made, and could have a material impact on our financial
condition and operating results.
Valuation of Assets
The valuation and impairment assessment of certain assets, including recoverability, requires significant judgment and assumptions such as estimation of
future cash flows, discount rates, market data of comparable assets and companies, holding period and residual value of asset groups, among others.
Impairment testing for long-lived-assets, including property and equipment and operating lease right-of-use assets, occurs whenever events or
circumstances indicate that the carrying amount of such assets may not be recoverable compared to the future undiscounted cash flows the assets are expected
to generate from the use and eventual disposition. The impairment test is performed at the asset group level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities. When the test results indicate that the carrying amount of long-lived assets is not recoverable, the
carrying amount of such assets is reduced to fair value.
Impairment testing for non-marketable equity securities without readily determinable fair values accounted for using the measurement alternative is
performed at each reporting date to determine whether there are triggering events for impairment. Such qualitative assessment considers factors such as, but not
limited to, the investee's financial condition and business outlook; industry and sector performance; regulatory, economic or technological environment;
operational and financing cash flows; and other relevant events and factors affecting the investee. When indicators of impairment exist, we estimate the fair
value of our non-marketable equity securities using the market approach and/or the income approach and recognize impairment loss in our consolidated
statements of income if the estimated fair value is less than the carrying value. In addition, for these non-marketable equity securities, determining whether a
non-marketable equity security issued by the same issuer is similar to the non-marketable equity security we hold may require judgment in (a) assessment of
differences in rights and obligations associated with the instruments such as voting rights, distribution rights and preferences, and conversion features, and (b)
adjustments to the observable price for differences such as, but not limited to, rights and obligations, control premium, liquidity, or principal or most
advantageous markets. The identification of observable transactions will depend on the timely reporting of these transactions from our investee companies,
which may occur in a period subsequent to when the transactions take place. Therefore, our fair value adjustment for these observable transactions may occur
in a period subsequent to when the transaction actually occurred.
Change in Accounting Estimate
In January 2025, we completed an assessment of the useful lives of certain servers and network assets, which resulted in an increase in their estimated
useful life to 5.5 years, effective beginning fiscal year 2025. Based on the servers and network assets placed in service as of December 31, 2024, we expect this
change in accounting estimate will reduce our full-year 2025 depreciation expense by approximately $2.9 billion. For information regarding the change in
useful lives of our servers and network assets, see Note 1 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
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Components of Results of Operations
Revenue
Family of Apps (FoA)
Advertising. We generate substantially all of our revenue from advertising. Our advertising revenue is generated by displaying ad products on Facebook,
Instagram, Messenger, and third-party mobile applications. Marketers pay for ad products either directly or through their relationships with advertising
agencies or resellers, based on the number of impressions delivered or the number of actions, such as clicks, taken by users.
We recognize revenue from the display of impression-based ads in the contracted period in which the impressions are delivered. Impressions are
considered delivered when an ad is displayed to a user. We recognize revenue from the delivery of action-based ads in the period in which a user takes the
action the marketer contracted for. The number of ads we show is subject to methodological changes as we continue to evolve our ads business and the
structure of our ads products. In particular, the ads we show may vary by product (for example, our video and Reels products are not currently monetized at the
same rate as our Feed or Stories products), and from time to time we increase or decrease the number or frequency of ads we show as part of our product and
monetization strategies. We calculate average price per ad as total advertising revenue divided by the number of ads delivered, representing the average price
paid per ad by a marketer regardless of their desired objective such as impression or action. For advertising revenue arrangements where we are not the
principal, we recognize revenue on a net basis.
Other revenue. Other revenue consists of revenue from WhatsApp Business Platform, Meta Verified subscriptions, net fees we receive from developers
using our Payments infrastructure, and revenue from various other sources.
Reality Labs (RL)
RL revenue is generated from the delivery of consumer hardware products, such as Meta Quest and Ray-Ban Meta AI glasses, and related software and
content.
Cost of Revenue and Operating Expenses
Cost of revenue. Our cost of revenue consists of expenses associated with the delivery and distribution of our products. These mainly include expenses
related to the operation of our data centers and technical infrastructure, such as depreciation expense from servers, network infrastructure and buildings,
employee compensation which includes payroll, share-based compensation and benefits for employees on our operations teams, and energy and bandwidth
costs. Cost of revenue also consists of costs associated with partner arrangements, including traffic acquisition costs and credit card and other fees related to
processing customer transactions; RL inventory costs, which consist of cost of products sold and estimated losses on non-cancelable contractual commitments;
and content costs.
Research and development. Research and development expenses consist mostly of employee compensation which includes payroll, share-based
compensation and benefits for our employees on our engineering and technical teams who are responsible for developing new technologies and products; RL
technology development costs; infrastructure costs; and facilities-related costs.
Marketing and sales. Marketing and sales expenses consist primarily of employee compensation which includes payroll, share-based compensation and
benefits for our employees engaged in sales, sales support, marketing, business development, and customer service functions; marketing and promotional
expenses; and professional services to support our community and product operations.
General and administrative. General and administrative expenses consist primarily of employee compensation which includes payroll, share-based
compensation and benefits for certain of our executives as well as our legal, finance, human resources, corporate communications and policy, and other
administrative employees; legal-related costs, which include estimated fines, settlements, or other losses in connection with legal and related matters, as well as
other legal fees; other taxes, such as digital services taxes and other non-income-based tax levies; and professional services.
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Results of Operations
In this section, we discuss the results of our operations for the year ended December 31, 2024 compared to the year ended December 31, 2023. For a
discussion of the year ended December 31, 2023 compared to the year ended December 31, 2022, please refer to Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2023.
The following table sets forth our consolidated statements of income data (in millions):
Year Ended December 31,
2024
2023
Revenue
Costs and expenses:
Cost of revenue
Research and development
Marketing and sales
General and administrative
Total costs and expenses
Income from operations
Interest and other income (expense), net
Income before provision for income taxes
Provision for income taxes
$
164,501
Net income
$
30,161
43,873
11,347
9,740
95,121
69,380
1,283
70,663
8,303
62,360
2022
$
134,902
$
25,959
38,483
12,301
11,408
88,151
46,751
677
47,428
8,330
39,098
$
116,609
$
25,249
35,338
15,262
11,816
87,665
28,944
(125)
28,819
5,619
23,200
The following table sets forth our consolidated statements of income data (as a percentage of revenue)(1):
Year Ended December 31,
2024
Revenue
Costs and expenses:
Cost of revenue
Research and development
Marketing and sales
General and administrative
Total costs and expenses
Income from operations
Interest and other income (expense), net
Income before provision for income taxes
Provision for income taxes
Net income
_________________________
(1) Percentages have been rounded for presentation purposes and may differ from unrounded results.
71
2023
2022
100 %
100 %
100 %
18
27
7
6
58
42
1
43
5
38 %
19
29
9
8
65
35
1
35
6
29 %
22
30
13
10
75
25
—
25
5
20 %
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Revenue
The following table sets forth our revenue by source and by segment:
Year Ended December 31,
2024
2023
2022
2024 vs 2023 %
change
2023 vs 2022 %
change
(in millions, except percentages)
Advertising
Other revenue
Family of Apps
Reality Labs
$
Total revenue
$
160,633
1,722
162,355
2,146
164,501
$
131,948
1,058
133,006
1,896
134,902
$
$
$
113,642
808
114,450
2,159
116,609
22 %
63 %
22 %
13 %
16 %
31 %
16 %
(12)%
22 %
16 %
Family of Apps
FoA revenue in 2024 increased $29.35 billion, or 22%, compared to 2023. The increase was almost entirely driven by advertising revenue.
Advertising
Advertising revenue in 2024 increased $28.68 billion, or 22%, compared to 2023 due to increases in ad impressions delivered and average price per ad.
In 2024, ad impressions delivered increased by 11%, as compared with a 28% increase in 2023, year-over-year. Ad impressions delivered during 2024 grew in
all regions, especially in Asia-Pacific and Rest of World, which was mostly driven by increases in users and their engagement on our products. In 2024, the
average price per ad increased by 10%, as compared with a decrease of 9% in 2023, year-over-year. The increase in average price per ad in 2024 was driven by
an increase in advertising demand, which we believe is mainly due to ongoing improvements to our ad performance from our ad targeting and measurement
tools. This increase was partially offset by a higher number of ad impressions delivered, especially in geographies and in products, such as Reels, that monetize
at lower rates. Other factors are discussed in the section entitled "—Executive Overview of Full Year 2024 Results." In addition, the online commerce vertical
was the largest contributor to the increase in advertising revenue in 2024 compared to 2023. We anticipate that future advertising revenue will be driven by a
combination of price and ad impressions delivered.
Other revenue
FoA other revenue in 2024 increased $664 million, or 63%, compared to 2023. The increase was primarily driven by WhatsApp Business Platform
revenue.
Reality Labs
RL revenue in 2024 increased $250 million, or 13%, compared to 2023. The increase was mostly due to an increase in RL consumer hardware products
sold.
Revenue Seasonality
Revenue is traditionally seasonally strong in the fourth quarter of each year due in part to seasonal holiday demand. We believe that this seasonality in
both advertising revenue and RL consumer hardware sales affects our quarterly results, which generally reflect significant growth in revenue between the third
and fourth quarters and a decline between the fourth and subsequent first quarters. For instance, our total revenue increased 19%, 17%, and 16% between the
third and fourth quarters of 2024, 2023, and 2022, respectively, while total revenue for the first quarters of 2024, 2023, and 2022 declined 9%, 11%, and 17%
compared to the fourth quarters of 2023, 2022, and 2021, respectively.
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Foreign Exchange Impact on Revenue
Changes in foreign exchange rates had an unfavorable impact on our revenue in the full year 2024 compared to the same period in 2023. To calculate
revenue on a constant currency basis, we translated revenue using the prior year's monthly exchange rates for our settlement or billing currencies other than the
U.S. dollar. Using these constant rates for full year 2024, our total revenue and advertising revenue would have been $165.37 billion and $161.51 billion, which
were $874 million and $880 million higher than actual total revenue and advertising revenue, respectively.
Cost of revenue
Year Ended December 31,
2024
2023
2022
2024 vs 2023 %
change
2023 vs 2022 %
change
(in millions, except percentages)
Cost of revenue
Percentage of revenue
$
30,161
$
18 %
25,959
$
19 %
25,249
22 %
16 %
3%
Cost of revenue in 2024 increased $4.20 billion, or 16%, compared to 2023. The increase was primarily due to higher operational expenses related to our
data centers and technical infrastructure, mostly from higher depreciation expense.
See Note 7 — Property and Equipment in the notes to the consolidated financial statements included in Part II, Item 8, "Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K for additional information regarding depreciation expense.
Research and development
Year Ended December 31,
2024
2023
2022
2024 vs 2023 %
change
2023 vs 2022 %
change
(in millions, except percentages)
Research and development
Percentage of revenue
$
43,873
$
27 %
38,483
$
29 %
35,338
30 %
14 %
9%
Research and development expenses in 2024 increased $5.39 billion, or 14%, compared to 2023. The increase was mostly due to higher employee
compensation as well as infrastructure costs for research and development, partially offset by lower restructuring charges.
The higher employee compensation was mainly from a 13% growth in employee headcount from 2023 to 2024 in engineering and other technical
functions supporting our continued investment in our family of products and Reality Labs.
See Note 3 — Restructuring in the notes to the consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary
Data" of this Annual Report on Form 10-K for additional information regarding restructuring charges.
Marketing and sales
Year Ended December 31,
2024
2023
2022
2024 vs 2023 %
change
2023 vs 2022 %
change
(in millions, except percentages)
Marketing and sales
Percentage of revenue
$
11,347
$
7%
12,301
$
9%
15,262
13 %
(8)%
(19)%
Marketing and sales expenses in 2024 decreased $954 million, or 8%, compared to 2023. The decrease was primarily due to lower restructuring charges
and, to a lesser extent, a decrease in employee compensation.
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See Note 3 — Restructuring in the notes to the consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary
Data" of this Annual Report on Form 10-K for additional information regarding restructuring charges.
General and administrative
Year Ended December 31,
2024
2023
2022
2024 vs 2023 %
change
2023 vs 2022 %
change
(in millions, except percentages)
General and administrative
Percentage of revenue
$
9,740
$
6%
11,408
$
8%
11,816
10 %
(15)%
(3)%
General and administrative expenses in 2024 decreased $1.67 billion, or 15%, compared to 2023. The decrease was mostly driven by a favorable impact
of $1.55 billion in legal-related costs. To a lesser extent, the decrease was also attributed to lower restructuring charges, partially offset by an increase in other
taxes.
See Note 3 — Restructuring and Note 12 — Commitments and Contingencies in the notes to the consolidated financial statements included in Part II,
Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information regarding restructuring charges and
legal-related costs, respectively.
Segment profitability
The following table sets forth income (loss) from operations by segment:
Year Ended December 31,
2024
2023
2022
2024 vs 2023 %
change
2023 vs 2022 %
change
(in millions, except percentages)
Family of Apps
Reality Labs
Total income from operations
$
$
87,109 $
(17,729)
69,380 $
62,871 $
(16,120)
46,751 $
42,661
(13,717)
28,944
39 %
(10)%
47 %
(18)%
48 %
62 %
Family of Apps
FoA income from operations in 2024 increased $24.24 billion, or 39%, compared to 2023. The increase in FoA income from operations was driven by
higher advertising revenue which was partially offset by an increase in costs and expenses. The increase in costs and expenses was mainly due to increases in
operational expenses related to our data centers and technical infrastructure, mostly from higher depreciation expense and employee compensation, partially
offset by lower restructuring and legal-related costs.
Reality Labs
RL loss from operations in 2024 increased $1.61 billion, or 10%, compared to 2023, driven by an increase in RL costs and expenses. RL costs and
expenses increased primarily due to increases in employee compensation and infrastructure costs.
See Note 3 — Restructuring, Note 7 — Property and Equipment, Note 12 — Commitments and Contingencies, and Note 16 — Segment and
Geographical Information in the notes to the consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of
this Annual Report on Form 10-K for additional information regarding restructuring charges, depreciation expense, legal-related costs, and segment employee
compensation, respectively.
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Interest and other income (expense), net
Year Ended December 31,
2024
2023
2024 vs 2023 %
change
2022
2023 vs 2022 %
change
(in millions, except percentages)
Interest income
Interest expense
Foreign currency exchange losses, net
Other income (expense), net
$
2,517 $
(715)
(690)
171
1,283 $
$
Total interest and other income (expense), net
1,639 $
(446)
(366)
(150)
677 $
461
(185)
(81)
(320)
(125)
54 %
(60)%
(89)%
214 %
256 %
(141)%
(352)%
53 %
90 %
NM
____________________________________
NM
- not meaningful
Interest and other income (expense), net in 2024 increased $606 million compared to 2023, mostly due to an increase in interest income from a
combination of higher balances and interest rates, partially offset by an increase in interest expense on our long-term debt.
Provision for income taxes
Year Ended December 31,
2024
2023
2024 vs 2023 %
change
2022
2023 vs 2022 %
change
(in millions, except percentages)
Provision for income taxes
Effective tax rate
$
8,303
$
12 %
8,330
$
18 %
5,619
19 %
—%
48 %
Our provision for income taxes in 2024 decreased $27 million compared to 2023, due to a decrease in the effective tax rate, offset by an increase in
income before provision for income taxes.
Our effective tax rate in 2024 decreased compared to 2023, primarily due to excess tax benefits recognized from share-based compensation and an
increase in research tax credits.
Effective Tax Rate Items. Our effective tax rate in the future will depend upon the proportion between the following items and income before provision
for income taxes: U.S. tax benefits from foreign-derived intangible income, tax effects from share-based compensation, research tax credit, tax effects from
capital losses not expected to be utilized, settlement of tax contingency items, tax effects of changes in our business, and the effects of changes in tax law.
The accounting for share-based compensation may increase or decrease our effective tax rate based upon the difference between our share-based
compensation expense and the deductions taken on our tax return, which depend upon the stock price at the time of employee award vesting. If our stock price
remains constant to the January 24, 2025 price, and absent any changes to our tax landscape, we expect our effective tax rate for the full year 2025 to be in the
range of 12-15%. This includes the effects of the mandatory capitalization and amortization of research and development expenses incurred in 2024, as
required by the 2017 Tax Cuts and Jobs Act (Tax Act). The mandatory capitalization requirement increased our 2024 cash tax liabilities materially but also
decreased our effective tax rate due to increasing the foreign-derived intangible income deduction. If the mandatory capitalization is deferred, our effective tax
rate in 2025 could be higher when compared to current law and our cash tax liabilities could be lower.
A number of countries have enacted legislation to implement the Organization for Economic Cooperation and Development’s 15% global minimum tax
regime with effect from January 1, 2024. These changes did not have a material impact on our consolidated financial statements for 2024. We continue to
evaluate the impacts of proposed and enacted legislation with respect to the global minimum tax regime in the jurisdictions we operate in. As additional
jurisdictions enact legislation, transitional relief expires, and other provisions of the minimum tax legislation become effective, our effective tax rate and cash
tax payments could increase in future years.
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Unrecognized Tax Benefits. As of December 31, 2024, we had net uncertain tax positions of $9.99 billion which was included in long-term income taxes
on our consolidated balance sheets. These unrecognized tax benefits were predominantly accrued for uncertainties with our research tax credits and transfer
pricing with our foreign subsidiaries, which include licensing of intellectual property, providing services and other transactions. The ultimate settlement of the
liabilities will depend upon resolution of tax audits, litigation, or events that would otherwise change the assessment of such items. Based upon the status of
litigation described below and the current status of tax audits in various jurisdictions, we do not anticipate a material change to such amounts within the next 12
months.
See Note 15 — Income Taxes in the notes to the consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary
Data" of this Annual Report on Form 10-K for additional information regarding income tax contingencies.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash, cash equivalents, marketable securities, and cash generated from operations. Cash, cash equivalents, and
marketable securities are comprised of cash on deposit with banks, time deposits, money market funds, U.S. government and agency securities, investment
grade corporate debt securities, and marketable equity securities. As part of our cash management strategy, we concentrate cash deposits with large financial
institutions and our investment holdings are in diversified highly rated securities. Cash, cash equivalents, and marketable securities were $77.81 billion as of
December 31, 2024, an increase of $12.41 billion from December 31, 2023. The increase was due to $91.33 billion of cash generated from operations and
$10.43 billion of net proceeds from the issuance of fixed-rate senior unsecured notes (the Notes) in August 2024. These increases were offset by $39.23 billion
of capital expenditures, including principal payments on finance leases, our capital returns of $35.20 billion for repurchases of our Class A common stock and
payments of dividends and dividend equivalents, and $13.77 billion of taxes paid related to net share settlement of employee restricted stock unit (RSU)
awards.
The following table presents our cash flows (in millions):
Year Ended December 31,
2024
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
$
$
$
91,328 $
(47,150) $
(40,781) $
2023
71,113 $
(24,495) $
(19,500) $
2022
50,475
(28,970)
(22,136)
Cash Provided by Operating Activities
Cash provided by operating activities during 2024 mostly consisted of $62.36 billion net income adjusted for certain non-cash items, such as
$16.69 billion of share-based compensation expense and $15.50 billion of depreciation and amortization expense. The increase in cash flows from operating
activities during 2024 compared to 2023, was due to an increase in cash collection from our customers driven by the increase in revenue, partially offset by
higher cash paid for income taxes and other operational spending.
Cash Used in Investing Activities
Cash used in investing activities during 2024 mostly consisted of $37.26 billion of purchases of property and equipment as we continued to invest in
servers, data centers, and network infrastructure, and $9.75 billion of net purchases of marketable securities. The increase in cash used in investing activities
during 2024 compared to 2023 was mostly due to increases in net purchases of marketable debt securities and property and equipment.
We anticipate making capital expenditures of approximately $60 billion to $65 billion in 2025 to support our core business and generative AI efforts.
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Cash Used in Financing Activities
Cash used in financing activities during 2024 mostly consisted of $30.13 billion for repurchases of our Class A common stock, $5.07 billion of payments
of dividends and dividend equivalents, and $13.77 billion of taxes paid related to net share settlement of RSUs, partially offset by $10.43 billion of net
proceeds from the issuance of additional Notes in August 2024. The increase in cash used in financing activities during 2024 compared to 2023, was mostly
due to increases in our capital returns of $10.35 billion for repurchases of our Class A common stock and $5.07 billion for quarterly dividend payments that
began in March 2024, as well as a $6.76 billion increase in taxes paid related to net share settlement of RSUs.
Free Cash Flow
In addition to other financial measures presented in accordance with U.S. GAAP, we monitor free cash flow (FCF) as a non-GAAP measure to manage
our business, make planning decisions, evaluate our performance, and allocate resources. We define FCF as net cash provided by operating activities reduced
by purchases of property and equipment and principal payments on finance leases.
We believe that FCF is one of the key financial indicators of our business performance over the long term and provides useful information regarding
how cash provided by operating activities compares to the property and equipment investments required to maintain and grow our business.
We have chosen our definition for FCF because we believe that this methodology can provide useful supplemental information to help investors better
understand underlying trends in our business. We use FCF in discussions with our senior management and board of directors.
FCF has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of other GAAP financial measures,
such as net cash provided by operating activities. FCF is not intended to represent our residual cash flow available for discretionary expenses. Some of the
limitations of FCF are:
•
•
FCF does not reflect our future contractual commitments; and
other companies in our industry present similarly titled measures differently than we do, limiting their usefulness as comparative measures.
Management compensates for the inherent limitations associated with using the FCF measure through disclosure of such limitations, presentation of our
financial statements in accordance with GAAP, and reconciliation of FCF to the most directly comparable GAAP measure, net cash provided by operating
activities, as presented below.
The following is a reconciliation of FCF to the most comparable GAAP measure, net cash provided by operating activities (in millions):
Year Ended December 31,
2024
Net cash provided by operating activities
Purchases of property and equipment
Principal payments on finance leases
$
$
Free cash flow
77
91,328 $
(37,256)
(1,969)
52,103 $
2023
71,113 $
(27,045)
(1,058)
43,010 $
2022
50,475
(31,186)
(850)
18,439
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Material Cash Requirements
We currently anticipate that our available funds and cash flow from operations and financing activities will be sufficient to meet our operational cash
needs and fund our investments in infrastructure and AI initiatives, share repurchases and dividend payments for at least the next 12 months and thereafter for
the foreseeable future. We continuously evaluate our liquidity and capital resources, including our access to external capital, to ensure we can finance our future
capital requirements.
Leases and Contractual Commitments
Our operating lease obligations mostly include data centers, offices and colocations. Our finance lease obligations include certain network infrastructure.
Our facilities consolidation restructuring efforts did not materially change our operating lease obligations. Our contractual commitments are primarily related to
our investments in servers and network infrastructure, and content costs from content providers whom we license video and music to increase engagement on
the platform.
Long-term Debt
As of December 31, 2024, we had outstanding long-term debt in the form of senior unsecured notes for an aggregate principal amount of $29.0 billion,
which mature from 2027 through 2064. Short-term and long-term future interest payments obligations as of December 31, 2024 were $1.39 billion and
$28.10 billion, respectively.
Capital Return Program
Share Repurchase
Our board of directors has authorized a share repurchase program of our Class A common stock, which commenced in January 2017 and does not have
an expiration date. In 2024, we repurchased and subsequently retired 65 million shares of our Class A common stock for an aggregate amount of $29.75 billion.
As of December 31, 2024, $51.28 billion remained available and authorized for repurchases.
Dividend
We paid four quarterly cash dividends, including dividend equivalents, totaling $2.00 for each share of Class A and Class B common stock during the
year ended December 31, 2024. Total dividends and dividend equivalents paid were $5.07 billion for the year ended December 31, 2024. Subject to legally
available funds and future declaration by our board of directors, we currently intend to continue to pay a quarterly cash dividend and dividend equivalents on
our outstanding common stock.
Taxes
Cash paid for income taxes was $10.55 billion for the year ended December 31, 2024. As of December 31, 2024, we had taxes payable of $718 million
related to a one-time transition tax payable incurred as a result of the Tax Act, which is due within one year.
Our long-term income taxes include $9.99 billion related to the uncertain tax positions as of December 31, 2024. Due to uncertainties in the timing of
the completion of tax audits, the timing of the resolution of these positions is uncertain and we are unable to make a reasonably reliable estimate of the timing
of payments.
Loss Contingencies
We are involved in legal proceedings, claims, and regulatory, tax or government inquiries and investigations. Significant judgment is required to
determine both probability and the estimated amount of loss. Such matters are inherently unpredictable and subject to significant uncertainties, some of which
are beyond our control. Should any of these estimates and assumptions change or prove to be incorrect, it could have a material impact on our results of
operations, financial position, and cash flows.
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Item 8. Financial Statements and Supplementary Data
META PLATFORMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 42)
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
81
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82
86
87
88
89
90
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Meta Platforms, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Meta Platforms, Inc. (the Company) as of December 31, 2024 and 2023, the related
consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31,
2024, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company at December 31, 2024 and 2023, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2024, 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) (PCAOB), the Company's internal
control over financial reporting as of December 31, 2024, 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, 2025 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We
believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required
to be communicated to the Audit & Risk Oversight Committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which they relate.
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Uncertain Tax Positions
Description of the Matter
As discussed in Note 15 to the consolidated financial statements, the Company has received certain notices from the Internal
Revenue Service (IRS) related to transfer pricing agreements with the Company's foreign subsidiaries for certain periods
examined. The IRS has stated that it will also apply its position to tax years subsequent to those examined. If the IRS prevails in
its position, it could result in an additional federal tax liability, plus interest and any penalties asserted. The Company uses
judgment to (1) determine whether a tax position's technical merits are more-likely-than-not to be sustained and (2) measure the
amount of tax benefit that qualifies for recognition.
Auditing the Company's accounting for, and disclosure of, these uncertain tax positions was especially challenging due to the
significant judgment required to assess management's evaluation of technical merits and the measurement of the tax position
based on interpretations of tax laws and legal rulings.
How We Addressed the
Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's process
to assess the technical merits of tax positions related to these transfer pricing agreements and to measure the benefit of those tax
positions.
As part of our audit procedures over the Company's accounting for these positions, we involved our tax professionals to assist
with our assessment of the technical merits of the Company's tax positions. This included assessing the Company's
correspondence with the relevant tax authorities, evaluating income tax opinions or other third-party advice obtained by the
Company, and requesting and receiving confirmation letters from third-party advisors. We also used our knowledge of, and
experience with, the application of international and local income tax laws by the relevant income tax authorities to evaluate the
Company's accounting for those tax positions. We analyzed the Company's assumptions and data used to determine the amount of
the federal tax liability recognized and tested the mathematical accuracy of the underlying data and calculations. We also
evaluated the appropriateness of the related disclosures included in Note 15 to the consolidated financial statements in relation to
these matters.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2007.
San Jose, California
January 29, 2025
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Meta Platforms, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Meta Platforms, Inc.'s internal control over financial reporting as of December 31, 2024, 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). In our
opinion, Meta Platforms, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
balance sheets of the Company as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, stockholders' equity
and cash flows for each of the three years in the period ended December 31, 2024, and the related notes and our report dated January 29, 2025 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company'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 are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Ernst & Young LLP
San Jose, California
January 29, 2025
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META PLATFORMS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares and par value)
December 31,
2024
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Prepaid expenses and other current assets
Total current assets
Non-marketable equity securities
Property and equipment, net
Operating lease right-of-use assets
Goodwill
Other assets
$
$
Total assets
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
Operating lease liabilities, current
Accrued expenses and other current liabilities
Total current liabilities
Operating lease liabilities, non-current
Long-term debt
Long-term income taxes
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders' equity:
Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 2,190 million and 2,211 million
shares issued and outstanding, as of December 31, 2024 and 2023, respectively; 4,141 million Class B shares
authorized, 344 million and 350 million shares issued and outstanding, as of December 31, 2024 and 2023,
respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total stockholders' equity
$
$
Total liabilities and stockholders' equity
See Accompanying Notes to Consolidated Financial Statements.
86
2023
43,889
33,926
16,994
5,236
100,045
6,070
121,346
14,922
20,654
13,017
276,054
$
7,687
1,942
23,967
33,596
18,292
28,826
9,987
2,716
93,417
$
4,849
1,623
25,488
31,960
17,226
18,385
7,514
1,370
76,455
—
83,228
(3,097)
102,506
182,637
276,054 $
—
73,253
(2,155)
82,070
153,168
229,623
$
41,862
23,541
16,169
3,793
85,365
6,141
96,587
13,294
20,654
7,582
229,623
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META PLATFORMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
Year Ended December 31,
2024
2023
Revenue
Costs and expenses:
Cost of revenue
Research and development
Marketing and sales
General and administrative
Total costs and expenses
Income from operations
Interest and other income (expense), net
Income before provision for income taxes
Provision for income taxes
$
164,501
Net income
Earnings per share:
Basic
Diluted
Weighted-average shares used to compute earnings per share:
Basic
Diluted
134,902
$
30,161
43,873
11,347
9,740
95,121
69,380
1,283
70,663
8,303
62,360
$
$
24.61
23.86
2,534
2,614
See Accompanying Notes to Consolidated Financial Statements.
87
2022
$
$
116,609
$
25,959
38,483
12,301
11,408
88,151
46,751
677
47,428
8,330
39,098
$
25,249
35,338
15,262
11,816
87,665
28,944
(125)
28,819
5,619
23,200
$
$
15.19
14.87
$
$
8.63
8.59
2,574
2,629
2,687
2,702
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META PLATFORMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Year Ended December 31,
2024
2023
2022
Net income
Other comprehensive income (loss):
Change in foreign currency translation adjustment, net of tax
Change in unrealized gain (loss) on available-for-sale investments and other, net of tax
$
62,360
$
39,098
Comprehensive income
$
(1,413)
471
61,418 $
618
757
40,473
See Accompanying Notes to Consolidated Financial Statements.
88
$
23,200
$
(1,184)
(1,653)
20,363
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META PLATFORMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions, except per share amounts)
Class A and Class B
Common Stock
Shares
Balances at December 31, 2021
Issuance of common stock
Shares withheld related to net share settlement
Share-based compensation
Share repurchases
Other comprehensive loss
Net income
Balances at December 31, 2022
Issuance of common stock
Shares withheld related to net share settlement
Share-based compensation
Share repurchases
Other comprehensive income
Net income
Balances at December 31, 2023
Issuance of common stock
Shares withheld related to net share settlement
Share-based compensation
Share repurchases
Dividends
and dividend equivalents declared ($2.00 per share)
(1)
Other
Other comprehensive loss
Net income
Balances at December 31, 2024
Par Value
2,741 $
54
(20)
—
(161)
—
—
2,614
65
(26)
—
(92)
—
—
2,561
65
(27)
—
(65)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,534
—
—
—
—
—
$
Additional
Paid-In Capital
$
$
Retained
Earnings
Total
Stockholders'
Equity
55,811 $
—
(3,359)
11,992
—
—
—
64,444
—
(5,218)
14,027
—
—
—
73,253
—
(6,721)
16,690
—
(693) $
—
—
—
—
(2,837)
—
(3,530)
—
—
—
—
1,375
—
(2,155)
—
—
—
—
69,761 $
—
(236)
—
(27,926)
—
23,200
64,799
—
(1,794)
—
(20,033)
—
39,098
82,070
—
(7,049)
—
(29,754)
124,879
—
(3,595)
11,992
(27,926)
(2,837)
23,200
125,713
—
(7,012)
14,027
(20,033)
1,375
39,098
153,168
—
(13,770)
16,690
(29,754)
—
6
—
—
83,228
—
—
(942)
—
(3,097) $
(5,121)
—
—
62,360
102,506 $
(5,121)
6
(942)
62,360
182,637
_______________________
(1) Our dividend program began in the first quarter of 2024.
See Accompanying Notes to Consolidated Financial Statements.
89
Accumulated
Other
Comprehensive
Income (Loss)
$
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META PLATFORMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
2024
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Share-based compensation
Deferred income taxes
Impairment charges for facilities consolidation
Data center assets abandonment
Other
Changes in assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued expenses and other current liabilities
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Purchases of property and equipment
Purchases of marketable securities
Sales and maturities of marketable securities
Acquisitions of businesses and intangible assets
Other investing activities
Net cash used in investing activities
Cash flows from financing activities
Taxes paid related to net share settlement of equity awards
Repurchases of Class A common stock
Payments for dividends and dividend equivalents
Proceeds from issuance of long-term debt, net
Principal payments on finance leases
Other financing activities
Net cash used in financing activities
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of the period
$
$
Cash, cash equivalents, and restricted cash at end of the period
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance
sheets
Cash and cash equivalents
$
Restricted cash, included in prepaid expenses and other current assets
Restricted cash, included in other assets
$
Total cash, cash equivalents, and restricted cash
2023
62,360
39,098
$
23,200
15,498
16,690
(4,738)
383
—
87
11,178
14,027
131
2,432
(224)
635
8,686
11,992
(3,286)
2,218
1,341
641
(1,485)
(698)
(270)
373
323
2,805
91,328
(2,399)
559
(80)
51
5,081
624
71,113
231
162
(106)
210
4,300
886
50,475
(37,256)
(25,542)
15,789
(270)
129
(47,150)
(27,045)
(2,982)
6,184
(629)
(23)
(24,495)
(31,186)
(9,626)
13,158
(1,312)
(4)
(28,970)
(13,770)
(30,125)
(5,072)
10,432
(1,969)
(277)
(40,781)
(786)
2,611
42,827
45,438 $
(7,012)
(19,774)
—
8,455
(1,058)
(111)
(19,500)
113
27,231
15,596
42,827 $
(3,595)
(27,956)
—
9,921
(850)
344
(22,136)
(638)
(1,269)
16,865
15,596
43,889
353
1,196
45,438
41,862
99
866
42,827
14,681
294
621
15,596
See Accompanying Notes to Consolidated Financial Statements.
90
$
2022
$
$
$
$
Table of Contents
META PLATFORMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
2024
Supplemental cash flow data
Cash paid for income taxes, net
Cash paid for interest, net of amounts capitalized
Non-cash investing and financing activities:
Property and equipment in accounts payable and accrued expenses and other current
liabilities
Acquisition of businesses and intangible assets in accrued expenses and other current
liabilities and other liabilities
Repurchases of Class A common stock in accrued expenses and other current liabilities
2023
$
$
10,554
486
$
$
6,607
448
$
$
6,407
—
$
7,127
$
4,105
$
3,319
$
$
172
—
$
$
119
474
$
$
291
310
See Accompanying Notes to Consolidated Financial Statements.
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2022
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META PLATFORMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization and Description of Business
We were incorporated in Delaware in July 2004. Our mission is to build the future of human connection and the technology that makes it possible.
We report our financial results based on two reportable segments: Family of Apps (FoA) and Reality Labs (RL). The segment information aligns with
how the chief operating decision maker (CODM), who is our chief executive officer (CEO), reviews and manages the business. We generate substantially all of
our revenue from advertising.
Basis of Presentation
We prepared the consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP). The consolidated financial
statements include the accounts of Meta Platforms, Inc., its subsidiaries where we have controlling financial interests, and any variable interest entities for
which we are deemed to be the primary beneficiary. All intercompany balances and transactions have been eliminated.
Balance Sheets Reclassifications
Certain prior period amounts on the consolidated balance sheets have been reclassified to conform to current period presentation.
•
•
•
Intangible assets, net was reclassified into other assets
Partners payable was reclassified into accrued expenses and other current liabilities
Long-term income taxes was reclassified out of other liabilities
These reclassifications had no impact on our previously reported total assets, total liabilities, revenue, income from operations, net income or cash flows.
Use of Estimates
Preparation of consolidated financial statements in conformity with GAAP requires the use of estimates and judgments that affect the reported amounts
in the consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets
and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical information and on various other
assumptions that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including, but not
limited to, those related to loss contingencies, income taxes, valuation of long-lived assets and their associated estimated useful lives, valuation of nonmarketable equity securities, revenue recognition, valuation of goodwill, credit losses of available-for-sale (AFS) debt securities and accounts receivable, and
fair value of financial instruments and leases. These estimates are based on management's knowledge about current events, interpretation of regulations, and
expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.
In January 2025, we completed an assessment of the useful lives of certain servers and network assets, and determined we should extend the estimated
useful lives to 5.5 years. This change in accounting estimate will be effective beginning fiscal year 2025.
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Revenue Recognition
We recognize revenue under Accounting Standards Codification (ASC) 606 Revenue from Contracts with Customers. Revenue is recognized when
control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for
those goods or services.
Sales commissions we pay in connection with contracts are expensed when incurred because the amortization period is one year or less. These costs are
recorded within marketing and sales on our consolidated statements of income. We do not disclose the value of unsatisfied performance obligations for
contracts with an original expected length of one year or less.
Revenue includes sales and usage‑based taxes, except for cases where we are acting as a pass‑through agent.
Advertising Revenue
Advertising revenue is generated by displaying ad products on Facebook, Instagram, Messenger, and third-party mobile applications. Marketers pay for
ad products either directly or through their relationships with advertising agencies or resellers, based on the number of impressions delivered or the number of
actions, such as clicks, taken by our users.
We recognize revenue from the display of impression-based ads in the contracted period in which the impressions are delivered. Impressions are
considered delivered when an ad is displayed to users. We recognize revenue from the delivery of action-based ads in the period in which a user takes the
action the marketer contracted for. In general, we report advertising revenue on a gross basis, since we control the advertising inventory before it is transferred
to our customers. Our control is evidenced by our sole ability to monetize the advertising inventory before it is transferred to our customers.
For revenue generated from arrangements that involve third-parties, we evaluate whether we are the principal, and report revenue on a gross basis, or the
agent, and report revenue on a net basis. In this assessment, we consider if we obtain control of the specified goods or services before they are transferred to the
customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price.
We may accept lower consideration than the amount promised per the contract for certain revenue transactions and certain customers may receive cashbased incentives, credits, or refunds, which are accounted for as variable consideration when estimating the amount of revenue to recognize. We estimate these
amounts and reduce revenue based on the amounts expected to be provided to customers. We believe that there will not be significant changes to our estimates
of variable consideration for the reported periods.
Reality Labs Revenue
RL revenue is generated from the delivery of consumer hardware products, such as Meta Quest and Ray-Ban Meta AI glasses, and related software and
content. Revenue is recognized at the time control of the products is transferred to customers, which is generally at the time of delivery, in an amount that
reflects the consideration RL expects to be entitled to in exchange for the products.
Other Revenue
FoA other revenue consists of revenue from WhatsApp Business Platform, Meta Verified subscriptions, net fees we receive from developers using our
Payments infrastructure, and revenue from various other sources.
Cost of Revenue
Our cost of revenue consists of expenses associated with the delivery and distribution of our products. These mainly include expenses related to the
operation of our data centers and technical infrastructure, such as depreciation expense from servers, network infrastructure and buildings, employee
compensation which includes payroll, share-based compensation and benefits for employees on our operations teams, and energy and bandwidth costs. Cost of
revenue also consists of costs associated with partner arrangements, including traffic acquisition costs and credit card and other fees related to processing
customer transactions; RL inventory costs, which consist of cost of products sold and estimated losses on non-cancelable contractual commitments; and content
costs.
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Content Costs
Our content costs are mostly related to payments to content providers from whom we license video and music to increase engagement on the platform.
We pay fees to these content providers based on revenue generated, a flat fee, or both. For licensed video, we expense the cost per title when the title is
accepted and available for viewing if the capitalization criteria are not met. Video content costs that meet the criteria for capitalization were not material to
date.
For licensed music, we expense the license fees over the contractual license period. We pay fees to music partners based on revenue generated, minimum
guaranteed fees, flat fees, or a combination thereof. Expensed content costs are included in cost of revenue on our consolidated statements of income.
Software Development Costs
Software development costs, including costs to develop software products or the software component of products to be marketed or sold to external
users, are expensed before the software or technology reach technological feasibility, which is typically reached shortly before the release of such products.
Software development costs also include costs to develop software to be used solely to meet internal needs and applications used to deliver our services.
These software development costs meet the criteria for capitalization once the preliminary project stage is complete, and it is probable that the project will be
completed and the software will be used to perform the function intended. Software development costs that meet the criteria for capitalization were not material
to date.
Share-based Compensation
Share-based compensation expense consists of the company's restricted stock units (RSUs) expense. RSUs granted to employees are measured based on
the grant-date fair value. In general, our RSUs vest over a service period of four years. Share-based compensation expense is generally recognized on the
straight-line basis over the requisite service period and forfeitures are accounted for as they occur.
Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our provision for
income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.
We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method.
Under this method, we recognize deferred income tax assets and liabilities for the expected future consequences of temporary differences between the financial
reporting and tax bases of assets and liabilities, as well as for loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax
rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We recognize the
deferred income tax effects of a change in tax rates in the period of the enactment.
We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We consider
all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable
income and ongoing tax planning strategies in assessing the need for a valuation allowance.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on
examination by the taxing authorities based on the technical merits of the position. We recognize interest and penalties related to uncertain tax positions as a
component of the provision for income taxes.
Advertising Expense
Advertising costs are expensed when incurred and are included in marketing and sales expenses on our consolidated statements of income. We incurred
advertising expenses of $2.06 billion, $2.02 billion, and $2.65 billion for the years ended December 31, 2024, 2023, and 2022, respectively.
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Cash and Cash Equivalents, Marketable Securities, and Restricted Cash
Cash and cash equivalents consist of cash on deposit with financial institutions globally and highly liquid investments with maturities of 90 days or less
from the date of purchase. We classify amounts in transit from customer credit cards and payment service providers as cash on our consolidated balance sheets.
We hold investments in marketable debt securities, consisting of U.S. government securities, U.S. government agency securities, and investment grade
corporate debt securities. We classify our marketable debt securities as available-for-sale (AFS) investments in our current assets because they represent
investments of cash available for current operations. Our AFS investments are carried at estimated fair value with any unrealized gains and losses, net of taxes,
included in accumulated other comprehensive income (loss) in stockholders' equity. AFS debt securities with an amortized cost basis in excess of estimated fair
value are assessed to determine what amount of that difference, if any, is caused by expected credit losses. Allowance for credit losses on AFS debt securities
are recognized as a charge in interest and other income (expense), net on our consolidated statements of income, and any remaining unrealized losses, net of
taxes, are included in accumulated other comprehensive income (loss) in stockholders' equity. We determine realized gains or losses on sale of marketable
securities on a specific identification method and include such gains or losses in interest and other income (expense), net on our consolidated statements of
income.
We also hold investments in marketable equity securities that are publicly traded stocks. We classify these equity securities as marketable securities
within current assets on our consolidated balance sheets because they are available to be converted into cash to fund current operations without any restriction.
These marketable equity securities are measured at fair value at each reporting date with the resulted unrealized gains and losses recognized in interest and
other income (expense), net on our consolidated statements of income.
We classify certain restricted cash balances, consisting mostly of cash related to insurance policies, cash reserves designated for a specific purpose, as
well as retention and indemnification holdback for our acquisitions, within prepaid expenses and other current assets and other assets on our consolidated
balance sheets, based upon the expected duration of the restrictions.
Non-marketable Equity Securities
Our non-marketable equity securities are investments in privately-held companies without readily determinable fair values. We elected to account for
substantially all of our non-marketable equity securities using the measurement alternative, which is cost, less any impairment, adjusted for changes in fair
value resulting from observable transactions for identical or similar investments of the same issuer as of the respective transaction dates. We periodically
review our non-marketable equity securities for impairment. When indicators exist and the estimated fair value of an investment is below its carrying amount,
we write down the investment to fair value. The change in carrying value, resulted from the remeasurements, is recognized in interest and other income
(expense), net on our consolidated statements of income. For additional information, see Note 6 — Non-marketable Equity Securities.
In addition, we also held other non-marketable equity securities accounted for under the equity method which were not material as of December 31,
2024 and 2023.
Fair Value Measurements
We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value
in the financial statements on a recurring basis. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are
required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk
measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer
restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels
and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1- Quoted prices in active markets for identical assets or liabilities.
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Level 2- Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or
liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
Level 3- Inputs that are generally unobservable and typically reflect management's estimate of assumptions that market participants would use in pricing
the asset or liability.
Our cash equivalents, marketable securities, and restricted cash equivalents are classified within Level 1 or Level 2 of the fair value hierarchy because
their fair values are derived from quoted market prices or alternative pricing sources and models utilizing observable market inputs. Certain other assets are
classified within Level 3 because factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity.
Our non-marketable equity securities accounted for using the measurement alternative are recorded at fair value on a non-recurring basis. When
indicators of impairment exist or observable price changes of qualified transactions occur, the respective non-marketable equity security would be classified
within Level 3 of the fair value hierarchy because the valuation methods include a combination of the observable transaction price at the transaction date and
other unobservable inputs including volatility, rights, and obligations of the securities we hold.
Accounts Receivable and Allowances
Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. We make
estimates of expected credit and collectibility trends for the allowance for credit losses and allowance for unbilled receivables based upon our assessment of
various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions,
reasonable and supportable forecasts of future economic conditions, and other factors that may affect our ability to collect from customers. Expected credit
losses are recorded as general and administrative expenses on our consolidated statements of income. As of December 31, 2024 and 2023, the allowance for
credit losses on accounts receivable were not material.
Property and Equipment
Property and equipment, including finance leases, are depreciated and stated at cost less accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets or the remaining lease term, whichever is shorter.
The estimated useful lives of property and equipment and amortization periods of finance lease right-of-use (ROU) assets as of December 31, 2024 are
described below:
Property and Equipment
Useful Life/ Amortization period
Servers and network assets
Buildings
Equipment and other
Finance lease right-of-use assets
Leasehold improvements
Four to Five years (1)
25 to 30 years
One to 25 years
Five to 20 years
Lesser of estimated useful life or remaining lease term
_______________________
(1) Effective January 2025, the useful lives of certain servers and network assets are extended to 5.5 years.
We evaluate at least annually the recoverability of property and equipment for possible impairment whenever events or circumstances indicate that the
carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of property and equipment assets is not recoverable,
and the asset's fair value is less than the carrying amount, an impairment charge is recognized.
The useful lives of our property and equipment are management's estimates when the assets are initially recognized and are routinely reviewed for the
remaining estimated useful lives. Our estimate of useful lives represents the best estimate of the useful lives based on current facts and circumstances, but may
differ from the actual useful lives due to changes to our business operations, changes in the planned use of assets, and technological advancements. When we
change the estimated
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useful life assumption for any asset, the remaining carrying amount of the asset is accounted for prospectively and depreciated or amortized over the revised
estimated useful life.
Servers and network assets include equipment mostly in our data centers, which is used to support production traffic. Land and assets held within
construction in progress (CIP) are not depreciated. CIP assets are related to the construction or development of property and equipment that have not yet been
placed in service for their intended use. We also capitalize interest on our debt related to certain eligible CIP assets and depreciate over the useful life of the
related assets.
The cost of maintenance and repairs is expensed as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from their respective accounts, and gain or loss on such sale or disposal is reflected in income from operations.
Lease Obligations
Our operating leases mostly comprise of certain data centers, offices, and colocations. We also have finance leases for certain network infrastructure. We
determine if an arrangement is a lease at inception and most of our leases contain lease and non-lease components. Non-lease components include fixed
payments for maintenance, utilities, real estate taxes, and management fees. We combine fixed lease and non-lease components and account for them as a
single lease component. Our lease agreements may contain variable costs such as contingent rent escalations, common area maintenance, insurance, real estate
taxes, or other costs. These amounts are affected by the Consumer Price Index, payments contingent on energy production for renewable energy purchase
arrangements, and maintenance and utilities. Such variable lease costs are expensed as incurred on our consolidated statements of income. For certain
colocation and equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and lease liabilities.
For leases with a lease term greater than 12 months, ROU assets and lease liabilities are recognized on our consolidated balance sheets at the
commencement date based on the present value of the remaining fixed lease payments and includes only payments that are fixed and determinable at the time
of commencement.
Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. When determining
the probability of exercising such options, we consider contract-based, asset-based, entity-based, and market-based factors. We do not assume renewals in our
determination of the lease term unless the renewals are deemed to be reasonably assured. Our lease agreements generally do not contain any material residual
value guarantees or material restrictive covenants.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement
date in determining the present value of lease payments. Our incremental borrowing rate is based on our understanding of what our credit rating would be in a
similar economic environment.
Operating leases are included in operating lease ROU assets, operating lease liabilities, current, and operating lease liabilities, non-current on our
consolidated balance sheets. Finance leases are included in property and equipment, net, accrued expenses and other current liabilities, and other liabilities on
our consolidated balance sheets.
Operating lease costs are recognized on a straight-line basis over the lease terms. Finance lease assets are amortized on a straight-line basis over the
shorter of the estimated useful lives of the assets or the lease terms.
During the year ended December 31, 2024, 2023 and 2022, we recorded net impairment losses of $383 million, $2.43 billion, and $2.22 billion,
respectively, in aggregate for operating lease ROU assets and leasehold improvements under ASC Topic 360 as a part of our facilities consolidation
restructuring efforts. The fair values of the impaired assets were estimated using discounted cash flow models (income approach) based on market participant
assumptions with Level 3 inputs. The assumptions used in estimating fair value include the expected downtime prior to the commencement of future subleases,
projected sublease income over the remaining lease periods, and discount rates that reflect the level of risk associated with receiving future cash flows. For
additional information regarding our restructuring efforts, see Note 3 — Restructuring.
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Loss Contingencies
We are involved in legal proceedings, claims, and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business.
Certain of these matters include speculative claims for substantial or indeterminate amounts of damages. Additionally, we are required to comply with various
legal and regulatory obligations around the world, and we regularly become subject to new laws and regulations in the jurisdictions in which we operate. The
requirements for complying with these obligations may be uncertain and subject to interpretation and enforcement by regulatory and other authorities, and any
failure to comply with such obligations could eventually lead to asserted legal or regulatory action. With respect to these matters, asserted and unasserted, we
evaluate the associated developments on a regular basis and accrue a liability when we believe that it is both probable that a loss has been incurred and the
amount can be reasonably estimated. We record such losses as general and administrative expenses on our consolidated statements of income.
If we determine that a loss is probable or reasonably possible and the loss or range of loss can be reasonably estimated, we disclose the possible loss in
the accompanying notes to the consolidated financial statements to the extent material.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their
estimated fair values as of the acquisition date. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and
liabilities is recorded as goodwill to reporting units based on the expected benefit from the business combination. Allocation of purchase consideration to
identifiable assets and liabilities affects the amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas any
indefinite-lived intangible assets, including goodwill, are not amortized. During the measurement period, which is not to exceed one year from the acquisition
date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement
period, any subsequent adjustments are recorded to earnings. Acquisition-related expenses are recognized separately from business combinations and are
expensed as incurred.
Goodwill and Intangibles Assets
We allocate goodwill to reporting units based on the expected benefit from business combinations. We evaluate our reporting units annually, as well as
when changes in our operating segments occur. For changes in reporting units, we reassign goodwill using a relative fair value allocation approach. Goodwill is
tested for impairment at the reporting unit level annually or more frequently if events or changes in circumstances would more likely than not reduce the fair
value of a reporting unit below its carrying value. We have two reporting units, Family of Apps (FoA) and Reality Labs (RL), subject to goodwill impairment
testing. As of December 31, 2024, no impairment of goodwill has been identified.
We evaluate the recoverability of finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying
amount of such assets may not be recoverable. The evaluation of these intangible assets are performed at the lowest level for which identifiable cash flows are
largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the
future undiscounted cash flows the assets are expected to generate from the use and eventual disposition. If such review indicates that the carrying amount of a
finite-lived intangible asset is not recoverable and the asset's fair value is less than the carrying amount, an impairment charge is recognized. The impairment
charges of finite-lived intangible assets were not material during the reporting periods presented.
Our finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. Indefinite-lived intangible assets are
not amortized. If an indefinite-lived intangible asset is subsequently determined to have a finite useful life, the asset will be tested for impairment and
accounted for as a finite-lived intangible asset prospectively over its estimated remaining useful life. We routinely review the remaining estimated useful lives
of finite-lived intangible assets. If we change the estimated useful life assumption for any asset, the remaining unamortized balance is amortized over the
revised estimated useful life. Intangible assets are included within other assets on our consolidated balance sheet.
Foreign Currency
Generally, the functional currency of our international subsidiaries is the local currency. We translate the financial statements of these subsidiaries to
U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenue, costs, and expenses. Translation gains and
losses are recorded in accumulated other comprehensive
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Note 2. Revenue
Revenue disaggregated by revenue source and by segment consists of the following (in millions):
Year Ended December 31,
2024
Advertising
Other revenue
Family of Apps
Reality Labs
$
Total revenue
$
160,633
1,722
162,355
2,146
164,501
2023
$
$
131,948
1,058
133,006
1,896
134,902
2022
$
$
113,642
808
114,450
2,159
116,609
Revenue disaggregated by geography, based on the addresses of our customers, consists of the following (in millions):
Year Ended December 31,
2024
United States and Canada (1)
Europe (3)
Asia-Pacific (2)
Rest of World (3)
$
$
Total revenue
63,207
38,361
45,009
17,924
164,501
2023
$
$
52,888
31,210
36,154
14,650
134,902
2022
$
$
50,150
26,681
27,760
12,018
116,609
_________________________
(1) United States revenue was $59.73 billion, $49.78 billion, and $47.20 billion for the years ended December 31, 2024, 2023, and 2022, respectively.
(2) China revenue was $18.35 billion, $13.69 billion, and $7.40 billion for the years ended December 31, 2024, 2023, and 2022, respectively.
(3) Europe includes Russia and Turkey, and Rest of World includes Africa, Latin America, and the Middle East.
Total deferred revenue was $772 million and $675 million as of December 31, 2024 and 2023, respectively. As of December 31, 2024, we expect $721
million of our deferred revenue to be realized in less than a year.
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Note 3. Restructuring
2022 Restructuring
In 2022, we initiated several measures to pursue greater efficiency and to realign our business and strategic priorities. These measures included a
facilities consolidation strategy to sublease, early terminate, or abandon several office buildings under operating leases, a layoff of approximately 11,000
employees across the Family of Apps (FoA) and Reality Labs (RL) segments, and a pivot towards a next generation data center design, including cancellation
of multiple data center projects (the 2022 Restructuring). As of December 31, 2024, we have completed the 2022 restructuring initiatives.
A summary of our 2022 Restructuring pre-tax charges for the years ended December 31, 2024, 2023, and 2022, including subsequent adjustments, is as
follows (in millions):
Year Ended December 31,
2024 (1)
Cost of revenue
Research and development
Marketing and sales
General and administrative
$
$
Total
2023
31
254
54
50
389
$
$
2022
(47) $
1,572
395
335
2,255 $
1,495
1,719
638
759
4,611
________________________
(1) The 2024 charges are all related to facilities consolidation.
Plan to Date
Severance and Other
Personnel Costs
Facilities Consolidation
Cost of revenue
Research and development
Marketing and sales
General and administrative
Total
$
$
362
3,146
854
828
5,190
$
$
—
399
233
316
948
Data Center Assets
$
$
1,116
—
—
—
1,116
Total
$
$
1,478
3,545
1,087
1,144
7,254
Total restructuring charges recorded under our FoA segment were $305 million, $1.74 billion, and $4.10 billion, and RL segment were $84 million, $516
million and $515 million for the years ended December 31, 2024, 2023, and 2022, respectively.
2023 Restructuring
The 2023 Restructuring charges for severance and related personnel costs were $1.20 billion for the year ended December 31, 2023. We completed the
2023 restructuring as of December 31, 2023.
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Note 4. Earnings per Share
The holders of our Class A and Class B common stock (together, "common stock") have identical liquidation and dividend rights but different voting
rights. Accordingly, we present the earnings per share (EPS) for Class A and Class B common stock together.
Basic EPS is computed by dividing net income by the weighted-average number of shares of our common stock outstanding. Diluted EPS is computed
by dividing net income by the weighted-average number of fully diluted common stock outstanding and assumes the conversion of our Class B common stock
to Class A common stock.
Class A common stock equivalent of restricted stock units (RSUs) with anti-dilutive effect were not material for the year ended December 31, 2024. For
the years ended December 31, 2023, and 2022, approximately 16 million and 95 million shares of RSUs were excluded from the diluted EPS calculation,
respectively, as including them would have an anti-dilutive effect.
The numerators and denominators of the basic and diluted EPS computations for our common stock are calculated as follows (in millions, except per
share amounts):
Year Ended December 31,
2023 (2)
2024
Basic EPS:
Numerator
Distributed earnings
Undistributed earnings
Net income
Denominator
Shares used in computation of basic EPS (1)
$
Basic EPS
Diluted EPS:
Numerator
Net income for diluted EPS
Denominator
Shares used in computation of basic EPS (1)
Effect of dilutive RSUs
Shares used in computation of diluted EPS
Diluted EPS
$
5,072
57,288
62,360
$
$
$
—
39,098
39,098
2,534
24.61
$
$
62,360
$
2,534
80
2,614
23.86
2022 (2)
$
$
—
23,200
23,200
2,574
15.19
$
2,687
8.63
$
39,098
$
23,200
$
2,574
55
2,629
14.87
$
2,687
15
2,702
8.59
____________________________________
(1) Includes 2,189 million, 2,220 million, and 2,285 million shares of Class A common stock and 345 million, 354 million, and 402 million shares of Class B common stock,
for the years ended December 31, 2024, 2023, and 2022, respectively.
(2) The prior period EPS for Class A and Class B common stock has been presented together to conform with current period presentation, which had no impact on our
previously reported basic or diluted EPS.
We declared and paid four quarterly cash dividends, including dividend equivalents, totaling $2.00 for each share of common stock during the year
ended December 31, 2024. Total dividends and dividend equivalents paid for Class A and Class B common stock were $4.38 billion and $691 million,
respectively, during the year ended December 31, 2024. EPS for Class B common stock is not presented separately as under the two-class method Class A and
Class B EPS is not meaningfully different.
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Note 5. Financial Instruments
Fair Value Measurements
Our cash equivalents, marketable securities, and restricted cash equivalents are classified within Level 1 or Level 2 of the fair value hierarchy because
their fair values are derived from quoted market prices or alternative pricing sources and models utilizing market observable inputs. Certain other assets are
classified within Level 3 because factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity.
The following tables summarize our assets measured at fair value on a recurring basis and the classification by level of input within the fair value
hierarchy (in millions):
Fair Value Measurement at Reporting Date Using
Description
Cash equivalents:
Money market funds
U.S. government and agency securities
Time deposits
Corporate debt securities
Total cash equivalents
Marketable securities:
U.S. government securities
U.S. government agency securities
Corporate debt securities
Marketable equity securities
Total marketable securities
Restricted cash equivalents
Other assets
Total
December 31, 2024
$
$
36,165
23
369
114
36,671
14,889
3,053
14,758
1,226
33,926
1,193
101
71,891
103
Quoted Prices in Active
Markets for
Identical Assets
(Level 1)
$
$
36,165
23
—
—
36,188
14,889
3,053
—
1,226
19,168
1,193
—
56,549
Significant Other
Observable Inputs
(Level 2)
$
$
—
—
369
114
483
—
—
14,758
—
14,758
—
—
15,241
Significant Unobservable
Inputs
(Level 3)
$
$
—
—
—
—
—
—
—
—
—
—
—
101
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Fair Value Measurement at Reporting Date Using
Description
Quoted Prices in Active
Markets for
Identical Assets
(Level 1)
December 31, 2023
Cash equivalents:
Money market funds
U.S. government and agency securities
Time deposits
Corporate debt securities
Total cash equivalents
Marketable securities:
U.S. government securities
U.S. government agency securities
Corporate debt securities
Total marketable securities
Restricted cash equivalents
Other assets
$
32,910
2,206
261
220
35,597
8,439
3,498
11,604
23,541
857
101
60,096
$
Total
$
32,910
2,206
—
—
35,116
8,439
3,498
—
11,937
857
—
47,910
$
Significant Other
Observable Inputs
(Level 2)
$
Significant Unobservable
Inputs
(Level 3)
—
—
261
220
481
—
—
11,604
11,604
—
—
12,085
$
$
—
—
—
—
—
—
—
—
—
—
101
101
$
Unrealized Losses
The following tables summarize our available-for-sale marketable debt securities and cash equivalents with unrealized losses as of December 31, 2024
and 2023, aggregated by major security type and the length of time that individual securities have been in a continuous loss position (in millions):
December 31, 2024
Less than 12 months
Fair Value
U.S. government securities
U.S. government agency securities
Corporate debt securities
Total
$
$
6,860
435
2,989
10,284
12 months or greater
Unrealized Losses
$
(71) $
(2)
(26)
(99) $
$
Fair Value
4,330
2,083
6,373
12,786
Total
Unrealized Losses
$
$
(146) $
(44)
(192)
(382) $
Fair Value
Unrealized Losses
11,190
2,518
9,362
23,070
$
$
(217)
(46)
(218)
(481)
December 31, 2023
Less than 12 months
Fair Value
U.S. government securities
U.S. government agency securities
Corporate debt securities
Total
$
$
336
71
647
1,054
12 months or greater
Unrealized Losses
$
(1) $
—
(3)
(4) $
$
Fair Value
7,041
3,225
10,125
20,391
Total
Unrealized Losses
$
$
(275) $
(164)
(491)
(930) $
The gross unrealized gains on our marketable debt securities were not material as of December 31, 2024 and 2023.
104
Fair Value
7,377
3,296
10,772
21,445
Unrealized Losses
$
$
(276)
(164)
(494)
(934)
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Contractual Maturities
The following table classifies our marketable debt securities by contractual maturities (in millions):
December 31, 2024
Due within one year
Due after one year to five years
Total
$
7,847
24,853
32,700
$
Instruments Measured at Fair Value on Non-recurring Basis
Our non-marketable equity securities accounted for using the measurement alternative are measured at fair value on a non-recurring basis and are
classified within Level 3 of the fair value hierarchy because we use significant unobservable inputs to estimate their fair value. For the years ended
December 31, 2024 and 2023, changes in the fair value recorded for these non-marketable equity securities were not material. For additional information, see
Note 6 — Non-marketable Equity Securities.
Note 6. Non-marketable Equity Securities
Our non-marketable equity securities are investments in privately-held companies without readily determinable fair values. The following table
summarizes our non-marketable equity securities that were measured using measurement alternative and equity method (in millions):
December 31,
2024
Non-marketable equity securities under measurement alternative:
Initial cost
Cumulative upward adjustments
Cumulative impairment/downward adjustments
Carrying value
Non-marketable equity securities under equity method
$
$
Total non-marketable equity securities
2023
6,342 $
300
(624)
6,018
52
6,070 $
6,389
293
(599)
6,083
58
6,141
During the years ended December 31, 2024, 2023 and 2022, impairment and downward adjustments recorded for our non-marketable equity securities
that were measured using measurement alternative was $42 million, $101 million, and $447 million, respectively.
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Note 7. Property and Equipment
Property and equipment, net consists of the following (in millions):
December 31,
2024
Land
Servers and network assets
Buildings
Leasehold improvements
Equipment and other
Finance lease right-of-use assets
Construction in progress
Property and equipment, gross
Less: Accumulated depreciation
$
Property and equipment, net
$
2023
2,561 $
68,397
47,076
7,293
7,150
5,384
26,802
164,663
(43,317)
121,346 $
2,080
46,838
37,961
6,972
7,416
4,185
24,269
129,721
(33,134)
96,587
Construction in progress includes costs mostly related to construction of data centers, network infrastructure and servers. Depreciation expense on
property and equipment was $15.29 billion, $11.02 billion, and $8.50 billion for the years ended December 31, 2024, 2023, and 2022, respectively. Within
property and equipment, our servers and network assets depreciation expenses were $11.34 billion, $7.32 billion, and $5.29 billion for the years ended
December 31, 2024, 2023, and 2022, respectively. During the year ended December 31, 2024 and 2023, we capitalized $384 million and $283 million of
interest expense related to certain eligible construction in progress assets, respectively.
During the year ended December 31, 2024, 2023, and 2022, total impairment losses, including restructuring charges, for property and equipment were
$288 million, $738 million and $2.01 billion, respectively. For additional information, see Note 3 — Restructuring.
Note 8. Leases
We have entered into various non-cancelable operating lease agreements mostly for our data centers, offices and colocations. We have also entered into
various non-cancelable finance lease agreements for certain network infrastructure. Our leases have original lease periods expiring between 2025 and 2093.
Many leases include one or more options to renew.
The components of lease costs are as follows (in millions):
Year Ended December 31,
2024
Finance lease cost:
Amortization of right-of-use assets
Interest
Operating lease cost
Variable lease cost and other
$
$
Total
2023
387
23
2,359
844
3,613
$
$
2022
349
20
2,091
580
3,040
$
$
380
16
1,857
363
2,616
We also recorded $385 million, $1.76 billion, and $1.71 billion net impairment losses for operating lease right-of-use assets as a part of our facilities
consolidation restructuring efforts for the years ended December 31, 2024, 2023, and 2022, respectively. For additional information, see Note 3 —
Restructuring.
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Supplemental balance sheet information related to lease liabilities is as follows:
December 31,
2024
Weighted-average remaining lease term:
Finance leases
Operating leases
Weighted-average discount rate:
Finance leases
Operating leases
2023
13.7 years
11.5 years
14.0 years
11.6 years
3.6 %
3.9 %
3.4 %
3.7 %
The following is a schedule, by years, of maturities of lease liabilities as of December 31, 2024 (in millions):
Operating Leases
2025
2026
2027
2028
2029
Thereafter
Total undiscounted cash flows
Less: Imputed interest
$
$
Present value of lease liabilities (1)
Lease liabilities, current
Lease liabilities, non-current
$
$
Present value of lease liabilities (1)
Finance Leases
2,657 $
2,625
2,575
2,459
2,391
13,022
25,729
(5,495)
20,234 $
96
68
68
68
64
528
892
(183)
709
1,942
18,292
20,234
76
633
709
$
$
_________________
(1) Lease liabilities include operating leases under restructuring as a part of our facilities consolidation efforts. For additional information, see Note 3 — Restructuring.
The table above does not include lease payments that were not fixed at commencement or lease modification. As of December 31, 2024, we have
additional operating and finance leases, that have not yet commenced, with total lease obligations of approximately $34.12 billion, mostly for data centers,
network infrastructure, and colocations. These operating and finance leases will commence between 2025 and 2030 with lease terms of greater than one year to
30 years.
Supplemental cash flow information related to leases is as follows (in millions):
Year Ended December 31,
2024
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases (1)
Operating cash flows for finance leases
Financing cash flows for finance leases
Lease liabilities arising from obtaining right-of-use assets:
Operating leases
Finance leases
2023
2022
$
$
$
2,830
23
1,969
$
$
$
2,233
20
1,058
$
$
$
1,654
16
850
$
$
3,784
181
$
$
4,370
588
$
$
4,366
223
_________________
(1) Cash flows for operating leases during the year ended December 31, 2024 and 2023 include cash paid for terminations of certain operating leases.
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Note 9. Goodwill and Intangible Assets
Goodwill generated from our business acquisitions was primarily attributable to expected synergies and potential monetization opportunities. Changes in
the carrying amount of goodwill by reportable segment for the years ended December 31, 2024 and 2023 are as follows (in millions):
Family of Apps
December 31, 2022
Acquisitions
Adjustments
December 31, 2023
Acquisitions
$
December 31, 2024
$
Reality Labs
19,250 $
—
(4)
19,246
—
19,246 $
Total
1,056 $
357
(5)
1,408
—
1,408 $
20,306
357
(9)
20,654
—
20,654
The following table sets forth the major categories of the intangible assets and their weighted-average remaining useful lives (in millions):
December 31, 2024
WeightedAverage
Remaining
Useful Lives
(in years)
Acquired technology
Acquired patents
Acquired software
Other
Total finite-lived assets
Total indefinite-lived assets
Total
4.6
3.7
2.7
2.0
Gross Carrying
Amount
$
N/A
$
442
252
250
24
968
425
1,393
Accumulated
Amortization
$
(247) $
(165)
(58)
(8)
(478)
—
(478) $
$
December 31, 2023
Net Carrying
Amount
195
87
192
16
490
425
915
Gross Carrying
Amount
$
$
478
287
—
28
793
425
1,218
Accumulated
Amortization
$
$
(182) $
(233)
—
(15)
(430)
—
(430) $
Net Carrying
Amount
296
54
—
13
363
425
788
Amortization expense of intangible assets for the years ended December 31, 2024, 2023, and 2022 was $211 million, $161 million, and $185 million,
respectively.
As of December 31, 2024, expected amortization expense for the unamortized finite-lived intangible assets for the next five years and thereafter is as
follows (in millions):
2025
2026
2027
2028
2029
Thereafter
$
Total
$
108
205
125
64
38
23
35
490
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Note 10. Long-term Debt
As of December 31, 2024 and 2023, we had $29.0 billion and $18.50 billion of fixed-rate senior unsecured notes (the Notes), respectively, including
$10.50 billion of Notes issued in August 2024. The following table summarizes the Notes and the carrying amount of our long-term debt (in millions, except
percentages):
August 2022 Notes:
May 2023 Notes:
August 2024 Notes:
Total face amount of long-term debt
Unamortized discount and issuance costs,
net
Maturity
Stated Interest Rate
Effective Interest Rate
2027 - 2062
2028 - 2063
2029 - 2064
3.50% - 4.65%
4.60% - 5.75%
4.30% - 5.55%
3.63% - 4.71%
4.68% - 5.79%
4.42% - 5.60%
December 31, 2024
$
December 31, 2023
10,000
8,500
10,500
29,000
$
10,000
8,500
—
18,500
(174)
$
Long-term debt
28,826
(115)
$
18,385
Each series of the Notes in the table above rank equally with each other. Interest on the Notes is payable semi-annually in arrears. We may redeem the
Notes at any time, in whole or in part, at specified redemption prices. We are not subject to any financial covenants under the Notes. Interest expense, net of
capitalized interest, recognized on the Notes was $683 million, $420 million, and $160 million for the years ended December 31, 2024, 2023, and 2022,
respectively.
The total estimated fair value of our outstanding Notes was $27.83 billion and $18.48 billion as of December 31, 2024 and 2023, respectively. The fair
value is determined based on the quoted prices at the end of the reporting periods and categorized as Level 2 in the fair value hierarchy.
As of December 31, 2024, future principal payments for the Notes, by year, are as follows (in millions):
2025 through 2026
2027
2028
2029
Thereafter
$
—
2,750
1,500
1,000
23,750
29,000
$
Total
Note 11. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities are as follows (in millions):
December 31,
2024
(1)
Legal-related accruals
Accrued compensation and benefits
Accrued property and equipment
Accrued taxes
Other current liabilities
$
$
Total
2023
5,523
6,350
2,582
3,438
6,074
23,967
$
$
6,592
6,659
2,213
3,655
6,369
25,488
_________________________
(1) Includes accruals for estimated fines, settlements, or other losses in connection with legal and related matters, as well as other legal fees. For further information, see Legal
and Related Matters in Note 12 — Commitments and Contingencies.
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Note 12. Commitments and Contingencies
Contractual Commitments
We have $32.82 billion of non-cancelable contractual commitments as of December 31, 2024, which are primarily related to our investments in servers
and network infrastructure, and content costs. The following is a schedule, by years, of non-cancelable contractual commitments as of December 31, 2024 (in
millions):
2025
2026
2027
2028
2029
Thereafter
$
Total
$
26,335
2,548
812
227
153
2,749
32,824
Additionally, as part of the normal course of business, we have entered into multi-year agreements to purchase renewable energy that do not specify a
fixed or minimum volume commitment. We enter into these agreements in order to secure price. Using the expected volume consumption, the total estimated
spend related to our renewable energy agreements as of December 31, 2024 was approximately $24.97 billion, a majority of which is due beyond five years.
The ultimate spend under these agreements may vary and will be based on actual volume purchased.
Legal and Related Matters
With respect to the cases, actions, and inquiries described below, we evaluate the associated developments on a regular basis and accrue a liability when
we believe a loss is probable and the amount can be reasonably estimated. In addition, we believe there is a reasonable possibility that we may incur a loss in
some of these matters. Unless otherwise noted, with respect to the matters described below that do not include an estimate of the amount of loss or range of
possible loss, such losses or range of possible losses either cannot be estimated or are not individually material, but we believe there is a reasonable possibility
that they may be material in the aggregate.
We are also party to various other legal proceedings, claims, and regulatory, tax or government inquiries and investigations that arise in the ordinary
course of business. Additionally, we are required to comply with various legal and regulatory obligations around the world. The requirements for complying
with these obligations may be uncertain and subject to interpretation and enforcement by regulatory and other authorities, and any failure to comply with such
obligations could eventually lead to asserted legal or regulatory action. With respect to these other legal proceedings, claims, regulatory, tax, or government
inquiries and investigations, and other matters, asserted and unasserted, we evaluate the associated developments on a regular basis and accrue a liability when
we believe a loss is probable and the amount can be reasonably estimated. In addition, we believe there is a reasonable possibility that we may incur a loss in
some of these other matters. We believe that the amount of losses or any estimable range of possible losses with respect to these other matters will not, either
individually or in the aggregate, have a material adverse effect on our business and consolidated financial statements.
The ultimate outcome of the legal and related matters described in this section, such as whether the likelihood of loss is remote, reasonably possible, or
probable, or if and when the reasonably possible range of loss is estimable, is inherently uncertain. Therefore, if one or more of these matters were resolved
against us for amounts in excess of management's estimates of loss, our results of operations and financial condition, including in a particular reporting period
in which any such outcome becomes probable and estimable, could be materially adversely affected.
For information regarding income tax contingencies, see Note 15 — Income Taxes.
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Note 13. Stockholders' Equity
Common Stock
Our certificate of incorporation authorizes the issuance of Class A common stock and Class B common stock. As of December 31, 2024, we are
authorized to issue 5,000 million shares of Class A common stock and 4,141 million shares of Class B common stock, each with a par value of $0.000006 per
share. Holders of our Class A common stock and Class B common stock are entitled to dividends when, as, and if declared by our board of directors, subject to
the rights of the holders of all classes of stock outstanding having priority rights to dividends. The holder of each share of Class A common stock is entitled to
one vote, while the holder of each share of Class B common stock is entitled to ten votes. Shares of our Class B common stock are convertible into an
equivalent number of shares of our Class A common stock and generally convert into shares of our Class A common stock upon transfer. Class A common
stock and Class B common stock are collectively referred to as common stock throughout the notes to these financial statements, unless otherwise noted.
As of December 31, 2024, there were 2,190 million shares of Class A common stock and 344 million shares of Class B common stock issued and
outstanding.
Capital Return Program
Share Repurchase
Our board of directors has authorized a share repurchase program of our Class A common stock, which commenced in January 2017 and does not have
an expiration date. As of December 31, 2023, $30.93 billion remained available and authorized for repurchases under this program. In January 2024, an
additional $50 billion of repurchases was authorized under this program. In 2024, we repurchased and subsequently retired 65 million shares of our Class A
common stock for an aggregate amount of $29.75 billion, which includes the 1% excise tax accruals as a result of the Inflation Reduction Act of 2022. As of
December 31, 2024, $51.28 billion remained available and authorized for repurchases.
The timing and actual number of shares repurchased under the repurchase program depend on a variety of factors, including price, general business and
market conditions, and other investment opportunities. Shares may be repurchased through open market purchases or privately negotiated transactions,
including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
Dividend
Beginning in February 2024, our board of directors declared quarterly cash dividend of $0.50 per share to the holders of our Class A and Class B
common stock. RSUs granted on or after March 1, 2024 under our 2012 Equity Incentive Plan (Amended 2012 Plan), which was most recently amended in
May 2024, are entitled to dividend equivalent rights. During the year ended December 31, 2024, total dividend and dividend equivalent payments were $4.38
billion and $691 million for Class A and Class B common stock, respectively.
Subject to legally available funds and future declaration by our board of directors, we currently intend to continue to pay a quarterly cash dividend on
our outstanding common stock. The declaration and payment of future dividends is at the sole discretion of our board of directors after taking into account
various factors, including our financial condition, operating results, available cash, and current and anticipated cash needs.
Share-based Compensation Plan
We have one active share-based employee compensation plan, the 2012 Equity Incentive Plan (Amended 2012 Plan), which was most recently amended
in May 2024. Our Amended 2012 Plan provides for the issuance of incentive and nonqualified stock options, restricted stock awards, stock appreciation rights,
RSUs, performance shares, and stock bonuses to qualified employees, directors, and consultants. Shares that are withheld in connection with the net settlement
of RSUs or forfeited are added to the reserves of the Amended 2012 Plan.
As of December 31, 2024, there were 483 million shares of our Class A common stock reserved for future issuance under our Amended 2012 Plan.
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Table of Contents
The following table summarizes our share-based compensation expense, which consists of the RSU expense, by line item in our consolidated statements
of income (in millions):
Year Ended December 31,
2024
Cost of revenue
Research and development
Marketing and sales
General and administrative
$
$
Total
2023
1,055
13,683
1,026
926
16,690
$
2022
740
11,429
952
906
14,027
$
$
768
9,361
1,004
859
11,992
$
The following table summarizes the activities for our unvested RSUs for the year ended December 31, 2024:
Number of Shares
Weighted-Average Grant
Date Fair Value Per
Share
(in thousands)
Unvested at December 31, 2023
Granted
Vested
Forfeited
149,062
48,661
(64,769)
(10,322)
122,632
Unvested at December 31, 2024
$
$
$
$
209.85
506.80
250.76
255.04
$
302.27
The weighted-average grant date fair value per share of RSUs granted in the years ended December 31, 2023 and 2022 was $202.46 and $195.66,
respectively. The fair value as of the respective vesting dates of RSUs that vested during the years ended December 31, 2024, 2023, and 2022 was
$33.14 billion, $17.46 billion, and $9.44 billion, respectively. The income tax benefit recognized related to awards vested during the years ended December 31,
2024, 2023, and 2022 was $6.95 billion, $3.65 billion, and $2.00 billion, respectively.
As of December 31, 2024, there was $34.79 billion of unrecognized share-based compensation expense related to RSU awards. This unrecognized
compensation expense is expected to be recognized over a weighted-average period of approximately three years based on vesting under the award service
conditions.
Note 14. Interest and Other Income (Expense), Net
The following table presents the detail of interest and other income (expense), net (in millions):
Year Ended December 31,
2024
Interest income
Interest expense
Foreign currency exchange losses, net
Other income (expense), net
$
$
Total interest and other income (expense), net
117
2023
2,517 $
(715)
(690)
171
1,283 $
2022
1,639 $
(446)
(366)
(150)
677 $
461
(185)
(81)
(320)
(125)
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Note 15. Income Taxes
The components of income before provision for income taxes are as follows (in millions):
Year Ended December 31,
2024
Domestic
Foreign
$
$
Income before provision for income taxes
2023
66,342
4,321
70,663
$
2022
43,499
3,929
47,428
$
$
25,025
3,794
28,819
$
The provision for income taxes consists of the following (in millions):
Year Ended December 31,
2024
Current:
Federal
State
Foreign
Total current tax expense
$
9,569
775
2,696
13,040
Deferred:
Federal
State
Foreign
Total deferred tax (benefits)/expense
$
2022
4,934
577
2,688
8,199
(4,709)
(43)
15
(4,737)
8,303 $
$
Provision for income taxes
2023
$
6,094
874
1,928
8,896
67
123
(59)
131
8,330 $
(2,776)
(405)
(96)
(3,277)
5,619
A reconciliation of the U.S. federal statutory income tax rates to our effective tax rate is as follows (in percentages):
Year Ended December 31,
2024
U.S. federal statutory income tax rate
State income taxes, net of federal benefit
Share-based compensation
Research and development tax credits
Foreign-derived intangible income deduction
Effect of non-U.S. operations
Other
2023
21.0 %
0.7
(3.7)
(2.9)
(4.9)
0.2
1.4
11.8 %
Effective tax rate
118
2022
21.0 %
1.1
(0.6)
(1.5)
(4.3)
0.9
1.0
17.6 %
21.0 %
1.0
2.6
(2.4)
(7.0)
3.0
1.3
19.5 %
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Our deferred tax assets (liabilities) are as follows (in millions):
December 31,
2024
Deferred tax assets:
Loss carryforwards
Tax credit carryforwards
Share-based compensation
Accrued expenses and other liabilities
Lease liabilities
Capitalized research and development
Unrealized losses in securities and investments
Other
Total deferred tax assets
Less: valuation allowance
Deferred tax assets, net of valuation allowance
$
Deferred tax liabilities:
Depreciation and amortization
Right-of-use assets
Total deferred tax liabilities
$
Net deferred tax assets
2023
289 $
2,771
520
2,223
3,940
16,743
115
442
27,043
(3,506)
23,537
353
2,028
459
2,168
3,752
9,292
232
487
18,771
(2,879)
15,892
(10,959)
(3,000)
(13,959)
9,578 $
(8,320)
(2,708)
(11,028)
4,864
The valuation allowance was approximately $3.51 billion and $2.88 billion as of December 31, 2024 and 2023, respectively, mostly related to U.S. state
tax credit carryforwards, U.S. foreign tax credits, and unrealized losses in marketable securities.
As of December 31, 2024, our state net operating loss carryforwards were $2.36 billion, which will begin to expire in 2031, if not utilized. We have
federal tax credit carryforwards of $595 million, which will begin to expire in 2029, if not utilized, and state tax credit carryforwards of $5.47 billion, most of
which do not expire.
Utilization of our net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations
provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the net operating loss and tax
credit carryforwards before their utilization. The events that may cause ownership changes include, but are not limited to, a cumulative stock ownership change
of greater than 50% over a three‑year period.
The following table reflects changes in the gross unrecognized tax benefits (in millions):
Year Ended December 31,
2024
Gross unrecognized tax benefits ‑ beginning of period
Increases related to prior year tax positions
Decreases related to prior year tax positions
Increases related to current year tax positions
Decreases related to settlements of prior year tax positions
Decreases related to lapses of statute of limitations
$
Gross unrecognized tax benefits ‑ end of period
$
119
2023
11,666 $
685
(6)
2,882
(9)
(87)
15,131 $
2022
10,757 $
168
(263)
1,204
(199)
(1)
11,666 $
9,807
210
(172)
1,166
(254)
—
10,757
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Note 16. Segment and Geographical Information
We report our financial results for our two reportable segments: Family of Apps (FoA) and Reality Labs (RL). FoA includes Facebook, Instagram,
Messenger, WhatsApp, and other services. RL includes our virtual, augmented, and mixed reality related consumer hardware, software, and content. Our
operating segments are the same as our reportable segments.
Our chief executive officer is our chief operating decision maker (CODM), who allocates resources to and assesses the performance of each operating
segment using information about the operating segment's revenue and income (loss) from operations. Our CODM does not evaluate operating segments using
asset or liability information.
Revenue and costs and expenses are generally directly attributed to our segments. These costs and expenses include certain product development related
operating expenses, costs associated with partnership arrangements, consumer hardware product costs, content costs, and legal-related costs. Indirect costs are
allocated to segments based on a reasonable allocation methodology, when such costs are significant to the performance measures of the operating segments.
Indirect operating expenses, such as facilities, information technology, certain shared research and development activities, recruiting, and physical security
expenses are mostly allocated based on headcount. Costs related to the operation of our data centers and technical infrastructure are generally allocated to our
segments based on estimated usage, most of which is allocated to the FoA segment.
Beginning in 2024 annual reporting, we adopted ASU 2023-07 retrospectively. The following table sets forth our segment information of revenue,
expenses, and income (loss) from operations (in millions):
Year Ended December 31,
2024
Family of Apps:
Revenue
Employee compensation (1)
Other costs and expenses (2)
$
$
Income from operations
Reality Labs:
Revenue
Employee compensation (1)
Other costs and expenses (3)
$
$
Loss from operations
Total:
Revenue
Employee compensation (1)
Other costs and expenses
$
$
Income from operations
2023
2022
162,355 $
(31,116)
(44,130)
87,109 $
133,006 $
(28,878)
(41,257)
62,871 $
114,450
(28,545)
(43,244)
42,661
2,146 $
(10,211)
(9,664)
(17,729) $
1,896 $
(8,942)
(9,074)
(16,120) $
2,159
(7,766)
(8,110)
(13,717)
164,501 $
(41,327)
(53,794)
69,380 $
134,902 $
(37,820)
(50,331)
46,751 $
116,609
(36,311)
(51,354)
28,944
____________________________________
(1) Employee compensation includes employee payroll, share-based compensation, bonus, and employee benefits for medical care, retirement, insurances and other.
(2) Includes costs and expenses in FoA segment for infrastructure, professional services, partner arrangements, marketing, facilities, legal-related costs, and other expenses.
(3) Includes costs and expenses in RL segment for inventory, professional services, marketing, infrastructure, facilities, and other expenses.
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The following table sets forth our long-lived assets by geographic area, which consist of property and equipment, net and operating lease right-of-use
assets (in millions):
December 31,
2024
United States
Rest of the world (1)
$
$
Total long-lived assets
_________________________
(1) No individual country, other than disclosed above, exceeded 10% of our total long-lived assets for any period presented.
For information regarding revenue disaggregated by geography, see Note 2 — Revenue.
122
2023
117,478
18,790
136,268
$
$
91,940
17,941
109,881
PART I:
BUILDING THE
TOOLKIT
• SELECT PAGES FROM PEPSICO’S 2024 10-K
• COMMON SIZE & PERECENTAGE CHANGE
STATEMENTS FOR PEPSICO
• SELECT PAGES FROM NIKE’S 2025 10-K
• MOODY’S METHODOLOGY & NIKE REPORTS
EXCERPTS
FROM
10-K
Table of Contents
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 28, 2024
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 number 1-1183
PepsiCo, Inc.
(Exact Name of Registrant as Specified in its Charter)
North Carolina
(State or Other Jurisdiction of Incorporation or Organization)
13-1584302
(I.R.S. Employer Identification No.)
700 Anderson Hill Road, Purchase, New York 10577
(Address of principal executive offices and Zip Code)
(914) 253-2000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Common Stock, par value 1-2/3 cents per share
2.625% Senior Notes Due 2026
0.750% Senior Notes Due 2027
0.875% Senior Notes Due 2028
0.500% Senior Notes Due 2028
3.200% Senior Notes Due 2029
1.125% Senior Notes Due 2031
0.400% Senior Notes Due 2032
0.750% Senior Notes Due 2033
3.550% Senior Notes Due 2034
0.875% Senior Notes Due 2039
1.050% Senior Notes Due 2050
Trading Symbols
PEP
PEP26
PEP27
PEP28
PEP28A
PEP29
PEP31
PEP32
PEP33
PEP34
PEP39
PEP50
Name of each exchange on which registered
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: 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 15(d) of the 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 ¨
Table of Contents
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes ☒ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an error to previously issued financial statements. ¨
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of PepsiCo, Inc. Common Stock held by nonaffiliates of PepsiCo, Inc. (assuming for these purposes, but
without conceding, that all executive officers and directors of PepsiCo, Inc. are affiliates of PepsiCo, Inc.) as of June 14, 2024, the last
day of business of our most recently completed second fiscal quarter, was $224.8 billion (based on the closing sale price of PepsiCo,
Inc.’s Common Stock on that date as reported on the Nasdaq Global Select Market).
The number of shares of PepsiCo, Inc. Common Stock outstanding as of January 28, 2025 was 1,371,499,838.
Documents Incorporated by Reference
Portions of the Proxy Statement relating to PepsiCo, Inc.’s 2025 Annual Meeting of Shareholders are incorporated by reference into
Part III of this Form 10-K.
Table of Contents
PepsiCo, Inc.
Form 10-K Annual Report
For the Fiscal Year Ended December 28, 2024
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 1C.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Cybersecurity
Properties
Legal Proceedings
Mine Safety Disclosures
2
12
26
26
28
28
29
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Management’s Discussion and Analysis of Financial Condition and Results of
Item 7.
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9.
Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
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32
33
120
120
120
120
121
121
121
122
122
122
122
123
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Table of Contents
Forward-Looking Statements
This Annual Report on Form 10-K contains statements reflecting our views about our future performance
that constitute “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995 (Reform Act). Statements that constitute forward-looking statements within the
meaning of the Reform Act are generally identified through the inclusion of words such as “aim,”
“anticipate,” “believe,” “drive,” “estimate,” “expect,” “expressed confidence,” “forecast,” “future,”
“goal,” “guidance,” “intend,” “may,” “objective,” “outlook,” “plan,” “position,” “potential,”
“project,” “seek,” “should,” “strategy,” “target,” “will” or similar statements or variations of such
words and other similar expressions. All statements addressing our future operating performance, and
statements addressing events and developments that we expect or anticipate will occur in the future, are
forward-looking statements within the meaning of the Reform Act. These forward-looking statements are
based on currently available information, operating plans and projections about future events and trends.
They inherently involve risks and uncertainties that could cause actual results to differ materially from
those predicted in any such forward-looking statement. These risks and uncertainties include, but are not
limited to, those described in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Our Business – Our Business Risks.”
Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak
only as of the date they are made. We undertake no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. The discussion of risks in this report is
by no means all-inclusive but is designed to highlight what we believe are important factors to consider
when evaluating our future performance.
PART I
Item 1. Business.
When used in this report, the terms “we,” “us,” “our,” “PepsiCo” and the “Company” mean PepsiCo, Inc.
and its consolidated subsidiaries, collectively. Certain terms used in this Annual Report on Form 10-K are
defined in the Glossary included in Item 7. of this report.
Company Overview
We were incorporated in Delaware in 1919 and reincorporated in North Carolina in 1986. We are a
leading global beverage and convenient food company with a complementary portfolio of brands,
including Lay’s, Doritos, Cheetos, Gatorade, Pepsi-Cola, Mountain Dew, Quaker and SodaStream.
Through our operations, authorized bottlers, contract manufacturers and other third parties, we make,
market, distribute and sell a wide variety of beverages and convenient foods, serving customers and
consumers in more than 200 countries and territories.
Our Operations
We are organized into seven reportable segments (also referred to as divisions), as follows:
1) Frito-Lay North America (FLNA), which includes our branded convenient food businesses in the
United States and Canada;
2) Quaker Foods North America (QFNA), which includes our branded convenient food businesses,
such as cereal, rice, pasta and other branded food, in the United States and Canada;
3) PepsiCo Beverages North America (PBNA), which includes our beverage businesses in the United
States and Canada;
4) Latin America (LatAm), which includes all of our beverage and convenient food businesses in
Latin America;
5) Europe, which includes all of our beverage and convenient food businesses in Europe;
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6) Africa, Middle East and South Asia (AMESA), which includes all of our beverage and convenient
food businesses in Africa, the Middle East and South Asia; and
7) Asia Pacific, Australia and New Zealand and China Region (APAC), which includes all of our
beverage and convenient food businesses in Asia Pacific, Australia and New Zealand, and China
region.
Frito-Lay North America
Either independently or in conjunction with third parties, FLNA makes, markets, distributes and sells
branded convenient foods. These foods include branded dips, Cheetos cheese-flavored snacks, Doritos
tortilla chips, Fritos corn chips, Lay’s potato chips, Ruffles potato chips and Tostitos tortilla chips.
FLNA’s branded products are sold to independent distributors and retailers. In December 2024, we
acquired the Strauss Group’s 50% ownership in Sabra Dipping Company, LLC (Sabra) and Sabra became
a wholly-owned subsidiary. Sabra makes, markets, distributes and sells Sabra refrigerated dips and
spreads.
Quaker Foods North America
Either independently or in conjunction with third parties, QFNA makes, markets, distributes and sells
branded convenient foods, which include cereals, rice, pasta and other branded products. QFNA’s
products include Cap’n Crunch cereal, Life cereal, Pearl Milling Company syrups and mixes, Quaker
Chewy granola bars, Quaker grits, Quaker oatmeal, Quaker rice cakes, Quaker Simply Granola and RiceA-Roni side dishes. QFNA’s branded products are sold to independent distributors and retailers.
PepsiCo Beverages North America
Either independently or in conjunction with third parties, PBNA makes, markets and sells beverage
concentrates, fountain syrups and finished goods under various beverage brands including Aquafina,
Bubly, Diet Mountain Dew, Diet Pepsi, Gatorade, Gatorade Zero, Mountain Dew, Pepsi, Pepsi Zero Sugar
and Propel. PBNA operates its own bottling plants and distribution facilities and sells branded finished
goods directly to independent distributors and retailers. PBNA also sells concentrate and finished goods
for our brands to authorized and independent bottlers, who in turn sell our branded finished goods to
independent distributors and retailers in certain markets. PBNA also, either independently or in
conjunction with third parties, makes, markets, distributes and sells ready-to-drink tea and coffee products
through joint ventures with Unilever (under the Lipton brand name) and Starbucks, respectively. Further,
PBNA manufactures and distributes certain brands licensed from Keurig Dr Pepper Inc., including Crush,
Dr Pepper and Schweppes, and certain juice brands licensed from Dole Food Company, Inc. and Ocean
Spray Cranberries, Inc. In the first quarter of 2022, we sold our Tropicana, Naked and other select juice
brands to PAI Partners, while retaining a 39% noncontrolling interest in a newly formed joint venture,
Tropicana Brands Group (TBG), operating across North America and Europe (Juice Transaction). In the
United States, PepsiCo acts as the exclusive distributor for TBG’s portfolio of brands for small-format and
foodservice customers with chilled direct-store-delivery (DSD). See Note 13 to our consolidated financial
statements for further information.
Latin America
Either independently or in conjunction with third parties, LatAm makes, markets, distributes and sells a
number of convenient food brands including Cheetos, Doritos, Emperador, Lay’s, Marias Gamesa,
Ruffles, Sabritas, Saladitas Gamesa and Tostitos, as well as many Quaker-branded convenient foods.
LatAm also, either independently or in conjunction with third parties, makes, markets, distributes and sells
beverage concentrates, fountain syrups and finished goods under various beverage brands including 7UP,
Diet 7UP, Gatorade, H2oh!, Manzanita Sol, Mirinda, Pepsi, Pepsi Black, San Carlos and Toddy. These
branded products are sold to authorized and independent bottlers, independent distributors and retailers.
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LatAm also, either independently or in conjunction with third parties, makes, markets, distributes and sells
ready-to-drink tea products through an international joint venture with Unilever (under the Lipton brand
name).
Europe
Either independently or in conjunction with third parties, Europe makes, markets, distributes and sells a
number of convenient food brands including Cheetos, Doritos, Lay’s, Ruffles and Walkers, as well as
many Quaker-branded convenient foods, through consolidated businesses, as well as through
noncontrolled affiliates. Europe also, either independently or in conjunction with third parties, makes,
markets, distributes and sells beverage concentrates, fountain syrups and finished goods under various
beverage brands including 7UP, Adrenaline Rush, Aqua Minerale, Lubimy, Mirinda, Pepsi and Pepsi Zero
Sugar. These branded products are sold to authorized and independent bottlers, independent distributors
and retailers. In certain markets, however, Europe operates its own bottling plants and distribution
facilities. Europe also, as part of its beverage business, manufactures and distributes SodaStream sparkling
water makers and related products. Further, Europe makes, markets, distributes and sells a number of
dairy products including Agusha, Chudo and Domik v Derevne. Europe also, either independently or in
conjunction with third parties, makes, markets, distributes and sells ready-to-drink tea products through an
international joint venture with Unilever (under the Lipton brand name).In the first quarter of 2022, we
sold our Tropicana, Naked and other select juice brands to PAI Partners, while retaining a 39%
noncontrolling interest in TBG, operating across North America and Europe. See Note 13 to our
consolidated financial statements for further information.
Africa, Middle East and South Asia
Either independently or in conjunction with third parties, AMESA makes, markets, distributes and sells a
number of convenient food brands including Cheetos, Chipsy, Doritos, Kurkure, Lay’s, Sasko, Spekko,
Wheaten and White Star, as well as many Quaker-branded convenient foods, through consolidated
businesses, as well as through noncontrolled affiliates. AMESA also makes, markets, distributes and sells
beverage concentrates, fountain syrups and finished goods under various beverage brands including 7UP,
Aquafina, Mirinda, Mountain Dew, Pepsi and Sting Energy. These branded products are sold to authorized
and independent bottlers, independent distributors and retailers. In certain markets, however, AMESA
operates its own bottling plants and distribution facilities. AMESA also, either independently or in
conjunction with third parties, makes, markets, distributes and sells ready-to-drink tea products through an
international joint venture with Unilever (under the Lipton brand name).
Asia Pacific, Australia and New Zealand and China Region
Either independently or in conjunction with third parties, APAC makes, markets, distributes and sells a
number of convenient food brands including BaiCaoWei, Cheetos, Doritos, Lay’s and Smith’s, as well as
many Quaker-branded convenient foods, through consolidated businesses, as well as through
noncontrolled affiliates. APAC also makes, markets, distributes and sells beverage concentrates, fountain
syrups and finished goods under various beverage brands including 7UP, Aquafina, Mirinda, Mountain
Dew, Pepsi and Sting Energy. These branded products are sold to authorized and independent bottlers,
independent distributors and retailers. APAC also, either independently or in conjunction with third
parties, makes, markets, distributes and sells ready-to-drink tea products through an international joint
venture with Unilever (under the Lipton brand name).
Changes to Organizational Structure
The division amounts and discussions included in this Form 10-K reflect the reportable segments that
existed through the end of 2024. Effective beginning with our first quarter of 2025, we realigned certain of
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Table of Contents
our reportable segments to be consistent with certain changes to our organizational structure and how the
Chief Executive Officer will monitor the performance of these segments.
In North America, the food businesses, FLNA and QFNA, will be reported together as PepsiCo Foods
North America. These changes do not impact our PBNA segment.
Internationally, the foods businesses in LatAm, Europe, AMESA and APAC will be reorganized into three
reportable segments: Latin America Foods, Europe, Middle East and Africa (EMEA), and Other
International Foods. Other International Foods will include the foods businesses in APAC and India,
currently part of AMESA.
Our international franchise beverage businesses that were part of our LatAm, Europe, AMESA and APAC
segments will be reported as International Beverages Franchise.
The company-owned bottling businesses operating internationally are all located within EMEA and will
be reported in the newly created EMEA segment.
Our historical segment reporting will be recast beginning first quarter 2025 to reflect the new
organizational structure.
Our Distribution Network
Our products are primarily brought to market through DSD, customer warehouse and distributor networks
and are also sold directly to consumers through e-commerce platforms and retailers. The distribution
system used depends on customer needs, product characteristics and local trade practices.
Direct-Store-Delivery
We, our independent bottlers and our distributors operate DSD systems that deliver beverages and
convenient foods directly to retail stores where the products are merchandised by our employees or our
independent bottlers. DSD enables us to merchandise with maximum visibility and appeal. DSD is
especially well-suited to products that are restocked often and respond to in-store promotion and
merchandising.
Customer Warehouse
Some of our products are delivered from our manufacturing plants and distribution centers, both company
and third-party operated, to customer warehouses. These less costly systems generally work best for
products that are less fragile and perishable, and have lower turnover.
Distributor Networks
We distribute many of our products through third-party distributors. Third-party distributors are
particularly effective when greater distribution reach can be achieved by including a wide range of
products on the delivery vehicles. For example, our foodservice and vending business distributes
beverages and convenient foods to restaurants, businesses, schools and stadiums through third-party
foodservice and vending distributors and operators.
E-commerce
Our products are also available and sold directly to consumers on a growing number of company-owned
and third-party e-commerce websites and mobile commerce applications.
Ingredients and Other Supplies
The principal ingredients we use in our beverage and convenient food products are acesulfame potassium,
aspartame, corn, corn sweeteners, flavorings, flour, juice concentrates, nuts, oats, potatoes, raw milk, rice,
seasonings, sucralose, sugar, vegetable and essential oils, and wheat. We also use water in the
manufacturing of our products. Our key packaging materials include plastic resins, including polyethylene
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terephthalate (PET) and polypropylene resins used for plastic beverage bottles and film packaging used for
convenient foods, aluminum, glass, closures, cardboard and paperboard cartons. In addition, we continue
to integrate recyclability into our product development process and support the increased use of recycled
content, including recycled PET, in our packaging. Fuel, electricity and natural gas are also important
commodities for our businesses due to their use in our and our business partners’ facilities and the vehicles
delivering our products. We employ specialists to secure adequate supplies of many of these items and
have not experienced any significant continuous shortages that would prevent us from meeting our
requirements. Many of these ingredients, raw materials and commodities are purchased in the open
market. The prices we pay for such items are subject to fluctuation, and we manage this risk through the
use of fixed-price contracts and purchase orders, pricing agreements and derivative instruments, including
swaps and futures. In addition, risk to our supply of certain raw materials is mitigated through purchases
from multiple geographies and suppliers. When prices increase, we may or may not pass on such increases
to our customers. In addition, we continue to make investments to improve the sustainability and resources
of our agricultural supply chain, including the development of our initiative to advance sustainable
farming practices by our suppliers and expanding it further globally. During 2024, we continued to
experience volatility in our commodity, packaging and other input costs, that may continue into fiscal
2025. See Note 9 to our consolidated financial statements for further information on how we manage our
exposure to commodity prices.
We also maintain voluntary supply chain finance agreements with several participating global financial
institutions, pursuant to which our suppliers, at their sole discretion, may elect to sell their accounts
receivable with PepsiCo to such global financial institutions. These agreements did not have a material
impact on our business or financial results. See “Our Financial Results – Our Liquidity and Capital
Resources” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and Note 14 to our consolidated financial statements for further information.
Our Brands and Intellectual Property Rights
We own numerous valuable trademarks which are essential to our worldwide businesses, including
Adrenaline Rush, Agusha, Amp Energy, Aquafina, Aquafina Flavorsplash, Aqua Minerale, Arto Lifewtr,
Baja Blast, BaiCaoWei, Bare, Bokomo, Bubly, Cap’n Crunch, Ceres, Cheetos, Chester’s, Chipsy, Chokis,
Chudo, Cracker Jack, Crunchy, Diet Mountain Dew, Diet Mug, Diet Pepsi, Diet 7UP (outside the United
States), Domik v Derevne, Doritos, Duyvis, Elma Chips, Emperador, Evolve, Fast Twitch, Frito-Lay,
Fritos, Fruktovy Sad, Futurelife, G2, Gamesa, Gatorade, Gatorade Fit, Gatorade Zero, Gatorlyte,
Grandma’s, H2oh!, Hard MTN Dew, Health Warrior, Imunele, J7, Kas, Kurkure, Lay’s, Life, Lifewtr,
Liquifruit, Lubimy, Manzanita Sol, Marias Gamesa, Matutano, Mirinda, Miss Vickie’s, Moirs, Mother’s,
Mountain Dew, Mountain Dew Code Red, Mountain Dew Game Fuel, Mountain Dew Kickstart,
Mountain Dew Zero Sugar, Mug, Munchies, Muscle Milk, Near East, Obela, Off the Eaten Path, Paso de
los Toros, Pasta Roni, Pearl Milling Company, Pepsi, Pepsi Black, Pepsi Max, Pepsi Zero Sugar,
PopCorners, Pronutro, Propel, Quaker, Quaker Chewy, Quaker Simply Granola, Rice-A-Roni, Rockstar,
Rold Gold, Ruffles, Sabra, Sabritas, Safari, Sakata, Saladitas Gamesa, San Carlos, Sandora, Santitas,
Sasko, 7UP (outside the United States), 7UP Free (outside the United States), Siete, Simba, Smartfood,
Smith’s, Snack a Jacks, SoBe, SodaStream, Sonric’s, Spekko, Stacy’s, Starry, Starry Zero Sugar, Sting
Energy, Stubborn Soda, SunChips, Toddy, Toddynho, Tostitos, Vesely Molochnik, Walkers, Weetbix,
Wheaten, White Star, Ya and Yachak. We also hold long-term licenses to use valuable trademarks in
connection with our products in certain markets, including Ocean Spray. We also distribute Celsius energy
drinks and various Keurig Dr Pepper Inc. brands, including Dr Pepper in certain markets, Crush and
Schweppes. Joint ventures in which we have an ownership interest either own or have the right to use
certain trademarks, such as Lipton and Starbucks. In the United States, PepsiCo acts as the exclusive
distributor for TBG’s portfolio of brands for small-format and foodservice customers with chilled DSD.
See Note 13 to our consolidated financial statements for further information. In 2024, we shifted our
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alcoholic beverage business away from distribution to a trademark licensing model and flavor sales model
and have licensed certain brands in certain markets in the United States and internationally. Trademarks
remain valid so long as they are used properly for identification purposes, and we emphasize correct use of
our trademarks. We have authorized, through licensing arrangements, the use of many of our trademarks
in such contexts as convenient food joint ventures and beverage bottling appointments. In addition, we
license the use of our trademarks on merchandise that is sold at retail, which enhances brand awareness.
We either own or have licenses to use a number of patents which relate to certain of our products, their
packaging, the processes for their production and the design and operation of various equipment used in
our businesses. Some of these patents are licensed to others.
Seasonality
Our businesses are affected by seasonal variations. Our beverage and convenient food sales are generally
highest in the third quarter due to seasonal and holiday-related patterns and generally lowest in the first
quarter. However, taken as a whole, seasonality has not had a material impact on our consolidated
financial results.
Our Customers
Our customers include wholesale and other distributors, foodservice customers, grocery stores, drug
stores, convenience stores, discount/dollar stores, mass merchandisers, membership stores, hard
discounters, e-commerce retailers and authorized independent bottlers, among others. We normally grant
our independent bottlers exclusive contracts to sell and manufacture certain beverage products bearing our
trademarks within a specific geographic area. These arrangements provide us with the right to charge our
independent bottlers for concentrate, finished goods and Aquafina royalties and specify the manufacturing
process required for product quality. We also grant distribution rights to our independent bottlers for
certain beverage products bearing our trademarks for specified geographic areas.
We rely on and provide financial incentives to our customers to assist in the distribution and promotion of
our products to the consumer. For our independent distributors and retailers, these incentives include
volume-based rebates, product placement fees, promotions and displays. For our independent bottlers,
these incentives are referred to as bottler funding and are negotiated annually with each bottler to support
a variety of trade and consumer programs, such as consumer incentives, advertising support, new product
support, and vending and cooler equipment placement. Consumer incentives include pricing discounts and
promotions, and other promotional offers. Advertising support is directed at advertising programs and
supporting independent bottler media. New product support includes targeted consumer and retailer
incentives and direct marketplace support, such as point-of-purchase materials, product placement fees,
media and advertising. Vending and cooler equipment placement programs support the acquisition and
placement of vending machines and cooler equipment. The nature and type of programs vary annually.
Changes to the retail landscape, including increased consolidation of retail ownership, the continued
growth of sales through e-commerce websites and mobile commerce applications, including through
subscription services and other direct-to-consumer businesses, the integration of physical and digital
operations among retailers, as well as the international expansion of hard discounters, and the current
economic environment continue to increase the importance of major customers. In 2024, sales to Walmart
Inc. (Walmart) and its affiliates, including Sam’s Club (Sam’s), represented approximately 14% of our
consolidated net revenue, with sales reported across all of our divisions, including concentrate sales to our
independent bottlers, which were used in finished goods sold by them to Walmart. The loss of this
customer would have a material adverse effect on our FLNA, QFNA and PBNA divisions.
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Our Competition
Our beverage and convenient food products are in highly competitive categories and markets and compete
against products of international beverage and convenient food companies that, like us, operate in multiple
geographies, as well as regional, local and private label manufacturers and economy brands and other
competitors, including smaller companies developing and selling micro brands directly to consumers
through e-commerce platforms or through retailers focused on locally-sourced products. In many countries
in which our products are sold, including the United States, The Coca-Cola Company is our primary
beverage competitor. Other beverage and convenient food competitors include, but are not limited to, The
Campbell’s Company, Conagra Brands, Inc., Hormel Foods Corporation, Kellanova, Keurig Dr Pepper
Inc., The Kraft Heinz Company, Link Snacks, Inc., Mondelēz International, Inc., Monster Beverage
Corporation, Nestlé S.A., Primo Brands Corporation, Red Bull GmbH and Utz Brands, Inc.
Many of our convenient food products hold significant leadership positions in the convenient food
industry in the United States and worldwide. In 2024, we and The Coca-Cola Company represented
approximately 18% and 21%, respectively, of the U.S. liquid refreshment beverage category by estimated
retail sales in measured channels, according to Information Resources, Inc. However, The Coca-Cola
Company has significant carbonated soft drink (CSD) share advantage in many markets outside the United
States.
Our beverage and convenient food products compete primarily on the basis of brand recognition and
loyalty, taste, price, value, quality, product variety, innovation, distribution, shelf space, advertising,
marketing and promotional activity (including digital), packaging, convenience, service and the ability to
anticipate and effectively respond to consumer preferences and trends, including increased consumer
focus on health and wellness and sustainability and the continued acceleration of e-commerce and other
methods of distributing and purchasing products. Success in this competitive environment is dependent on
effective promotion of existing products, effective introduction of new products and reformulations of
existing products, increased efficiency in production techniques, effective incorporation of technology and
digital tools across all areas of our business, the effectiveness of our advertising campaigns, marketing
programs, product packaging and pricing, new vending and dispensing equipment and brand and
trademark development and protection. We believe that the strength of our brands, innovation and
marketing, coupled with the quality of our products and flexibility of our distribution network, allows us
to compete effectively.
Research and Development
We engage in a variety of research and development activities and invest in innovation globally with the
goal of meeting the needs of our customers and consumers and accelerating growth. These activities
principally involve: innovations focused on creating consumer preferred products to grow and transform
our portfolio through development of new technologies, ingredients, flavors and substrates; development
and improvement of our manufacturing processes, including reductions in cost and environmental
footprint; implementing product improvements to our global portfolio that reduce added sugars, sodium or
saturated fat; offering more products with functional ingredients and positive nutrition including legumes,
whole grains, fruits and vegetables, nuts and seeds, dairy, protein (including plant-based proteins), fiber,
micronutrients and hydration; development of packaging technology and new package designs, including
reducing the amount of plastic in our packaging and developing recyclable, compostable, biodegradable,
reusable or otherwise sustainable packaging; development of marketing, merchandising and dispensing
equipment; further expanding our beyond the bottle portfolio including innovation for our SodaStream
business; investments in technology and digitalization, including artificial intelligence and data analytics
to enhance our consumer insights and research; continuing to strengthen our omnichannel capabilities,
particularly in e-commerce; and efforts focused on reducing our impact on the environment, including
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reducing water use in our operations and our agricultural practices and reducing our environmental impact
in our operations throughout our value chain.
Our research centers are located around the world, including in Brazil, China, India, Ireland, Mexico,
Russia, South Africa, the United Kingdom and the United States, and leverage consumer insights, food
science and engineering to meet our strategy to continually innovate our portfolio of beverages and
convenient foods.
Regulatory Matters
The conduct of our businesses, including the production, storage, distribution, sale, display, advertising,
marketing, labeling, content, quality, safety, transportation, packaging, disposal, recycling and use of our
products and their ingredients, as well as our employment and occupational health and safety practices and
protection of personal information, are subject to various laws and regulations administered by federal,
state and local governmental agencies in the United States, as well as to laws and regulations administered
by government entities and agencies in the more than 200 other countries and territories in which our
products are made, manufactured, distributed or sold. It is our policy to abide by the laws and regulations
around the world that apply to our businesses.
The U.S. laws and regulations that we are subject to include, but are not limited to: the Federal Food, Drug
and Cosmetic Act and various state laws governing food safety and food labeling; the Food Safety
Modernization Act; the Occupational Safety and Health Act and various state laws and regulations
governing workplace health and safety; various federal, state and local environmental protection laws, as
discussed below; the Federal Motor Carrier Safety Act; the Federal Trade Commission Act; the Lanham
Act and various state law statutory and common law duties regarding false advertising; various federal and
state laws and regulations governing competition and trade practices, including the Robinson-Patman Act
and the Clayton Act; various federal and state laws and regulations governing our employment practices,
including those related to equal employment opportunity, such as the Equal Employment Opportunity Act
and the National Labor Relations Act and those related to overtime compensation, such as the Fair Labor
Standards Act; data privacy and personal data protection laws and regulations, including the California
Consumer Privacy Act of 2018 (as modified by the California Privacy Rights Act); customs and foreign
trade laws and regulations, including laws regarding the import or export of our products or ingredients
used in our products and tariffs; laws regulating the sale of certain of our products in schools; laws
regulating the ingredients or substances contained in, or attributes of, our products; laws regulating our
supply chain, including the 2010 California Transparency in Supply Chains Act and laws relating to the
payment of taxes. We are also required to comply with the Foreign Corrupt Practices Act and the Trade
Sanctions Reform and Export Enhancement Act. We are also subject to various state and local statutes and
regulations, including state consumer protection laws such as Proposition 65 in California, which requires
that a specific warning appear on any product that contains a substance listed by the State of California as
having been found to cause cancer or birth defects, unless the amount of such substance in the product is
below a safe harbor level.
We are subject to numerous similar and other laws and regulations outside the United States, including but
not limited to laws and regulations governing food safety; the ingredients or substances contained in, or
attributes of, our products, including the Food (Promotion and Placement)(England) Regulations;
international trade, import/export restrictions and tariffs; supply chains, including the U.K. Modern
Slavery Act; occupational health and safety; competition; and anti-corruption and data privacy, including
the European Union General Data Protection Regulation. In many jurisdictions, compliance with
competition laws is of special importance to us due to our competitive position in those jurisdictions, as is
compliance with anti-corruption laws, including the U.K. Bribery Act. We rely on legal and operational
compliance programs, as well as in-house and outside counsel and other experts, to guide our businesses
in complying with the laws and regulations around the world that apply to our businesses.
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Item 2. Properties.
Our principal executive office located in Purchase, New York and our facilities located in Plano, Texas,
all of which we own, are our most significant corporate properties.
In connection with making, marketing, distributing and selling our products, each division utilizes
manufacturing, processing, bottling and production plants, warehouses, distribution centers, storage
facilities, offices, including division headquarters, research and development facilities and other facilities,
all of which are either owned or leased.
Significant properties by division are as follows:
Property Type
Location
Owned/ Leased
FLNA
Research and development facility Plano, Texas
Owned
QFNA
Convenient food plant
Cedar Rapids, Iowa
Owned
PBNA
Research and development facility Valhalla, New York
Owned
PBNA
Concentrate plant
Arlington, Texas
Owned
LatAm
Convenient food plant
Celaya, Mexico
Owned
LatAm
Two convenient food plants
Vallejo, Mexico
Owned
Europe
Convenient food plant
Leicester, United Kingdom
Owned (a)
Europe
Convenient food plant
Kashira, Russia
Owned
Europe
Manufacturing plant
Lehavim, Israel
Owned
Europe
Dairy plant
Moscow, Russia
Owned
AMESA
Convenient food plant
Riyadh, Saudi Arabia
Owned (a)
APAC
Convenient food plant
FLNA, QFNA, PBNA, LatAm, Corporate Shared service center
Shanghai, China
Mexico City, Mexico
Owned (a)
Leased
PBNA, LatAm
Concentrate plant
Colonia, Uruguay
Owned (a)
PBNA, Europe, AMESA
Two concentrate plants
Cork, Ireland
Owned
PBNA, AMESA, APAC
Concentrate plant
Singapore
Owned (a)
All divisions
Shared service center
Hyderabad, India
Leased
(a) The land on which these properties are located is leased.
Most of our plants are owned or leased on a long-term basis. In addition to company-owned or leased
properties described above, we also utilize a highly distributed network of plants, warehouses and
distribution centers that are owned or leased by our contract manufacturers, co-packers, strategic alliances
or joint ventures in which we have an equity interest. We believe that our properties generally are in good
operating condition and, taken as a whole, are suitable, adequate and of sufficient capacity for our current
operations.
Item 3. Legal Proceedings.
We are party to the following litigation asserting claims for public nuisance, deceptive acts or practices in
the conduct of business among other related claims allegedly resulting in plastic pollution in certain areas.
•
On November 15, 2023, the Attorney General of New York, on behalf of the people of the State of
New York, filed a lawsuit against PepsiCo, Inc., Frito-Lay, Inc. and Frito-Lay North America, Inc.
(the NYS Matter). This matter was assigned to the Commercial Division of the New York State
Supreme Court – Erie County. On November 8, 2024, the court granted our motion to dismiss the
complaint in its entirety. On December 9, 2024, the plaintiff filed an appeal to the New York State
Supreme Court Appellate Division – Fourth Department.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OUR BUSINESS
Executive Overview
Our Operations
Other Relationships
Our Business Risks
OUR FINANCIAL RESULTS
Results of Operations – Consolidated Review
Results of Operations – Division Review
FLNA
QFNA
PBNA
LatAm
Europe
AMESA
APAC
Non-GAAP Measures
Items Affecting Comparability
Our Liquidity and Capital Resources
Changes in Line Items in Our Consolidated Financial Statements
Return on Invested Capital
OUR CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Revenue Recognition
Goodwill and Other Intangible Assets
Income Tax Expense and Accruals
Pension and Retiree Medical Plans
CONSOLIDATED STATEMENT OF INCOME
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF EQUITY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation and Our Divisions
Note 2 – Our Significant Accounting Policies
Note 3 – Restructuring and Impairment Charges
Note 4 – Intangible Assets
Note 5 – Income Taxes
Note 6 – Share-Based Compensation
Note 7 – Pension, Retiree Medical and Savings Plans
Note 8 – Debt Obligations
Note 9 – Financial Instruments
Note 10 – Net Income Attributable to PepsiCo per Common Share
Note 11 – Accumulated Other Comprehensive Loss Attributable to PepsiCo
Note 12 – Leases
Note 13 – Acquisitions and Divestitures
Note 14 – Supply Chain Financing Arrangements
Note 15 – Supplemental Financial Information
Note 16 – Legal Contingencies
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
GLOSSARY
33
34
35
36
36
41
43
45
45
45
46
46
46
47
47
49
52
54
55
56
57
58
59
61
62
63
65
66
67
74
79
81
84
88
92
98
100
106
107
108
110
112
113
114
115
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primarily due to declines in the Egyptian pound, Russian ruble, Mexican peso and Brazilian real. Currency
declines against the U.S. dollar which are not offset could adversely impact our future financial results.
Our foreign exchange derivative contracts had a total notional value of $3.1 billion as of December 28,
2024 and $3.8 billion as of December 30, 2023. At the end of 2024, we estimate that an unfavorable 10%
change in the underlying exchange rates would have decreased our net unrealized gains in 2024 by $319
million, which would be significantly offset by an inverse change in the fair value of the underlying
exposure.
Our cross-currency swap contracts had a total notional value of $1.2 billion as of December 28, 2024 and
$1.3 billion as of December 30, 2023. At the end of 2024, we estimate that an unfavorable 10% change in
the underlying exchange rates would have increased our net unrealized losses in 2024 by $107 million,
which would be significantly offset by an inverse change in the fair value of the underlying exposure.
The total notional amount of our debt instruments designated as net investment hedges was $2.9 billion as
of December 28, 2024 and $3.0 billion as of December 30, 2023.
Interest Rates
Our interest rate swap contracts had a total notional value of $2.0 billion as of December 28, 2024.
Assuming year-end 2024 investment levels and variable rate debt, a 1-percentage-point increase in interest
rates would have decreased our net interest expense in 2024 by $32 million due to higher cash and cash
equivalents and short-term investments levels, as compared with our variable rate debt.
OUR FINANCIAL RESULTS
Results of Operations — Consolidated Review
Volume
Physical or unit volume is one of the key metrics management uses internally to make operating and
strategic decisions, including the preparation of our annual operating plan and the evaluation of our
business performance. We believe volume provides additional information to facilitate the comparison of
our historical operating performance and underlying trends, and provides additional transparency on how
we evaluate our business because it measures demand for our products at the consumer level. Unit volume
performance adjusts for the impacts of acquisitions and divestitures. Acquisitions and divestitures, when
used in this report, reflect mergers and acquisitions activity, as well as divestitures and other structural
changes, including changes in ownership or control in consolidated subsidiaries and nonconsolidated
equity investees. Further, unit volume performance excludes the impact of a 53rd reporting week, where
applicable. Our fiscal year ends on the last Saturday of each December, resulting in an additional reporting
week every five or six years (53rd reporting week).
Beverage volume includes volume of concentrate sold to independent bottlers and volume of finished
products bearing company-owned or licensed trademarks and allied brand products and joint venture
trademarks sold by company-owned bottling operations. Beverage volume also includes volume of
finished products bearing company-owned or licensed trademarks sold by our noncontrolled affiliates.
Concentrate volume sold to independent bottlers is reported in concentrate shipments and equivalents
(CSE), whereas finished beverage product volume is reported in bottler case sales (BCS). Both CSE and
BCS convert all beverage volume to an 8-ounce-case metric. Typically, CSE and BCS are not equal in any
given period due to seasonality, timing of product launches, product mix, bottler inventory practices and
other factors. While our net revenue is not entirely based on BCS volume due to the independent bottlers
in our supply chain, we believe that BCS is a better measure of the consumption of our beverage products.
PBNA, LatAm, Europe, AMESA and APAC, either independently or in conjunction with third parties,
make, market, distribute and sell ready-to-drink tea products through a joint venture with Unilever (under
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the Lipton brand name), and PBNA, either independently or in conjunction with third parties, makes,
markets, distributes and sells ready-to-drink coffee products through a joint venture with Starbucks.
Convenient food volume includes volume sold by us and our noncontrolled affiliates of convenient food
products bearing company-owned or licensed trademarks. Internationally, we measure convenient food
product volume in kilograms, while in North America we measure convenient food product volume in
pounds. FLNA makes, markets, distributes and sells Sabra refrigerated dips and spreads through a joint
venture with Strauss Group. In December 2024, we acquired the Strauss Group’s 50% ownership in Sabra
and Sabra became a wholly-owned subsidiary.
Consolidated Net Revenue and Operating Profit
Change
2024
2023
$ 91,854
$ 91,471
—%
$ 12,887
$ 11,986
8%
14.0 %
13.1 %
0.9
Net revenue
Operating profit
Operating margin
See “Results of Operations – Division Review” for a tabular presentation and discussion of key drivers of
net revenue.
Operating profit increased 8% and operating margin improved 0.9 percentage points. Operating profit
growth was primarily driven by effective net pricing, productivity savings and an 18-percentage-point
impact of prior-year impairment charges related to the SodaStream business. These impacts were partially
offset by certain operating cost increases, a decline in organic volume, an 8-percentage-point impact of
higher impairment and other charges associated with our TBG investment and Juice Transaction-related
receivables, a 5-percentage-point impact of higher restructuring charges and a 4-percentage-point
unfavorable impact of an indirect tax reserve. Corporate unallocated expenses reflect a 3-percentage-point
favorable impact driven primarily by a decrease in corporate expenses and prior-year contributions to The
PepsiCo Foundation, Inc.
Other Consolidated Results
Other pension and retiree medical benefits (expense)/income
Net interest expense and other
Annual tax rate
Net income attributable to PepsiCo
Net income attributable to PepsiCo per common share – diluted
2024
2023
Change
$ (22)
$ 250
$ (272)
$ 919
$ 819
$ 100
19.4 %
19.8 %
$ 9,578
$ 9,074
5.5 %
$ 6.95
$ 6.56
6%
Other pension and retiree medical benefits expense increased $272 million, primarily reflecting higher
settlement charges due to lump sum distributions to retired or terminated employees and the purchase of a
group annuity contract whereby a third-party insurance company assumed the obligation to pay and
administer future benefit payments for certain retirees.
Net interest expense and other increased $100 million, primarily due to higher interest rates on debt and
higher average debt balances, partially offset by higher average cash balances and higher interest rates on
average cash balances.
The reported tax rate decreased 0.4 percentage points, primarily reflecting a reduction in the state tax rate.
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Operating Profit, Operating Profit Adjusted for Items Affecting Comparability and Operating Profit
Performance Adjusted for Items Affecting Comparability on a Constant Currency Basis
Operating profit adjusted for items affecting comparability and operating profit performance adjusted for
items affecting comparability on a constant currency basis are both non-GAAP financial measures. For
further information on these measures, see “Non-GAAP Measures” and “Items Affecting Comparability.”
Operating Profit and Operating Profit Adjusted for Items Affecting Comparability
FLNA
QFNA
PBNA
LatAm
Europe
AMESA
APAC
Corporate unallocated
expenses
Total
Mark-toReported,
market
GAAP
net
Measure
impact
$ 6,316 $
—
303
—
2,302
—
2,245
—
2,019
—
798
—
811
—
(1,907)
$ 12,887 $
2024
Items Affecting Comparability(a)
Restructuring
Product
and
Acquisition and Impairment
recallimpairment
divestitureand other
related
charges
related charges
charges
impact
$
150 $
9 $
— $
—
11
—
9
184
238
8
556
—
51
—
—
—
123
—
145
—
14
5
—
—
10
—
4
—
(25)
(25) $
101
698
—
22
$
—
714
$
$
Indirect
tax
impact
$
—
—
—
218
—
—
—
—
184
$
—
218
Core,
Non-GAAP
Measure
$
6,475
507
3,104
2,514
2,287
817
825
$
(1,831)
14,698
2023
FLNA
QFNA
PBNA
LatAm
Europe
AMESA
APAC
Corporate unallocated
expenses
Total
(a)
Reported,
GAAP
Measure
$
6,755
492
2,584
2,252
767
807
713
$
Mark-tomarket net
impact
$
—
—
—
—
—
—
—
(2,384)
11,986 $
36
36
Items Affecting Comparability(a)
Impairment
Product
Restructuring and Acquisition and
and other
recallimpairment
divestiturecharges/
related
charges
related charges
credits
impact
$
42 $
— $
— $
—
—
—
—
136
41
16
321
—
29
—
2
—
223
(2)
855
—
15
2
(7)
—
8
—
59
—
88
446
$
See “Items Affecting Comparability.”
44
$
25
41
$
—
1,230
$
—
136
Core,
Non-GAAP
Measure
$
6,797
628
2,962
2,283
1,843
817
780
$
(2,235)
13,875
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Operating Profit Performance and Operating Profit Performance Adjusted for Items Affecting
Comparability on a Constant Currency Basis
2024
Impact of Items Affecting Comparability(a)
Impact of
Reported
%
Change,
GAAP
Measure
Mark-tomarket
net
impact
Restructuring
and
impairment
charges
Acquisition
and
divestiture
-related
charges
Impairment
and other
charges/
credits
Product
recallrelated
impact
Indirect
tax
impact
FLNA
(7)%
—
2
—
—
—
QFNA
(38)%
—
3
—
3
14
PBNA
(11)%
—
7
—
9
—
LatAm
—%
—
1
—
—
—
Europe
163 %
—
(17)
—
(122)
AMESA
(1)%
—
—
0.5
1
APAC
14 %
—
—
—
Corporate
unallocated
expenses
Total
(20)%
2
—
8%
(1)
5
(a)
(b)
Core
Constant
Currency
% Change,
Non-GAAP
Measure(b)
Core
% Change,
Non-GAAP
Measure(b)
Foreign
exchange
translation
—
(5)%
—
(5)%
—
(19)%
—
(19)%
—
5%
—
5%
10
10 %
3
13 %
—
—
24 %
3
27 %
—
—
—%
8
9%
(8)
—
—
6%
3
8%
1
—
—
—
(18)%
—
(18)%
—
(10)
1
4
6%
2
8%
See “Items Affecting Comparability.”
Amounts may not sum due to rounding.
FLNA
Net revenue decreased 1%, primarily driven by a decrease in organic volume, partially offset by effective
net pricing.
Unit volume declined 2.5%, primarily driven by mid-single-digit declines in trademark Cheetos and
trademark Tostitos and low-single-digit declines in trademark Lay’s and variety packs, partially offset by
double-digit growth in trademark Chester’s and trademark Miss Vickie’s.
Operating profit decreased 7%, primarily reflecting certain operating cost increases, including strategic
initiatives, and the decrease in organic volume. These impacts were partially offset by productivity savings
and the effective net pricing.
QFNA
Net revenue decreased 14%, primarily driven by a decrease in organic volume, which was negatively
impacted by the loss of sales from products included in the Quaker Recall.
Unit volume declined 14%, primarily driven by double-digit declines in bars, oatmeal, pancake syrup and
mix and ready-to-eat cereals. The unit volume decline in bars and ready-to-eat cereals was negatively
impacted by the loss of sales from products included in the Quaker Recall.
Operating profit decreased 38%, primarily reflecting the decrease in organic volume, certain operating
cost increases and a 14-percentage-point impact of charges associated with the Quaker Recall, partially
offset by productivity savings, a 12-percentage-point favorable impact of an insurance recovery related to
the Quaker Recall, lower advertising and marketing expenses and effective net pricing.
PBNA
Net revenue increased 0.5%, primarily driven by effective net pricing, partially offset by an organic
volume decline.
Unit volume declined 3%, driven by a 4% decline in non-carbonated beverage (NCB) volume and a 2%
decline in CSD volume. The NCB volume decline primarily reflected a mid-single-digit decline in our
overall water portfolio, a low-single-digit decline in Gatorade sports drinks and a high-single-digit decline
in our Lipton ready-to-drink tea portfolio.
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Operating profit decreased 11%, primarily driven by certain operating cost increases, the decline in
organic volume, a 9-percentage-point impact of higher impairment and other charges associated with our
TBG investment and Juice Transaction-related receivables, a 7-percentage-point impact of higher
restructuring charges and higher advertising and marketing expenses. These impacts were partially offset
by the effective net pricing and productivity savings.
LatAm
Net revenue increased 0.5%, reflecting effective net pricing, partially offset by a 3-percentage-point
impact of unfavorable foreign exchange translation and a net decline in organic volume.
Convenient foods unit volume declined 2%, primarily reflecting double-digit declines in Peru and
Argentina, partially offset by low-single-digit growth in Brazil. Additionally, Mexico experienced a lowsingle-digit decline.
Beverage unit volume grew slightly, primarily reflecting mid-single-digit growth in Brazil and low-singledigit growth in Mexico, Guatemala and Chile, partially offset by a double-digit decline in Colombia and
high-single-digit declines in Argentina and Peru.
Operating profit decreased slightly, primarily reflecting certain operating cost increases, a 10-percentagepoint unfavorable impact of an indirect tax reserve, the net organic volume decline, higher advertising and
marketing expenses and a 3-percentage-point impact of unfavorable foreign exchange translation, partially
offset by the effective net pricing, productivity savings and a 5-percentage-point impact of lower
commodity costs.
Europe
Net revenue increased 5%, primarily reflecting effective net pricing and organic volume growth, partially
offset by a 2-percentage-point impact of unfavorable foreign exchange translation.
Convenient foods unit volume grew 2%, primarily reflecting mid-single-digit growth in Russia and lowsingle-digit growth in the United Kingdom, partially offset by a high-single-digit decline in France and a
mid-single-digit decline in the Netherlands. Additionally, Turkey experienced low-single-digit growth.
Beverage unit volume grew 2%, primarily reflecting mid-single-digit growth in Russia and low-singledigit growth in Turkey, partially offset by a double-digit decline in France and a slight decline in
Germany. Additionally, the United Kingdom experienced low-single-digit growth.
Operating profit increased 163%, primarily reflecting a 148-percentage-point favorable impact of the
prior-year impairment charges related to the SodaStream business, the net revenue growth, productivity
savings and a 17-percentage-point favorable impact of lower restructuring charges. These impacts were
partially offset by certain operating cost increases, a 23-percentage-point impact of impairment and other
charges associated with our TBG investment and Juice Transaction-related receivables, an 8-percentagepoint impact of higher commodity costs and higher advertising and marketing costs.
AMESA
Net revenue increased 1%, primarily reflecting effective net pricing and organic volume growth, partially
offset by a 9-percentage-point impact of unfavorable foreign exchange translation.
Convenient foods unit volume grew 2%, primarily reflecting mid-single-digit growth in South Africa and
double-digit growth in India, partially offset by double-digit declines in the Middle East and Pakistan.
Beverage unit volume grew 1%, primarily reflecting double-digit growth in India, partially offset by a
low-single-digit decline in the Middle East, a mid-single-digit decline in Pakistan and a high-single-digit
decline in Nigeria.
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Operating profit decreased 1%, primarily reflecting certain operating cost increases, a 33-percentage-point
impact of higher commodity costs, primarily packaging materials, potatoes and other ingredients, largely
driven by transaction-related foreign exchange and an 8-percentage-point impact of unfavorable foreign
exchange translation. These impacts were partially offset by the net revenue growth and productivity
savings.
APAC
Net revenue increased 1%, primarily reflecting organic volume growth, partially offset by a 2-percentagepoint impact of unfavorable foreign exchange translation and unfavorable net pricing.
Convenient foods unit volume grew 4%, primarily reflecting double-digit growth in Thailand and midsingle-digit growth in China. Additionally, Australia experienced mid-single-digit growth.
Beverage unit volume grew 1%, primarily reflecting high-single-digit growth in Vietnam, mid-single-digit
growth in Thailand and low-single-digit growth in the Philippines, partially offset by a low-single-digit
decline in China.
Operating profit increased 14%, primarily reflecting productivity savings, the organic volume growth, a 9percentage-point favorable impact of impairment charges related to the Be & Cheery brand in the prior
year and a 5-percentage-point impact of lower commodity costs. These impacts were partially offset by
certain operating cost increases and the unfavorable net pricing.
Non-GAAP Measures
Certain financial measures contained in this Form 10-K adjust for the impact of specified items and are
not in accordance with GAAP. We use non-GAAP financial measures internally to make operating and
strategic decisions, including the preparation of our annual operating plan, evaluation of our overall
business performance and as a factor in determining compensation for certain employees. We believe
presenting non-GAAP financial measures in this Form 10-K provides additional information to facilitate
comparison of our historical operating results and trends in our underlying operating results and provides
additional transparency on how we evaluate our business. We also believe presenting these measures in
this Form 10-K allows investors to view our performance using the same measures that we use in
evaluating our financial and business performance and trends.
We consider quantitative and qualitative factors in assessing whether to adjust for the impact of items that
may be significant or that could affect an understanding of our ongoing financial and business
performance or trends. Examples of items for which we may make adjustments include: amounts related
to mark-to-market gains or losses (non-cash); charges related to restructuring plans; charges associated
with acquisitions and divestitures; gains associated with divestitures; asset impairment charges (non-cash);
product recall-related impact; pension and retiree medical-related amounts, including all settlement and
curtailment gains and losses; charges or adjustments related to the enactment of new laws, rules or
regulations, such as tax law changes; amounts related to the resolution of tax positions; tax benefits related
to reorganizations of our operations; debt redemptions, cash tender or exchange offers; and
remeasurements of net monetary assets. See below and “Items Affecting Comparability” for a description
of adjustments to our GAAP financial measures in this Form 10-K.
Non-GAAP information should be considered as supplemental in nature and is not meant to be considered
in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In
addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP
measures presented by other companies.
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The following non-GAAP financial measures contained in this Form 10-K are discussed below:
Cost of sales, gross profit, selling, general and administrative expenses, impairment of intangible assets,
other pension and retiree medical benefits expense/income, net interest expense and other, provision for
income taxes, net income attributable to noncontrolling interests and net income attributable to PepsiCo,
each adjusted for items affecting comparability, operating profit and net income attributable to PepsiCo
per common share – diluted, each adjusted for items affecting comparability, and the corresponding
constant currency growth rates
These measures exclude the net impact of mark-to-market gains and losses on centrally managed
commodity derivatives that do not qualify for hedge accounting, restructuring and impairment charges
related to our 2019 Multi-Year Productivity Plan (2019 Productivity Plan), charges associated with our
acquisitions and divestitures, impairment and other charges/credits, product recall-related impact, indirect
tax expense related to an international audit and the impact of settlement and curtailment gains and losses
related to pension and retiree medical plans (see “Items Affecting Comparability” for a detailed
description of each of these items). We also evaluate performance on operating profit and net income
attributable to PepsiCo per common share – diluted, each adjusted for items affecting comparability, on a
constant currency basis, which measure our financial results assuming constant foreign currency exchange
rates used for translation based on the rates in effect for the comparable prior-year period. In order to
compute our constant currency results, we multiply or divide, as appropriate, our current-year U.S. dollar
results by the current-year average foreign exchange rates and then multiply or divide, as appropriate,
those amounts by the prior-year average foreign exchange rates. We believe these measures provide useful
information in evaluating the results of our business because they exclude items that we believe are not
indicative of our ongoing performance or that we believe impact comparability with the prior year.
Organic revenue performance
We define organic revenue performance as a measure that adjusts for the impacts of foreign exchange
translation, acquisitions and divestitures, and every five or six years, the impact of the 53rd reporting week.
Adjusting for acquisitions and divestitures reflects mergers and acquisitions activity, as well as
divestitures and other structural changes, including changes in ownership or control in consolidated
subsidiaries and nonconsolidated equity investees. We believe organic revenue performance provides
useful information in evaluating the results of our business because it excludes items that we believe are
not indicative of ongoing performance or that we believe impact comparability with the prior year.
See “Net Revenue and Organic Revenue Performance” in “Results of Operations – Division Review” for
further information.
Free cash flow
We define free cash flow as net cash from operating activities less capital spending, plus sales of property,
plant and equipment. Since net capital spending is essential to our product innovation initiatives and
maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash. As
such, we believe investors should also consider net capital spending when evaluating our cash from
operating activities. Free cash flow is used by us primarily for acquisitions and financing activities,
including debt repayments, dividends and share repurchases. Free cash flow is not a measure of cash
available for discretionary expenditures since we have certain non-discretionary obligations such as debt
service that are not deducted from the measure.
See “Free Cash Flow” in “Our Liquidity and Capital Resources” for further information.
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Return on invested capital (ROIC) and net ROIC, excluding items affecting comparability
We define ROIC as net income attributable to PepsiCo plus interest expense after-tax divided by the sum
of quarterly average debt obligations and quarterly average common shareholders’ equity. Although ROIC
is a common financial metric, numerous methods exist for calculating ROIC. Accordingly, the method
used by management to calculate ROIC may differ from the methods other companies use to calculate
their ROIC.
We believe this metric serves as a measure of how well we use our capital to generate returns. In addition,
we use net ROIC, excluding items affecting comparability, to compare our performance over various
reporting periods on a consistent basis because it removes from our operating results the impact of items
that we believe are not indicative of our ongoing performance and reflects how management evaluates our
operating results and trends. We define net ROIC, excluding items affecting comparability, as ROIC,
adjusted for quarterly average cash, cash equivalents and short-term investments, after-tax interest income
and items affecting comparability. We believe the calculation of ROIC and net ROIC, excluding items
affecting comparability, provides useful information to investors and is an additional relevant comparison
of our performance to consider when evaluating our capital allocation efficiency.
See “Return on Invested Capital” in “Our Liquidity and Capital Resources” for further information.
Items Affecting Comparability
Our reported financial results in this Form 10-K are impacted by the following items in each of the
following years:
2024
Reported, GAAP Measure
Cost of
sales
Gross
profit
Selling,
general and
administrative
expenses
$ 41,744
$ 50,110
$
37,190
Impairment
of
intangible
assets
Operating
profit
$
$
33
12,887
Other
pension
and retiree
medical
benefits
(expense)/
income
$
Provision
for
income
taxes(a)
(22) $
2,320
Net income
attributable
to PepsiCo
$
9,578
Items Affecting Comparability
Mark-to-market net impact
26
(26)
(1)
—
(25)
—
(6)
(19)
(133)
133
(551)
(14)
698
29
164
563
Acquisition and divestiture-related charges
—
—
(22)
—
22
—
4
18
Impairment and other charges
—
—
(695)
(19)
714
—
184
530
Product recall-related impact
(176)
176
(8)
—
184
3
44
143
Indirect tax impact
(218)
218
—
—
218
—
—
218
—
—
—
—
—
276
61
$ 41,243
$ 50,611
Restructuring and impairment charges
Pension and retiree medical-related impact
Core, Non-GAAP Measure
$
35,913
49
$
—
$
14,698
$
286
$
2,771
215
$
11,246
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2023
Impairment
of
intangible
assets
Operating
profit
Other
pension and
retiree
medical
benefits
income
$
927
$ 11,986
$
Cost of
sales
Gross
profit
Selling,
general and
administrative
expenses
$ 41,881
$ 49,590
$
Mark-to-market net impact
(3)
3
(33)
—
36
—
9
—
27
Restructuring and impairment
charges
(13)
13
(433)
—
446
(1)
96
1
348
Acquisition and divestiture-related
charges
—
—
(41)
—
41
—
18
—
23
5
(5)
(308)
(927)
1,230
—
284
—
946
(136)
136
—
—
136
—
32
—
104
Reported, GAAP Measure
36,677
250
Provision
for
income
taxes(a)
Net income
attributable to
noncontrolling
interests
Net income
attributable
to PepsiCo
$
$
$
2,262
81
9,074
Items Affecting Comparability
Impairment and other charges/
credits
Product recall-related impact
Pension and retiree medical-related
impact
Core, Non-GAAP Measure
(a)
—
—
$ 41,734
$ 49,737
—
$
35,862
$
—
—
—
$ 13,875
14
$
263
3
$
2,704
—
$
82
11
$
10,533
Provision for income taxes is the expected tax charge/benefit on the underlying item based on the tax laws and income tax rates applicable to the
underlying item in its corresponding tax jurisdiction.
Net income attributable to PepsiCo per common share – diluted, GAAP measure
Mark-to-market net impact
Restructuring and impairment charges
Acquisition and divestiture-related charges
Impairment and other charges/credits
Product recall-related impact
Indirect tax impact
Pension and retiree medical-related impact
Core net income attributable to PepsiCo per common share – diluted, non-GAAP
measure
Impact of foreign exchange translation
Growth in core net income attributable to PepsiCo per common share – diluted, on a
constant currency basis, non-GAAP measure
$
$
2024
6.95
(0.01)
0.41
0.01
0.38
0.10
0.16
0.16
8.16
$
$
2023
6.56
0.02
0.25
0.02
0.68
0.07
—
0.01
7.62
Change
6%
(a)
7%
2
9%
(a) Does not sum due to rounding.
Mark-to-Market Net Impact
We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives
include agricultural products, metals, and energy. Commodity derivatives that do not qualify for hedge
accounting treatment are marked to market each period with the resulting gains and losses recorded in
corporate unallocated expenses as either cost of sales or selling, general and administrative expenses,
depending on the underlying commodity. These gains and losses are subsequently reflected in division
results when the divisions recognize the cost of the underlying commodity in operating profit. Therefore,
the divisions realize the economic effects of the derivative without experiencing any resulting mark-tomarket volatility, which remains in corporate unallocated expenses.
Restructuring and Impairment Charges
2019 Multi-Year Productivity Plan
The 2019 Productivity Plan leverages new technology and business models to further simplify, harmonize
and automate processes; re-engineers our go-to-market and information systems, including deploying the
right automation for each market; and simplifies our organization and optimizes our manufacturing and
supply chain footprint. To build on the successful implementation of the 2019 Productivity Plan, in the
fourth quarter of 2024, we further expanded and extended the plan through the end of 2030 to take
advantage of additional opportunities within the initiatives described above. As a result, we expect to incur
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pre-tax charges of approximately $6.15 billion, including cash expenditures of approximately $5.1 billion,
as compared to our previous estimate of pre-tax charges of approximately $3.65 billion, including cash
expenditures of approximately $2.9 billion. Plan to date through December 28, 2024, we have incurred
pre-tax charges of $2.6 billion, including cash expenditures of $1.9 billion. In our 2025 financial results,
we expect to incur pre-tax charges of approximately $900 million, including cash expenditures of
approximately $800 million. These charges will be funded primarily through cash from operations. We
expect to incur the majority of the remaining pre-tax charges and cash expenditures through 2027, with the
balance to be incurred through 2030. Charges include severance and other employee costs, asset
impairments and other costs.
See Note 3 to our consolidated financial statements for further information related to our 2019
Productivity Plan. We regularly evaluate productivity initiatives beyond the productivity plan and other
initiatives discussed above and in Note 3 to our consolidated financial statements.
Acquisition and Divestiture-Related Charges
Acquisition and divestiture-related charges primarily include transaction expenses, such as consulting,
advisory and other professional fees, and merger and integration charges. Merger and integration charges
include employee-related costs, contract termination costs, closing costs and other integration costs.
See Note 13 to our consolidated financial statements for further information.
Impairment and Other Charges/Credits
We recognized Russia-Ukraine conflict charges, brand portfolio impairment charges and other impairment
charges as described below.
Russia-Ukraine Conflict Charges
In connection with the ongoing conflict in Ukraine, we recognized charges related to indefinite-lived
intangible assets and property, plant and equipment impairment, allowance for expected credit losses,
inventory write-downs and other costs in 2022. We also recognized adjustments to these charges in 2023.
See Notes 1 and 4 to our consolidated financial statements for further information.
Brand Portfolio Impairment Charges
We recognized intangible asset, investment and property, plant and equipment impairments and other
charges as a result of management’s decision to reposition or discontinue the sale/distribution of certain
brands and to sell an investment in 2022. We also recognized adjustments to these charges in 2023.
See Notes 1 and 4 to our consolidated financial statements for further information.
Other Impairment Charges
We recognized impairment charges taken as a result of our quantitative assessments of certain of our
indefinite-lived intangible assets and related to our investment in TBG. In addition, we recorded allowance
for expected credit losses related to outstanding receivables from TBG associated with the Juice
Transaction.
See Notes 1, 4 and 9 to our consolidated financial statements for further information.
Product Recall-Related Impact
We recognized product returns, inventory write-offs and customer and consumer-related costs in our
QFNA division associated with a voluntary recall of certain bars and cereals.
See Note 1 to our consolidated financial statements for further information.
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Indirect Tax Impact
We recognized additional expenses related to an indirect tax reserve in our LatAm division.
Pension and Retiree Medical-Related Impact
Pension and retiree medical-related impact includes settlement charges due to lump sum distributions to
retired or terminated employees and the purchase of a group annuity contract whereby a third-party
insurance company assumed the obligation to pay and administer future benefit payments for certain
retirees. The settlement charge was triggered when the aggregate of the cumulative lump sum distributions
and the annuity contract premium exceeded the total annual service and interest costs. Pension and retiree
medical-related impact also includes curtailment losses due to restructuring actions as part of our 2019
Productivity Plan.
See Notes 7 and 13 to our consolidated financial statements for further information.
Our Liquidity and Capital Resources
We believe that our cash generating capability and financial condition, together with our revolving credit
facilities, working capital lines and other available methods of debt financing, such as commercial paper
borrowings and long-term debt financing, will be adequate to meet our operating, investing and financing
needs, including with respect to our net capital spending plans. Our primary sources of liquidity include
cash from operations, proceeds obtained from issuances of commercial paper and long-term debt, and cash
and cash equivalents. These sources of cash are available to fund cash outflows that have both a short- and
long-term component, including debt repayments and related interest payments; payments for acquisitions;
operating leases; purchase, marketing, and other contractual commitments, including capital expenditures
and the transition tax liability under the Tax Cuts and Jobs Act (TCJ Act). In addition, these sources of
cash fund other cash outflows including anticipated dividend payments and share repurchases. We do not
have guarantees or off-balance sheet financing arrangements, including variable interest entities, that we
believe could have a material impact on our liquidity. See “Item 1A. Risk Factors,” “Our Business Risks”
and Note 8 to our consolidated financial statements for further information.
As of December 28, 2024, cash, cash equivalents and short-term investments in our consolidated
subsidiaries subject to currency controls or currency exchange restrictions were not material.
The TCJ Act imposed a one-time mandatory transition tax on undistributed international earnings. As of
December 28, 2024, our mandatory transition tax liability was $1.7 billion, which must be paid through
2026 under the provisions of the TCJ Act; we currently expect to pay approximately $772 million of this
liability in 2025. Any additional guidance issued by the Internal Revenue Service (IRS) may impact our
recorded amounts for this transition tax liability. See Note 5 to our consolidated financial statements for
further discussion of the TCJ Act.
Supply chain financing arrangements did not have a material impact on our liquidity or capital resources
in the periods presented and we do not expect such arrangements to have a material impact on our
liquidity or capital resources for the foreseeable future. See Note 14 to our consolidated financial
statements for further discussion of supply chain financing arrangements.
Furthermore, our cash provided from operating activities is somewhat impacted by seasonality. Working
capital needs are impacted by weekly sales, which are generally highest in the third quarter due to seasonal
and holiday-related patterns and generally lowest in the first quarter. On a continuing basis, we consider
various transactions to increase shareholder value and enhance our business results, including acquisitions,
divestitures, joint ventures, dividends, share repurchases, productivity and other efficiency initiatives and
other structural changes. These transactions may result in future cash proceeds or payments.
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The table below summarizes our cash activity:
2024
2023
$ 12,507 $ 13,442
$ (5,472) $ (5,495)
$ (7,556) $ (3,009)
Net cash provided by operating activities
Net cash used for investing activities
Net cash used for financing activities
Operating Activities
In 2024, net cash provided by operating activities was $12.5 billion, compared to $13.4 billion in the prior
year. The decrease in operating cash flow primarily reflects unfavorable working capital comparisons.
Investing Activities
In 2024, net cash used for investing activities was $5.5 billion, primarily reflecting net capital spending of
$5.0 billion.
In 2023, net cash used for investing activities was $5.5 billion, primarily reflecting net capital spending of
$5.3 billion.
See Note 1 to our consolidated financial statements for further discussion of capital spending by division
and see Note 13 to our consolidated financial statements for further discussion of our acquisitions.
We regularly review our plans with respect to net capital spending and believe that we have sufficient
liquidity to meet our net capital spending needs.
Financing Activities
In 2024, net cash used for financing activities was $7.6 billion, primarily reflecting the return of operating
cash flow to our shareholders through dividend payments and share repurchases of $8.2 billion, as well as
payments of long-term debt borrowings of $3.9 billion, partially offset by proceeds from the issuances of
long-term debt of $4.0 billion.
In 2023, net cash used for financing activities was $3.0 billion, primarily reflecting the return of operating
cash flow to our shareholders through dividend payments and share repurchases of $7.7 billion, as well as
payments of long-term debt borrowings of $3.0 billion, partially offset by proceeds from issuances of
long-term debt of $5.5 billion and net proceeds from short-term borrowings of $2.3 billion.
See Note 8 to our consolidated financial statements for further discussion of debt obligations.
We annually review our capital structure with our Board, including our dividend policy and share
repurchase activity. On February 10, 2022, we announced a share repurchase program providing for the
repurchase of up to $10.0 billion of PepsiCo common stock which commenced on February 11, 2022 and
will expire on February 28, 2026. In addition, on February 4, 2025, we announced a 5% increase in our
annualized dividend to $5.69 per share from $5.42 per share, effective with the dividend expected to be
paid in June 2025. We expect to return a total of approximately $8.6 billion to shareholders in 2025,
comprising dividends of approximately $7.6 billion and share repurchases of approximately $1.0 billion.
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Free Cash Flow
The table below reconciles net cash provided by operating activities, as reflected on our cash flow
statement, to our free cash flow. Free cash flow is a non-GAAP financial measure. For further information
on free cash flow, see “Non-GAAP Measures.”
Net cash provided by operating activities, GAAP measure
Capital spending
Sales of property, plant and equipment
Free cash flow, non-GAAP measure
$
$
2024
12,507 $
(5,318)
342
7,531 $
2023
13,442
(5,518)
198
8,122
Change
(7)%
(7)%
We use free cash flow primarily for acquisitions and financing activities, including debt repayments,
dividends and share repurchases. We expect to continue to return free cash flow to our shareholders
primarily through dividends and share repurchases while maintaining Tier 1 commercial paper access,
which we believe will facilitate appropriate financial flexibility and ready access to global capital and
credit markets at favorable interest rates. However, see “Item 1A. Risk Factors” and “Our Business Risks”
for certain factors that may impact our credit ratings or our operating cash flows.
Any downgrade of our credit ratings by a credit rating agency, especially any downgrade to below
investment grade, whether or not as a result of our actions or factors which are beyond our control, could
increase our future borrowing costs and impair our ability to access capital and credit markets on terms
commercially acceptable to us, or at all. In addition, any downgrade of our current short-term credit
ratings could impair our ability to access the commercial paper market with the same flexibility that we
have experienced historically, and therefore require us to rely more heavily on more expensive types of
debt financing. See “Item 1A. Risk Factors,” “Our Business Risks” and Note 8 to our consolidated
financial statements for further information.
Changes in Line Items in Our Consolidated Financial Statements
Changes in line items in the income statement are discussed in “Results of Operations – Consolidated
Review,” “Results of Operations – Division Review” and “Items Affecting Comparability.”
Changes in line items in the cash flow statement are discussed in “Our Liquidity and Capital Resources.”
Changes in line items in the balance sheet are discussed below:
Total Assets
As of December 28, 2024, total assets were $99.5 billion, compared to $100.5 billion as of December 30,
2023. The decrease in total assets is primarily driven by the following line item:
Change(a)
Cash and cash equivalents (b)
$
(1.2)
(a) In billions.
(b) Refer to the cash flow statement for further information.
Total Liabilities
As of December 28, 2024, total liabilities were $81.3 billion, compared to $81.9 billion as of
December 30, 2023. There were no material line item changes. See Notes 8 and 13 for further information
regarding our liabilities.
Total Equity
See the equity statement and Notes 9 and 11 to our consolidated financial statements.
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Return on Invested Capital
ROIC is a non-GAAP financial measure. For further information on ROIC, see “Non-GAAP Measures.”
2024
Net income attributable to PepsiCo
$
9,578
Interest expense
1,606
Tax on interest expense
(357)
$ 10,827
Average debt obligations (a)
$ 44,844
Average common shareholders’ equity (b)
18,898
Average invested capital
$ 63,742
ROIC, non-GAAP measure
17.0 %
(a) Includes a quarterly average of short-term and long-term debt obligations.
(b) Includes a quarterly average of common stock, capital in excess of par value, retained earnings, accumulated other comprehensive loss
and repurchased common stock.
The table below reconciles ROIC as calculated above to net ROIC, excluding items affecting
comparability.
ROIC, non-GAAP measure
Impact of:
Average cash, cash equivalents and short-term investments
Interest income
Tax on interest income
Mark-to-market net impact (a)
Restructuring and impairment charges (a)
Acquisition and divestiture-related charges (a)
Impairment and other charges/credits (a)
Product recall-related impact (a)
Indirect tax impact (a)
Pension and retiree medical-related impact (a)
Core Net ROIC, non-GAAP measure
2024
17.0 %
2.6
(1.0)
0.2
—
0.6
—
0.5
0.1
0.2
0.2
20.4 %
(a) See “Items Affecting Comparability” for a detailed description.
OUR CRITICAL ACCOUNTING POLICIES AND ESTIMATES
An appreciation of our critical accounting policies and estimates is necessary to understand our financial
results. These policies may require management to make difficult and subjective judgments regarding
uncertainties, including the business and economic uncertainty resulting from volatile geopolitical
conditions and the high interest rate and inflationary cost environment, and as a result, such estimates may
significantly impact our financial results. The precision of these estimates and the likelihood of future
changes depend on a number of underlying variables and a range of possible outcomes. We applied our
critical accounting policies and estimation methods consistently in all material respects and for all periods
presented. We have discussed our critical accounting policies and estimates with our Audit Committee.
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are recognized in earnings in the period such differences are determined. In addition, certain advertising
and marketing costs are also based on annual targets and recognized during the year as incurred.
See Note 2 to our consolidated financial statements for further information on our revenue recognition and
related policies, including total marketplace spending.
Goodwill and Other Intangible Assets
We sell products under a number of brand names, many of which were developed by us. Brand
development costs are expensed as incurred. We also purchase brands and other intangible assets in
acquisitions. In a business combination, the consideration is first assigned to identifiable assets and
liabilities, including brands and other intangible assets, based on estimated fair values, with any excess
recorded as goodwill. Determining fair value requires significant estimates and assumptions, including
those related to volatile geopolitical conditions and a high interest rate and inflationary cost environment,
based on an evaluation of a number of factors, such as marketplace participants, product life cycles,
market share, consumer awareness, brand history and future expansion expectations, amount and timing of
future cash flows and the discount rate applied to the cash flows.
We believe that a brand has an indefinite life if it has a history of strong revenue and cash flow
performance and we have the intent and ability to support the brand with marketplace spending for the
foreseeable future. If these indefinite-lived brand criteria are not met, brands are amortized over their
expected useful lives, which generally range from 20 to 40 years. Determining the expected life of a brand
requires management judgment and is based on an evaluation of a number of factors, including market
share, consumer awareness, brand history, future expansion expectations and regulatory restrictions, as
well as the macroeconomic environment of the countries in which the brand is sold.
In connection with previous acquisitions, we reacquired certain franchise rights which provided the
exclusive and perpetual rights to manufacture and/or distribute beverages for sale in specified territories.
In determining the useful life of these franchise rights, many factors were considered, including the preexisting perpetual bottling arrangements, the indefinite period expected for these franchise rights to
contribute to our future cash flows, as well as the lack of any factors that would limit the useful life of
these franchise rights to us, including legal, regulatory, contractual, competitive, economic or other
factors. Therefore, certain of these franchise rights are considered as indefinite-lived. Franchise rights that
are not considered indefinite-lived are amortized over the remaining contractual period of the contract in
which the right was granted.
Indefinite-lived intangible assets and goodwill are not amortized and, as a result, are assessed for
impairment at least annually, using either a qualitative or quantitative approach. We perform this annual
assessment during our third quarter, or more frequently if circumstances indicate that the carrying value
may not be recoverable. Where we use the qualitative assessment, first we determine if, based on
qualitative factors, it is more likely than not that an impairment exists. Factors considered include
macroeconomic conditions (including those related to volatile geopolitical conditions and a high interest
rate and inflationary cost environment), industry and competitive conditions, legal and regulatory
environment, historical financial performance and significant changes in the brand or reporting unit. If the
qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative
assessment is performed.
In the quantitative assessment for indefinite-lived intangible assets and goodwill, an assessment is
performed to determine the fair value of the indefinite-lived intangible asset and the reporting unit,
respectively. Estimated fair value is determined using discounted cash flows and requires an analysis of
several estimates including future cash flows or income consistent with management’s strategic business
plans, annual sales growth rates, perpetuity growth assumptions and the selection of assumptions
underlying a discount rate (weighted-average cost of capital) based on market data available at the time.
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Significant management judgment is necessary to estimate the impact of competitive operating,
macroeconomic and other factors (including those related to volatile geopolitical conditions and a high
interest rate and inflationary cost environment) to estimate future levels of sales, operating profit or cash
flows. All assumptions used in our impairment evaluations for indefinite-lived intangible assets and
goodwill, such as forecasted growth rates (including perpetuity growth assumptions) and weightedaverage cost of capital, are based on the best available market information and are consistent with our
internal forecasts and operating plans. A deterioration in these assumptions could adversely impact our
results. Additionally, indefinite-lived intangible assets acquired in recent acquisitions are more susceptible
to impairment because they are recorded at fair value at the time of acquisition. These assumptions could
be adversely impacted by certain of the risks described in “Item 1A. Risk Factors” and “Our Business
Risks.”
As of December 28, 2024, the estimated fair value of the SodaStream reporting unit narrowly exceeded its
carrying value. Given the low coverage, there could be further impairment to the carrying value of the
SodaStream reporting unit goodwill if future sales and operating profit results are not in line with the
forecasted future cash flows of the business and/or if macroeconomic conditions worsen and drive an
increase in the weighted-average cost of capital used to estimate its fair value. We continue to monitor the
performance of the SodaStream reporting unit, as well as all of our indefinite-lived intangible assets.
Amortizable intangible assets are only evaluated for impairment upon a significant change in the operating
or macroeconomic environment. If an evaluation of the undiscounted future cash flows indicates
impairment, the asset is written down to its estimated fair value, which is based on its discounted future
cash flows.
See Note 2 and Note 4 to our consolidated financial statements for further information.
Income Tax Expense and Accruals
Our annual tax rate is based on our income, statutory tax rates and tax structure and transactions, including
transfer pricing arrangements, available to us in the various jurisdictions in which we operate. Significant
judgment is required in determining our annual tax rate and in evaluating our tax positions. We establish
reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain
positions are subject to challenge and that we likely will not succeed. We adjust these reserves, as well as
the related interest, in light of changing facts and circumstances, such as the progress of a tax audit, new
tax laws, relevant court cases or tax authority settlements. See “Item 1A. Risk Factors” for further
discussion.
An estimated annual effective tax rate is applied to our quarterly operating results. In the event there is a
significant or unusual item recognized in our quarterly operating results, the tax attributable to that item is
separately calculated and recorded at the same time as that item. We consider the tax adjustments from the
resolution of prior-year tax matters to be among such items.
Tax law requires items to be included in our tax returns at different times than the items are reflected in
our consolidated financial statements. As a result, our annual tax rate reflected in our consolidated
financial statements is different than that reported in our tax returns (our cash tax rate). Some of these
differences are permanent, such as expenses that are not deductible in our tax return, and some differences
reverse over time, such as depreciation expense. These temporary differences create deferred tax assets
and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in
our tax returns in future years for which we have already recorded the tax benefit on our consolidated
financial statements. We establish valuation allowances for our deferred tax assets if, based on the
available evidence, it is not more likely than not that some portion or all of the deferred tax assets will be
realized. Deferred tax liabilities generally represent tax expense recognized in our consolidated financial
statements for which payment has been deferred, or expense for which we have already taken a deduction
58
Table of Contents
Consolidated Statement of Income
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 28, 2024, December 30, 2023 and December 31, 2022
(in millions except per share amounts)
Net Revenue
Cost of sales
Gross profit
Selling, general and administrative expenses
Gain associated with the Juice Transaction (see Note 13)
Impairment of intangible assets (see Notes 1 and 4)
Operating Profit
Other pension and retiree medical benefits (expense)/income
Net interest expense and other
Income before income taxes
Provision for income taxes
Net income
Less: Net income attributable to noncontrolling interests
Net Income Attributable to PepsiCo
Net Income Attributable to PepsiCo per Common Share
Basic
Diluted
Weighted-average common shares outstanding
Basic
Diluted
See accompanying notes to the consolidated financial statements.
61
$
2024
91,854 $
41,744
50,110
37,190
—
33
12,887
(22)
(919)
11,946
2,320
9,626
48
9,578 $
2023
91,471 $
41,881
49,590
36,677
—
927
11,986
250
(819)
11,417
2,262
9,155
81
9,074 $
2022
86,392
40,576
45,816
34,459
(3,321)
3,166
11,512
132
(939)
10,705
1,727
8,978
68
8,910
$
$
6.97 $
6.95 $
6.59 $
6.56 $
6.45
6.42
1,373
1,378
1,376
1,383
1,380
1,387
$
Table of Contents
Consolidated Statement of Comprehensive Income
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 28, 2024, December 30, 2023 and December 31, 2022
(in millions)
2024
2023
Net income
$
9,626 $
9,155 $
Other comprehensive loss, net of taxes:
Net currency translation adjustment
(1,962)
(307)
Net change on cash flow hedges
113
(32)
Net pension and retiree medical adjustments
5
(358)
Net change on available-for-sale debt securities and
other
(234)
465
Total other comprehensive loss, net of taxes
(2,078)
(232)
Comprehensive income
7,548
8,923
Less: Comprehensive income attributable to
noncontrolling interests
48
81
Comprehensive Income Attributable to PepsiCo
$
7,500 $
8,842 $
See accompanying notes to the consolidated financial statements.
62
2022
8,978
(643)
(158)
389
4
(408)
8,570
64
8,506
Table of Contents
Consolidated Statement of Cash Flows
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 28, 2024, December 30, 2023 and December 31, 2022
(in millions)
Operating Activities
Net income
Depreciation and amortization
Gain associated with the Juice Transaction
Impairment and other charges
Indirect tax impact
Product recall-related impact
Cash payments for product recall-related impact
Operating lease right-of-use asset amortization
Share-based compensation expense
Restructuring and impairment charges
Cash payments for restructuring charges
Pension and retiree medical plan expense
Pension and retiree medical plan contributions
Deferred income taxes and other tax charges and credits
Tax expense related to the TCJ Act
Tax payments related to the TCJ Act
Change in assets and liabilities:
Accounts and notes receivable
Inventories
Prepaid expenses and other current assets
Accounts payable and other current liabilities
Income taxes payable
Other, net
Net Cash Provided by Operating Activities
$
Investing Activities
Capital spending
Sales of property, plant and equipment
Acquisitions, net of cash acquired, investments in noncontrolled affiliates and
purchases of intangible and other assets
Proceeds associated with the Juice Transaction
Other divestitures, sales of investments in noncontrolled affiliates and other
assets
Short-term investments, by original maturity:
More than three months - purchases
More than three months - maturities
More than three months - sales
Three months or less, net
Other investing, net
Net Cash Used for Investing Activities
(Continued on following page)
63
2024
2023
2022
9,626 $
3,160
—
714
218
187
(148)
655
362
727
(436)
414
(348)
(42)
—
(579)
9,155 $ 8,978
2,948
2,763
—
(3,321)
1,230
3,618
—
—
136
—
—
—
570
517
380
343
445
411
(434)
(224)
150
419
(410)
(384)
(271)
(873)
—
86
(309)
(309)
(138)
(314)
40
(1,161)
(123)
(307)
12,507
(793)
(261)
(13)
420
310
189
13,442
(1,763)
(1,142)
118
1,842
57
(325)
10,811
(5,318)
342
(5,518)
198
(5,207)
251
(256)
—
(314)
—
(873)
3,456
166
75
49
(425)
—
—
5
14
(5,472)
(555)
556
12
3
48
(5,495)
(291)
150
—
24
11
(2,430)
Table of Contents
Consolidated Statement of Cash Flows (continued)
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 28, 2024, December 30, 2023 and December 31, 2022
(in millions)
2024
Financing Activities
Proceeds from issuances of long-term debt
Payments of long-term debt
Debt redemptions
Short-term borrowings, by original maturity:
More than three months - proceeds
More than three months - payments
Three months or less, net
Cash dividends paid
Share repurchases
Proceeds from exercises of stock options
Withholding tax payments on restricted stock units (RSUs) and performance
stock units (PSUs) converted
Other financing
Net Cash Used for Financing Activities
Effect of exchange rate changes on cash and cash equivalents and restricted
cash
Net (Decrease)/Increase in Cash and Cash Equivalents and Restricted
Cash
Cash and Cash Equivalents and Restricted Cash, Beginning of Year
Cash and Cash Equivalents and Restricted Cash, End of Year
See accompanying notes to the consolidated financial statements.
64
$
2023
2022
4,042 $ 5,482 $ 3,377
(3,886)
(3,005)
(2,458)
—
—
(1,716)
5,786
(5,639)
392
(7,229)
(1,000)
166
5,428
(3,106)
(29)
(6,682)
(1,000)
116
1,969
(1,951)
(31)
(6,172)
(1,500)
138
(135)
(53)
(7,556)
(140)
(73)
(3,009)
(107)
(72)
(8,523)
(687)
(277)
(465)
(1,208)
9,761
$ 8,553 $
4,661
5,100
9,761 $
(607)
5,707
5,100
Table of Contents
Consolidated Balance Sheet
PepsiCo, Inc. and Subsidiaries
December 28, 2024 and December 30, 2023
(in millions except per share amounts)
2024
ASSETS
Current Assets
Cash and cash equivalents
Short-term investments
Accounts and notes receivable, net
Inventories
Raw materials and packaging
Work-in-process
Finished goods
$
Prepaid expenses and other current assets
Total Current Assets
Property, Plant and Equipment, net
Amortizable Intangible Assets, net
Goodwill
Other Indefinite-Lived Intangible Assets
Investments in Noncontrolled Affiliates
Deferred Income Taxes
Other Assets
Total Assets
$
LIABILITIES AND EQUITY
Current Liabilities
Short-term debt obligations
Accounts payable and other current liabilities
Total Current Liabilities
Long-Term Debt Obligations
Deferred Income Taxes
Other Liabilities
Total Liabilities
Commitments and contingencies
PepsiCo Common Shareholders’ Equity
$
Common stock, par value 12/3¢ per share (authorized 3,600 shares; issued, net of repurchased
common stock at par value: 1,372 and 1,374 shares, respectively)
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Repurchased common stock, in excess of par value 495 and 493 shares, respectively)
Total PepsiCo Common Shareholders’ Equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
$
See accompanying notes to the consolidated financial statements.
65
2023
8,505
761
10,333
$
9,711
292
10,815
2,440
104
2,762
5,306
921
25,826
28,008
1,102
17,534
13,699
1,985
4,362
6,951
99,467
2,388
104
2,842
5,334
798
26,950
27,039
1,199
17,728
13,730
2,714
4,474
6,661
$ 100,495
7,082
24,454
31,536
37,224
3,484
9,052
81,296
$
6,510
25,137
31,647
37,595
3,895
8,721
81,858
23
23
4,385
4,261
72,266
70,035
(17,612)
(15,534)
(41,021)
(40,282)
18,041
18,503
130
134
18,171
18,637
99,467 $ 100,495
Table of Contents
Consolidated Statement of Equity
PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 28, 2024, December 30, 2023 and December 31, 2022
(in millions except per share amounts)
Common Stock
Balance, beginning of year
Change in repurchased common stock
Balance, end of year
Capital in Excess of Par Value
Balance, beginning of year
Share-based compensation expense
Stock option exercises, RSUs and PSUs
converted
Withholding tax on RSUs and PSUs
converted
Other
Balance, end of year
Retained Earnings
Balance, beginning of year
Net income attributable to PepsiCo
Cash dividends declared (a)
Balance, end of year
Accumulated Other Comprehensive Loss
Balance, beginning of year
Other comprehensive loss attributable to
PepsiCo
Balance, end of year
Repurchased Common Stock
Balance, beginning of year
Share repurchases
Stock option exercises, RSUs and PSUs
converted
Other
Balance, end of year
Total PepsiCo Common Shareholders’ Equity
Noncontrolling Interests
Balance, beginning of year
Net income attributable to noncontrolling
interests
Distributions to noncontrolling interests
Acquisitions
Other, net
Balance, end of year
Total Equity
2024
Shares
Amount
2023
Shares
Amount
2022
Shares
Amount
1,374 $
(2)
1,372
1,377 $
(3)
1,374
1,383 $
(6)
1,377
23
—
23
23
—
23
23
—
23
4,261
357
4,134
379
4,001
346
(90)
(107)
(102)
(135)
(8)
4,385
(140)
(5)
4,261
(107)
(4)
4,134
70,035
9,578
(7,347)
72,266
67,800
9,074
(6,839)
70,035
65,165
8,910
(6,275)
67,800
(15,534)
(15,302)
(14,898)
(2,078)
(17,612)
(232)
(15,534)
(404)
(15,302)
(493)
(6)
(40,282)
(1,000)
(490)
(6)
(39,506)
(1,000)
(484)
(9)
(38,248)
(1,500)
4
—
(495)
256
5
(41,021)
18,041
3
—
(493)
223
1
(40,282)
18,503
3
—
(490)
240
2
(39,506)
17,149
134
124
108
48
(49)
—
(3)
130
$ 18,171
81
(68)
—
(3)
134
$ 18,637
68
(69)
21
(4)
124
$ 17,273
(a) Cash dividends declared per common share were $5.3300, $4.9450 and $4.5250 for 2024, 2023 and 2022, respectively.
See accompanying notes to the consolidated financial statements.
66
Table of Contents
Net revenue, significant expenses and operating profit/(loss) of each division are as follows:
2024
FLNA QFNA PBNA LatAm Europe AMESA APAC Total
$24,755 $ 2,676 $27,769 $11,718 $13,874 $ 6,217 $ 4,845 $91,854
8,786
1,459 12,701
4,762
7,219
3,885
2,431
Net revenue
Segment cost of sales (a)
Segment selling, general and administrative
9,494
710 11,964
4,442
4,368
1,515
1,589
expenses (a)(b)
Restructuring and impairment charges (c)
150
11
238
51
123
14
10
Acquisition and divestiture-related charges (d)
9
—
8
—
—
5
—
Impairment and other charges (e)
—
9
556
—
145
—
4
Product recall-related impact (f)
—
184
—
—
—
—
—
Indirect tax impact (g)
—
—
—
218
—
—
—
Division operating profit
$ 6,316 $ 303 $ 2,302 $ 2,245 $ 2,019 $
798 $ 811 $14,794
Corporate unallocated expenses
(1,907)
Operating profit
12,887
Other pension and retiree medical benefits
expense
(22)
Net interest expense and other
(919)
Income before income taxes
$11,946
2023
FLNA QFNA PBNA LatAm Europe AMESA APAC
Total
$24,914 $ 3,101 $27,626 $11,654 $13,234 $ 6,139 $ 4,803 $ 91,471
8,829
1,603 12,856
4,958
7,178
3,888
2,422
Net revenue
Segment cost of sales (a)
Segment selling, general and administrative
9,288
870 11,808
4,413
4,213
1,434
1,601
expenses (a)
Restructuring and impairment charges (c)
42
—
41
29
223
15
8
Acquisition and divestiture-related charges (d)
—
—
16
—
(2)
2
—
Impairment and other charges/credits (e)
—
—
321
2
855
(7)
59
Product recall-related impact (f)
—
136
—
—
—
—
—
Division operating profit
$ 6,755 $ 492 $ 2,584 $ 2,252 $ 767 $
807 $ 713 $ 14,370
Corporate unallocated expenses
(2,384)
Operating profit
11,986
Other pension and retiree medical benefits
income
250
Net interest expense and other
(819)
Income before income taxes
$ 11,417
70
Table of Contents
2022
FLNA QFNA PBNA LatAm Europe AMESA APAC
Total
$23,291 $ 3,160 $26,213 $ 9,779 $12,724 $ 6,438 $ 4,787 $ 86,392
8,183
1,673 12,154
4,490
7,173
4,108
2,509
Net revenue
Segment cost of sales (a)
Segment selling, general and administrative
8,839
876 11,383
3,559
4,168
1,459
1,548
expenses (a)
Restructuring and impairment charges (c)
46
7
68
32
109
12
16
Acquisition and divestiture-related charges (d)
—
—
51
—
14
3
—
(h)
Gain associated with the Juice Transaction
—
— (3,029)
—
(292)
—
—
Impairment and other charges (e)
88
—
160
71
2,932
190
177
Division operating profit/(loss)
$ 6,135 $ 604 $ 5,426 $ 1,627 $ (1,380) $
666 $ 537 $ 13,615
Corporate unallocated expenses
(2,103)
Operating profit
11,512
Other pension and retiree medical benefits
income
132
Net interest expense and other
(939)
Income before income taxes
$ 10,705
(a) Does not include items recorded in the cost of sales or selling, general and administrative expenses lines on our income statement that are
presented in the restructuring and impairment charges, acquisition and divestiture-related charges, impairment and other charges/credits,
product recall-related impact and indirect tax impact lines of these tables.
(b) We recognized a pre-tax gain of $122 million ($92 million after-tax or $0.07 per share) in our FLNA division, recorded in selling,
general and administrative expenses, related to the remeasurement of our previously held 50% equity ownership in Sabra at fair value.
See Note 13 for further information.
(c) See Note 3 for further information related to restructuring and impairment charges.
(d) See Note 13 for further information related to acquisitions and divestiture-related charges.
(e) See below and Note 4 for impairment and other charges taken related to the Russia-Ukraine conflict, brand portfolio impairment and
other impairment.
(f) In 2024, we recorded a pre-tax charge of $187 million ($143 million after-tax or $0.10 per share) associated with the Quaker Recall with
$176 million recorded in cost of sales related to property, plant and equipment write-offs, employee severance costs and other costs,
$8 million recorded in selling, general and administrative expenses and $3 million recorded in other pension and retiree medical benefits
(expense)/income, which is not included in operating profit. In 2023, we recorded a pre-tax charge of $136 million ($104 million aftertax or $0.07 per share) in cost of sales for product returns, inventory write-offs and customer and consumer-related costs associated with
the Quaker Recall.
(g) We recorded a pre-tax charge of $218 million ($218 million after-tax or $0.16 per share) in cost of sales related to an indirect tax reserve
in our LatAm division.
(h) We recorded a gain of $3,029 million and $292 million in our PBNA and Europe divisions, respectively, associated with the Juice
Transaction. The total after-tax amount was $2,888 million or $2.08 per share. See Note 13 for further information.
Disaggregation of Net Revenue
Our primary performance obligation is the distribution and sales of beverage and convenient food products
to our customers. The following table reflects the percentage of net revenue generated between our
beverage business and our convenient food business for each of our international divisions, as well as our
consolidated net revenue:
LatAm
Europe
AMESA
APAC
PepsiCo
2024
2023
2022
Convenient
Convenient
Convenient
Beverages(a)
Foods
Beverages(a)
Foods
Beverages(a)
Foods
10 %
90 %
9%
91 %
9%
91 %
48 %
52 %
48 %
52 %
50 %
50 %
30 %
70 %
29 %
71 %
30 %
70 %
23 %
77 %
23 %
77 %
23 %
77 %
42 %
58 %
41 %
59 %
42 %
58 %
(a) Beverage revenue from company-owned bottlers, which primarily includes our consolidated bottling operations in our PBNA and
Europe divisions, is 35% of our consolidated net revenue in both 2024 and 2023, and 37% of our consolidated net revenue in 2022.
Generally, our finished goods beverage operations produce higher net revenue, but lower operating margins as compared to concentrate
sold to authorized bottling partners for the manufacture of finished goods beverages.
71
Table of Contents
Impairment and Other Charges
We recognized Russia-Ukraine conflict charges, brand portfolio impairment charges and other impairment
charges as described below.
A summary of pre-tax charges taken in 2022 in our Europe division as a result of the Russia-Ukraine
conflict is as follows:
Selling,
general and
Impairment of
administrative
intangible
Cost of sales
expenses
assets(a)
$
— $
— $
1,198 $
Impairment charges related to intangible assets
Impairment charges related to property, plant and
equipment
Allowance for expected credit losses
Allowance for inventory write downs
103
—
28
9
140 $
Other
Total
$
After-tax amount
Impact on net income attributable to PepsiCo per common
share
22
12
1
42
77 $
Total
1,198
—
—
—
—
1,198 $
$
125
12
29
51
1,415
1,124
$
(0.81)
(a) See Note 4 for further information. For information on our policies for indefinite-lived intangible assets, see Note 2.
In 2023, a pre-tax credit of $7 million ($7 million after-tax or $0.01 per share) was recorded in our Europe
division, primarily in selling, general and administrative expenses, representing adjustments for changes in
estimates of previously recorded amounts.
A summary of pre-tax charges taken in 2022 as a result of our decision to reposition or discontinue the
sale/distribution of certain brands and to sell an investment is as follows:
PBNA
Selling,
general and Impairment of
administrative
intangible
Cost of sales
expenses
assets
$
26 $
8 $
126 $
Total
160 Impairment and other charges
LatAm
—
35
36
71
Europe
1
10
242
253
AMESA
29
121
9
159
APAC
5
—
—
5
61 $
174 $
413 $
$
648
522
$
(0.38)
Total
After-tax amount
Impact on net income
attributable to PepsiCo
per common share
$
associated with distribution rights
and inventory due to the termination
of Bang energy drinks distribution
agreement
Loss on sale and impairment of
intangible assets related to the sale
of certain non-strategic brands
Primarily impairment of intangible
assets related to the discontinuation
or repositioning of certain juice and
dairy brands in Russia (a)
Primarily impairment of investment,
property, plant and equipment and
intangible assets related to the sale
or discontinuation of non-strategic
investment and brands
Impairment of property, plant and
equipment related to the
discontinuation of a non-strategic
brand in China
(a) See Note 4 for further information. For information on our policies for indefinite-lived intangible assets, see Note 2.
72
Table of Contents
In 2023, a pre-tax credit of $13 million ($13 million after-tax or $0.01 per share) was recorded in our
AMESA division, with $9 million in selling, general and administrative expenses and $4 million in cost of
sales. In addition, a pre-tax charge of $2 million ($1 million after-tax with a nominal amount per share)
was recorded in our LatAm division in selling, general and administrative expenses. Both of these
amounts represent adjustments for changes in estimates of previously recorded amounts.
A summary of pre-tax other impairment charges taken as a result of our quantitative assessments is as
follows:
FLNA
2024
2023
2022
$
— $
— $
88 Related to a baked fruit convenient food brand (recorded in
impairment of intangible assets)
QFNA
9
—
— Related to a nutrition bar brand (recorded in impairment of
PBNA
556
321
—
Europe
145
862
AMESA
—
6
31 Related to brands from the Pioneer Food Group Ltd.
APAC
4
59
172 Primarily related to the Be & Cheery brand (recorded in
714 $
584 $
1,248 $
1,033 $
1,555
1,301
(0.42) $
(0.75) $
(0.94)
Total
$
After-tax amount
$
Impact on net income attributable
to PepsiCo per common share
$
intangible assets)
2024 includes other-than-temporary impairment of our
remaining investment in TBG and allowance for expected
credit losses related to receivables associated with the Juice
Transaction (recorded in selling, general and administrative
expenses). 2023 includes our proportionate share of TBG’s
indefinite-lived intangible assets impairment and other-thantemporary impairment of our investment in TBG (recorded in
selling, general and administrative expenses) (a)
1,264 2024 primarily includes other-than-temporary impairment of
our investment in TBG and allowance for expected credit
losses related to certain receivables from TBG (recorded in
selling, general and administrative expenses). 2023 and 2022
are related to the SodaStream brand and goodwill (recorded
in impairment of intangible assets) (a)(b)
acquisition (recorded in impairment of intangible assets)
impairment of intangible assets)
(a) See Note 9 for further information regarding our proportionate share of TBG’s indefinite-lived intangible assets impairment and otherthan temporary impairment of our investment in TBG. In 2024, we recorded an allowance for expected credit losses of $193 million,
primarily related to outstanding receivables associated with the Juice Transaction.
(b) See Note 4 for further information regarding impairment of intangible assets. For information on our policies for indefinite-lived
intangible assets, see Note 2.
73
Table of Contents
currently required to be disclosed to be included in the same tabular disclosure as these disaggregation
requirements. Furthermore, on an annual and interim basis, a public entity is required to separately
disclose selling expenses and annually, disclose a description of the selling expenses. The guidance is
effective for 2027 annual reporting, and in the first quarter of 2028 for interim reporting, with early
adoption permitted, to be applied on a prospective basis, with retrospective application permitted. We will
adopt the guidance when it becomes effective, in our 2027 annual reporting and each quarter thereafter, on
a prospective basis.
In December 2023, the FASB issued guidance to enhance transparency of income tax disclosures. On an
annual basis, the new guidance requires a public entity to disclose: (1) specific categories in the rate
reconciliation, (2) additional information for reconciling items that are equal to or greater than 5% of the
amount computed by multiplying income (or loss) from continuing operations before income tax expense
(or benefit) by the applicable statutory income tax rate, (3) income taxes paid (net of refunds received)
disaggregated by federal (national), state, and foreign taxes, with foreign taxes disaggregated by individual
jurisdictions in which income taxes paid is equal to or greater than 5% of total income taxes paid, (4)
income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between
domestic and foreign, and (5) income tax expense (or benefit) from continuing operations disaggregated
between federal (national), state and foreign. The guidance is effective for fiscal year 2025 annual
reporting, with early adoption permitted, to be applied on a prospective basis, with retrospective
application permitted. We will adopt the guidance when it becomes effective, in our 2025 annual
reporting, on a prospective basis.
Note 3 — Restructuring and Impairment Charges
2019 Multi-Year Productivity Plan
The 2019 Productivity Plan leverages new technology and business models to further simplify, harmonize
and automate processes; re-engineers our go-to-market and information systems, including deploying the
right automation for each market; and simplifies our organization and optimizes our manufacturing and
supply chain footprint. To build on the successful implementation of the 2019 Productivity Plan, in the
fourth quarter of 2024, we further expanded and extended the plan through the end of 2030 to take
advantage of additional opportunities within the initiatives described above. As a result, we expect to incur
pre-tax charges of approximately $6.15 billion, including cash expenditures of approximately $5.1 billion,
as compared to our previous estimate of pre-tax charges of approximately $3.65 billion, including cash
expenditures of approximately $2.9 billion. These pre-tax charges are expected to consist of
approximately 55% of severance and other employee-related costs, 10% for asset impairments (all noncash) resulting from plant closures and related actions and 35% for other costs associated with the
implementation of our initiatives.
The total plan pre-tax charges are expected to be incurred by division approximately as follows:
FLNA
Expected pre-tax charges
15 %
QFNA
1%
PBNA
25 %
79
LatAm
Europe
AMESA
10 %
25 %
5%
APAC
4%
Corporate
15 %
Table of Contents
A summary of our 2019 Productivity Plan charges is as follows:
2024
133 $
551
14
2023
13 $
433
—
2022
33
347
—
$
$
29
727
563
$
$
(1)
445 $
349 $
31
411
334
$
(0.41) $
(0.25) $
(0.24)
2024
150 $
11
238
51
123
14
10
101
698
2023
42 $
—
41
29
223
15
8
88
446
Plan to Date
2022 through 12/28/2024
46 $
402
7
30
68
505
32
251
109
689
12
111
16
95
90
418
380
2,501
29
727
(1)
445 $
31
411
Cost of sales
Selling, general and administrative expenses
Impairment of intangible assets
Other pension and retiree medical benefits expense/
(income) (a)
Total restructuring and impairment charges
After-tax amount
Impact on net income attributable to PepsiCo per
common share
FLNA
QFNA
PBNA
LatAm
Europe
AMESA
APAC
Corporate
$
Other pension and retiree medical
benefits expense/(income) (a)
Total
$
$
$
$
126
2,627
(a) Income amount represents adjustments for changes in estimates of previously recorded amounts.
Plan to Date
through 12/28/2024
$
1,434
306
887
$
2,627
Severance and other employee costs
Asset impairments
Other costs
Total
Severance and other employee costs primarily include severance and other termination benefits, as well as
voluntary separation arrangements. Other costs primarily include costs associated with the implementation
of our initiatives, including consulting and other professional fees, as well as contract termination costs.
80
Table of Contents
A summary of our 2019 Productivity Plan is as follows:
Liability as of December 25, 2021
2022 restructuring charges
Cash payments (a)
Non-cash charges and translation
Liability as of December 31, 2022
2023 restructuring charges
Cash payments (a)
Non-cash charges and translation
Liability as of December 30, 2023
2024 restructuring charges
Cash payments (a)
Non-cash charges and translation
Liability as of December 28, 2024
Severance
and Other
Asset
Employee Costs
Impairments
Other Costs
$
64 $
— $
7 $
243
33
135
(90)
—
(134)
(29)
(33)
—
188
—
8
243
2
200
(242)
—
(192)
(1)
(2)
(7)
188
—
9
384
114
229
(204)
—
(232)
(30)
(114)
20
$
338 $
— $
26 $
Total
71
411
(224)
(62)
196
445
(434)
(10)
197
727
(436)
(124)
364
(a) Excludes cash expenditures of $7 million in 2024, and $1 million each in 2023 and 2022, reported in the cash flow statement in pension
and retiree medical plan contributions.
The majority of the restructuring accrual at December 28, 2024 is expected to be paid by the end of 2025.
Other Productivity Initiatives
There were no material charges related to other productivity and efficiency initiatives outside the scope of
the 2019 Productivity Plan.
We regularly evaluate different productivity initiatives beyond the productivity plan and other initiatives
described above.
For information on additional impairment charges, see Notes 1, 4 and 9 for impairment and other charges
taken related to the Russia-Ukraine conflict, brand portfolio impairment charges and other impairment
charges.
Note 4 — Intangible Assets
A summary of our amortizable intangible assets is as follows:
2024
Average
Useful Life
(Years)
Acquired franchise rights
56 – 60
Customer relationships
15 – 24
Brands
Other identifiable intangibles
Total
2023
Gross
Accumulated
Amortization
$
$
821
Gross
Accumulated
Amortization
$
$
Net
(223) $
598
565
(279)
286
20 – 40
1,051
(977)
10 – 24
420
(276)
(1,755) $ 1,102
$ 2,942
$ 2,857
$
Amortization expense
$
81
Net
(214) $
626
560
(265)
295
74
1,093
(989)
104
144
449
(275)
174
74
840
2022
$
(1,743) $ 1,199
$
75
$
78
Table of Contents
Amortization is recognized on a straight-line basis over an intangible asset’s estimated useful life.
Amortization of intangible assets for each of the next five years, based on existing intangible assets as of
December 28, 2024 and using average 2024 foreign exchange rates, is expected to be as follows:
2025
Five-year projected amortization
$
73
2026
$
64
2027
$
60
2028
$
59
2029
$
58
Depreciable and amortizable assets are evaluated for impairment upon a significant change in the
operating or macroeconomic environment. In these circumstances, if an evaluation of the undiscounted
cash flows indicates impairment, the asset is written down to its estimated fair value, which is based on
discounted future cash flows. Useful lives are periodically evaluated to determine whether events or
circumstances have occurred which indicate the need for revision.
Indefinite-Lived Intangible Assets
As discussed in Note 2, we perform our annual impairment assessment on indefinite-lived intangible
assets during our third quarter. The annual impairment assessment on indefinite-lived intangible assets
performed in the third quarter of 2024, based on best available market information and our internal
forecasts and operating plans at the time, did not result in any material impairment charges.
As of December 28, 2024, the estimated fair value of the SodaStream reporting unit narrowly exceeded its
carrying value. Given the low coverage, there could be further impairment to the carrying value of the
SodaStream reporting unit goodwill if future sales and operating profit results are not in line with the
forecasted future cash flows of the business and/or if macroeconomic conditions worsen and drive an
increase in the weighted-average cost of capital used to estimate its fair value. We continue to monitor the
performance of the SodaStream reporting unit, as well as all of our indefinite-lived intangible assets.
We did not recognize any impairment charges for goodwill in the year ended December 28, 2024.
In the fourth quarter of 2023, macroeconomic conditions, including higher interest rates, inflationary
costs, and the ongoing conflict in the Middle East, and recent business performance indicated a
deterioration of the significant inputs used to determine the fair value of our indefinite-lived intangible
assets in various markets, primarily assumptions underlying the weighted-average cost of capital and the
impact of economic uncertainty on current and future financial performance, and required us to perform a
quantitative assessment on certain assets. The fair value of our indefinite-lived intangible assets was
estimated using discounted cash flows under the income approach, which we consider to be a Level 3
measurement. We determined that the carrying value exceeded the fair value for certain of our intangible
assets, which reflects the increase in the weighted-average cost of capital as well as our most current
estimates of future sales and their contributions to operating profit and expected future cash flows
(including perpetuity growth assumptions). As a result of the quantitative assessment, we recorded pre-tax
impairment charges of $0.6 billion ($0.5 billion after-tax or $0.35 per share) for brands and $0.3 billion
($0.3 billion after-tax or $0.22 per share) for goodwill, both in impairment of intangible assets, primarily
related to the SodaStream brand and reporting unit in our Europe division, in the year ended December 30,
2023. See Note 1 for further information.
In the first quarter of 2022, we discontinued or repositioned certain juice and dairy brands in Russia in our
Europe division. As a result, we recognized pre-tax impairment charges of $241 million ($193 million
after-tax or $0.14 per share) in impairment of intangible assets, primarily related to indefinite-lived
intangible assets in the year ended December 31, 2022. See Note 1 for further information.
In the second quarter of 2022, macroeconomic factors, sanctions and other regulations as a result of the
Russia-Ukraine conflict indicated a material deterioration of the significant inputs used to determine the
fair value of our indefinite-lived intangible assets in Russia, primarily assumptions underlying the
82
Table of Contents
weighted-average cost of capital. These factors required us to perform a quantitative assessment, despite
the absence of a material adverse impact on these assets’ financial performance (e.g., sales, operating
profit, cash flows). The fair value of our indefinite-lived intangible assets in Russia was estimated using
discounted cash flows under the income approach, which we consider to be a Level 3 measurement. We
determined that the carrying value exceeded the fair value, with the decrease in the fair value primarily
attributable to a significant increase in the weighted-average cost of capital, which reflected the
macroeconomic uncertainty in Russia. As a result of the quantitative assessment, we recorded pre-tax
impairment charges of $1.2 billion ($958 million after-tax or $0.69 per share) in impairment of intangible
assets, related to our juice and dairy brands in Russia in our Europe division, in the year ended December
31, 2022. See Note 1 for further information.
In the fourth quarter of 2022, macroeconomic conditions including a high interest rate and inflationary
cost environment, coupled with recent business performance, indicated a deterioration of the significant
inputs used to determine the fair value of our indefinite-lived intangible assets in various markets,
primarily assumptions underlying the weighted-average cost of capital and the impact of economic
uncertainty on current and future financial performance, and required us to perform a quantitative
assessment on certain assets. The fair value of our indefinite-lived intangible assets was estimated using
discounted cash flows under the income approach, which we consider to be a Level 3 measurement. We
determined that the carrying value exceeded the fair value, which reflected the increase in the weightedaverage cost of capital as well as our most current estimates of future sales and their contributions to
operating profit and expected future cash flows (including perpetuity growth assumptions). As a result of
the quantitative assessment, we recognized pre-tax impairment charges of $1.6 billion ($1.3 billion aftertax or $0.94 per share) in impairment of intangible assets, primarily related to the SodaStream brand in our
Europe division, in the year ended December 31, 2022. See Note 1 for further information.
We did not recognize any impairment charges for goodwill in the year ended December 31, 2022.
For further information on our policies for indefinite-lived intangible assets, see Note 2.
The components of indefinite-lived intangible assets are as follows:
Goodwill
Other indefinite-lived intangible assets
Reacquired franchise rights
Acquired franchise rights
Brands (a)
Total indefinite-lived intangible assets
$
2024
17,534 $
2023
17,728
$
7,437
1,858
4,404
31,233 $
7,533
1,891
4,306
31,458
(a) Increase is related to the acquisition of remaining ownership in Sabra. See Note 13 for further information.
83
Table of Contents
The change in the book value of goodwill is as follows:
FLNA
QFNA
PBNA
LatAm Europe (a) AMESA APAC
Total
Balance as of December 31, 2022 $
451 $
189 $ 11,947 $
436 $
3,646 $ 1,015 $
518 $ 18,202
Acquisitions
—
—
4
—
—
34
—
38
Impairment
—
—
—
—
(290)
—
—
(290)
Translation and other
2
—
10
24
(190)
(58)
(10)
(222)
Balance as of December 30, 2023
453
189
11,961
460
3,166
991
508
17,728
Acquisitions (b)
159
—
—
—
—
—
3
162
Translation and other
(10)
—
(36)
(47)
(220)
(21)
(22)
(356)
Balance as of December 28, 2024 $
602 $
189 $ 11,925 $
413 $
2,946 $
970 $
489 $ 17,534
(a) Impairment in 2023 is related to SodaStream. Translation and other in 2023 primarily reflects the depreciation of the Russian ruble,
partially offset by appreciation of the euro and British pound. Translation and other in 2024 primarily reflects the depreciation of the
Russian ruble and euro.
(b) Primarily related to the acquisition of remaining ownership in Sabra. See Note 13 for further information.
Note 5 — Income Taxes
The components of income before income taxes are as follows:
2024
2023
2022
2,590 $ 4,120 $ 7,305
9,356
7,297
3,400
$ 11,946 $ 11,417 $ 10,705
$
United States
Foreign
The provision for income taxes consisted of the following:
Current:
U.S. Federal
Foreign
State
$
Deferred:
U.S. Federal
Foreign
State
$
84
2024
2023
2022
1,033 $
1,406
255
2,694
1,133 $
1,201
309
2,643
1,137
1,027
246
2,410
(306)
(10)
(58)
(374)
2,320 $
(109)
(212)
(60)
(381)
2,262 $
22
(709)
4
(683)
1,727
Table of Contents
A reconciliation of the U.S. Federal statutory tax rate to our annual tax rate is as follows:
2024
21.0 %
1.3
(2.5)
—
—
—
(0.4)
19.4 %
U.S. Federal statutory tax rate
State income tax, net of U.S. Federal tax benefit
Lower taxes on foreign results
One-time mandatory transition tax - TCJ Act
Juice Transaction
Tax settlements
Other, net
Annual tax rate
2023
21.0 %
1.8
(2.5)
—
(0.1)
—
(0.4)
19.8 %
2022
21.0 %
1.8
(1.5)
0.8
(2.4)
(3.0)
(0.6)
16.1 %
Tax Cuts and Jobs Act
In 2022, we recorded $86 million ($0.06 per share) of net tax expense related to the TCJ Act as a result of
correlating adjustments related to a partial audit settlement with the IRS for tax years 2014 through 2019.
As of December 28, 2024, our mandatory transition tax liability was $1.7 billion, which must be paid
through 2026 under the provisions of the TCJ Act. We reduced our liability through cash payments and
application of tax overpayments by $579 million in 2024, and $309 million in each of 2023 and 2022. We
currently expect to pay approximately $772 million of this liability in 2025.
The TCJ Act also created a requirement that certain income earned by foreign subsidiaries, known as
global intangible low-tax income (GILTI), must be included in the gross income of their U.S. shareholder.
The FASB allows an accounting policy election of either recognizing deferred taxes for temporary
differences expected to reverse as GILTI in future years or recognizing such taxes as a current-period
expense when incurred. We elected to treat the tax effect of GILTI as a current-period expense when
incurred.
Other Tax Matters
On October 29, 2021, we filed a formal written protest of a final assessment from the IRS audit for the tax
years 2014 through 2016 and requested an appeals conference. In 2022, we came to an agreement with the
IRS to settle one of the issues assessed in the 2014 through 2016 tax audit. The agreement covers tax years
2014 through 2019. As a result, we reduced our reserves for uncertain tax positions, including any
correlating adjustments impacting the mandatory transition tax liability under the TCJ Act, resulting in a
net non-cash tax benefit of $233 million ($0.17 per share) in 2022. Tax years 2014 through 2019 remain
under audit for other issues.
In 2024 and 2023, tax benefits of $54 million ($0.04 per share) and $68 million ($0.05 per share),
respectively, were recorded related to the impairment of certain consolidated investments.
85
COMMON-SIZE &
PERCENTAGE CHANGE
FINANCIAL
STATEMENTS
Basic
Diluted
Weighted-average common shares outstanding
Basic
Diluted
$ 6.59
$ 6.56
1,376
1,383
1,373
1,378
$ 9,074
$ 6.97
$ 6.95
$ 9,578
(819)
11,417
2,262
9,155
81
(919)
11,946
2,320
9,626
48
Net Income Attributable to PepsiCo
Net Income Attributable to PepsiCo per Common Share
927
11,986
250
33
12,887
(22)
Impairment of intangible assets (see Notes 1 and 4)
Operating Profit
Other pension and retiree medical benefits
(expense)/income
Net interest expense and other
Income before income taxes
Provision for income taxes
Net income
Less: Net income attributable to noncontrolling interests
$ 91,471
41,881
49,590
36,677
—
$ 91,854
41,744
50,110
37,190
—
Raw Values ($Millions)
2023
Net Revenue
Cost of sales
Gross profit
Selling, general and administrative expenses
Gain associated with the Juice Transaction (see Note 13)
2024
1,380
1,387
$ 6.45
$ 6.42
$ 8,910
(939)
10,705
1,727
8,978
68
3,166
11,512
132
$ 86,392
40,576
45,816
34,459
(3,321)
2022
PepsiCo 2024 Income Statement
10.4%
-1.0%
13.0%
2.5%
10.5%
0.1%
0.0%
14.0%
0.0%
9.9%
-0.9%
12.5%
2.5%
10.0%
0.1%
1.0%
13.1%
0.3%
100.0%
45.8%
54.2%
40.1%
N/A
10.3%
-1.1%
12.4%
2.0%
10.4%
0.1%
3.7%
13.3%
0.2%
100.0%
47.0%
53.0%
39.9%
-3.8%
Common Size
2023
2022
100.0%
45.4%
54.6%
40.5%
N/A
2024
-0.2%
-0.4%
5.8%
5.9%
5.6%
12.2%
4.6%
2.6%
5.1%
-40.7%
-96.4%
7.5%
-108.8%
0.4%
-0.3%
1.0%
1.4%
N/A
-0.3%
-0.3%
2.2%
2.2%
1.8%
-12.8%
6.7%
31.0%
2.0%
19.1%
-70.7%
4.1%
89.4%
5.9%
3.2%
8.2%
6.4%
N/A
Percentage Changes
2024
2023
$ 23
$ 4,134
67,800
$ (15,302)
$ (39,506)
$ 17,149
124
17,273
$ 92,187
$ 23
Capital in excess of par value
$ 4,385
$ 4,261
Retained earnings
72,266
70,035
Accumulated other comprehensive loss
$ (17,612)
$ (15,534)
Repurchased common stock, in excess of par value 495 and 493$ shares,
(41,021)respectively)
$ (40,282)
Total PepsiCo Common Shareholders’ Equity
$ 18,041
$ 18,503
Noncontrolling interests
130
134
Total Equity
18,171
18,637
Total Liabilities and Equity
$ 99,467
$ 100,495
3,414
23,371
26,785
35,657
4,133
8,339
48,129
74,914
2,366
114
2,742
5,222
806
21,539
24,291
1,277
18,202
14,309
3,073
4,204
5,292
70,648
92,187
$ 23
2,388
104
2,842
5,334
798
26,950
27,039
1,199
17,728
13,730
2,714
4,474
6,661
73,545
100,495
2,440
104
2,762
5,306
921
25,826
28,008
1,102
17,534
13,699
1,985
4,362
6,951
73,641
99,467
$ 4,954
394
10,163
2022
6,510
25,137
31,647
37,595
3,895
8,721
50,211
81,858
$ 9,711
292
10,815
$ 8,505
761
10,333
Raw Values ($Millions)
2023
7,082
24,454
31,536
37,224
3,484
9,052
49,760
81,296
Short-term debt obligations
Accounts payable and other current liabilities
Total Current Liabilities
Long-Term Debt Obligations
Deferred Income Taxes
Other Liabilities
Long-term Liabilities
Total Liabilities
PepsiCo Common Shareholders’ Equity
Common stock, par value 1 2 / 3 ¢ per share (authorized
3,600 shares; issued, net of repurchased common stock at
par value: 1,372 and 1,374 shares, respectively)
Cash and cash equivalents
Short-term investments
Accounts and notes receivable, net
Inventories:
Raw materials and packaging
Work-in-process
Finished goods
Total Inventory
Prepaid expenses and other current assets
Total Current Assets
Property, Plant and Equipment, net
Amortizable Intangible Assets, net
Goodwill
Other Indefinite-Lived Intangible Assets
Investments in Noncontrolled Affiliates
Deferred Income Taxes
Other Assets
Long-term Assets
Total Assets
2024
PepsiCo 2024 Balance Sheet
4%
73%
-18%
-41%
18%
0%
18%
100%
0%
7%
25%
32%
37%
4%
9%
50%
82%
2%
0%
3%
5%
1%
26%
28%
1%
18%
14%
2%
4%
7%
74%
100%
4%
70%
-15%
-40%
18%
0%
19%
100%
0%
6%
25%
31%
37%
4%
9%
50%
81%
2%
0%
3%
5%
1%
27%
27%
1%
18%
14%
3%
4%
7%
73%
100%
10%
0%
11%
4%
74%
-17%
-43%
19%
0%
19%
100%
0%
4%
25%
29%
39%
4%
9%
52%
81%
3%
0%
3%
6%
1%
23%
26%
1%
20%
16%
3%
5%
6%
77%
100%
5%
0%
11%
Common Size
2023
2022
9%
1%
10%
2024
3%
3%
13%
2%
-2%
-3%
-3%
-1%
0%
9%
-3%
0%
-1%
-11%
4%
-1%
-1%
2%
0%
-3%
-1%
15%
-4%
4%
-8%
-1%
0%
-27%
-3%
4%
0%
-1%
-12%
161%
-4%
3%
3%
2%
2%
8%
8%
8%
9%
0%
91%
8%
18%
5%
-6%
5%
4%
9%
1%
-9%
4%
2%
-1%
25%
11%
-6%
-3%
-4%
-12%
6%
26%
4%
9%
96%
-26%
6%
Percentage Change
2024
2023
EXCERPTS
FROM
10-K
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 MAY 31, 2025
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. 1-10635
NIKE, Inc.
(Exact name of Registrant as specified in its charter)
Oregon
93-0584541
(State or other jurisdiction of incorporation)
(IRS Employer Identification No.)
One Bowerman Drive, Beaverton, Oregon 97005-6453
(Address of principal executive offices and zip code)
(503) 671-6453
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Class B Common Stock
NKE
New York Stock Exchange
(Title of each class)
(Trading symbol)
(Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark:
Yes
• if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
• if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
• whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
þ
No
¨
¨
þ
þ
¨
• whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
þ
¨
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.
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files).
• whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer
þ
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
• if an emerging growth company, if the registrant has elected not to use the extended transition period for
¨
• whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of
þ
• if securities are registered pursuant to Section 12(b) of the Act, whether the financial statements of the registrant
¨
• whether any of those error corrections are restatements that required a recovery analysis of incentive-based
¨
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.
its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by
the registered public accounting firm that prepared or issued its audit report.
included in the filing reflect the correction of an error to previously issued financial statements.
compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to
§ 240.10D-1(b).
• whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
☐
þ
As of November 30, 2024, the aggregate market values of the Registrant's Common Stock held by non-affiliates were:
Class A
$
Class B
5,603,520,725
92,655,504,471
$
98,259,025,196
As of July 9, 2025, the number of shares of the Registrant's Common Stock outstanding were:
Class A
288,887,752
Class B
1,188,015,740
1,476,903,492
DOCUMENTS INCORPORATED BY REFERENCE:
Parts of Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on September 9, 2025, are incorporated by reference into Part III of
this report.
NIKE, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 1C.
ITEM 2.
ITEM 3.
ITEM 4.
1
Business
1
General
1
Products
1
Sales and Marketing
2
Our Markets
2
Significant Customer
3
Product Research, Design and Development
3
Manufacturing
3
International Operations and Trade
4
Competition
5
Trademarks and Patents
5
Human Capital Resources
6
Available Information and Websites
7
Information about our Executive Officers
8
Risk Factors
9
Unresolved Staff Comments
24
Cybersecurity
24
Properties
25
Legal Proceedings
25
Mine Safety Disclosures
25
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
26
Reserved
28
Management's Discussion and Analysis of Financial Condition and Results of Operations
29
Quantitative and Qualitative Disclosures about Market Risk
50
Financial Statements and Supplementary Data
52
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
89
Controls and Procedures
89
Other Information
89
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
89
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 9C.
26
PART III
90
(Except for the information set forth under “Information about our Executive Officers” in Item 1 above, Part III is
incorporated by reference from the Proxy Statement for the NIKE, Inc. 2025 Annual Meeting of Shareholders.)
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
Directors, Executive Officers and Corporate Governance
90
Executive Compensation
90
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
90
Certain Relationships and Related Transactions and Director Independence
90
Principal Accountant Fees and Services
90
PART IV
ITEM 15.
ITEM 16.
91
Exhibits and Financial Statement Schedules
91
Form 10-K Summary
94
Signatures
96
PART I
ITEM 1. BUSINESS
GENERAL
NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this Annual Report on Form 10-K (this
"Annual Report"), the terms "we," "us," "our," "NIKE" and the "Company" refer to NIKE, Inc. and its predecessors, subsidiaries
and affiliates, collectively, unless the context indicates otherwise.
Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel,
equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products
through NIKE Direct operations, which are comprised of both NIKE-owned retail stores and sales through our digital platforms
(also referred to as "NIKE Brand Digital") and to wholesale accounts, which include a mix of independent distributors, licensees
and sales representatives in nearly all countries around the world. We also offer interactive consumer services and experiences.
Nearly all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are
manufactured outside the United States, while equipment products are manufactured both in the United States and abroad.
All references to fiscal 2025, 2024 and 2023 are to NIKE, Inc.'s fiscal years ended May 31, 2025, 2024 and 2023, respectively.
Any references to other fiscal years refer to a fiscal year ending on May 31 of that year.
PRODUCTS
We offer our products under the NIKE, Jordan and Converse brands. Our strategy is to achieve sustainable, profitable long-term
growth by leading with sport, creating innovative, “must-have” products, building deep personal consumer connections with our
brands and delivering compelling consumer experiences through digital platforms and at retail. We believe this approach will
allow us to create products that better meet individual consumer needs while accelerating our largest growth opportunities.
NIKE's athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are
worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the
development and manufacturing of our products.
We also sell sports apparel, which features the same trademarks and are sold predominantly through the same marketing and
distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for
athletic use, although many of the products are worn for casual or leisure purposes, and demonstrates our commitment to
innovation and high-quality construction. We often market footwear, apparel and accessories in "collections" of similar use. We
also market apparel with licensed college and professional team and league logos.
We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls,
eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We
also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, doing business
as Air Manufacturing Innovation.
Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused
on sport performance and streetwear using the Jumpman trademark. Sales and operating results for Jordan Brand products are
reported within the respective NIKE Brand geographic operating segments.
Our wholly-owned subsidiary brand, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses
casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell
trademarks. Operating results of the Converse brand are reported on a stand-alone basis.
In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we
have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks,
certain apparel, digital devices and applications and other equipment designed for sports activities.
We also offer interactive consumer services and experiences, including sport focused events and activations; fitness and activity
apps; sport, fitness and wellness content; and digital services and features in retail stores that enhance the consumer
experience.
2025 FORM 10-K
1
SALES AND MARKETING
We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth
fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary
considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment,
as well as other macroeconomic, strategic, operating and logistics-related factors.
Because NIKE is a consumer products company, the relative popularity and availability of various sports and fitness activities, as
well as changing design trends and consumer preferences, affect the demand for our products. We must, therefore, respond to
trends and shifts in consumer preferences by adjusting the mix of existing product offerings and channels, developing new
products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in
a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer
to Item 1A. Risk Factors.
OUR MARKETS
We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment
operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and
equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa
("EMEA"); Greater China; and Asia Pacific & Latin America ("APLA"), and include results for the NIKE and Jordan brands.
Converse is also a reportable operating segment and operates predominately in one industry: the design, marketing, licensing
and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce,
are reported within the Converse operating segment results.
UNITED STATES MARKET
For fiscal 2025, NIKE Brand and Converse sales in the United States accounted for approximately 43% of total revenues,
compared to 42% and 43% for fiscal 2024 and fiscal 2023, respectively. We sell our products to wholesale accounts in the United
States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and
golf shops and other wholesale accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal
2025, our three largest United States customers accounted for approximately 25% of sales in the United States.
Our NIKE Direct and Converse direct to consumer operations sell our products to consumers through various digital platforms, as
well as through the following number of retail stores in the United States:
U.S. RETAIL STORES
NIKE Brand factory stores
NIKE Brand in-line stores (including employee-only stores)
Converse stores (including factory stores)
TOTAL
In the United States, NIKE has eight significant distribution centers. Refer to Item 2. Properties for additional information.
2
NIKE, INC.
NUMBER
213
85
78
376
INTERNATIONAL MARKETS
For fiscal 2025, non-U.S. NIKE Brand and Converse sales accounted for approximately 57% of total revenues, compared to 58%
and 57% for fiscal 2024 and fiscal 2023, respectively. We sell our products to wholesale accounts, which include a mix of
independent distributors, licensees and sales representatives around the world. We also ship products from 72 distribution
centers outside of the United States. Refer to Item 2. Properties for additional information on distribution facilities outside of the
United States. During fiscal 2025, NIKE's three largest customers outside of the United States accounted for approximately 16%
of total non-U.S. sales.
In addition to NIKE-owned and Converse-owned digital commerce platforms in over 40 countries, our NIKE Direct and Converse
direct to consumer businesses operate the following number of retail stores outside the United States:
NON-U.S. RETAIL STORES
NUMBER
NIKE Brand factory stores
NIKE Brand in-line stores (including employee-only stores)
Converse stores (including factory stores)
TOTAL
543
61
54
658
SIGNIFICANT CUSTOMER
No customer accounted for 10% or more of our consolidated net Revenues during fiscal 2025.
PRODUCT RESEARCH, DESIGN AND DEVELOPMENT
We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and
manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce
products that help to enhance athletic performance, reduce injury and maximize comfort, while decreasing our environmental
impact.
In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, digital
technologies, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made
up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, physicians and other experts who consult with
us and review certain designs, materials and concepts for product and manufacturing, design and other process improvements
and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing
contracts and other athletes wear-test and evaluate products during the design and development process.
As we continue to develop new technologies, we are simultaneously focused on the design of innovative products and
experiences incorporating such technologies throughout our products and consumer applications. Using market intelligence and
research, our various design teams identify opportunities to leverage new technologies in existing categories to respond to
consumer preferences. The proliferation of Nike Air, Zoom, Free, Dri-FIT, Flyknit, FlyEase, ZoomX, Air Max, and React
technologies, among others, typifies our dedication to designing innovative products.
MANUFACTURING
Nearly all of our footwear and apparel products are manufactured outside the United States by independent contract
manufacturers ("contract manufacturers"), many of which operate multiple factories. We are also supplied, primarily indirectly, by
a number of materials, or "Tier 2", suppliers who provide the principal materials used in footwear and apparel finished goods
products. As of May 31, 2025, we had 184 strategic Tier 2 suppliers.
As of May 31, 2025, contract manufacturers operated 97 finished goods footwear factories located in 11 countries. For fiscal
2025, NIKE Brand footwear finished goods were manufactured by 15 contract manufacturers, many of which operate multiple
factories. The largest single finished goods footwear factory accounted for approximately 11% of total fiscal 2025 NIKE Brand
footwear production. For fiscal 2025, factories in Vietnam, Indonesia and China manufactured approximately 51%, 28% and 17%
of total NIKE Brand footwear, respectively. For fiscal 2025, four footwear contract manufacturers each accounted for greater than
10% of footwear production and in the aggregate accounted for approximately 59% of NIKE Brand footwear production.
As of May 31, 2025, contract manufacturers operated 303 finished goods apparel factories located in 34 countries. For fiscal
2025, NIKE Brand apparel finished goods were manufactured by 67 contract manufacturers, many of which operate multiple
factories. The largest single finished goods apparel factory accounted for approximately 8% of total fiscal 2025 NIKE Brand
apparel production. For fiscal 2025, factories in Vietnam, China and Cambodia manufactured approximately 31%, 15% and 15%
2025 FORM 10-K
3
of total NIKE Brand apparel, respectively. For fiscal 2025, two apparel contract manufacturers accounted for more than 10% of
apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 51% of NIKE Brand
apparel production.
NIKE's contract manufacturers buy raw materials for the manufacturing of our footwear, apparel and equipment products from
Tier 2 suppliers. Most raw materials are available and purchased by those contract manufacturers in the countries where
manufacturing takes place.
The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning
materials, natural and synthetic leather, nylon, polyester and natural fiber textiles, as well as polyurethane films used to make
NIKE Air-Sole cushioning components. During fiscal 2025, Air Manufacturing Innovation, a wholly-owned subsidiary, with facilities
near Beaverton, Oregon, in Dong Nai Province, Vietnam, and St. Charles, Missouri, as well as contract manufacturers in China
and Vietnam, were our suppliers of NIKE Air-Sole and other cushioning components used in footwear.
The principal materials used in our apparel products are natural and synthetic fabrics, yarns, trims and threads (both virgin and
recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain
and/or snow; and plastic and metal hardware.
From time to time, certain materials used in the production of our products experience periods of high demand, shortages and
price volatility. In fiscal 2025, contract manufacturers were able to source sufficient quantities of raw materials for use in our
footwear and apparel products. Refer to Item 1A. Risk Factors, for additional discussion of the impact of sourcing risks on our
business.
Since 1972, Sojitz Corporation of America ("Sojitz America"), a large Japanese trading company and the sole owner of our
redeemable preferred stock, has performed import-export financing services for us.
INTERNATIONAL OPERATIONS AND TRADE
Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the
implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping
measures, quotas, trade agreement enforcement practices, safeguard measures, trade restrictions, restrictions on the transfer of
funds and, in certain parts of the world, political tensions, instability, conflicts, nationalism and terrorism, and resulting sanctions
and other measures imposed in response to such issues.
In 2025 and in other recent years, uncertain global and regional economic and political conditions have affected international
trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service
sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade
protectionism in many different regions, and, in nearly all cases, we are working together with industry groups to address trade
issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts,
protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, will
adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole, possibly
materially.
We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage
in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in
additional anti-dumping measures and could affect our industry. We are also monitoring for other impediments that may limit or
delay customs clearance for imports of footwear, apparel and equipment and advocating for trade facilitation. NIKE also
advocates for trade liberalization for footwear and apparel in a number of bilateral and multilateral free trade agreements.
Changes in, and responses to, U.S. trade policies, including the imposition of tariffs or penalties on imported goods or retaliatory
measures by other countries, have negatively affected, and could in the future materially negatively affect, U.S. corporations,
including NIKE, with business operations and/or consumer markets in those countries, which could also make it necessary for us
to change the way we conduct business, either of which may have an adverse effect on our business, financial condition or our
results of operations. In addition, we work with a broad coalition of global businesses and trade associations representing a wide
variety of sectors to help support the development and implementation of legislation that (i) addresses legitimate and core
concerns, (ii) is consistent with international trade rules and (iii) reflects and considers domestic economies and the important
role they may play in the global economic community.
Where trade protection measures are implemented, we believe we have the ability to develop, over a period of time, adequate
alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products
from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse
financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would,
therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an
ongoing adverse impact on profitability.
4
NIKE, INC.
Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act (the "FCPA"), and other
anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer
markets, outside of the United States. We have an ethics and compliance program to address compliance with the FCPA and
similar laws by us, our employees, agents, suppliers and other partners. Refer to Item 1A. Risk Factors for additional information
on risks relating to our international operations.
COMPETITION
The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with
a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment
companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including
adidas, Anta, ASICS, Deckers, Li Ning, lululemon athletica, New Balance, On, Puma, Under Armour and V.F. Corporation, among
others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and
leisure footwear and apparel and athletic equipment constitute significant risk factors in our operations. Refer to Item 1A. Risk
Factors for additional information.
NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are:
• Product attributes such as quality; innovation and development; performance and reliability; new product style, and design;
as well as consumer price/value.
• Consumer connection, engagement and affinity for brands and products, developed through marketing, promotion and
digital experiences; social media interaction; customer support and service; identification with prominent and influential
athletes, influencers, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our
products and active engagement through sponsored sporting events and clinics.
• Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and on
digital platforms.
We believe that we are competitive in all of these areas. See Item 1A. Risk Factors, including the risk factor titled "Our products,
services and experiences face intense competition."
TRADEMARKS AND PATENTS
We believe that our intellectual property rights are important to our brand, our success and our competitive position. We
strategically pursue available protections of these rights and vigorously protect and enforce them against third-party theft and
infringement.
We use trademarks on nearly all of our products and packaging, and in our marketing materials, and believe having distinctive
marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the
Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh Design trademarks to be
among our most valuable assets and we have registered these trademarks in over 190 jurisdictions worldwide. In addition, we
own many other trademarks that we use in marketing our products. Throughout the world, we own common law rights in the trade
dress of several distinctive shoe designs and elements. For certain trade dress, we have sought and obtained trademark
registrations.
We have copyright protection in our designs, graphics, software applications, digital goods and other original works. When
appropriate, we also obtain registered copyrights.
We file for, own and maintain many U.S. and foreign utility and design patents protecting components, technologies, materials,
manufacturing techniques, features, functionality, and industrial designs used in and for the manufacture of various athletic,
performance, and leisure footwear and apparel, including physical and digital versions thereof, athletic equipment, and digital
devices, and related software applications. These patents expire at various times.
We believe our success depends upon our capabilities in areas such as design, research and development, production and
marketing and is supported and protected by our intellectual property rights, such as trademarks, utility and design patents,
copyrights, and trade secrets, among others.
We have followed a policy of applying for and registering intellectual property rights in the United States and select foreign
countries on trademarks, inventions, innovations and designs that we deem protectable and valuable. We also continue to
vigorously protect and enforce our intellectual property, including trademarks, patents and trade secrets against third-party
infringement and misappropriation.
2025 FORM 10-K
5
ITEM 1A. RISK FACTORS
Special Note Regarding Forward-Looking Statements and Analyst Reports
Certain written and oral statements, other than purely historic information, including estimates, projections, statements relating to
NIKE's business plans, objectives and expected operating or financial results and the assumptions upon which those statements
are based, made or incorporated by reference from time to time by NIKE or its representatives in this Annual Report, other
reports, filings with the SEC, press releases, conferences or otherwise, are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results,
performance or achievements, and may contain the words "believe," "anticipate," "expect," "estimate," "project," "will be," "will
continue," "will likely result" or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties
which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed
from time to time in reports filed by NIKE with the SEC, including reports filed on Forms 8-K, 10-Q and 10-K, and include, among
others, the following: risks relating to our business strategy, including, but not limited to, risks related to an increased focus on
sport and rebalancing of our channel mix; intense competition among designers, marketers, distributors and sellers of athletic or
leisure footwear, apparel and equipment for consumers and endorsers; NIKE's ability to successfully innovate and compete in
various categories; new product development and innovation; demographic changes; changes in consumer preferences and
channel mix; popularity of particular designs, categories of products and sports; seasonal and geographic demand for NIKE
products; difficulties in anticipating or forecasting, and responding to changes in consumer preferences, consumer demand for
NIKE products, changes in channel mix and the various market factors described above; the size and growth of the overall
athletic or leisure footwear, apparel and equipment markets; general risks associated with operating a global business, including,
without limitation, exchange rate fluctuations, inflation, import duties, quotas, sanctions, political and economic instability, conflicts
and terrorism; the potential impact of new and existing laws, regulations or policies, including, without limitation, those relating to
tariffs, import/export, trade, taxes, wages, labor and immigration; international, national and local political, civil, economic and
market conditions, including volatility and uncertainty regarding inflation and interest rates; difficulties in implementing, operating
and maintaining NIKE's increasingly complex information technology systems and controls, including, without limitation, the
systems related to demand and supply planning and inventory control; interruptions in data and information technology systems;
consumer data security; risks related to our sustainability strategy; fluctuations and difficulty in forecasting operating results,
including, without limitation, the fact that advance orders may not be indicative of future revenues due to changes in shipment
timing, the changing mix of orders with shorter lead times, and discounts, order cancellations and returns; the ability of NIKE to
sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE's products; increases in the
cost of materials, labor and energy used to manufacture products; the ability to secure and protect trademarks, patents and other
intellectual property; product performance and quality; customer service; adverse publicity and an inability to maintain NIKE's
reputation and brand image, including without limitation, through social media or in connection with brand damaging events; the
loss of significant customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of
freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in NIKE's debt ratings;
changes in business strategy or development plans; the impact of, including business and legal developments relating to, climate
change, extreme weather conditions and natural disasters; litigation, regulatory proceedings, sanctions or any other claims
asserted against NIKE; the ability to attract and retain qualified employees, and any negative public perception with respect to
key personnel or our corporate culture, values or purpose; the effects of NIKE's decision to invest in or divest of businesses or
capabilities; health epidemics, pandemics and similar outbreaks; and other factors referenced or incorporated by reference in this
Annual Report and other reports.
Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE's
policy to disclose to them any material non-public information or other confidential commercial information. Accordingly,
shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content
of the statement or report. Furthermore, NIKE has a policy against confirming financial forecasts or projections issued by others.
Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not
the responsibility of NIKE.
Risk Factors
The risks included here are not exhaustive. Other sections of this Annual Report may include additional factors which could
adversely affect NIKE's business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing
environment. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess
the impact of all such risks on NIKE's business or the extent to which any risk, or combination of risks, may cause actual results
to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should
not place undue reliance on forward-looking statements as a prediction of actual results.
2025 FORM 10-K
9
Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and
limiting our financing options.
Our long-term debt is currently rated Investment Grade by Standard & Poor's and Moody's Investors Service. While we have
maintained our Investment Grade rating, in July 2025, our rating was downgraded by Standard & Poor's. Any negative change to
our credit rating will increase borrowing costs for our existing facilities and may increase our borrowing costs for future long-term
debt or short-term credit facilities. In addition, our financing options, including our access to credit or capital markets, could be
adversely affected. We may also be subject to restrictive covenants that would reduce our flexibility to, among other things, incur
additional indebtedness, make restricted payments, pledge assets as security, make investments, loans, advances, guarantees
and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Failure to comply with such covenants
could result in a default, and as a result, the commitments of our lenders under our credit agreements may be terminated and the
maturity of amounts owed may be accelerated. In addition, macroeconomic conditions, such as increased volatility or disruption
in the credit or capital markets, could adversely affect our ability to refinance existing debt.
If our internal controls are ineffective, our operating results could be adversely affected.
Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including
the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide
only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the
adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience
difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial
reporting obligations.
If our estimates or judgments relating to our critical accounting estimates prove to be incorrect, our operating results
could be adversely affected.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. We base our estimates on historical experience and on various other assumptions we believe to be
reasonable under the circumstances, as provided in "Management's Discussion and Analysis of Financial Condition and Results
of Operations". The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities
and equity, and the amount of revenues and expenses that are not readily apparent from other sources. Significant assumptions
and estimates used in preparing our consolidated financial statements include those related to sales-related reserves, inventory
reserves, hedge accounting for derivatives, income taxes and other contingencies. Our operating results may be adversely
affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our
operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our Class
B Common Stock.
Anti-takeover provisions may impair an acquisition of the Company or reduce the price of our common stock.
There are provisions within our articles of incorporation and Oregon law intended to protect shareholder interests by providing the
Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to
obtain more favorable terms. Such provisions include a control share acquisition statute, a freeze-out statute, two classes of
stock that vote separately on certain issues, and the fact that holders of Class A Common Stock elect three-quarters of the Board
of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited
merger, acquisition or other change in control of the Company that some shareholders might believe to be in their best interests
or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions
could also discourage proxy contests for control of the Company.
We have in the past failed and may in the future fail to meet market expectations, which has caused and could in the
future cause the price of our stock to decline.
Our Class B Common Stock is traded publicly, and at any given time various securities analysts follow our financial results and
issue reports on us. These reports include information about our historical financial results as well as analysts' opinions of our
future performance, which may, in part, be based upon any guidance we have provided. Analysts' estimates are often different
from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and
investors, our stock price could decline (which has happened in the past and could happen in the future). We are currently
subject to multiple securities class action and shareholder derivative lawsuits relating to a drop in our stock price and could
become involved in additional litigation of this type in the future if our stock price is volatile for any reason. Any litigation could
result in reputational damage, substantial costs and a diversion of management's attention and resources needed to successfully
run our business.
2025 FORM 10-K
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
NIKE's Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 9, 2025,
there were 20,485 holders of record of NIKE's Class B Common Stock and 16 holders of record of NIKE's Class A Common
Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not
publicly traded, but each share is convertible upon request of the holder into one share of Class B Common Stock. Refer to our
Consolidated Statements of Shareholders' Equity for dividends declared on the Class A and Class B Common Stock.
In June 2022, the Board of Directors approved a four-year, $18 billion share repurchase program. As of May 31, 2025, the
Company had repurchased 122.6 million shares at an average price of $98.00 per share for a total approximate cost of $12.0
billion under this program.
All share repurchases were made under NIKE's publicly announced program, and there are no other programs under which the
Company repurchases shares. The following table presents a summary of share repurchases made during the quarter ended
May 31, 2025:
PERIOD
March 1 — March 31, 2025
April 1 — April 30, 2025
May 1 — May 31, 2025
26
NIKE, INC.
TOTAL NUMBER OF
SHARES PURCHASED
936,074
1,189,613
1,116,872
3,242,559
AVERAGE PRICE
PAID PER SHARE
$
$
$
$
72.39 $
56.01 $
60.77 $
62.38
APPROXIMATE DOLLAR
VALUE OF SHARES THAT
MAY YET BE PURCHASED
UNDER THE PLANS
OR PROGRAMS
(IN MILLIONS)
6,124
6,058
5,990
PERFORMANCE GRAPH
The following graph demonstrates a five-year comparison of cumulative total returns for NIKE's Class B Common Stock; the
Standard & Poor's 500 Stock Index; the Dow Jones U.S. Footwear Index; and the Standard & Poor's Apparel, Accessories &
Luxury Goods Index. The graph assumes an investment of $100 on May 31, 2020, in each of the indices and our Class B
Common Stock. Each of the indices assumes that all dividends were reinvested on the day of issuance.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG NIKE, INC.; S&P 500 INDEX; THE DOW JONES U.S. FOOTWEAR
INDEX; AND S&P APPAREL, ACCESSORIES & LUXURY GOODS INDEX
$240
$220
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
2020
2021
2022
2023
2024
2025
NIKE, Inc.
S&P 500 INDEX - TOTAL RETURN
DOW JONES US FOOTWEAR INDEX
S&P 500 APPAREL, ACCESSORIES & LUXURY GOODS INDEX
The Dow Jones U.S. Footwear Index and the Standard & Poor's Apparel, Accessories & Luxury Goods Index include companies
in two major lines of business in which the Company competes. The indices do not encompass all of the Company's competitors,
nor all product categories and lines of business in which the Company is engaged. Because NIKE is part of the Dow Jones U.S.
Footwear Index, the price and returns of NIKE stock have a substantial effect on this index.
The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company
will not make or endorse any predictions as to future stock performance.
The performance graph above is being furnished solely to accompany this Annual Report pursuant to Item 201(e) of Regulation
S-K, is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be
incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general
incorporation language in such filing.
2025 FORM 10-K
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are
the largest seller of athletic footwear and apparel in the world. We sell our products through two distribution channels: NIKE
Direct operations, which are comprised of both NIKE-owned retail stores and sales through our digital platforms (also referred to
as "NIKE Brand Digital"), and to wholesale accounts, which include a mix of independent distributors, licensees and sales
representatives in nearly all countries around the world. Our goal is to deliver value to our shareholders by building a profitable
global portfolio of branded footwear, apparel, equipment and accessories.
Our strategy is to achieve sustainable, profitable long-term revenue growth by leading with sport, creating innovative, "must-have"
products, building deep personal consumer connections with our brands and delivering compelling consumer experiences
through digital platforms and at retail.
FISCAL 2025 FINANCIAL HIGHLIGHTS
• NIKE, Inc. Revenues for fiscal 2025 were $46.3 billion compared to $51.4 billion for fiscal 2024
• NIKE Direct revenues declined 13% from $21.5 billion in fiscal 2024 to $18.8 billion in fiscal 2025, and represented
approximately 42% of total NIKE Brand revenues for fiscal 2025
• NIKE Brand wholesale revenues decreased 7% on a reported basis and 6% on a currency-neutral basis
• Gross margin decreased 190 basis points to 42.7%, primarily due to higher discounts, changes in channel mix and higher
inventory obsolescence reserves, partially offset by lower product costs
• Inventories as of May 31, 2025 were $7.5 billion, flat compared to the prior year
• We returned $5.3 billion to our shareholders in fiscal 2025 through share repurchases and dividends
• Return on Invested Capital ("ROIC") was 20.2% as of May 31, 2025, compared to 34.9% as of May 31, 2024. ROIC is
considered a non-GAAP financial measure, see "Use of Non-GAAP Financial Measures" for additional information.
Our results for fiscal 2025 reflected a decrease in traffic across NIKE Direct and our actions to reduce supply of certain footwear
products in the marketplace through increased markdowns across NIKE Direct and discounts and higher sales returns with our
wholesale partners, which negatively impacted our Revenues and gross margin.
For discussion related to the results of operations and changes in financial condition for fiscal 2024 compared to fiscal 2023 refer
to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2024
Form 10-K, which was filed with the United States Securities and Exchange Commission on July 25, 2024.
2025 FORM 10-K
29
FACTORS IMPACTING OUR BUSINESS
We are navigating through several external factors that create uncertainty and volatility in the operating environment including,
but not limited to, geopolitical dynamics, tax regulation, fluctuating foreign exchange rates and new tariffs. As a result of the new
tariffs, we expect to incur a material gross incremental increase to Cost of sales. Over the next several quarters, we are taking
actions to mitigate the impact of the new tariffs, however for fiscal 2026, we expect a negative impact on gross margin. We will
continue to monitor changes to the import and export policies of the U.S. and other countries that could require us to change the
way in which we do business. These factors, and any changes to these factors, among others, could have a material adverse
impact on consumer behavior and on our future Revenues and overall profitability.
Despite these factors, we are focused on driving distinction within key sports, building a complete product portfolio, creating
stories to inspire and emotionally connect with consumers, and elevating and growing the entire marketplace as we continue to
take actions across the following areas:
• Product Management: Reducing the supply of certain footwear products in the marketplace as we shift to new and
innovative products and rebalance the mix of our footwear portfolio.
• Marketplace Management: Repositioning NIKE Brand Digital as a full-price platform and reinvesting in wholesale
distribution. This includes liquidating inventory through increased markdowns across NIKE Direct, and higher sales returns
and discounts with our wholesale partners to reduce inventory and create capacity for new product.
• Brand Management: Increasing investment in demand creation including brand marketing and sports marketing to support
key product launches and sports moments.
These actions have had, and in the future could have, a negative impact on our Revenues and gross margin as well as higher
Demand creation expense. However, we believe these actions will reignite brand momentum and reposition our business to drive
long-term shareholder value.
For more information refer to Item 1A Risk Factors, within Part 1, Item 1, Business.
USE OF NON-GAAP FINANCIAL MEASURES
Throughout this Annual Report on Form 10-K, we discuss non-GAAP financial measures, which should be considered in addition
to, and not in lieu of, the financial measures calculated and presented in accordance with generally accepted accounting
principles in the United States of America ("U.S. GAAP"). References to these measures should not be considered in isolation or
as a substitute for other financial measures calculated and presented in accordance with U.S. GAAP and may not be comparable
to similarly titled measures used by other companies. Management uses these non-GAAP measures when evaluating the
Company's performance, including when making financial and operating decisions. Additionally, management believes these nonGAAP financial measures provide investors with additional financial information that should be considered when assessing our
underlying business performance and trends.
Earnings Before Interest and Taxes ("EBIT"): Calculated as Net income before Interest expense (income), net and Income tax
expense in the Consolidated Statements of Income. Total NIKE, Inc. EBIT for fiscal 2025, 2024 and 2023 are as follows:
YEAR ENDED MAY 31,
2025
(Dollars in millions)
Net income
$
3,219
Add: Interest expense (income), net
$
3,778
$
5,070
(161)
666
$
2023
5,700
(107)
Add: Income tax expense
EARNINGS BEFORE INTEREST AND TAXES
2024
(6)
1,000
$
6,539
1,131
$
6,195
EBIT Margin: Calculated as total NIKE, Inc. EBIT divided by total NIKE, Inc. Revenues. Our EBIT Margin calculation for fiscal
2025, 2024 and 2023 are as follows:
YEAR ENDED MAY 31,
2025
(Dollars in millions)
2024
2023
Numerator
Earnings before interest and taxes
$
3,778
$
6,539
$
6,195
$
46,309
$
51,362
$
51,217
Denominator
Total NIKE, Inc. Revenues
EBIT MARGIN
30
NIKE, INC.
8.2%
12.7%
12.1%
Return on Invested Capital ("ROIC"): Represents a performance measure that management believes is useful information in
understanding the Company's ability to effectively manage invested capital. Our ROIC calculation as of May 31, 2025 and 2024 is
as follows:
(Dollars in millions)
Numerator
Net income
Add: Interest expense (income), net
Add: Income tax expense
Earnings before interest and taxes
Income tax adjustment(1)
Earnings before interest and after taxes
FOR THE TRAILING FOUR QUARTERS ENDED
MAY 31, 2025
MAY 31, 2024
$
$
3,219
$
5,700
(107)
666
(161)
1,000
3,778
(645)
6,539
(976)
3,133
$
5,563
AVERAGE FOR THE TRAILING FIVE QUARTERS
ENDED
MAY 31, 2025
MAY 31, 2024
Denominator
Total debt(2)
Add: Shareholders' equity
Less: Cash and equivalents and Short-term investments
Total invested capital
RETURN ON INVESTED CAPITAL
$
11,814
$
13,926
$
10,236
15,504
20.2%
12,110
14,155
$
10,309
15,956
34.9%
(1)
Equals Earnings before interest and taxes multiplied by the effective tax rate as of each of the respective quarter ends.
(2)
Total debt includes the following: 1) Current portion of long-term debt, 2) Notes Payable, 3) Current portion of operating lease liabilities, 4) Long-term
debt and 5) Operating lease liabilities.
Currency-neutral revenues: Currency-neutral revenues enhance visibility to underlying business trends, excluding the impact of
translation arising from foreign currency exchange rate fluctuations. Currency-neutral revenues are calculated using actual
exchange rates in use during the comparative prior year period in place of the exchange rates in use during the current period.
COMPARABLE STORE SALES
Comparable store sales: This key metric, which excludes NIKE Brand Digital sales, comprises revenues from NIKE-owned inline and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one
year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently
repositioned within the past year. Comparable store sales represents a performance metric that we believe is useful information
for management and investors in understanding the performance of our established NIKE-owned in-line and factory stores.
Management considers this metric when making financial and operating decisions. The method of calculating comparable store
sales varies across the retail industry. As a result, our calculation of this metric may not be comparable to similarly titled metrics
used by other companies.
2025 FORM 10-K
31
RESULTS OF OPERATIONS
FISCAL 2025
$ 46,309
FISCAL 2024
$ 51,362
Cost of sales
Gross profit
26,519
19,790
28,475
22,887
Gross margin
Demand creation expense
42.7 %
4,689
44.6 %
4,285
Operating overhead expense
Total selling and administrative expense
11,399
16,088
12,291
16,576
(Dollars in millions, except per share data)
Revenues
% CHANGE
FISCAL 2023
-10% $ 51,217
-7%
-14%
% CHANGE
0%
28,925
22,292
-2%
3%
9%
43.5 %
4,060
6%
-7%
-3%
12,317
16,377
0%
1%
% of revenues
Interest expense (income), net
34.7 %
(107)
32.3 %
(161)
—
32.0 %
(6)
—
Other (income) expense, net
Income before income taxes
(76)
3,885
(228)
6,700
—
-42%
(280)
6,201
—
8%
666
1,000
-33%
1,131
-12%
17.1 %
3,219
$
2.16
$
14.9 %
5,700
3.73
-44% $
-42% $
18.2 %
5,070
3.23
12%
15%
Income tax expense
Effective tax rate
NET INCOME
Diluted earnings per common share
32
NIKE, INC.
$
$
CONSOLIDATED OPERATING RESULTS
REVENUES
(Dollars in millions)
NIKE, Inc. Revenues:
NIKE Brand Revenues by:
Footwear
FISCAL 2025 FISCAL 2024
% CHANGE
EXCLUDING
% CURRENCY
CHANGE CHANGES(1)
-12%
-11% $ 33,135
1%
1%
13,775
2,075
-6%
6%
-5%
6%
13,843
1,727
0%
20%
0%
20%
48
45
$ 44,714 $ 49,322
7%
-9%
10%
58
-9% $ 48,763
-22%
1%
-25%
1%
2,082
(42)
-19%
—
-18%
—
2,427
27
-14%
—
-15%
—
TOTAL NIKE, INC. REVENUES
$ 46,309 $ 51,362
Supplemental NIKE Brand Revenues Details:
-10%
-9% $ 51,217
0%
1%
$ 25,883 $ 27,758
18,783
21,519
48
45
$ 44,714 $ 49,322
-7%
-13%
7%
-9%
-6% $ 27,397
-12%
21,308
10%
58
-9% $ 48,763
1%
1%
-22%
1%
2%
1%
-25%
1%
$ 23,216 $ 24,785
9,719
10,366
5,695
6,019
7,270
8,701
(1,234)
(594)
48
45
$ 44,714 $ 49,322
-6%
-6%
-5%
-16%
-108%
7%
-9%
-6% $ 24,445
-5%
10,274
-5%
5,889
-16%
8,460
-106%
(363)
10%
58
-9% $ 48,763
1%
1%
2%
3%
-64%
-22%
1%
2%
2%
2%
3%
-67%
-25%
1%
Apparel
Equipment
Global Brand Divisions(2)
TOTAL NIKE BRAND REVENUES
Converse
Corporate(3)
NIKE Brand Revenues by:
Sales to Wholesale Customers
Sales through NIKE Direct
Global Brand Divisions(2)
TOTAL NIKE BRAND REVENUES
Supplemental NIKE Brand Revenue Details:
NIKE Brand Revenues by:(4)
Men's
Women's
Kids'
Jordan Brand
Others(5)
Global Brand Divisions(2)
TOTAL NIKE BRAND REVENUES
$ 29,510 $ 33,427
% CHANGE
EXCLUDING
% CURRENCY
CHANGE CHANGES(1) FISCAL 2023
12,965
2,191
1,692
(97)
(1)
The percent change excluding currency changes represents a non-GAAP financial measure. For additional information, see "Use of Non-GAAP
Financial Measures".
(2)
Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.
(3)
Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand
geographic operating segments and Converse, but managed through our central foreign exchange risk management program.
(4)
Beginning in fiscal 2025, with the continued rollout of a new Enterprise Resource Planning Platform, we have removed the non-GAAP financial
measure of wholesale equivalent revenues. There is no change to our reported revenues or gross margin. Prior year amounts have been recast to
conform to fiscal 2025 presentation.
(5)
Others include products not allocated to Men's, Women's, Kids' and Jordan Brand, as well as certain adjustments that are not allocated to products
designated by consumer.
2025 FORM 10-K
33
FISCAL 2025 NIKE BRAND REVENUE HIGHLIGHTS
The following tables present NIKE Brand revenues disaggregated by reportable operating segment, distribution channel and
major product line:
14%
44%
North
America
APLA
5%
58%
66%
Wholesale
15%
Greater
China
Equipment
Footwear
42%
NIKE
Direct
29%
Apparel
27%
EMEA
FISCAL 2025 COMPARED TO FISCAL 2024
• NIKE, Inc. Revenues were $46.3 billion in fiscal 2025 compared to $51.4 billion for fiscal 2024, which decreased 10% and
9% on a reported and currency-neutral basis, respectively. On a currency-neutral basis, the decrease was primarily due to
lower revenues in North America, Europe, Middle East & Africa ("EMEA") and Greater China which each decreased NIKE,
Inc. Revenues by 4, 3 and 2 percentage points, respectively.
• NIKE Brand revenues, which represented over 90% of NIKE, Inc. Revenues, decreased 9% on both a reported and
currency-neutral basis. The decrease, on a currency-neutral basis, was due to lower revenues in Men's, the Jordan Brand,
Women's and Kids'.
• NIKE Brand footwear revenues decreased 11% on a currency-neutral basis. Unit sales of footwear decreased 8%,
while lower average selling price ("ASP") per pair reduced footwear revenues by approximately 3 percentage points.
Lower ASP per pair was primarily due to higher discounts and changes in channel mix, partially offset by strategic
pricing actions.
• NIKE Brand apparel revenues decreased 5% on a currency-neutral basis. Unit sales of apparel decreased 5%, while
ASP per unit was flat as strategic pricing actions were offset by changes in channel mix and higher discounts.
• NIKE Brand wholesale revenues decreased 7% on a reported basis and 6% on a currency-neutral basis, compared to fiscal
2024. The decrease, on a currency-neutral basis, was driven by lower revenues across all geographies.
• NIKE Direct revenues were $18.8 billion in fiscal 2025 compared to $21.5 billion in fiscal 2024. On a currency-neutral basis,
NIKE Direct revenues decreased 12% due to declines in NIKE Brand Digital sales of 20% from $12.1 billion in fiscal 2024 to
$9.6 billion in fiscal 2025, while NIKE store sales were flat. Comparable store sales decreased 1%. For additional
information regarding comparable store sales, including the definition, see "Comparable Store Sales".
34
NIKE, INC.
GROSS MARGIN
FISCAL 2025 COMPARED TO FISCAL 2024
For fiscal 2025, our consolidated gross profit decreased 14% to $19,790 million compared to $22,887 million for fiscal 2024.
Gross margin decreased 190 basis points to 42.7% for fiscal 2025 compared to 44.6% for fiscal 2024 due to the following:
48%
46%
%
44.6
0.8
44%
(1.8)
42%
(0.9)
(0.2)
(0.1)
OTHER
COSTS
CONVERSE
FOREIGN
CURRENCY
EXCHANGE
RATES (INCL.
HEDGES)
40%
FY 24
NIKE
BRAND
AVERAGE
SELLING
PRICE
NIKE
BRAND
PRODUCT
COSTS
0.2
0.1
42.7
WAREHOUSING RESTRUCTURING
AND
CHARGES IN
LOGISTICS
THE PRIOR YEAR
COSTS
FY 25
• Lower NIKE Brand ASP (decreasing gross margin approximately 180 basis points), primarily due to higher discounts and
changes in channel mix, partially offset by strategic pricing actions;
• Higher other costs (decreasing gross margin approximately 90 basis points), including higher inventory obsolescence
reserves;
• Lower gross margin from Converse (decreasing gross margin approximately 20 basis points); and
• Unfavorable changes in net foreign currency exchange rates, including hedges (decreasing gross margin approximately 10
basis points).
This was partially offset by:
• Lower NIKE Brand product costs (increasing gross margin approximately 80 basis points);
• Lower warehousing and logistics costs (increasing gross margin approximately 20 basis points); and
• Restructuring charges in the prior year (increasing gross margin approximately 10 basis points).
TOTAL SELLING AND ADMINISTRATIVE EXPENSE
(Dollars in millions)
Demand creation expense(1)
Operating overhead expense(2)
Total selling and administrative expense
% of revenues
FISCAL 2025
$
$
4,689
11,399
16,088
34.7%
$
$
FISCAL 2024
% CHANGE
4,285
12,291
16,576
9%
-7%
-3%
32.3%
240 bps
$
$
FISCAL 2023
% CHANGE
4,060
12,317
16,377
6%
0%
1%
32.0%
30 bps
(1)
Demand creation expense consists of brand marketing expense and sports marketing expense. Brand marketing expense includes advertising and
promotion costs such as production and media costs, digital marketing expense, brand events and retail brand presentation costs. Sports marketing
expense includes expenses related to endorsement contracts, complimentary product and sports marketing events.
(2)
Operating overhead expense consists primarily of wage and benefit-related expenses and other administrative expenses, such as research and
development costs, bad debt expense, rent, depreciation and amortization and costs related to professional services, certain technology investments,
meetings and travel.
FISCAL 2025 COMPARED TO FISCAL 2024
Demand creation expense increased 9%, due to higher brand marketing expense, reflecting investment in key sports events, and
higher sports marketing expense. Changes in foreign currency exchange rates did not have a material impact on Demand
creation expense.
Operating overhead expense decreased 7%, due to restructuring charges in the prior year, lower wage-related expenses and
lower other administrative costs. Changes in foreign currency exchange rates did not have a material impact on Operating
overhead expense.
2025 FORM 10-K
35
OTHER (INCOME) EXPENSE, NET
(Dollars in millions)
Other (income) expense, net
FISCAL 2025
$
(76) $
FISCAL 2024
(228) $
FISCAL 2023
(280)
Other (income) expense, net comprises foreign currency conversion gains and losses from the remeasurement of monetary
assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments,
as well as unusual or non-operating transactions that are outside the normal course of business.
FISCAL 2025 COMPARED TO FISCAL 2024
Other (income) expense, net decreased from $228 million of other income, net, to $76 million of other income, net, primarily due
to a net unfavorable change in foreign currency conversion gains and losses, including hedges.
INCOME TAXES
Effective tax rate
FISCAL 2025
FISCAL 2024
17.1%
14.9%
% CHANGE
220 bps
FISCAL 2023
18.2%
% CHANGE
(330) bps
FISCAL 2025 COMPARED TO FISCAL 2024
Our effective tax rate was 17.1% for fiscal 2025, compared to 14.9% for fiscal 2024, primarily due to changes in earnings mix,
decreased benefits from stock-based compensation and non-recurring one-time benefits in fiscal 2024 including the impact of the
delay of the effective date of certain U.S. foreign tax credit regulations. These impacts were partially offset by a one-time, noncash deferred tax benefit in fiscal 2025 provided by US tax regulations related to foreign currency gains and losses.
On July 4, 2025, the U.S. government enacted The One Big Beautiful Bill Act of 2025 which includes, among other provisions,
changes to the U.S. corporate income tax system including the allowance of immediate expensing of qualifying research and
development expenses and permanent extensions of certain provisions within the Tax Cuts and Jobs Act. Certain provisions are
effective for NIKE beginning fiscal 2026. We are evaluating the future impact of these tax law changes on our financial
statements.
36
NIKE, INC.
SEGMENT INFORMATION
See Note 15 — Segment Information in the accompanying Notes to the Consolidated Financial Statements for a description of
our segments and related information.
The breakdown of Revenues is as follows:
(Dollars in millions)
North America
Europe, Middle East & Africa
Greater China
Asia Pacific & Latin America
Global Brand Divisions(2)
TOTAL NIKE BRAND
Converse
Corporate(3)
TOTAL NIKE, INC. REVENUES
FISCAL 2024
% CHANGE
% CHANGE
EXCLUDING
CURRENCY
CHANGES(1) FISCAL 2023
$ 19,572 $ 21,396
12,257
13,607
6,586
7,545
6,251
6,729
48
45
$ 44,714 $ 49,322
1,692
2,082
(97)
(42)
$ 46,309 $ 51,362
-9%
-10%
-13%
-7%
7%
-9%
-19%
—
-10%
-8% $ 21,608
-10%
13,418
-12%
7,248
-3%
6,431
10%
58
-9% $ 48,763
-18%
2,427
—
27
-9% $ 51,217
FISCAL 2025
% CHANGE
% CHANGE
EXCLUDING
CURRENCY
CHANGES(1)
-1%
1%
4%
5%
-22%
1%
-14%
—
0%
-1%
0%
8%
5%
-25%
1%
-15%
—
1%
(1)
The percent change excluding currency changes represents a non-GAAP financial measure. For additional information, see "Use of Non-GAAP
Financial Measures".
(2)
Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.
(3)
Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand
geographic operating segments and Converse, but managed through our central foreign exchange risk management program.
The primary financial measure used by the Company to evaluate performance of its segments is EBIT. For additional information
on our segments, refer to Note 15 — Segment Information in the accompanying Notes to the Consolidated Financial Statements.
The breakdown of EBIT is as follows:
(Dollars in millions)
North America
Europe, Middle East & Africa
Greater China
Asia Pacific & Latin America
Global Brand Divisions
TOTAL NIKE BRAND(1)
Converse
Corporate
TOTAL NIKE, INC. EARNINGS BEFORE INTEREST AND
TAXES(1)
EBIT margin(1)
Interest expense (income), net
TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES
(1)
FISCAL 2025
FISCAL 2024
FISCAL 2023
% CHANGE
$
4,735
2,575
1,602
1,527
(4,699)
$ 5,740
240
(2,202)
$
5,822
3,388
2,309
1,885
(4,720)
$ 8,684
474
(2,619)
-19% $ 5,454
-24%
3,531
-31%
2,283
-19%
1,932
0%
(4,841)
-34% $ 8,359
-49%
676
16%
(2,840)
7%
-4%
1%
-2%
2%
4%
-30%
8%
$
3,778
$
-42% $
6,195
6%
$
8.2 %
(107)
3,885
$
—
-42% $
12.1 %
(6)
6,201
—
8%
6,539
12.7 %
(161)
6,700
% CHANGE
Total NIKE Brand EBIT, Total NIKE, Inc. EBIT and EBIT Margin represent non-GAAP financial measures. See "Use of Non-GAAP Financial Measures"
for additional information.
2025 FORM 10-K
37
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ACTIVITY
(Dollars in millions)
Cash provided (used by):
Operating activities
Investing activities
FISCAL 2025
$
Financing activities
Effect of exchange rate changes on cash and equivalents
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
$
FISCAL 2024
$ CHANGE
3,698 $
(275)
7,429 $
894
(3,731)
(1,169)
(5,820)
1
(5,888)
(16)
68
17
(2,396) $
2,419 $
(4,815)
Cash provided by operating activities decreased $3,731 million. This was driven by a decrease of $2,228 million in Net income,
adjusted for non-cash items, and changes in certain working capital components and other assets and liabilities, which
decreased $1,503 million. The change in working capital was impacted by changes to Inventories, primarily due to reduced
inventory purchases in the prior year as well as unfavorable changes in standard foreign currency exchange rates in the current
year.
Cash used by investing activities increased $1,169 million, from an inflow in fiscal 2024 to an outflow in fiscal 2025, primarily
driven by the net change in short-term investments (including sales, maturities and purchases).
Cash used by financing activities decreased $68 million, primarily driven by lower share repurchases, largely offset by a $1.0
billion bond repayment and slightly higher dividend payments.
In fiscal 2025, we purchased a total of 37.6 million shares of NIKE's Class B Common Stock for $3.0 billion (an average price of
$78.50 per share) under the four-year, $18 billion share repurchase plan authorized by the Board of Directors in June 2022. As of
May 31, 2025, we had repurchased 122.6 million shares at a cost of approximately $12.0 billion (an average price of $98.00 per
share) under this program. We have moderated, and intend to continue moderating, share repurchases. The timing and the
amount of share repurchases will be dictated by our liquidity, capital needs and operating cash flows. We continue to expect
funding of share repurchases from operating cash flows and excess cash.
CAPITAL RESOURCES
On July 21, 2022, we filed a shelf registration statement (the "Shelf") with the U.S. Securities and Exchange Commission (the
"SEC") which permits us to issue an unlimited amount of debt securities from time to time. The Shelf expires on July 21, 2025,
and we plan to file a new shelf registration with the SEC in July 2025.
On March 7, 2025, we entered into a 364-day committed credit facility agreement with a syndicate of banks which provides for up
to $1 billion of borrowings, with the option to increase borrowings up to $1.5 billion in total with lender approval. The facility
matures on March 6, 2026, with an option to extend the maturity date an additional 364 days. This facility replaces the prior $1
billion 364-day credit facility agreement entered into on March 8, 2024, which matured on March 7, 2025. Refer to Note 5 —
Short-Term Borrowings and Credit Lines for additional information.
On March 7, 2025, we entered into a five-year committed credit facility agreement with a syndicate of banks which provides for
up to $2 billion of borrowings, with the option to increase borrowings up to $3 billion in total with lender approval. The facility
matures on March 7, 2030, with options to extend the maturity date up to an additional two years. This facility replaces the prior
$2 billion five-year credit facility agreement entered into on March 11, 2022, which would have matured on March 11, 2027. Refer
to Note 5 — Short-Term Borrowings and Credit Lines for additional information.
We currently have long-term debt ratings of A+ and A1 from Standard and Poor's Corporation and Moody's Investor Services,
respectively. As it relates to our committed credit facilities entered into on March 7, 2025, if our long-term debt ratings were to
decline, the facility fees and interest rates would increase. Conversely, if our long-term debt ratings were to improve, the facility
fees and interest rates would decrease. In July 2025, Standard and Poor's Corporation downgraded our debt rating from AA- to
A+, and, as a result, our facility fees and interest rates will increase compared to what they were prior to the downgrade. Refer to
Note 5 — Short-Term Borrowings and Credit Lines for additional information. Changes in our long-term debt ratings would not
trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facilities.
Under these facilities, we have agreed to various covenants. These covenants include limits on the disposal of assets and the
amount of debt secured by liens we may incur. In the event we were to have any borrowings outstanding under these facilities,
failed to meet any covenant and were unable to obtain a waiver from a majority of the banks in the applicable syndicate, any
borrowings would become immediately due and payable. As of May 31, 2025, we were in full compliance with each of these
covenants, and we believe it is unlikely we will fail to meet any of these covenants in the foreseeable future.
46
NIKE, INC.
Liquidity is also provided by our $3 billion commercial paper program. As of and for the fiscal years ended May 31, 2025 and
2024, we did not have any borrowings outstanding under our $3 billion program. We may issue commercial paper or other debt
securities depending on general corporate needs.
To date, we have not experienced difficulty accessing the capital or credit markets; however, future volatility may increase costs
associated with issuing commercial paper or other debt instruments or affect our ability to access those markets.
As of May 31, 2025, we had Cash and equivalents and Short-term investments totaling $9.2 billion, primarily consisting of
commercial paper, corporate notes, deposits held at major banks, money market funds, U.S. Treasury obligations and other
investment grade fixed-income securities. Our fixed-income investments are exposed to both credit and interest rate risk. All of
our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of
May 31, 2025, the weighted-average days to maturity of our cash equivalents and short-term investments portfolio was 96 days.
We believe that existing Cash and equivalents, Short-term investments and cash generated by operations, together with access
to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs for the next
twelve months and beyond.
Our material cash requirements as of May 31, 2025, were as follows:
•
Debt Obligations — Refer to Note 5 — Short-Term Borrowings and Credit Lines and Note 6 — Long-Term Debt in the
accompanying Notes to the Consolidated Financial Statements for additional information.
•
Operating Leases — Refer to Note 17 — Leases in the accompanying Notes to the Consolidated Financial Statements
for additional information.
•
Endorsement Contracts — As of May 31, 2025, we had endorsement contract obligations, including associated
marketing commitments, of $16.2 billion, with $1.6 billion payable within 12 months, primarily representing approximate
amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete, public figure,
sport team and league endorsers of our products. Actual payments under some contracts may be higher than these
amounts as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or
royalties on product sales in future periods. Actual payments under some contracts may also be lower as these
contracts include provisions for reduced payments if athletic performance declines in future periods. In addition to the
cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine
how much we will spend on this product on an annual basis as the amount of product provided to the endorsers will
depend on many factors and the contracts generally do not stipulate a minimum amount of cash to be spent on the
product.
•
Product Purchase Obligations — As of May 31, 2025, we had product purchase obligations of $7.9 billion, all of which
are payable within the next 12 months. Product purchase obligations represent agreements (including open purchase
orders) to purchase products in the ordinary course of business that are enforceable and legally binding and specify all
significant terms. We generally order product at least four to five months in advance of sale based primarily on
advanced orders received from external wholesale customers and internal orders from our direct to consumer
operations. In some cases, prices are subject to change throughout the production process.
•
Other Purchase Obligations — As of May 31, 2025, we had $3.1 billion of other purchase obligations, with $1.9 billion
payable within the next 12 months. Other purchase obligations primarily include technology investments, construction,
service and marketing commitments made in the ordinary course of business. The amounts represent the minimum
payments required by legally binding contracts and agreements that specify all significant terms, and may include open
purchase orders for non-product purchases.
As of May 31, 2025, we had approximately $260 million in estimated future income tax obligations payable within 12 months
related to expected resolution with the Internal Revenue Service of certain U.S. federal income tax matters for fiscal years 2017
through 2019 related to transfer pricing adjustments, research and development credits and other items.
As a part of the transition tax related to the Tax Cuts and Jobs Act, as of May 31, 2025, we had $268 million in estimated future
cash payments payable within the next 12 months. These amounts represent the transition tax on deemed repatriation of
undistributed earnings of foreign subsidiaries, which are reflected net of foreign tax credits we utilized.
In addition to the above, we have long-term obligations for uncertain tax positions and various post-retirement benefits for which
we are not able to reasonably estimate when cash payments will occur. Refer to Note 7 — Income Taxes and Note 11 — Benefit
Plans in the accompanying Notes to the Consolidated Financial Statements for additional information related to uncertain tax
positions and post-retirement benefits, respectively.
Refer to Note 16 — Commitments and Contingencies in the accompanying Notes to the Consolidated Financial Statements for
additional information related to our off-balance sheet arrangements, bank guarantees and letters of credit.
2025 FORM 10-K
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Management of NIKE, Inc. is responsible for the information and representations contained in this Annual Report. The financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America
("U.S. GAAP") and include certain amounts based on our best estimates and judgments. Other financial information in this
Annual Report is consistent with these financial statements.
Our accounting systems include controls designed to reasonably assure assets are safeguarded from unauthorized use or
disposition and provide for the preparation of financial statements in conformity with U.S. GAAP. These systems are
supplemented by the selection and training of qualified financial personnel and an organizational structure providing for
appropriate segregation of duties.
An internal corporate audit department reviews the results of its work with the Audit & Finance Committee of the Board of
Directors, presently comprised of three outside, independent directors. The Audit & Finance Committee is responsible for the
appointment of the independent registered public accounting firm and reviews, with the independent registered public accounting
firm, management and the internal corporate audit staff, the scope and the results of the annual audit, the effectiveness of the
accounting control system and other matters relating to the financial affairs of NIKE as the Audit & Finance Committee deems
appropriate. The independent registered public accounting firm and the internal corporate auditors have full access to the Audit &
Finance Committee, with and without the presence of management, to discuss any appropriate matters.
52
NIKE, INC.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rule 13(a) - 15(f) and Rule 15(d) - 15(f) of the Securities Exchange Act of 1934, as amended. Internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the
United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the
Company; (ii) 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 our management and directors; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company 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.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management
conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was
effective as of May 31, 2025.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited (1) the Consolidated Financial
Statements and (2) the effectiveness of our internal control over financial reporting as of May 31, 2025, as stated in their report
herein.
Elliott Hill
Matthew Friend
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
2025 FORM 10-K
53
NIKE, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MAY 31,
2025
2024
2023
46,309 $
51,362 $
51,217
Cost of sales
26,519
28,475
28,925
Gross profit
19,790
22,887
22,292
Demand creation expense
4,689
4,285
4,060
Operating overhead expense
11,399
12,291
12,317
16,088
16,576
16,377
Interest expense (income), net
(107)
(161)
(6)
Other (income) expense, net
(76)
(228)
(280)
Income before income taxes
3,885
6,700
6,201
666
1,000
1,131
$
3,219 $
5,700 $
5,070
Basic
$
2.17 $
3.76 $
3.27
Diluted
$
2.16 $
3.73 $
3.23
(In millions, except per share data)
Revenues
$
Total selling and administrative expense
Income tax expense
NET INCOME
Earnings per common share:
Weighted average common shares outstanding:
Basic
1,484.9
1,517.6
1,551.6
Diluted
1,487.6
1,529.7
1,569.8
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
56
NIKE, INC.
NIKE, INC.
CONSOLIDATED BALANCE SHEETS
MAY 31,
2025
(In millions)
2024
ASSETS
Current assets:
Cash and equivalents
$
7,464 $
9,860
Short-term investments
1,687
1,722
Accounts receivable, net
4,717
4,427
Inventories
7,489
7,519
Prepaid expenses and other current assets
2,005
1,854
23,362
25,382
Property, plant and equipment, net
4,828
5,000
Operating lease right-of-use assets, net
2,712
2,718
259
259
Total current assets
Identifiable intangible assets, net
Goodwill
240
240
5,178
4,511
$
36,579 $
38,110
$
— $
1,000
Deferred income taxes and other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
Notes payable
5
6
3,479
2,851
502
477
5,911
5,725
669
534
Total current liabilities
10,566
10,593
Long-term debt
7,961
7,903
Operating lease liabilities
2,550
2,566
Deferred income taxes and other liabilities
2,289
2,618
—
—
—
—
Accounts payable
Current portion of operating lease liabilities
Accrued liabilities
Income taxes payable
Commitments and contingencies (Note 16)
Redeemable preferred stock
Shareholders' equity:
Common stock at stated value:
Class A convertible — 290 and 298 shares outstanding
Class B — 1,186 and 1,205 shares outstanding
Capital in excess of stated value
3
13,409
Accumulated other comprehensive income (loss)
(258)
53
Retained earnings (deficit)
(727)
965
13,213
14,430
36,579 $
38,110
Total shareholders' equity
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
58
3
14,195
NIKE, INC.
NIKE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
Cash provided (used) by operations:
Net income
Adjustments to reconcile net income to net cash provided (used) by operations:
Depreciation and amortization
Deferred income taxes
Stock-based compensation
Impairment and other
Net foreign currency adjustments
Changes in certain working capital components and other assets and liabilities:
(Increase) decrease in accounts receivable
(Increase) decrease in inventories
2025
$
(Increase) decrease in prepaid expenses, operating lease right-of-use assets and
other current and non-current assets
Increase (decrease) in accounts payable, accrued liabilities, operating lease
liabilities and other current and non-current liabilities
Cash provided (used) by operations
Cash provided (used) by investing activities:
Purchases of short-term investments
Maturities of short-term investments
Sales of short-term investments
Additions to property, plant and equipment
Other investing activities
Cash provided (used) by investing activities
Cash provided (used) by financing activities:
Increase (decrease) in notes payable, net
Repayment of borrowings
Proceeds from exercise of stock options and other stock issuances
Repurchase of common stock
Dividends — common and preferred
Other financing activities
Cash provided (used) by financing activities
Effect of exchange rate changes on cash and equivalents
Net increase (decrease) in cash and equivalents
Cash and equivalents, beginning of year
CASH AND EQUIVALENTS, END OF YEAR
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, net of capitalized interest
Income taxes
Non-cash additions to property, plant and equipment
Dividends declared and not paid
$
$
YEAR ENDED MAY 31,
2024
2023
3,219 $
5,700 $
5,070
775
(288)
709
33
37
796
(497)
804
48
(138)
703
(117)
755
156
(213)
(257)
120
(329)
908
489
(133)
(224)
(260)
(644)
(426)
3,698
397
7,429
(225)
5,841
(3,234)
319
3,062
(430)
8
(275)
(4,767)
2,269
4,219
(812)
(15)
894
(6,059)
3,356
4,184
(969)
52
564
(1)
(1,000)
551
(2,985)
(2,300)
(85)
(5,820)
1
(2,396)
9,860
7,464 $
—
—
667
(4,250)
(2,169)
(136)
(5,888)
(16)
2,419
7,441
9,860 $
(4)
(500)
651
(5,480)
(2,012)
(102)
(7,447)
(91)
(1,133)
8,574
7,441
389 $
1,226
184
593
381 $
1,299
160
558
347
1,517
211
524
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
2025 FORM 10-K
59
NIKE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
CLASS A
CLASS B
(In millions, except per share data)
Balance at May 31, 2022
SHARES
AMOUNT
305 $
—
Stock options exercised
Conversion to Class B Common Stock
CAPITAL IN
ACCUMULATED
EXCESS
OTHER RETAINED
OF STATED COMPREHENSIVE EARNINGS
SHARES AMOUNT
VALUE INCOME (LOSS) (DEFICIT)
1,266 $
8
—
3 $ 11,484 $
318 $
(51)
4
Stock-based compensation
421
—
(378)
130
305 $
—
1,227 $
7
(7)
(41)
5
Stock-based compensation
3 $ 12,412 $
231 $
1,358 $14,004
432
—
(347)
108
(3,907)
(4,254)
(2,203)
(2,203)
17
125
5,700
5,700
804
(178)
298 $
—
1,205 $
6
(8)
3 $ 13,409 $
53 $
(178)
965 $14,430
315
315
8
Repurchase of Class B Common Stock
Dividends on common stock ($1.570 per
share) and preferred stock ($0.10 per
share)
Issuance of shares to employees, net of
shares withheld for employee taxes
(38)
5
Stock-based compensation
—
(342)
104
(2,613)
(2,955)
(2,337)
(2,337)
39
143
709
709
Net income
3,219
Other comprehensive income (loss)
(311)
290 $
—
1,186 $
5,070
(87)
804
Stock options exercised
3 $ 14,195 $
(258) $
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.
NIKE, INC.
132
432
Other comprehensive income (loss)
60
2
755
Net income
Balance at May 31, 2025
(2,059)
7
Repurchase of Class B Common Stock
Dividends on common stock ($1.450 per
share) and preferred stock ($0.10 per
share)
Issuance of shares to employees, net of
shares withheld for employee taxes
Conversion to Class B Common Stock
(2,059)
(87)
Stock options exercised
Balance at May 31, 2024
(5,509)
5,070
Other comprehensive income (loss)
Conversion to Class B Common Stock
(5,131)
755
Net income
Balance at May 31, 2023
3,476 $15,281
421
—
Repurchase of Class B Common Stock
Dividends on common stock ($1.325 per
share) and preferred stock ($0.10 per
share)
Issuance of shares to employees, net of
shares withheld for employee taxes
TOTAL
3,219
(311)
(727) $13,213
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Summary of Significant Accounting Policies
62
Note 2
Property, Plant and Equipment
68
Note 3
Accrued Liabilities
68
Note 4
Fair Value Measurements
69
Note 5
Short-Term Borrowings and Credit Lines
70
Note 6
Long-Term Debt
71
Note 7
Income Taxes
72
Note 8
Redeemable Preferred Stock
75
Note 9
Common Stock and Stock-Based Compensation
75
Note 10
Earnings Per Share
77
Note 11
Benefit Plans
77
Note 12
Risk Management and Derivatives
78
Note 13
Accumulated Other Comprehensive Income (Loss)
81
Note 14
Revenues
82
Note 15
Segment Information
84
Note 16
Commitments and Contingencies
87
Note 17
Leases
87
Note 18
Restructuring
88
Note 19
Supplier Finance Programs
88
2025 FORM 10-K
61
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
NIKE, Inc. is a worldwide leader in the design, development and worldwide marketing and selling of athletic footwear, apparel,
equipment, accessories and services. NIKE, Inc. portfolio brands include the NIKE Brand, Jordan Brand and Converse. The NIKE
Brand is focused on performance athletic footwear, apparel, equipment, accessories and services across Men's, Women's and
Kids', amplified with sport-inspired lifestyle products carrying the Swoosh trademark, as well as other NIKE Brand trademarks.
The Jordan Brand is focused on athletic and casual footwear, apparel and accessories using the Jumpman trademark. Sales and
operating results of Jordan Brand products are reported within the respective NIKE Brand geographic operating segments.
Converse designs, distributes, licenses and sells casual sneakers, apparel and accessories under the Converse, Chuck Taylor,
All Star, One Star, Star Chevron and Jack Purcell trademarks. In some markets outside the U.S., these trademarks are licensed
to third parties who design, distribute, market and sell similar products. Operating results of the Converse brand are reported on a
stand-alone basis.
BASIS OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of NIKE, Inc. and its subsidiaries (the "Company" or "NIKE"). All
significant intercompany transactions and balances have been eliminated.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to
make estimates, including estimates relating to assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these estimates.
REVENUE RECOGNITION
Revenue transactions associated with the sale of NIKE Brand footwear, apparel and equipment, as well as Converse products,
comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or direct
to consumer channels. The Company satisfies the performance obligation and records revenues when transfer of control to the
customer has occurred, based on the terms of sale. A customer is considered to have control once they are able to direct the use
and receive substantially all of the benefits of the product.
Control is transferred to wholesale customers upon shipment or upon receipt depending on the country of the sale and the
arrangement with the customer. Control transfers to retail store customers at the time of sale and to substantially all digital
commerce customers upon shipment. The transaction price is determined based upon the invoiced sales price, less anticipated
sales returns, discounts and claims from customers. Payment terms for wholesale transactions depend on the agreement with
the customer, which may be governed by the country of sale, and payment is generally required within 90 days or less of
shipment to or receipt by the wholesale customer. Payment is due at the time of sale for retail store and digital commerce
transactions.
Consideration for trademark licensing contracts is earned through sales-based or usage-based royalty arrangements, and the
associated revenues are recognized over the license period as earned.
Taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing
transaction, and are collected by the Company from a customer, are excluded from Revenues and Cost of sales in the
Consolidated Statements of Income. Shipping and handling costs associated with outbound freight after control over a product
has transferred to a customer are accounted for as fulfillment costs and are included in Cost of sales when the related revenues
are recognized.
SALES-RELATED RESERVES
Consideration promised in the Company's contracts with customers is variable due to anticipated reductions, such as sales
returns, discounts and claims from customers. The Company estimates the most likely amount it will be entitled to receive and
records an anticipated reduction against Revenues, with an offsetting increase to Accrued liabilities at the time revenues are
recognized. The related estimated cost of inventory for product returns is recorded as a reduction to Cost of sales with an
offsetting increase to Prepaid expenses and other current assets.
The provision for anticipated sales returns consists of both contractual return rights and discretionary authorized returns.
Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to
be granted at a later date.
62
NIKE, INC.
Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of
outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts
and claims expected but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently
uncertain and thus may differ from estimates recorded. If actual or expected future returns, discounts or claims are significantly
greater or lower than the reserves established, a reduction or increase to net Revenues is recorded in the period in which such
determination is made.
COST OF SALES
Cost of sales consists primarily of inventory costs, as well as warehousing costs (including the cost of warehouse labor), shipping
and handling costs, third-party royalties, certain foreign currency hedge gains and losses and product design costs.
DEMAND CREATION EXPENSE
Demand creation expense consists of brand marketing expense and sports marketing expense.
Brand marketing expense includes advertising and promotion costs such as production and media costs, digital marketing
expense, brand events and retail brand presentation costs. Advertising production costs are expensed the first time an
advertisement is run. Advertising media costs are expensed when the advertisement appears. Costs related to brand events are
expensed when the event occurs. Costs related to retail brand presentation are expensed when the presentation is complete and
delivered.
Sports marketing expense includes expenses related to endorsement contracts, complimentary product and sports marketing
events. A significant amount of the Company's promotional expenses result from payments under endorsement contracts. In
general, endorsement payments are expensed on a straight-line basis over the term of the contract. However, certain contracts
contain elements that may be accounted for differently based upon the facts and circumstances of each individual contract.
Prepayments made under contracts are included in Prepaid expenses and other current assets or Deferred income taxes and
other assets depending on the period to which the prepayment applies.
Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sport (e.g., winning a
championship). The Company records Demand creation expense for these amounts when the endorser achieves the specific
goal.
Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an
extended period of time (e.g., maintaining a specified ranking in a sport for a year). When the Company determines payments are
probable, the amounts are reported in Demand creation expense ratably over the contract period based on the Company's best
estimate of the endorser's performance. In these instances, to the extent actual payments to the endorser differ from the
Company's estimate due to changes in the endorser's performance, adjustments to Demand creation expense may be recorded
in a future period.
Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products,
which the Company records in Cost of sales as the related sales occur. For contracts containing minimum guaranteed royalty
payments, the Company records the amount of any guaranteed payment in excess of that earned through sales of product within
Demand creation expense.
Through cooperative advertising programs, the Company reimburses its wholesale customers for certain costs of advertising the
Company's products. To the extent the Company receives a distinct good or service in exchange for consideration paid to the
customer that does not exceed the fair value of that good or service, the amounts reimbursed are recorded in Demand creation
expense.
Total Demand creation expense was $4,689 million, $4,285 million and $4,060 million for the years ended May 31, 2025, 2024
and 2023, respectively. Prepaid demand creation expenses totaled $1,333 million and $814 million at May 31, 2025 and 2024,
respectively, of which $498 million and $420 million, respectively, were recorded in Prepaid expenses and other current assets,
and $835 million and $394 million, respectively, were recorded in Deferred income taxes and other assets.
OPERATING OVERHEAD EXPENSE
Operating overhead expense consists primarily of wage and benefit-related expenses and other administrative expenses, such
as research and development costs, bad debt expense, rent, depreciation and amortization and costs related to professional
services, certain technology investments, meetings and travel.
2025 FORM 10-K
63
CASH AND EQUIVALENTS
Cash and equivalents represent cash and short-term, highly liquid investments, that are both readily convertible to known
amounts of cash and so near their maturity they present insignificant risk of changes in value because of changes in interest
rates, with maturities three months or less at the date of purchase.
SHORT-TERM INVESTMENTS
Short-term investments consist of highly liquid investments with maturities over three months at the date of purchase. At May 31,
2025 and 2024, Short-term investments consisted of available-for-sale debt securities, which are recorded at fair value with
unrealized gains and losses reported, net of tax, in Accumulated other comprehensive income (loss), unless unrealized losses
are determined to be unrecoverable. Realized gains and losses on the sale of securities are determined by specific identification.
The Company considers all available-for-sale debt securities, including those with maturity dates beyond 12 months, as available
to support current operational liquidity needs and, therefore, classifies all securities with maturity dates beyond three months at
the date of purchase as current assets within Short-term investments on the Consolidated Balance Sheets.
Refer to Note 4 — Fair Value Measurements for more information on the Company's Short-term investments.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE
Accounts receivable, net consist primarily of amounts due from customers. The Company makes ongoing estimates relating to
the collectability of its accounts receivable and maintains an allowance for expected losses resulting from the inability of its
customers to make required payments. In addition to judgments about the creditworthiness of significant customers based on
ongoing credit evaluations, the Company considers historical levels of credit losses, as well as macroeconomic and industry
trends to determine the amount of the allowance. The allowance for uncollectible accounts receivable was $27 million and $35
million as of May 31, 2025 and 2024, respectively.
INVENTORY VALUATION
Inventory costs primarily consist of product cost from the Company's suppliers, as well as inbound freight, import duties, taxes,
insurance, logistics and other handling fees. Inventories, substantially all of which are finished goods, are stated at lower of cost
and net realizable value and valued on either an average or a specific identification cost basis. In some instances, the Company
ships products directly from its suppliers to the customer, with the related inventory and cost of sales recognized on a specific
identification basis.
If the net realizable value of inventory is estimated to be less than the cost of the inventory, a reserve is recorded equal to the
difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to Cost
of sales. As of May 31, 2025, the Company's inventory reserve was $233 million compared to $155 million as of May 31, 2024.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis for land improvements,
buildings and leasehold improvements over 2 to 40 years and for machinery and equipment over 2 to 15 years.
Depreciation of assets used in manufacturing, warehousing and product distribution are recorded in Cost of sales. Depreciation
of all other assets are recorded in Operating overhead expense.
SOFTWARE DEVELOPMENT COSTS
Expenditures for major software purchases and software developed for internal use are capitalized and amortized over 2 to 12
years on a straight-line basis, once ready for their intended use. The Company's policy provides for the capitalization of external
direct costs associated with developing or obtaining internal use computer software. The Company also capitalizes certain payroll
and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of
capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated
with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as
incurred.
64
NIKE, INC.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the carrying value of long-lived assets or asset groups to be used in operations whenever events or
changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an
impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant
adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the
observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the
recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected
undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life
of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not
recoverable, the Company will estimate the fair value of the asset group using appropriate valuation methodologies, which would
typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset
group's carrying amount and its estimated fair value.
GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS
The Company performs annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of
each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a
reporting unit or an intangible asset with an indefinite life below its carrying value.
For purposes of testing goodwill for impairment, the Company allocates goodwill across its reporting units, which are considered
the Company's operating segments. For both goodwill and indefinite-lived intangible assets, which primarily consist of acquired
trade names and trademarks, the Company may first assess qualitative factors to determine whether it is more likely than not that
the fair value of a reporting unit or an intangible asset with an indefinite life is less than its carrying amount. If, after assessing the
totality of events and circumstances, the Company determines it is more likely than not that the fair value of a reporting unit or
indefinite-lived intangible asset is greater than its carrying amount, an impairment test is unnecessary.
If an impairment test is necessary, the Company will estimate the fair value of the related reporting unit or indefinite-lived
intangible asset. If the carrying value of a reporting unit or indefinite-lived intangible asset exceeds its fair value, the goodwill of
that reporting unit or indefinite-lived intangible asset is determined to be impaired and the Company will record an impairment
charge equal to the excess of the carrying value over the related fair value.
There were no impairment losses for the year ended May 31, 2025, and an immaterial amount of accumulated impairment losses
as of May 31, 2024.
OPERATING LEASES
The Company primarily leases retail store space, certain distribution and warehouse facilities, office space, equipment and other
non-real estate assets. The Company determines if an arrangement is a lease at inception and begins recording lease activity at
the commencement date, which is generally the date in which the Company takes possession of or controls the physical use of
the asset. Lease components are not separated from non-lease components for real estate leases within the Company's lease
portfolio. Right-of-use ("ROU") assets and lease liabilities are recognized based on the present value of lease payments over the
lease term with lease expense recognized on a straight-line basis. The Company's incremental borrowing rate is used to
determine the present value of future lease payments unless the implicit rate is readily determinable.
Lease agreements may contain rent escalation clauses, renewal or termination options, rent holidays or certain landlord
incentives, including tenant improvement allowances. ROU assets include amounts for scheduled rent increases and are reduced
by the amount of lease incentives. The lease term includes the non-cancelable period of the lease and options to extend or
terminate the lease when it is reasonably certain the Company will exercise those options. The Company does not record leases
with an initial term of 12 months or less on the Consolidated Balance Sheets and recognizes related lease payments in the
Consolidated Statements of Income on a straight-line basis over the lease term. Certain lease agreements include variable lease
payments, which are based on a percent of retail sales over specified levels or adjust periodically for inflation as a result of
changes in a published index, primarily the Consumer Price Index, and are expensed as incurred.
FAIR VALUE MEASUREMENTS
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives, equity
securities and available-for-sale debt securities. Fair value is the price the Company would receive to sell an asset or pay to
transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level
hierarchy that prioritizes fair value measurements based on the types of inputs used, as follows:
2025 FORM 10-K
65
NOTE 2 — PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net included the following:
MAY 31,
(Dollars in millions)
Land and improvements
Buildings
Machinery and equipment
Internal-use software
Leasehold improvements
Construction in process
Total property, plant and equipment, gross
Less accumulated depreciation and amortization
TOTAL PROPERTY, PLANT AND EQUIPMENT, NET
2025
$
$
2024
334 $
3,510
2,954
1,693
2,037
404
10,932
6,104
4,828 $
329
3,439
3,123
1,807
2,023
193
10,914
5,914
5,000
Capitalized interest was not material for the fiscal years ended May 31, 2025, 2024 and 2023.
NOTE 3 — ACCRUED LIABILITIES
Accrued liabilities included the following:
MAY 31,
(Dollars in millions)
Sales-related reserves
Compensation and benefits, excluding taxes
Dividends payable
Endorsement compensation
Other
TOTAL ACCRUED LIABILITIES
68
NIKE, INC.
2025
$
$
2024
1,834 $
1,245
598
481
1,753
5,911 $
1,282
1,291
563
578
2,011
5,725
NOTE 4 — FAIR VALUE MEASUREMENTS
The following tables present information about the Company's financial assets measured at fair value on a recurring basis as of
May 31, 2025 and 2024, and indicate the level in the fair value hierarchy in which the Company classifies the fair value
measurement.
MAY 31, 2025
(Dollars in millions)
Cash
Level 1:
U.S. Treasury securities
Level 2:
Commercial paper and bonds
Money market funds
Time deposits
U.S. Agency securities
Total Level 2
TOTAL
ASSETS AT FAIR VALUE
$
$
CASH AND EQUIVALENTS
SHORT-TERM INVESTMENTS
1,221 $
1,221 $
—
1,046
—
1,046
675
5,902
297
10
6,884
9,151 $
45
5,902
295
1
6,243
7,464 $
630
—
2
9
641
1,687
MAY 31, 2024
(Dollars in millions)
Cash
ASSETS AT FAIR VALUE
$
CASH AND EQUIVALENTS
SHORT-TERM INVESTMENTS
1,222 $
1,222 $
—
1,175
155
1,020
591
8,119
440
35
9,185
11,582 $
17
8,119
347
—
8,483
9,860 $
574
—
93
35
702
1,722
Level 1:
U.S. Treasury securities
Level 2:
Commercial paper and bonds
Money market funds
Time deposits
U.S. Agency securities
Total Level 2
TOTAL
$
As of May 31, 2025, the Company held $776 million of available-for-sale debt securities with maturity dates within one year and
$911 million with maturity dates over one year and less than five years in Short-term investments on the Consolidated Balance
Sheets. The fair value of the Company's available-for-sale debt securities approximates their amortized cost.
Included in Interest expense (income), net was interest income related to the Company's investment portfolio of $404 million,
$430 million and $297 million for the years ended May 31, 2025, 2024 and 2023, respectively.
The Company records the assets and liabilities of its derivative financial instruments on a gross basis on the Consolidated
Balance Sheets. The Company's derivative financial instruments are subject to master netting arrangements that allow for the
offset of assets and liabilities in the event of default or early termination of the contract. Any amounts of cash collateral received
related to these instruments associated with the Company's credit-related contingent features are recorded in Cash and
equivalents and Accrued liabilities, the latter of which would further offset against the Company's derivative asset balance. Any
amounts of cash collateral posted related to these instruments associated with the Company's credit-related contingent features
are recorded in Prepaid expenses and other current assets, which would further offset against the Company's derivative liability
balance. Cash collateral received or posted related to the Company's credit-related contingent features is presented in the Cash
provided (used) by operations component of the Consolidated Statements of Cash Flows. The Company does not recognize
amounts of non-cash collateral received, such as securities, on the Consolidated Balance Sheets. For additional information
related to credit risk, refer to Note 12 — Risk Management and Derivatives.
The following tables present information about the Company's derivative assets and liabilities measured at fair value on a
recurring basis and indicate the level in the fair value hierarchy in which the Company classifies the fair value measurement:
2025 FORM 10-K
69
MAY 31, 2025
DERIVATIVE ASSETS
(Dollars in millions)
ASSETS AT
FAIR VALUE
OTHER
CURRENT
ASSETS
DERIVATIVE LIABILITIES
OTHER
LONG-TERM
ASSETS
LIABILITIES
AT FAIR
ACCRUED
VALUE LIABILITIES
OTHER
LONG-TERM
LIABILITIES
Level 2:
Foreign exchange forwards and options(1)
Interest rate swaps(1)
TOTAL
(1)
$
107 $
24
85 $
—
22
24
$
368 $
3
226 $
—
142
3
$
131 $
85 $
46
$
371 $
226 $
145
If the foreign exchange and interest rate swap derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability
positions each would have been reduced by $131 million as of May 31, 2025. As of that date, the Company posted $166 million cash collateral to
various counterparties on the derivative liability balance and no amount of collateral was received from counterparties on the derivative asset balance.
MAY 31, 2024
DERIVATIVE ASSETS
(Dollars in millions)
ASSETS AT
FAIR VALUE
OTHER
CURRENT
ASSETS
DERIVATIVE LIABILITIES
OTHER
LONG-TERM
ASSETS
LIABILITIES
AT FAIR
ACCRUED
VALUE LIABILITIES
OTHER
LONG-TERM
LIABILITIES
Level 2:
Foreign exchange forwards and options(1)
Interest rate swaps(1)
TOTAL
(1)
$
$
343 $
—
343 $
299 $
—
299 $
44
—
44
$
$
120 $
31
151 $
115 $
—
115 $
5
31
36
If the foreign exchange and interest rate swap derivative instruments had been netted on the Consolidated Balance Sheets, the asset and liability
positions each would have been reduced by $142 million as of May 31, 2024. As of that date, the Company received $112 million of cash collateral
from various counterparties on the derivative asset balance and posted $10 million cash collateral on the derivative liability balance.
For additional information related to the Company's derivative financial instruments, refer to Note 12 — Risk Management and
Derivatives. For fair value information regarding Notes payable and Long-term debt, refer to Note 5 — Short-Term Borrowings
and Credit Lines and Note 6 — Long-Term Debt, respectively.
The carrying amounts of other current financial assets and other current financial liabilities approximate fair value.
NOTE 5 — SHORT-TERM BORROWINGS AND CREDIT LINES
The carrying amounts reflected on the Consolidated Balance Sheets for Notes payable approximate fair value.
On March 7, 2025, the Company entered into a 364-day committed credit facility agreement with a syndicate of banks, which
provides for up to $1 billion of borrowings, with an option to increase borrowings up to $1.5 billion in total with lender approval.
The facility matures on March 6, 2026, with an option to extend the maturity date an additional 364 days. This facility replaces the
prior $1 billion 364-day credit facility agreement entered into on March 8, 2024, which matured on March 7, 2025. In July 2025,
Standard and Poor's Corporation downgraded the Company's senior unsecured debt rating from AA- to A+. Based on the
Company's current long-term senior unsecured debt ratings of A+ and A1 from Standard and Poor's Corporation and Moody's
Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing Term Secured
Overnight Financing Rate ("Term SOFR") for the applicable interest period plus 0.725%. The facility fee is 0.04% of the total
undrawn commitment.
On March 7, 2025, the Company entered into a five-year committed credit facility agreement with a syndicate of banks which
provides for up to $2 billion of borrowings, with the option to increase borrowings up to $3 billion in total with lender approval. The
facility matures on March 7, 2030, with options to extend the maturity date up to an additional two years. This facility replaces the
prior $2 billion five-year credit facility agreement entered into on March 11, 2022, which would have matured on March 11, 2027.
In July 2025, Standard and Poor's Corporation downgraded the Company's senior unsecured debt rating from AA- to A+. Based
on the Company's current long-term senior unsecured debt ratings of A+ and A1 from Standard and Poor's Corporation and
Moody's Investor Services, respectively, the interest rate charged on any outstanding borrowings would be the prevailing Term
SOFR for the applicable interest period plus 0.725%. The facility fee is 0.05% of the total undrawn commitment.
As of and for the periods ended May 31, 2025 and 2024, no amounts were outstanding under any of the Company's committed
credit facilities.
70
NIKE, INC.
NOTE 6 — LONG-TERM DEBT
Long-term debt, net of unamortized premiums, discounts, debt issuance costs, and interest rate swap fair value adjustments
comprises the following:
BOOK VALUE
OUTSTANDING
AS OF MAY 31,
Scheduled Maturity (Dollars in millions)
Corporate Term Debt:(1)(2)
ORIGINAL PRINCIPAL INTEREST RATE INTEREST PAYMENTS
March 27, 2025
1,000
2.40 %
Semi-Annually
November 1, 2026
March 27, 2027
1,000
1,000
2.38 %
2.75 %
March 27, 2030
March 27, 2040(3)
1,500
1,000
May 1, 2043(3)
November 1, 2045(3)
November 1, 2046
March 27, 2050
2025
$
2024
— $
999
Semi-Annually
Semi-Annually
999
999
998
998
2.85 %
3.25 %
Semi-Annually
Semi-Annually
1,495
993
1,494
966
500
1,000
3.63 %
3.88 %
Semi-Annually
Semi-Annually
502
997
488
986
500
1,500
3.38 %
3.38 %
Semi-Annually
Semi-Annually
493
1,483
492
1,482
7,961
—
8,903
1,000
7,961 $
7,903
Total
Less Current Portion of Long-Term Debt
TOTAL LONG-TERM DEBT
$
(1)
These senior unsecured obligations rank equally with the Company's other unsecured and unsubordinated indebtedness.
(2)
The bonds are redeemable at the Company's option at a price equal to the greater of (i) 100% of the aggregate principal amount of the notes to be
redeemed or (ii) the sum of the present values of the remaining scheduled payments, plus in each case, accrued and unpaid interest. However, the
bonds also feature a par call provision, which allows for the bonds to be redeemed at a price equal to 100% of the aggregate principal amount of the
notes being redeemed, plus accrued and unpaid interest on or after the Par Call Date, which can range from one to six months prior to the scheduled
maturity, as defined in the respective notes.
(3)
The Company entered into interest rate swap agreements pursuant to which the Company receives fixed interest payments at the same rate as the
term debt and pays variable interest payments based on SOFR plus a fixed spread. At May 31, 2025, the notional amount outstanding of these swaps
was $2.4 billion and had interest rates payable that ranged from 3.6% to 4.5%. These swaps mature during fiscal 2034 and 2035.
The scheduled maturity of Long-term debt in each of the years ending May 31, 2026 through 2030, is $0 million, $2,000 million,
$0 million, $0 million and $1,500 million, respectively, at face value.
The Company's Long-term debt is recorded at adjusted cost, net of unamortized premiums, discounts, debt issuance costs, and
interest rate swap fair value adjustments. The fair value of long-term debt is estimated based upon quoted prices for similar
instruments or quoted prices for identical instruments in inactive markets (Level 2). The fair value of the Company's Long-term
debt, including the current portion but excluding interest rate swap fair value adjustments, was approximately $6,673 million and
$7,631 million as of May 31, 2025 and 2024, respectively.
2025 FORM 10-K
71
NOTE 7 — INCOME TAXES
Income before income taxes is as follows:
YEAR ENDED MAY 31,
(Dollars in millions)
Income before income taxes:
United States
Foreign
TOTAL INCOME BEFORE INCOME TAXES
2025
$
$
2024
3,220 $
665
3,885 $
2023
5,588 $
1,112
6,700 $
4,663
1,538
6,201
The provision for income taxes is as follows:
YEAR ENDED MAY 31,
2025
(Dollars in millions)
Current:
United States
Federal
State
$
Foreign
Total Current
2024
358 $
121
2023
782 $
201
430
184
475
954
514
1,497
634
1,248
Federal
State
(135)
(12)
(422)
(61)
(162)
(25)
Foreign
Total Deferred
(141)
(288)
(14)
(497)
70
(117)
666 $
1,000 $
1,131
Deferred:
United States
TOTAL INCOME TAX EXPENSE
$
A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows:
YEAR ENDED MAY 31,
Federal income tax rate
State taxes, net of federal benefit
Foreign earnings
U.S. tax regulations - foreign currency losses
Foreign-derived intangible income benefit
Stock-based compensation
Income tax audits and contingency reserves
U.S. research and development tax credit
Other, net
EFFECTIVE INCOME TAX RATE
2025
21.0%
2.0%
1.1%
-3.4%
-5.3%
1.5%
2.7%
-2.1%
-0.4%
17.1%
2024
21.0%
1.4%
-2.5%
0.0%
-4.8%
-0.5%
1.8%
-2.1%
0.6%
14.9%
2023
21.0%
1.5%
1.7%
0.0%
-6.1%
-1.1%
1.0%
-1.2%
1.4%
18.2%
The increase in the Company's effective tax rate for the fiscal year ended May 31, 2025 compared to the fiscal year ended
May 31, 2024 was primarily due to changes in the Company's earnings mix, decreased benefits from stock-based compensation
and one-time benefits recognized in fiscal 2024 including the impact of temporary relief provided by the Internal Revenue Service
("IRS") relating to U.S. foreign tax credit regulations. These impacts were partially offset by a one-time, non-cash deferred tax
benefit recognized in the third quarter of fiscal 2025 provided by U.S. tax regulations. On December 10, 2024, the U.S.
Department of Treasury published final regulations related to Internal Revenue Code (IRC) Section 987 foreign currency gains
and losses derived from translation of the operations, assets and liabilities of non-US qualified business units. While these
regulations are effective for the Company beginning June 1, 2025, they require computation of a pre-transition foreign currency
gain or loss to be included in the determination of future taxable income or loss. Based on the Company’s analysis of the
regulations and recognition of temporary differences impacting U.S. taxation of foreign earnings under Subpart F of the Internal
72
NIKE, INC.
RETAIL CREDIT RATING
METHODOLOGY
&
NKE REPORTS
CORPORATES
RATING
METHODOLOGY
Rating Methodology
Retail and Apparel
9 November 2023
TABLE OF CONTENTS
Scope
Rating approach
Retail and apparel scorecard
Discussion of the scorecard factors
Other considerations
Using the scorecard to arrive at a
scorecard-indicated outcome
Assigning issuer-level and
instrument-level ratings
Key rating assumptions
Limitations
Moody’s related publications
1
2
3
6
9
13
15
15
15
17
This rating methodology replaces the Retail methodology published in November 2021
and the Apparel methodology published in June 2021, which has been retired. While the
methodology reflects many of the same core principles as the 2021 Retail methodology,
we have expanded the scope of the methodology to include apparel companies and have
made some changes to the scorecard. We have updated the Business Profile sub-factor
descriptions, included a Profitability and Efficiency factor, and replaced the EBIT/Interest
Expense sub-factor of Leverage and Coverage with (EBITDA-Capex)/Interest Expense. We
have also updated some sub-factor names, thresholds and weights. In addition, this updated
methodology provides more discussion of other considerations that may be important for
companies in this sector. We have also made editorial changes to enhance readability.
Scope
Contacts
Laura Acres
+65.6398.8335
MD-Regional Corporate Finance
laura.acres@moodys.com
Marina Albo
+34.917.688.311
MD-EMEA Corporate Finance
marina.albo@moodys.com
Paloma San Valentin
+1.212.553.4111
MD-North America Corporate Finance
paloma.sanvalentin@moodys.com
Marianna Waltz, CFA
+55.11.3043.7309
MD-Corporate Finance
marianna.waltz@moodys.com
CLIENT SERVICES
Americas
1-212-553-1653
Asia Pacific
852-3551-3077
Japan
81-3-5408-4100
EMEA
44-20-7772-5454
This methodology applies to companies globally that are primarily* engaged in the purchase
of products from manufacturers or wholesalers and the sale of these products directly to
consumers in stores or online. This methodology also applies to companies globally that
primarily design, source or produce, and market apparel, footwear or fashion accessories,
with many of these companies having meaningful, growing or planned direct-to-consumer
sales.
Companies rated using this methodology vary significantly in their scale, business mix,
strategic profile, geographic reach and industry focus. They include operators of grocery
stores, department stores, drugstores, auto dealerships, home improvement stores,
value stores, apparel, footwear and fashion accessory stores, big-box retailers and mass
merchandisers. Companies rated using this methodology sell products under third-party
brands, their own brands or licensed brands.
Companies that are primarily engaged in the design, manufacture and distribution to
consumers through third parties of products that are not consumed or disposed of quickly
and that can be used for several years, such as furniture, mattresses, appliances and musical
instruments, are rated using our methodology for consumer durables. Companies that
are primarily engaged in the production and sale of consumer packaged goods that they
*The determination of a company’s primary business is generally based on the preponderance of the company’s business
risks, which are usually proportionate to the company’s revenues, earnings and cash flows.
MOODY'S INVESTORS SERVICE
CORPORATES
source or manufacture for distribution to consumers through third parties are rated using our methodology for consumer packaged
goods. Companies that generate revenues solely through licensing, with no retail or apparel operations, are rated using our
methodology for business and consumer services companies.
Rating approach
In this methodology, we explain our general approach to assessing the credit risk of issuers in the retail and apparel industry globally,
including the qualitative and quantitative factors that are likely to affect rating outcomes in this sector. We seek to incorporate all
material credit considerations in ratings and to take the most forward-looking perspective that visibility into these risks and mitigants
permits.
The following schematic illustrates our general framework for the analysis of retail and apparel companies, which includes the use of a
scorecard. The scorecard-indicated outcome is not expected to match the actual rating for each company. For more information, see
the “Other considerations” and “Limitations” sections.
Exhibit 1
Illustration of the retail and apparel methodology framework
* This factor has no sub-factors.
∞ Environmental, social and governance (ESG) considerations, including, where available, our opinions of exposure to them as expressed in Issuer Profile Scores (IPSs), may affect scorecard
factors and other considerations outside of the scorecard. For more information, see the “Other considerations” section.
† Some of the methodological considerations described in one or more cross-sector rating methodologies may be relevant to ratings in this sector. A link to a list of our sector and crosssector methodologies can be found in the “Moody’s related publications” section.
Source: Moody's Investors Service
2
9 November 2023
Rating Methodology: Retail and Apparel
3
CORPORATES
Weight
9 November 2023
Market Characteristics
10%
15%
Revenue (USD Billion)[1]
Factor: Business Profile (20%)
Factor: Scale (15%)
≥ $100
Aaa
$50 - $100
Aa
$25 - $50
A
$10 - $25
Baa
$4 - $10
Ba
$1.5 - $4
B
Market segment faces
Market segment faces very
Market segment faces low
Market segment faces
Market segment faces competitive Market segment faces high
essentially no competitive
low competitive threats and competitive threats and high moderate competitive threats threats and moderate barriers to competitive threats and low
threats and extremely high
very high barriers to entry.
barriers to entry.
and some barriers to entry.
entry.
barriers to entry.
barriers to entry.
Extremely low risk of
Very low risk of changing
Low risk of changing
Moderate risk of changing
Likely to have high exposure to
Essentially no risk of changing changing consumer
consumer preferences,
consumer preferences,
consumer preferences, including changing consumer preferences,
consumer preferences,
preferences, including
including demographic and
including demographic or
demographic or fashion trends.
including demographic or fashion
including demographic and
demographic and fashion
fashion trends.
fashion trends.
Clear signs of demand elasticity, trends.
fashion trends.
trends.
Demand is moderately
Demand exhibits some
with deferral of purchases due to Demand is elastic, with easily
Demand is inelastic, with
Demand is inelastic, and
inelastic, with deferral of
elasticity, with deferral of
macroeconomic pressures likely. deferred purchases under even
deferral of purchases
deferral of purchases is highly purchases unlikely under any purchases under certain
The economic strength of the
mild macroeconomic pressures.
extremely unlikely under any unlikely under any
macroeconomic condition.
macroeconomic pressures
countries of operation also
The economic strength of the
macroeconomic condition.
macroeconomic condition.
The economic strength of the possible. The economic
countries of operation also
The economic strength of the The economic strength of the countries of operation also
strength of the countries of
countries of operation also
countries of operation also
operation also influences this
score.
score.
score.
Retail and apparel scorecard
Exhibit 2
score.
Market segment faces
extremely high competitive
threats and very low barriers
to entry.
Very high exposure to volatile
consumer preferences or
fashion trends.
Highly elastic demand, with
elimination of purchases
certain even under mild
macroeconomic pressures.
The economic strength of the
countries of operation also
< $0.5
Ca
Rating Methodology: Retail and Apparel
Market segment faces very
high or intensifying
competitive threats and very
low barriers to entry.
Likely to have very high
exposure to changing
consumer preferences,
including demographic or
fashion trends.
Highly elastic demand, with
significantly deferred or
eliminated purchases even
under mild macroeconomic
pressures. The economic
strength of the countries of
operation also influences this
$0.5 - $1.5
Caa
For general information about how we use the scorecard and for a discussion of scorecard mechanics, please see the “Using the scorecard to arrive at a scorecard-indicated outcome”
section. The scorecard does not include or address every factor that a rating committee may consider in assigning ratings in this sector. Please see the “Other considerations” and
“Limitations” sections.
Retail and apparel scorecard
MOODY'S INVESTORS SERVICE
4
10%
9 November 2023
Revenue and Earnings
Stability
10%
Aaa
Aa
A
Baa
Ba
B
Caa
Ca
CORPORATES
Exceptional long-term track Strong long-term track record Very good long-term track
Good track record of organic A track record of organic revenue
record of organic revenue and of organic revenue and
record of organic revenue
revenue and operating income and operating income growth
operating income growth,
operating income growth,
growth and operating income growth except in periods of
except in periods of
with low volatility. Financial with modest volatility.
growth, with moderate
macroeconomic pressure.
macroeconomic pressure.
performance, including
Financial performance,
volatility. Financial
Financial performance,
Financial performance, including
operating margin or return on including operating margin or performance, including
including operating margin or operating margin or return on
capital, always meets or
return on capital, meets or
operating margin or return on return on capital, typically
capital, typically meets the
exceeds the company's
exceeds the company's
capital, meets or exceeds the meets the company's targets, company's targets and is at least
targets, is exceptional relative targets, is strong relative to
company's targets, is very
is good relative to its peer
on par with its peer group.
to its peer group and is highly its peer group and is highly
good relative to its peer group group and is generally
predictable.
predictable.
and is largely predictable.
predictable.
in line with its peer group.
Revenue and operating income
can be volatile, even without
macroeconomic pressure.
Financial performance, including
operating margin or return on
capital, may underperform the
Revenue or operating income
are in a steep or consistent
decline. Company has
generally underperformed its
financial targets or
meaningfully lagged its peer
group.
Rating Methodology: Retail and Apparel
Revenue and operating
income are on a declining
trend or are very volatile
without macroeconomic
pressure. Company has a
trend of underperforming its
financial targets or lagging its
peer group.
Established, dominant
Clear share leader in several One of a few leaders in
Among the leaders in the
A leader in the product categories Recognized competitor in the
Credible competitor in the
Niche competitor in the
positions in multiple broad
broad product categories,
several broad product
broad product categories and and geographies in which the
product categories and
product categories and
product categories and
product categories with
with broad geographic
categories and geographies. geographies in which the
company operates. Market
geographies in which the
geographies in which the
geographies in which the
global geographic diversity.
diversity. Market position is Market position is stable or
company operates. Market
position can be defended against company operates. Generally
company operates. Market
company operates. Ongoing
Growing market share, with stable or growing and easily growing, and easily defended position is stable or growing, most types of threats; however
stable market position, however position is variable or
declines in market position in
no anticipated threats from defended against any type of against almost any type of
and can be defended against some share erosion can occur.
some market share erosion is
declining. Operational
its product categories.
any front. Exceptional and
threat. Strong and highly
threat. Compelling and clearly most types of threats.
Differentiated consumer value
expected at times. Somewhat
capabilities lag those of peers, Significant investment or
very highly differentiated
differentiated consumer value differentiated consumer value Attractive and wellproposition, including a good
differentiated consumer value
including a few areas among strategic change is needed to
consumer value proposition, proposition, including a best- proposition, including an
differentiated consumer value customer experience across the
proposition, including a good
technology, store operations, make the consumer value
including a best-in-class
in-class customer experience excellent customer experience proposition, including a
channels relevant to consumers in customer experience across the
labor management, and
proposition competitive and
customer experience across across the channels relevant across the channels relevant seamless customer experience this category. Operational
channels relevant to consumers in supply chain and sourcing
to bring operational
channels. Flawless operational to consumers in this category. to consumers in this category. across the channels relevant capabilities are at least in line with this category. Operational
practices. Investment or
capabilities in line with those
capabilities, including
Industry-leading, world-class Very strong and leading
to consumers in this category. those of peers, including
capabilities are in line with those strategic change is needed to of peers. May have high
technology, store operations, operational capabilities,
operational capabilities,
Strong operational
technology, store operations,
of peers, including technology,
make the consumer value
vendor or geographic
labor management, and
including technology, store
including technology, store
capabilities that are above
labor management, and supply
store operations, labor
proposition and operations
concentration or operate in a
supply chain and sourcing
operations, labor
operations, labor
those of most peers, including chain and sourcing practices.
management, and supply chain
competitive. May have high product category that is
practices. Excellent
management, and supply
management, and supply
technology, store operations, Profitable reinvestment
and sourcing practices. No
vendor or geographic
recently emergent or in
opportunities for sustained
chain and sourcing practices. chain and sourcing practices. labor management, and
opportunities and no catch-up or significant catch-up or turnaround concentration or operate in a significant secular decline.
and highly profitable
Clear opportunities for
Good opportunities for
supply chain and sourcing
turnaround investment needs.
investment is required to ensure niche product category.
For apparel companies, an
reinvestment.
sustained, profitable
profitable reinvestment.
practices. Credible
May have modest geographic or long-term business sustainability. For apparel companies, a
undifferentiated offering or
For apparel companies, at
reinvestment.
For apparel companies, an
opportunities for profitable
vendor concentration.
May have meaningful vendor or
brand with low market
brand in a commoditized
least three dominant global For apparel companies,
extremely strong global brand reinvestment.
For apparel companies, a strong
geographic concentration or
presence in a commoditized, category, concentrated in one
brands within very broad
extremely strong global
with broad appeal across
For apparel companies, a very global brand, or several welloperate in a narrow product
narrowly defined category, or region on one continent, or
product categories that are
brands synonymous with the multiple product segments, strong global brand or several recognized regional brands with
category. For apparel companies, an untested brand with a
very high concentration in or
synonymous with the
category and with leading
high customer loyalty and no well-recognized regional
distinctive and sustainable appeal at least one strong brand in a
short track record, significant reliance on one customer.
category, with leading market market presence and very
customer concentration.
brands with appeal across
but within a moderately sized
niche category or in a
concentration in one broad
presence and unwavering
high customer loyalty.
multiple product segments, product category. Apparel
commoditized category where
channel or price range, or high
loyalty from customers.
good geographic
companies also may have
price is the main driver;
geographic or customer
diversification and low
moderate channel, price range,
concentration in one broad
concentration.
customer concentration.
geography or customer
channel or price range, or some
concentration.
geographic or customer
concentration.
Factor: Profitability and Efficiency (10%)
Market Position
Factor: Business Profile (20%)
Weight
MOODY'S INVESTORS SERVICE
5
15%
15%
10%
15%
0.5x - 1x
60% - 80%
16x - 20x
Aa
1x - 2x
40% - 60%
9x - 16x
A
2x - 3x
25% - 40%
4.5x - 9x
Baa
Expected to have extremely Expected to have very
Expected to have predictable Expected to have financial
conservative financial policies conservative financial policies; financial policies (including
policies (including risk and
(including risk and liquidity
(including risk and liquidity
risk and liquidity
liquidity management) that
management); very stable
management); stable metrics; management) that preserve balance the interests of
metrics; essentially no event minimal event risk that would creditor interests; although
creditors and shareholders;
risk that would cause a rating cause a rating transition; and modest event risk exists, the some risk that debt-funded
transition; and public
public commitment to strong effect on leverage is likely to acquisitions or shareholder
commitment to very strong credit profile over the long
be small and temporary;
distributions could lead to a
credit profile over the long
term.
strong commitment to a solid weaker credit profile.
term
credit profile.
≤ 0.5x
Aaa
4x - 6x
10% - 15%
1.25x - 2.5x
B
6x - 8x
5% - 10%
0.25x - 1.25x
Caa
Expected to have financial policies Expected to have financial policies Expected to have financial
(including risk and liquidity
(including risk and liquidity
policies (including risk and
management) that tend to favor management) that favor
liquidity management) that
shareholders over creditors; above- shareholders over creditors; high create elevated risk of debt
average financial risk resulting
financial risk resulting from
restructuring in varied
from shareholder distributions,
shareholder distributions,
economic environments.
acquisitions, or other significant acquisitions, or other significant
capital structure changes.
capital structure changes.
3x - 4x
15% - 25%
2.5x - 4.5x
Ba
Expected to have financial
policies (including risk and
liquidity management) that
create elevated risk of debt
restructuring even in healthy
economic environments.
> 8x
< 5%
< 0.25x
Ca
CORPORATES
9 November 2023
Rating Methodology: Retail and Apparel
[1] For the linear scoring scale, the Aaa endpoint value is $150 billion. A value of $150 billion or better equates to a numeric score of 0.5. The Ca endpoint value is zero. A value of zero equates to a numeric score of 20.5.
[2] For the linear scoring scale, the Aaa endpoint value is 0x. A value of 0x equates to a numeric score of 0.5. The Ca endpoint value is 12x. A value of 12x or worse equates to a numeric score of 20.5, as does a negative Debt/EBITDA value.
[3] For the linear scoring scale, when net debt is positive, the Aaa endpoint value is 100%. A value of 100% or better equates to a numeric score of 0.5. The Ca endpoint value is 0%. A value of 0% or worse equates to a numeric score of 20.5. When net
debt is negative and RCF is positive, the numeric score is 0.5. When net debt is negative and RCF is negative or zero, the numeric score is 20.5.
[4] For the linear scoring scale, the Aaa endpoint value is 25x. A value of 25x or better equates to a numeric score of 0.5. The Ca endpoint value is 0x. A value of 0x or worse equates to a numeric score of 20.5.
Source: Moody's Investors Service
Financial Policy
Expense
Factor: Financial Policy (15%)
[4]
Debt/EBITDA[2]
RCF/Net Debt[3]
(EBITDA-Capex)/Interest
Factor: Leverage and Coverage (40%)
Weight
MOODY'S INVESTORS SERVICE
MOODY'S INVESTORS SERVICE
CORPORATES
Discussion of the scorecard factors
In this section, we explain our general approach for scoring each scorecard factor or sub-factor, and we describe why they are
meaningful as credit indicators.
Factor: Scale (15% weight)
Why it matters
Scale is an important indicator of the overall depth of a company’s business and its success in attracting a variety of customers, as
well as the cost advantages that typically come with a larger revenue base. For retail and apparel companies, scale is also an important
indicator of their buying power with vendors and potential pricing power, both of which can result in meaningful competitive
advantages compared with those of smaller companies.
How we assess it for the scorecard
Scoring for this factor is based on one sub-factor: Revenue.
REVENUE
Scale is measured (or estimated in the case of forward-looking expectations) using total reported revenue in billions of US dollars.
Factor: Business Profile (20% weight)
Why it matters
The business profile of retail and apparel companies is important because it greatly influences their ability to generate sustainable
earnings and operating cash flows. Core aspects of a retail and apparel company's business profile are its market characteristics and
market position.
Strong market characteristics, such as high barriers to entry, low exposure to changing consumer preferences, or inelastic product
demand reduce a company's vulnerability to profit erosion.
The sustainability and strength of a retail and apparel company’s market position provide important indications of its ability to attract
and keep customers. The company's geographic diversity, operating model, supply chain management, brand strength, consumer value
proposition and labor management all have a large degree of influence on its market position.
This factor has two sub-factors:
Market Characteristics
Retail and apparel companies encounter different levels of demand volatility, elasticity and structural threats, depending on the
sub-sector in which they operate. Companies that are less exposed to competitive threats, or sell products with inelastic demand
characteristics and low exposure to changes in consumer preferences, typically have more stable operating performance. The
barriers to entry and competitive threats in a particular market segment can provide insight into the risk of market share erosion.
Generally, barriers to entry are highest in very concentrated markets and in those where shifts in market share are limited. For example,
pharmacies and convenience stores typically face lower competitive threats and higher barriers to entry than do retailers in other
market segments. In contrast, home goods, department stores and apparel retailers in the US often face relatively high competitive
threats and low barriers to entry, as these market segments are highly fragmented with significant online competition. Low demand
elasticity contributes to stable earnings even amid challenging macroeconomic conditions, for instance for luxury goods retailers
and some large grocery retailers. Also, exposure to changing consumer preferences can be a significant risk, for example for apparel
companies, particularly those with elevated fashion risk (e.g., teen fashion) or concentration in one type of product (e.g., denim
bottoms). In addition, companies can face varying degrees of risk stemming from the economic strength of their countries of operation.
Market Position
Retail and apparel companies with strong and sustainable market position typically have strong market share and brand strength
in several product categories, as well as broad geographic diversification and excellent operational capabilities. Companies with the
strongest market position typically have dominant brands in multiple broad product categories globally. Customer experience across
relevant channels, such as in-store or online, is also a primary driver of market position. Retail and apparel companies can have strong
6
9 November 2023
Rating Methodology: Retail and Apparel
CORPORATES
MOODY'S INVESTORS SERVICE
market position in a sub-sector, even if that sub-sector has challenging characteristics such as demand volatility and structural threats.
For example, some off-price retailers with a concentration in apparel and home goods, which are highly exposed to economic cycles
and the continued migration to e-commerce, have demonstrated strong performance because of their solid market position, including
execution strength, geographic diversity and very strong customer loyalty.
How we assess it for the scorecard
Scoring for this factor is qualitative and is based on two sub-factors: Market Characteristics and Market Position.
MARKET CHARACTERISTICS
Our qualitative assessment is based on a variety of considerations, including competitive threats that companies in the sector are
exposed to and barriers to entry for new entrants, which provide insight into the risk of market share erosion. We also consider the
performance of the company's market segment through various economic scenarios, which indicates the necessity of its products.
Historical experience and our expectations of the impact of varied macroeconomic conditions inform our views of demand elasticity.
We also consider price competition, the availability of substitute products and the risk of changing consumer preferences in the market
segment, in particular for apparel companies that may experience greater demand volatility because of rapid shifts in fashion trends.
Scoring for this sub-factor also reflects our assessment of the economic strength of the country or countries where the company
primarily operates, which typically sets a cap on the sub-factor score.
MARKET POSITION
Scoring for this sub-factor is based on our holistic view of a company’s competitive position and the strength of its brands, products
and customer experience. Considerations typically include the company's market share in its geographic locations and the trajectory
of its market share based on historical trends and our view of the sector's competitive dynamics. Retail and apparel companies with
dominant market positions globally typically receive a high score for this sub-factor. To assess the strength of a company’s brand, we
consider customer awareness and how much they value the brand in the regions where it is primarily sold. We may review third-party
data on brand awareness and market share as part of our analysis.
We consider the company's performance across channels, typically by reviewing the percentage of revenue from retail stores, its online
distribution channels and other relevant channels, and the number and location of its retail stores. We also review the robustness of
the company's operations, including merchandising, inventory and labor management, technology and sourcing practices, and we
typically consider opportunities for reinvestment, as well as the degree of vendor concentration. For apparel companies, those with
multiple brands that are extremely strong globally and have superior customer loyalty typically receive a high score for this sub-factor.
Generally, we do not expect a given company’s market characteristics or market position to exactly match each of the attributes listed
for a given scoring category. The sub-factor score is typically the alpha category for which the company has the greatest number of
characteristics. However, there may be cases in which one characteristic is sufficiently important to a particular company’s credit
profile that it has a large influence on the sub-factor score. For example, exposure to increasing competition from new entrants or a
reliance on sales in one country or region is likely to limit the score for the rating category, because the business risk in these cases is
typically high.
Factor: Profitability and Efficiency (10% weight)
Why it matters
Profits matter because they are needed to generate sustainable cash flow and maintain a competitive position, including sufficient
reinvestment in operations. Sustained high profitability is generally a strong indicator of substantial competitive advantages,
particularly when combined with evidence of stable or rising market share. A track record of strong revenue growth and meeting
financial targets can also indicate predictability of solid financial performance in the future.
How we assess it for the scorecard
Scoring for this factor is based on one sub-factor: Revenue and Earnings Stability.
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9 November 2023
Rating Methodology: Retail and Apparel
CORPORATES
MOODY'S INVESTORS SERVICE
REVENUE AND EARNINGS STABILITY
Our qualitative assessment considers the company's track record of organic revenue and operating income growth, and an assessment
of the sustainability of revenue growth and margins. We consider historical revenue, margins and profitability, including volatility
in recent years, comparison to peers and the company's track record of meeting or exceeding its targets. We also typically consider
the composition and quality of profits. We also consider the drivers of revenue growth (i.e., from market or organic growth, or from
acquisitions) and the risks inherent in those drivers.
Factor: Leverage and Coverage (40% weight)
Why it matters
Leverage and coverage measures provide important indications of a company’s ability to service its debt levels and of its long-term
viability. These metrics are also important indicators of a company’s ability to sustain its competitive position and invest in growth
opportunities. The strength of credit metrics is critical for retail and apparel companies because of their need to adapt to almost
constant changes in consumer behavior.
This factor comprises three sub-factors:
Debt / EBITDA
The ratio of total debt to earnings before interest, taxes, depreciation and amortization (Debt/EBITDA) is an indicator of debt
serviceability and financial leverage. The ratio is commonly used in the retail and apparel sector as a proxy for comparative capital
structure strength.
RCF / Net Debt
The ratio of retained cash flow to net debt (RCF/Net Debt) is an indicator of a company’s cash generation (before working capital
movements and capital expenditures, and after dividend payments) relative to its net debt (total debt minus cash and cash
equivalents).
(EBITDA-Capex) / Interest Expense
The ratio of EBITDA minus capital expenditures to interest expense ((EBITDA-Capex)/Interest Expense) indicates a company’s ability to
meet its interest obligations and invest in fixed assets.
How we assess it for the scorecard
Scoring for this factor is based on three sub-factors: Debt/EBITDA, RCF/Net Debt, and (EBITDA-Capex)/Interest Expense.
DEBT / EBITDA
The numerator is total debt, and the denominator is EBITDA.
RCF / NET DEBT
The numerator is retained cash flow, and the denominator is net debt (total debt minus cash and cash equivalents).
(EBITDA-CAPEX) / INTEREST EXPENSE
The numerator is EBITDA minus capital expenditures, and the denominator is interest expense.
Factor: Financial Policy (15% weight)
Why it matters
Financial policy encompasses management and board tolerance for financial risk and commitment to a strong credit profile. It is an
important rating determinant, because it directly affects debt levels, credit quality, the future direction for the company and the risk of
adverse changes in financing and capital structure.
Financial risk tolerance serves as a guidepost to investment and capital allocation. An expectation that management will be committed
to sustaining an improved credit profile is often necessary to support an upgrade. For example, we may not upgrade the ratings of
8
9 November 2023
Rating Methodology: Retail and Apparel
MOODY'S INVESTORS SERVICE
CORPORATES
a company that has built flexibility within its rating category if we believe the company will use that flexibility to fund a strategic
acquisition, cash distribution to shareholders, spinoff or other leveraging transaction. Conversely, a company’s credit rating may
be better able to withstand a moderate leveraging event if management places a high priority on returning credit metrics to pretransaction levels and has consistently demonstrated the commitment to do so through prior actions. Liquidity management is an
important aspect of overall risk management and can provide insight into risk tolerance. Liquidity management is distinct from the
level of liquidity, which is discussed in the “Other considerations” section.
Many retail and apparel companies have historically used acquisitions to spur revenue growth, expand business lines, consolidate
market positions, advance cost synergies or seek access to new technology.
How we assess it for the scorecard
We assess the issuer’s desired capital structure or targeted credit profile, its history of prior actions, including its track record of risk and
liquidity management, and its adherence to its commitments. Attention is paid to management’s operating performance and use of
cash flow through different phases of economic and industry cycles. Also of interest is the way in which management responds to key
events, such as changes in the credit markets and liquidity environment, legal actions, competitive challenges or regulatory pressures.
Considerations include a company’s public commitments in this area, its track record of adhering to commitments and our views on
the ability of the company to achieve its targets.
When considering event risks in the context of scoring financial policy, we assess the likelihood and potential negative impact of M&A
or other types of balance-sheet-transforming events. Management’s appetite for M&A activity is assessed, with a focus on the type
of transactions (i.e., core competency or new business) and funding decisions. Frequency and materiality of acquisitions and previous
financing choices are evaluated. A history of debt-financed or credit-transforming acquisitions generally results in a lower score for this
factor. We may also consider negative repercussions caused by shareholders’ willingness to sell the company.
We also consider a company’s and its owners’ past record of balancing shareholder returns and debtholders’ interests. A track record of
favoring shareholder returns at the expense of debtholders is likely to be viewed negatively in scoring this factor.
Other considerations
Ratings may reflect consideration of additional factors that are not in the scorecard, usually because the factor’s credit importance
varies widely among the issuers in the sector or because the factor may be important only under certain circumstances or for a subset
of issuers. Such factors can include financial controls and the quality of financial reporting; corporate legal structure; the quality and
experience of management; assessments of corporate governance as well as environmental and social considerations; exposure to
uncertain licensing regimes; and possible government interference in some countries. Regulatory, litigation, liquidity, technology and
reputational risk, as well as changes to consumer and business spending patterns, competitor strategies and macroeconomic trends,
can also affect ratings.
The following are examples of additional considerations that may be reflected in our ratings and that may cause ratings to be different
from scorecard-indicated outcomes.
Environmental, social and governance considerations
Where environmental, social and governance (ESG) issues are meaningful for credit profiles, we incorporate them into our ratings
analysis in a variety of ways in the application of our sector-specific methodologies. As one part of our overall credit analysis, we
consider how ESG risks could affect the qualitative and quantitative factors and sub-factors in the scorecard.
Even where ESG considerations do not affect the measures in the scorecard, or where they cannot be quantified, we incorporate them
into our overall analysis of credit drivers that are meaningful to the rating. As a result, we may incorporate these ESG risks qualitatively
outside of the scorecard. As part of our ratings analysis, we may establish Issuer Profile Scores (IPSs), which indicate our opinion of the
extent to which a given issuer is exposed to E, S and G risks (incorporating ESG-specific mitigants) or benefits from its exposure to E, S
or G. The IPSs are inputs to credit ratings. For more information, please see our methodology that describes our general principles for
assessing ESG risks.1
Environmental considerations, which include carbon transition, physical climate risk, water management, waste and pollution, and
natural capital considerations, primarily influence the credit profiles of retail and apparel companies through their fiscal effects.
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Environmental considerations may be material to a company's credit strength primarily because of the costs of investing in reducing
carbon emissions and in weather-related preparedness and recovery costs.
Social considerations, which include changes in demographics, buyer behavior, customer relations, human capital, health and safety,
and responsible production, may affect the reputation and creditworthiness of retail and apparel companies. Demographic and societal
changes can alter buyer behavior in numerous ways that affect gross revenue, profitability and margins, and can affect customer
preferences and a company’s consumer value proposition.
Governance considerations for retail and apparel companies include compliance and reporting, organizational structure, financial
strategy and controls, management credibility, and board structure, policies and procedures. Certain aspects of governance are directly
embedded in the Financial Policy scorecard factor and may influence a company’s fiscal strength and susceptibility to event risk. The
strength of a company's governance can also materially impact profitability, margins and leverage.
Unlike exposure to environmental and social considerations, which are somewhat tied to the sector's attributes, governance
considerations are more company-specific in this sector. Strong governance mitigates susceptibility to event risk. It also may contribute
to higher growth potential and greater fiscal strength. Negative governance considerations can include overly aggressive financial
policies and concentrated ownership.
Liquidity
Liquidity is an important rating consideration for all retail and apparel companies, and extremely weak liquidity can heavily affect
ratings in many cases. However, the relative strength or weakness of liquidity may not have a substantial impact in discriminating
between two issuers with an otherwise similar credit profile. Liquidity can be particularly important where companies have large shortterm demands on liquidity, for example in highly seasonal operating environments where working capital needs must be considered.
We form an opinion on likely near-term liquidity requirements from the perspective of both sources and uses of cash. For more
information on our approach, please see our liquidity cross-sector methodology.2
Supplier payment terms
Suppliers' views on the creditworthiness of companies can affect the payment terms they offer, which can have a significant impact
on retail and apparel companies' working capital and liquidity levels. Suppliers may offer underperforming companies less favorable
payment terms, which can increase working capital requirements and reduce liquidity of these companies. In cases in which supply
chain financing is used, the effects on working capital and liquidity may be amplified if a deterioration in the company's credit profile
results in less favorable financing terms, a restriction in financing, or if suppliers lose access to credit risk insurance. We assess these
risks qualitatively, which may include analysis of downside scenarios that incorporate the effects of reduced supplier payment terms or
supplier financing on liquidity and financial metric forecasts.
Excess cash balances
Some companies in this sector may maintain cash balances (meaning liquid short-term investments, as well as cash) that are far in
excess of their operating needs. This excess cash, together with the company’s policy and motivations, can be an important credit
consideration.
The level of cash required to run a business can vary materially based on the region(s) of operation and the specific sub-sectors
in which the company operates. As a result, cash on the balance sheet is most often considered qualitatively, by assessing the
company’s track record and financial and liquidity policies. Cash holdings may be a material mitigant in our scenario analyses of
potential acquisitions, share buybacks or special dividends. We analyze possible uses of cash, especially for companies that may be
under shareholder pressure to return it. By contrast, some companies maintain large cash holdings for long periods in excess of their
operating and liquidity needs solely because of conservative financial policies, which provides a stronger indication of an enduring
approach that will benefit creditors. Large cash holdings provide some beneficial cushion against credit deterioration, and cash balances
are often considered in our analysis of near-term liquidity sources and uses. For more information, please see the “Liquidity” section.
While the scorecard in this methodology uses certain leverage and coverage ratios with total (or gross) debt, in cases where we are
sufficiently confident that cash will remain on the balance sheet or will be used for creditor-friendly purposes, we may consider excess
cash in a more quantitative manner. We do not typically adjust the balance-sheet debt for any specific amount because this implies
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greater precision than we think is achievable for the uncertain future uses of cash. We may consider creditor-friendly use of cash in our
forward view of metrics, for instance, when we expect the cash to be used for debt repayment. We may also cite rating threshold levels
for certain companies based on net debt ratios, particularly when these issuers have publicly stated financial targets based on net debt
metrics.
In the retail and apparel industry, the significant effects of seasonality may limit excess cash for some issuers because of periodic high
working capital demands or working capital needs that the use of supply chain financing may sometimes understate. We generally
consider cash needs to be at least equal to peak working capital cash outflows, and cash balances that fail to provide an adequate
buffer for working capital needs can negatively affect credit quality. The use of financing arrangements such as supply chain financing
can also negatively affect credit quality if they limit visibility into working capital needs. Where issuer disclosure is limited, our
assessment of the impact of supply chain financing arrangements may be informed by comparisons with industry-average working
capital metrics.
Seasonality
Seasonality is an important driver of the timing of customer demand and can result in a concentration of revenue and earnings in a
particular quarter, causing swings in companies' cash balances and working capital positions.
For retail and apparel companies, seasonality may cause significant fluctuations in working capital and gross or net debt levels
throughout the year, which may result in certain fiscal year-end financial metrics not being fully representative of a company's financial
strength. Apparel companies are particularly exposed to volatility in the sales cycle. For example, a company can earn a significant
percentage of its annual revenue in the weeks before the start of the school year or the holiday season, which typically drives cash
levels higher and net debt levels lower. This upward spike in cash is often preceded by a downward spike as the company invests in
working capital ahead of the back-to-school or holiday sales season. We consider seasonality in assessing a company’s liquidity and
leverage levels and we may incorporate peak debt levels, in addition to year-end debt levels, in our assessment.
Regulatory considerations
Companies in the retail and apparel sector are subject to varying degrees of regulatory oversight. Effects of these regulations may entail
limitations on operations, higher costs, and higher potential for technology disruptions and demand substitution. Regional differences
in regulation, implementation or enforcement may advantage or disadvantage particular issuers. As a sector with complex global
supply relationships, retail and apparel is sensitive to trade barriers and tariffs.
Our view of future regulations plays an important role in our expectations of future financial metrics, as well as our confidence level
in the ability of an issuer to generate sufficient cash flows relative to its debt burden over the medium and longer term. In some
circumstances, regulatory considerations may also be a rating factor outside of the scorecard, for instance when regulatory change is
swift.
Financial controls
We rely on the accuracy of audited financial statements to assign and monitor ratings in this sector. The quality of financial statements
may be influenced by internal controls, including the proper tone at the top, centralized operations, and consistency in accounting
policies and procedures. Auditors’ reports on the effectiveness of internal controls, auditors’ comments in financial reports and unusual
restatements of financial statements or delays in regulatory filings may indicate weaknesses in internal controls.
Management strategy
The quality of management is an important factor supporting a company’s credit strength. Assessing the execution of business plans
over time can be helpful in assessing management’s business strategies, policies and philosophies and in evaluating management
performance relative to performance of competitors and our projections. Management’s track record of adhering to stated plans,
commitments and guidelines provides insight into management’s likely future performance, including in stressed situations.
Additional metrics
The metrics included in the scorecard are those that are generally most important in assigning ratings to companies in this industry;
however, we may use additional metrics to inform our analysis of specific companies. These additional metrics may be important to
our forward view of metrics that are in the scorecard or other rating factors.
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For example, free cash flow is not always an important differentiator of credit profiles. Strong companies with excellent investment
opportunities may demonstrate multiyear periods of negative free cash flow while retaining solid access to capital and credit, because
these investments will yield stable cash flows in future years. Weaker companies with limited access to credit may have positive
free cash flow for a period of time because they have curtailed the investments necessary to maintain their assets and future cashgenerating prospects. However, in some cases, free cash flow can be an important driver of the future liquidity profile of an issuer,
which, as noted above, can have a meaningful impact on ratings. Additionally, we may consider inventory days on hand and payable
days. If inventory levels rise significantly above typical levels, that may indicate a potential need to liquidate inventory at discounted
prices, which generally depresses margins. Shrinking payable days may indicate that suppliers are pressuring the retail or apparel
company for faster repayment, a negative for the company’s liquidity position.
As another example, ratios with earnings before interest and taxes (EBIT) and earnings before interest, taxes and amortization (EBITA)
can sometimes provide additional analytical insights. As a measure of profitability, the ratio of EBIT to revenue (EBIT margin) can
provide an indicator of operating efficiency and competitive advantage that can be useful for comparability across market segments.
Also, the ratio of EBITA to interest expense (EBITA/interest) may provide further insight. This is particularly the case in situations where
a company engages in growth capex for a short period, and therefore a view of its post-investment period coverage is useful. We may
consider these metrics qualitatively and in scenario analysis, by assessing whether the scorecard metrics look stronger or weaker than
the additional metrics outside of the scorecard and, if so, why they diverge.
Non-wholly owned subsidiaries
Some companies in the retail and apparel sector choose to dilute their equity stake in certain material subsidiaries, for example through
an initial public offering, which may in some cases negatively impact future financial flexibility. While improving cash holdings on a
one-off basis, selling minority interests in subsidiaries may have a negative impact on cash flows available to the parent company that
may not be fully reflected in consolidated financial statements. For example, in the case of an equity stake reduction in a subsidiary
down to 75%, in the parent’s financial statements, all revenue and EBITDA of the subsidiary would typically still be consolidated at the
group level.
The parent’s share of dividend flows from a non-wholly owned subsidiary is reduced, and minority stakes can increase structural
subordination, since dividend flows to minority interest holders are made before the cash flows are available to service debt at the
parent company. While less frequent, sale of a minority stake may be accompanied by policies protective of the subsidiary that further
limit the parent’s financial flexibility, for instance restrictions on cash pooling with other members of the corporate family, limitations
on dividends and distributions, or arms-length business requirements. Minority stakeholders may have seats on the board of the
subsidiary.
In many cases, we consider the impact of non-wholly owned subsidiaries qualitatively. However, in some cases we may find that an
additional view of financial results, such as analyzing cash flows on a proportional consolidation basis, may be very useful to augment
our analysis based on consolidated financial statements. When equity dilution or structural subordination arising from non-wholly
owned subsidiaries is material and negative, the credit impact is captured in ratings but may not be fully reflected in scorecardindicated outcomes.
For companies that hold material minority interest stakes, consolidated funds from operations typically includes the dividends received
from the minority subsidiary, while none of its debt is consolidated. When such dividends are material to the company’s cash flows,
these cash flows may be subject to interruption if they are required for the minority subsidiary’s debt service, capital expenditures
or other cash needs. When minority interest dividends are material, we may also find that proportional consolidation or another
additional view of financial results is useful to augment our analysis of consolidated financials. We would generally also consider
structural subordination in these cases. Proportional consolidation brings a portion of the minority subsidiary’s debt onto the balance
sheet, but this debt is structurally senior to debt at the parent company, because it is closer to the assets and cash flows of the
minority subsidiary. When these credit considerations are material, their impact is captured in ratings but may not be fully reflected in
scorecard-indicated outcomes.
Event risk
We also recognize the possibility that an unexpected event could cause a sudden and sharp decline in a company's fundamental
creditworthiness, which may cause actual ratings to be lower than the scorecard-indicated outcome. Event risks — which are varied
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and can range from leveraged recapitalizations to sudden regulatory changes or liabilities from an accident — can overwhelm even a
stable, well-capitalized firm. Some other types of event risks include M&A, asset sales, spinoffs, shareholder distributions, litigation,
pandemics, significant cybercrime events and geopolitical conflicts. In addition, we recognize that shareholder activism can increase risk
to debtholders. These risks can include pressure to use excess cash holdings for dividends or share repurchases in a manner not aligned
with bondholder interests, and efforts to explore strategic alternatives like being sold, which could increase risk to debtholders.
Parental support
Ownership can provide ratings lift for a particular company in the retail and apparel sector if it is owned by a highly rated owner(s)
and is viewed to be of strategic importance to those owners. In our analysis of parental support, we consider whether the parent has
the financial capacity and strategic incentives to provide support to the issuer in times of stress or financial need (e.g., a major capital
investment or advantaged operating agreement), or has already done so in the past. Conversely, if the parent puts a high dividend
burden on the issuer, which in turn reduces its flexibility, the ratings would reflect this risk.
Government-related issuers may receive ratings uplift due to expected government support. However, for certain issuers, government
ownership can have a negative impact on the underlying Baseline Credit Assessment.3 For example, price controls, onerous taxation
and high distributions can have a negative effect on an issuer’s underlying credit profile.
Other institutional support
In some countries, large corporate issuers have received government or banking support in the event of financial difficulties because
of their overall importance to the functioning of the economy. In Japan, our corporate ratings consider the support that has operated
there for large and systemically important organizations. Over the years, this has resulted in lower levels of default than might
otherwise have occurred. Our approach considers whether the presence of group and banking relationships may provide support when
systemically important companies encounter significant financial stress.
Using the scorecard to arrive at a scorecard-indicated outcome
1. Measurement or estimation of factors in the scorecard
In the “Discussion of the scorecard factors” section, we explain our analytical approach for scoring each scorecard factor or sub-factor,
and we describe why they are meaningful as credit indicators. When a factor comprises sub-factors, we score at the sub-factor level.
Some factors do not have sub-factors, in which case we score at the factor level.
The information used in assessing the sub-factors is generally found in or calculated from information in the company’s financial
statements or regulatory filings, derived from other observations or estimated by Moody’s analysts. We may also incorporate nonpublic information.
Our ratings are forward-looking and reflect our expectations for future financial and operating performance. However, historical results
are helpful in understanding patterns and trends of a company’s performance as well as for peer comparisons. Financial metrics,4 unless
otherwise indicated, are typically calculated based on an annual or 12-month period. However, the factors in the scorecard can be
assessed using various time periods. For example, rating committees may find it analytically useful to examine both historical and
expected future performance for periods of several years or more.
All of the quantitative credit metrics incorporate our standard adjustments5 to income statement, cash flow statement and balance
sheet amounts for items such as underfunded pension obligations and operating leases. We may also make other analytical
adjustments that are specific to a particular company.
2. Mapping scorecard factors to a numeric score
After estimating or calculating each factor or sub-factor, each outcome is mapped to a broad Moody’s rating category (Aaa, Aa, A, Baa,
Ba, B, Caa or Ca, also called alpha categories) and to a numeric score.
Qualitative factors are scored based on the description by broad rating category in the scorecard. The numeric value of each alpha
score is based on the scale below.
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MOODY'S INVESTORS SERVICE
Exhibit 3
Numeric equivalents for qualitative factor and sub-factor scores
Aaa
Aa
A
Baa
Ba
B
Caa
Ca
1
3
6
9
12
15
18
20
Source: Moody's Investors Service
Quantitative factors are scored on a linear continuum. For each metric, the scorecard shows the range by alpha category. We use the
scale below and linear interpolation to convert the metric, based on its placement within the scorecard range, to a numeric score,
which may be a fraction. As a purely theoretical example, if there were a ratio of revenue to interest for which the Baa range was 50x
to 100x, then the numeric score for an issuer with revenue/interest of 99x, relatively strong within this range, would score closer to 7.5,
and an issuer with revenue/interest of 51x, relatively weak within this range, would score closer to 10.5. In the text or table footnotes,
we define the endpoints of the line (i.e., the value of the metric that constitutes the lowest possible numeric score, and the value that
constitutes the highest possible numeric score).
Exhibit 4
Ranges of numeric equivalents for quantitative factor and sub-factor scores
Aaa
Aa
A
Baa
Ba
B
Caa
Ca
0.5 - 1.5
1.5 - 4.5
4.5 - 7.5
7.5 - 10.5
10.5 - 13.5
13.5 - 16.5
16.5 - 19.5
19.5 - 20.5
Source: Moody's Investors Service
3. Determining the overall scorecard-indicated outcome
The numeric score for each sub-factor (or each factor, when the factor has no sub-factors) is multiplied by the weight for that subfactor (or factor), with the results then summed to produce an aggregate numeric score. The aggregate numeric score is then mapped
back to a scorecard-indicated outcome based on the ranges in the table below.
Exhibit 5
Scorecard-indicated outcome
Aggregate numeric score
Scorecard-indicated outcome
x ≤ 1.5
Aaa
1.5 < x ≤ 2.5
Aa1
2.5 < x ≤ 3.5
Aa2
3.5 < x ≤ 4.5
Aa3
4.5 < x ≤ 5.5
A1
5.5 < x ≤ 6.5
A2
6.5 < x ≤ 7.5
A3
7.5 < x ≤ 8.5
Baa1
8.5 < x ≤ 9.5
Baa2
9.5 < x ≤ 10.5
Baa3
10.5 < x ≤ 11.5
Ba1
11.5 < x ≤ 12.5
Ba2
12.5 < x ≤ 13.5
Ba3
13.5 < x ≤ 14.5
B1
14.5 < x ≤ 15.5
B2
15.5 < x ≤ 16.5
B3
16.5 < x ≤ 17.5
Caa1
17.5 < x ≤ 18.5
Caa2
18.5 < x ≤ 19.5
Caa3
19.5 < x ≤ 20.5
Ca
x > 20.5
C
Source: Moody's Investors Service
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PART II:
UNDERSTANDING
& ANALYZING
DISCLOSURES
• AMAZON 2023 10-K
• AMERICAN AIRLINES 2018 10-K
EXCERPTS
FROM
10-K
Table of Contents
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, 2023
☐
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
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
AMZN
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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Exchange Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of
an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive
officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2023
Number of shares of common stock outstanding as of January 24, 2024
No ☒
$
1,183,684,965,587
10,387,381,291
____________________________________
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 2024, 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.
Table of Contents
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 and outcomes may differ materially from those expressed in forward-looking statements.
See Item 1A of Part I — “Risk Factors.” As used herein, “Amazon.com,” “we,” “our,” and similar terms include Amazon.com, Inc. and its subsidiaries, unless
the context indicates otherwise.
General
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 segments, we serve our primary customer sets, consisting of
consumers, sellers, developers, enterprises, content creators, advertisers, and employees.
We have organized our operations into three segments: North America, International, and Amazon Web Services (“AWS”). These segments reflect the
way the Company evaluates its business performance and manages its operations. Information on our net sales is contained in Item 8 of Part II, “Financial
Statements and Supplementary Data — Note 10 — Segment Information.”
Consumers
We serve consumers through our online and physical stores and focus on selection, price, and convenience. We design our stores to enable hundreds of
millions of unique products to be sold by us and by third parties across dozens of product categories. Customers access our offerings through our websites,
mobile apps, Alexa, devices, streaming, and physically visiting our stores. We also manufacture and sell electronic devices, including Kindle, Fire tablet, Fire
TV, Echo, Ring, Blink, and eero, and we develop and produce media content. We seek to offer our customers low prices, fast and free delivery, easy-to-use
functionality, and timely customer service. In addition, we offer subscription services such as Amazon Prime, a membership program that includes fast, free
shipping on tens of millions of items, access to award-winning movies and series, and other benefits.
We fulfill customer orders in a number of ways, including through: North America and International fulfillment networks that we operate; co-sourced and
outsourced arrangements in certain countries; digital delivery; and through our physical stores. 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 grow their businesses, sell their products in our stores, and fulfill orders using our services. We are not the seller
of record in these transactions. We earn fixed fees, a percentage of sales, per-unit activity fees, interest, or some combination thereof, for our seller programs.
Developers and Enterprises
We serve developers and enterprises of all sizes, including start-ups, government agencies, and academic institutions, through AWS, which offers a broad
set of on-demand technology services, including compute, storage, database, analytics, and machine learning, and other services.
Content Creators
We offer programs that allow authors, independent publishers, musicians, filmmakers, Twitch streamers, skill and app developers, and others to publish
and sell content.
Advertisers
We provide advertising services to sellers, vendors, publishers, authors, and others, through programs such as sponsored ads, display, and video
advertising.
3
Table of Contents
Our Business Suffers When We Are Unsuccessful in Making, Integrating, and Maintaining Acquisitions and Investments
We have acquired and invested in a number of companies, and we may in the future acquire or invest in or enter into joint ventures with additional
companies. These transactions involve 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;
•
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 completing such transactions, including obtaining regulatory approvals or satisfying other closing conditions, and achieving
anticipated benefits within expected timeframes, or at all;
•
the difficulty of incorporating acquired operations, 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 data security, human resource, and other
administrative systems to permit effective management, and the lack of control if such integration is delayed or not successfully implemented;
•
losses we may incur as a result of declines in the value of an investment or as a result of incorporating an investee’s financial performance into our
financial results;
•
for investments in which an investee’s financial performance is incorporated into our financial results, either in full or in part, or investments for
which we are required to file financial statements or provide financial information, 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;
•
the risks associated with businesses we acquire or invest in, which may differ from or be more significant than the risks our other businesses face;
•
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 or only be available on unfavorable terms,
if at all. In addition, valuations supporting our acquisitions and strategic investments could change rapidly. We could determine that such valuations have
experienced impairments or other-than-temporary declines in fair value which could adversely impact our financial results.
We Face Significant Inventory Risk
In addition to risks described elsewhere in this Item 1A relating to fulfillment network 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 customer demand and consumer spending patterns, changes in consumer tastes with respect to our products,
spoilage, 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 or offering a new service, 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 requires 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
at times we are unable to sell products in sufficient quantities or to meet demand during the relevant selling seasons. Any one of the inventory risk factors set
forth above may adversely affect our operating results.
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
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Item 2.
Properties
As of December 31, 2023, we operated the following facilities (in thousands):
Leased Square
Footage (1)
Description of Use
Owned Square Footage
Location
Office space
29,655
9,222 North America
Office space
24,528
1,802 International
Physical stores (2)
22,871
Physical stores (2)
255
707 North America
— International
Fulfillment, data centers, and other
413,017
25,630 North America
Fulfillment, data centers, and other
173,765
14,802 International
Total
664,091
52,163
___________________
(1) For leased properties, represents the total leased space excluding sub-leased space.
(2) This includes 600 North America and 28 International stores as of December 31, 2023.
Leased Square Footage
(1)
Owned Square Footage
(1)
North America
424,145
15,438
International
165,329
7,931
AWS
20,434
17,770
Total
609,908
41,139
Segment
___________________
(1) Segment amounts exclude corporate facilities. Shared facilities are allocated among the segments based on usage and primarily relate to facilities that hold
our technology infrastructure. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 10 — Segment Information.”
We own and lease our corporate headquarters in Washington’s Puget Sound region and Arlington, Virginia.
Item 3.
Legal Proceedings
See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 7 — Commitments and Contingencies — Legal Proceedings.”
Item 4.
Mine Safety Disclosures
Not applicable.
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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 forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar
expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual
results and outcomes could differ materially for a variety of reasons, including, among others, fluctuations in foreign exchange rates, changes in global
economic conditions and customer demand and spending, inflation, interest rates, regional labor market constraints, world events, the rate of growth of the
internet, online commerce, cloud services, and new and emerging technologies, the amount that Amazon.com invests in new business opportunities and the
timing of those investments, the mix of products and services sold to customers, the mix of net sales derived from products as compared with services, the extent
to which we owe income or other taxes, competition, management of growth, potential fluctuations in operating results, international growth and expansion,
the outcomes of claims, litigation, government investigations, and other proceedings, fulfillment, sortation, delivery, and data center optimization, risks of
inventory management, variability in demand, the degree to which we enter into, maintain, and develop commercial agreements, proposed and completed
acquisitions and strategic transactions, payments risks, and risks of fulfillment throughput and productivity. In addition, global economic and geopolitical
conditions and additional or unforeseen circumstances, developments, or events may give rise to or amplify many of these risks. These risks and uncertainties,
as well as other risks and uncertainties that could cause our actual results or outcomes 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 through our stores include
merchandise and content we have purchased for resale and products offered by third-party sellers, and we also manufacture and sell electronic devices and
produce media content. 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 third-party sellers as service sales. We seek to increase unit sales across our stores, through increased product selection, across numerous
product categories. We also offer other services such as compute, storage, and database offerings, fulfillment, advertising, publishing, and digital content
subscriptions.
Our financial focus is on long-term, sustainable growth in free cash flows. Free cash flows are driven primarily by increasing operating income and
efficiently managing accounts receivable, inventory, accounts payable, and cash capital expenditures, including our decision to purchase or lease property and
equipment. 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, including capital expenditures focused on improving the customer experience. 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, producing original content, increasing product categories and service offerings, expanding
product information, improving ease of use, improving reliability, and earning customer trust. See “Results of Operations — Non-GAAP Financial Measures”
below for additional information on our non-GAAP free cash flows financial measures.
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 build and run our technology infrastructure; to build, enhance, and
add features to our online stores, web services, electronic devices, and digital offerings; and to build and optimize our fulfillment network. 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 unnecessary growth in fixed costs, we seek to improve process
efficiencies and maintain a lean culture.
We seek to turn inventory quickly and collect from consumers before our payments to vendors and sellers become due. Because consumers primarily use
credit cards in our stores, our receivables from consumers settle quickly. We expect variability in inventory turnover over time since it is affected by numerous
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, supply chain disruptions and resulting vendor lead times, our investment in new geographies and product lines, and the extent to which we
choose to utilize third-party fulfillment providers. We also 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 third-party sellers, the mix
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of suppliers, seasonality, and changes in payment and other terms over time, including the effect of balancing pricing and timing of payment terms with
suppliers.
We expect spending in technology and infrastructure will increase over time as we add computer scientists, designers, software and hardware engineers,
and merchandising employees. Our technology and infrastructure 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 invest efficiently in several areas of technology
and infrastructure, including AWS, and expansion of new and existing product categories and service offerings, as well as in 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, data storage and analytics, improved wireless connectivity, and the practical applications of artificial intelligence and machine learning, will continue to
improve users’ 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 AWS, which offers a broad set of on-demand technology services, including compute, storage, database, analytics, and machine learning, and other
services to developers and enterprises of all sizes. We are also investing in initiatives to build and deploy innovative and efficient software and electronic
devices as well as other initiatives including the development of a satellite network for global broadband service and autonomous vehicles for ride-hailing
services.
We 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 10.6
billion and 10.8 billion as of December 31, 2022 and 2023.
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 losses associated with the effect of movements in foreign
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 addressed above, refer to Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 —
Description of Business, Accounting Policies, and Supplemental Disclosures.”
Our Annual Report on Form 10-K for the year ended December 31, 2022 includes a discussion and analysis of our financial condition and results of
operations for the year ended December 31, 2021 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Critical Accounting Estimates
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 liabilities in the
consolidated financial statements and accompanying notes. Critical accounting estimates are those estimates made in accordance with GAAP that involve a
significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of
the Company. Based on this definition, we have identified the critical accounting estimates 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, Accounting Policies, and Supplemental Disclosures.” Although we
believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ
significantly from these estimates under different assumptions, judgments, or conditions.
Inventories
Inventories, consisting of products available for sale, are primarily accounted for using the first-in first-out method, and are valued at the lower of cost
and net realizable 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
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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, 2023, we would have recorded an additional cost of sales of approximately $355 million.
In addition, we enter into supplier commitments for certain electronic device components and certain products. These commitments are based on
forecasted customer demand. If we reduce these commitments, we may incur additional costs.
Income Taxes
We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, administrative practices,
principles, and interpretations in various jurisdictions may be subject to significant change, with or without notice, 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. In addition, our actual and forecasted earnings are subject to
change due to economic, political, and other conditions and significant judgment is required in determining our ability to use our deferred tax assets.
Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new
businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, including 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 related tax benefits, the applicability of special tax regimes, changes in foreign exchange rates, changes in our
stock price, changes to our forecasts of income and loss and the mix of jurisdictions to which they relate, changes in our deferred tax assets and liabilities and
their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax
framework, competition, and other laws and accounting rules in various jurisdictions. In addition, a number of countries have enacted or are actively pursuing
changes to their tax laws applicable to corporate multinationals.
We are also currently subject to tax controversies in various jurisdictions, and these jurisdictions may assess additional income tax liabilities against us.
Developments in an audit, investigation, or other tax controversy 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. We regularly assess the likelihood of an adverse outcome resulting from these
proceedings to determine the adequacy of our tax accruals. Although we believe our tax estimates are reasonable, the final outcome of audits, investigations,
and any other tax controversies could be materially different from our historical income tax provisions and accruals.
Liquidity and Capital Resources
Cash flow information is as follows (in millions):
Year Ended December 31,
2022
2023
Cash provided by (used in):
Operating activities
$
46,752
$
84,946
Investing activities
(37,601)
(49,833)
Financing activities
9,718
(15,879)
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 $70.0 billion and $86.8 billion as of December 31, 2022 and 2023. Amounts held in foreign currencies were $18.3 billion and $23.5 billion as
of December 31, 2022 and 2023. Our foreign currency balances include British Pounds, Canadian Dollars, Euros, Indian Rupees, and Japanese Yen.
Cash provided by (used in) operating activities was $46.8 billion and $84.9 billion in 2022 and 2023. Our operating cash flows result primarily from cash
received from our consumer, seller, developer, enterprise, and content creator customers, and advertisers, offset by cash payments we make for products and
services, employee compensation, payment processing and related transaction costs, operating leases, and interest payments. Cash received from our customers
and other activities generally corresponds to our net sales. The increase in operating cash flow in 2023, compared to the prior year, was due to an increase in
net income (loss), excluding non-cash expenses, and changes in working capital. Working capital at any specific point in time is subject to many variables,
including variability in demand, inventory management and category expansion, the timing of cash receipts and payments, customer and vendor payment
terms, and fluctuations in foreign exchange rates.
Cash provided by (used in) investing activities corresponds with cash capital expenditures, including leasehold improvements, incentives received from
property and equipment vendors, proceeds from asset sales, cash outlays for
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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 $(37.6) billion and $(49.8) billion in 2022 and 2023, with the variability caused primarily by purchases, sales, and maturities
of marketable securities and cash capital expenditures. Cash capital expenditures were $58.3 billion, and $48.1 billion in 2022 and 2023, which primarily
reflect investments in technology infrastructure (the majority of which is to support AWS business growth) and in additional capacity to support our fulfillment
network, which investments we expect to increase in 2024. We made cash payments, net of acquired cash, related to acquisition and other investment activity
of $8.3 billion and $5.8 billion in 2022 and 2023. We funded the acquisitions of MGM Holdings Inc. in 2022 and 1Life Healthcare, Inc. (One Medical) in 2023
with cash on hand. In 2023, we invested $1.25 billion in a note from Anthropic, PBC, which is convertible into equity. We have an agreement that expires in Q1
2024 to invest up to an additional $2.75 billion in a second convertible note.
Cash provided by (used in) financing activities was $9.7 billion and $(15.9) billion in 2022 and 2023. Cash inflows from financing activities resulted
from proceeds from short-term debt, and other and long-term-debt of $62.7 billion and $18.1 billion in 2022 and 2023. Cash outflows from financing activities
resulted from repurchases of common stock in 2022, payments of short-term debt, and other, long-term debt, finance leases, and financing obligations of $53.0
billion and $34.0 billion in 2022 and 2023. Property and equipment acquired under finance leases was $675 million and $642 million in 2022 and 2023.
We had no borrowings outstanding under the two unsecured revolving credit facilities or the commercial paper programs, we had $682 million of
borrowings outstanding under the secured revolving credit facility, and the entire amount of the term loan has been repaid as of December 31, 2023. See Item 8
of Part II, “Financial Statements and Supplementary Data — Note 6 — Debt” for additional information.
As of December 31, 2023, cash, cash equivalents, and marketable securities held by foreign subsidiaries were $4.7 billion. We intend to invest
substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in
which we would incur significant, additional costs upon repatriation of such amounts.
Our U.S. taxable income is reduced by accelerated depreciation deductions and increased by the impact of capitalized research and development
expenses. U.S. tax rules provide for enhanced accelerated depreciation deductions by allowing us to expense a portion of qualified property, primarily
equipment. These enhanced deductions are scheduled to phase out annually from 2023 through 2026. Our federal tax provision included a partial accelerated
depreciation deduction election for 2021, and a full election for 2022 and 2023. Additionally, effective January 1, 2022, research and development expenses are
required to be capitalized and amortized for U.S. tax purposes, which delays the deductibility of these expenses. Cash paid for U.S. (federal and state) and
foreign income taxes (net of refunds) totaled $6.0 billion and $11.2 billion for 2022 and 2023.
As of December 31, 2022 and 2023, restricted cash, cash equivalents, and marketable securities were $365 million and $503 million. See Item 8 of Part
II, “Financial Statements and Supplementary Data — Note 6 — Debt” and “Financial Statements and Supplementary Data — Note 7 — Commitments and
Contingencies” for additional discussion of our principal contractual commitments, as well as our pledged assets. Additionally, we have purchase obligations
and open purchase orders, including for inventory and capital expenditures, that support normal operations and are primarily due in the next twelve months.
These purchase obligations and open purchase orders are generally cancellable in full or in part through the contractual provisions.
We believe that cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, as well as our borrowing
arrangements, will be sufficient to meet our anticipated operating cash needs for at least the next twelve 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 finance and operating lease arrangements, enter into financing obligations, 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 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 credit lines or
financing instruments will be available in amounts or on terms acceptable to us, if at all. In addition, economic conditions and actions by policymaking bodies
are contributing to changing interest rates and significant capital market volatility, which, along with any increases in our borrowing levels, could increase our
future borrowing costs.
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Results of Operations
We have organized our operations into three segments: North America, International, and AWS. These segments reflect the way the Company evaluates
its business performance and manages its operations. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 10 — Segment
Information.”
Overview
Macroeconomic factors, including inflation, increased interest rates, significant capital market and supply chain volatility, and global economic and
geopolitical developments, have direct and indirect impacts on our results of operations that are difficult to isolate and quantify. In addition, changes in fuel,
utility, and food costs, interest rates, and economic outlook may impact customer demand and our ability to forecast consumer spending patterns. We also
expect the current macroeconomic environment and enterprise customer cost optimization efforts to impact our AWS revenue growth rates. We expect some or
all of these factors to continue to impact our operations into Q1 2024.
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 primarily represent third-party seller fees, which includes commissions and any related fulfillment and shipping
fees, AWS sales, advertising services, Amazon Prime membership fees, and certain digital media content subscriptions. Net sales information is as follows (in
millions):
Year Ended December 31,
2022
2023
Net Sales:
North America
$
315,880
$
352,828
International
118,007
131,200
AWS
80,096
90,757
Consolidated
$
513,983
$
574,785
Year-over-year Percentage Growth (Decline):
North America
13 %
International
(8)
11
AWS
29
13
9
12
North America
13 %
12 %
International
4
11
AWS
29
13
13
12
North America
61 %
61 %
International
23
23
AWS
16
16
100 %
100 %
Consolidated
12 %
Year-over-year Percentage Growth, excluding the effect of foreign exchange rates:
Consolidated
Net Sales Mix:
Consolidated
Sales increased 12% in 2023, compared to the prior year. Changes in foreign exchange rates reduced net sales by $71 million in 2023. For a discussion of
the effect of foreign exchange rates on sales growth, see “Effect of Foreign Exchange Rates” below.
North America sales increased 12% in 2023, compared to the prior year. The sales growth primarily reflects increased unit sales, primarily by third-party
sellers, advertising sales, and subscription services. Increased unit sales were driven largely by our continued focus on price, selection, and convenience for our
customers, including from our shipping offers.
International sales increased 11% in 2023, compared to the prior year. The sales growth primarily reflects increased unit sales, primarily by third-party
sellers, advertising sales, and subscription services. Increased unit sales were driven largely by our continued focus on price, selection, and convenience for our
customers, including from our shipping offers. Changes in foreign exchange rates increased International net sales by $88 million in 2023.
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Operating Expenses
Information about operating expenses is as follows (in millions):
Year Ended December 31,
2022
2023
Operating Expenses:
Cost of sales
$
288,831
$
304,739
Fulfillment
84,299
90,619
Technology and infrastructure
73,213
85,622
Sales and marketing
42,238
44,370
General and administrative
11,891
11,816
Other operating expense (income), net
1,263
767
Total operating expenses
$
501,735
$
537,933
Year-over-year Percentage Growth (Decline):
Cost of sales
6%
Fulfillment
12
7
Technology and infrastructure
31
17
Sales and marketing
30
5
General and administrative
6%
35
(1)
1,936
(39)
Cost of sales
56.2 %
53.0 %
Fulfillment
16.4
15.8
Technology and infrastructure
14.2
14.9
Sales and marketing
8.2
7.7
General and administrative
2.3
2.1
Other operating expense (income), net
0.2
0.1
Other operating expense (income), net
Percent of Net Sales:
Cost of Sales
Cost of sales primarily consists of the purchase price of consumer products, inbound and outbound shipping costs, including costs related to sortation and
delivery centers and where we are the transportation service provider, and digital media content costs where we record revenue gross, including video and
music.
The increase in cost of sales in absolute dollars in 2023, compared to the prior year, is primarily due to increased product and shipping costs resulting
from increased sales, partially offset by fulfillment network efficiencies and lower transportation rates. Changes in foreign exchange rates reduced cost of sales
by $254 million in 2023.
Shipping costs were $83.5 billion and $89.5 billion in 2022 and 2023. 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. We expect our cost of shipping to continue to increase to the extent our customers
accept and use our shipping offers at an increasing rate, 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 our fulfillment network, 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.
Costs to operate our AWS segment are primarily classified as “Technology and infrastructure” as we leverage a shared infrastructure that supports both
our internal technology requirements and external sales to AWS customers.
Fulfillment
Fulfillment costs primarily consist of those costs incurred in operating and staffing our North America and International fulfillment centers, physical
stores, and customer service centers and payment processing costs. While AWS payment processing and related transaction costs are included in “Fulfillment,”
AWS costs are primarily classified as “Technology and infrastructure.” 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
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fulfilled, the extent to which third-party sellers utilize Fulfillment by Amazon services, timing of fulfillment network and physical store 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, sales by our sellers have higher payment
processing and related transaction costs as a percentage of net sales compared to our retail sales because payment processing costs are based on the gross
purchase price of underlying transactions.
The increase in fulfillment costs in absolute dollars in 2023, compared to the prior year, is primarily due to increased sales and investments in our
fulfillment network, partially offset by fulfillment network efficiencies. Changes in foreign exchange rates increased fulfillment costs by $52 million in 2023.
We seek to expand our fulfillment network to accommodate a 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 regularly evaluate our facility requirements.
Technology and Infrastructure
Technology and infrastructure costs include payroll and related expenses for employees involved in the research and development of new and existing
products and services, development, design, and maintenance of our stores, curation and display of products and services made available in our online stores,
and infrastructure costs. Infrastructure costs include servers, networking equipment, and data center related depreciation and amortization, rent, utilities, and
other expenses necessary to support AWS and other Amazon businesses. Collectively, these costs reflect the investments we make in order to offer a wide
variety of products and services to our customers, including expenditures related to initiatives to build and deploy innovative and efficient software and
electronic devices and the development of a satellite network for global broadband service and autonomous vehicles for ride-hailing services.
We seek to invest efficiently in numerous areas of technology and 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. Our technology and infrastructure 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 expect spending in technology and infrastructure to increase over time as we continue to add employees and infrastructure. These costs are
allocated to segments based on usage. The increase in technology and infrastructure costs in absolute dollars in 2023, compared to the prior year, is primarily
due to an increase in spending on infrastructure and increased payroll and related costs associated with technical teams responsible for expanding our existing
products and services and initiatives to introduce new products and service offerings.
Sales and Marketing
Sales and marketing costs include advertising and payroll and related expenses for personnel engaged in marketing and selling activities, including sales
commissions related to AWS. We direct customers to our stores primarily through a number of marketing channels, such as our sponsored search, social and
online advertising, third-party customer referrals, television advertising, and other initiatives. Our marketing costs 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 costs.
The increase in sales and marketing costs in absolute dollars in 2023, compared to the prior year, is primarily due to increased payroll and related
expenses for personnel engaged in marketing and selling activities.
While costs associated with Amazon Prime membership benefits and other shipping offers are not included in sales and marketing expense, we view
these offers as effective worldwide marketing tools, and intend to continue offering them indefinitely.
General and Administrative
General and administrative costs were $11.9 billion and $11.8 billion during 2022 and 2023, and were primarily related to payroll and related expenses
and professional fees.
Other Operating Expense (Income), Net
Other operating expense (income), net was $1.3 billion and $767 million during 2022 and 2023, and was primarily related to asset impairments for
physical store closures in 2022 and for fulfillment network facilities and physical store closures in 2023, and the amortization of intangible assets.
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Interest Income and Expense
Our interest income was $989 million and $2.9 billion during 2022 and 2023, primarily due to an increase in prevailing rates. We generally invest our
excess cash in AAA-rated money market funds and investment grade short- to intermediate-term marketable debt securities. 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.
Interest expense was $2.4 billion and $3.2 billion in 2022 and 2023 and was primarily related to debt and finance leases. See Item 8 of Part II, “Financial
Statements and Supplementary Data — Note 4 — Leases and Note 6 — Debt” for additional information.
Our long-term lease liabilities were $73.0 billion and $77.3 billion as of December 31, 2022 and 2023. Our long-term debt was $67.1 billion and $58.3
billion as of December 31, 2022 and 2023. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 4 — Leases and Note 6 — Debt” for
additional information.
Other Income (Expense), Net
Other income (expense), net was $(16.8) billion and $938 million during 2022 and 2023. The primary components of other income (expense), net are
related to equity securities valuations and adjustments, equity warrant valuations, and foreign currency. Included in other income (expense), net in 2022 and
2023 is a marketable equity securities valuation gain (loss) of $(12.7) billion and $797 million from our equity investment in Rivian.
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, intercompany transactions, the applicability of special tax regimes, changes in how we do business, acquisitions,
investments, developments in tax controversies, changes in our stock price, changes in our deferred tax assets and liabilities and their valuation, foreign
currency gains (losses), changes in statutes, regulations, case law, and administrative practices, principles, and interpretations related to tax, including changes
to the global tax framework, competition, and other laws and accounting rules in various jurisdictions, and relative changes of expenses or losses for which tax
benefits are not recognized. Our effective tax rate can be more or less volatile based on the amount of pre-tax income or loss. For example, the impact of
discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower. In addition, we record valuation allowances
against deferred tax assets when there is uncertainty about our ability to generate future income in relevant jurisdictions.
We recorded a provision (benefit) for income taxes of $(3.2) billion and $7.1 billion in 2022 and 2023. See Item 8 of Part II, “Financial Statements and
Supplementary Data — Note 9 — Income Taxes” for additional information.
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 flows 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 flows because we believe these measures provide additional perspective on the impact of acquiring property
and equipment with cash and through finance leases and financing obligations.
Free Cash Flow
Free cash flow is cash flow from operations reduced by “Purchases of property and equipment, net of proceeds from sales and incentives.” 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 2022 and 2023
(in millions):
Year Ended December 31,
2022
Net cash provided by (used in) operating activities
$
Purchases of property and equipment, net of proceeds from sales and incentives
2023
46,752
$
84,946
(58,321)
(48,133)
Free cash flow
$
(11,569) $
36,813
Net cash provided by (used in) investing activities
$
(37,601) $
(49,833)
Net cash provided by (used in) financing activities
$
9,718
(15,879)
28
$
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Guidance
We provided guidance on February 1, 2024, in our earnings release furnished on Form 8-K as set forth below. These forward-looking statements reflect
Amazon.com’s expectations as of February 1, 2024, 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 and geopolitical conditions and customer demand and
spending (including the impact of recessionary fears), inflation, interest rates, regional labor market constraints, world events, the rate of growth of the internet,
online commerce, cloud services, and new and emerging technologies, as well as those outlined in Item 1A of Part I, “Risk Factors.”
First Quarter 2024 Guidance
•
Net sales are expected to be between $138.0 billion and $143.5 billion, or to grow between 8% and 13% compared with first quarter 2023. This
guidance anticipates a favorable impact of approximately 40 basis points from foreign exchange rates.
•
Operating income is expected to be between $8.0 billion and $12.0 billion, compared with $4.8 billion in first quarter 2023. This guidance includes
approximately $0.9 billion lower depreciation expense due to an increase in the estimated useful life of our servers beginning on January 1, 2024.
•
This guidance assumes, among other things, that no additional business acquisitions, restructurings, or legal settlements are concluded.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Amazon.com, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Amazon.com, Inc. (the Company) as of December 31, 2023 and 2022, the related
consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2023, 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) (PCAOB), the Company’s
internal control over financial reporting as of December 31, 2023, 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 February 1, 2024 expressed an unqualified
opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Uncertain Tax Positions
Description of
the Matter
As discussed in Notes 1 and 9 of the consolidated financial statements, the Company is subject to income taxes in the U.S. and
numerous foreign jurisdictions and during the ordinary course of business, there are many tax positions for which the ultimate tax
determination is uncertain. As a result, significant judgment is required in evaluating the Company’s tax positions and determining its
provision for income taxes. The Company uses significant judgment in (1) determining whether a tax position’s technical merits are
more likely than not to be sustained and (2) measuring the amount of tax benefit that qualifies for recognition. As of December 31,
2023, the Company reported accrued liabilities of $5.2 billion for various tax contingencies.
Auditing the recognition and measurement of the Company’s tax contingencies was challenging because the evaluation of whether a
tax position is more likely than not to be sustained and the measurement of the benefit of various tax positions can be complex and
involves significant auditor judgment. Management’s evaluation of tax positions is based on interpretations of tax laws and legal
rulings, and may be impacted by regulatory changes and judicial and examination activity.
How We Addressed the
Matter in Our Audit
We tested controls over the Company’s process to assess the technical merits of its tax contingencies, including controls over: the
assessment as to whether a tax position is more likely than not to be sustained; the measurement of the benefit of its tax positions,
both initially and on an ongoing basis; and the development of the related disclosures.
We involved our international tax, transfer pricing, and research and development tax professionals in assessing the technical merits
of certain of the Company’s tax positions. Depending on the nature of the specific tax position and, as applicable, developments with
the relevant tax authorities relating thereto, our procedures included obtaining and examining the Company’s analysis including the
Company’s correspondence with such tax authorities and evaluating the underlying facts upon which the tax positions are based. We
used our knowledge of and experience with international, transfer pricing, and other income tax laws of the relevant taxing
jurisdictions to evaluate the Company’s accounting for its tax contingencies. We evaluated developments in the applicable regulatory
environments to assess potential effects on the Company’s positions, including recent decisions in relevant court cases. We analyzed
the appropriateness of the Company’s assumptions and the accuracy of the Company’s calculations and data used to determine the
amount of tax benefits to recognize. We evaluated the Company’s income tax disclosures in relation to these matters.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1996.
Seattle, Washington
February 1, 2024
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AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Year Ended December 31,
2021
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD
$
OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash from operating activities:
2022
42,377
$
2023
36,477
$
54,253
33,364
(2,722)
30,425
Depreciation and amortization of property and equipment and capitalized content costs, operating lease
assets, and other
34,433
41,921
48,663
Stock-based compensation
Non-operating expense (income), net
Deferred income taxes
12,757
(14,306)
(310)
19,621
16,966
(8,148)
24,023
(748)
(5,876)
Changes in operating assets and liabilities:
Inventories
(9,487)
(2,592)
1,449
Accounts receivable, net and other
(9,145)
(8,622)
(8,348)
Other assets
Accounts payable
(9,018)
3,602
(13,275)
2,945
(12,265)
5,473
Accrued expenses and other
Unearned revenue
2,123
2,314
(1,558)
2,216
(2,428)
4,578
46,327
46,752
84,946
(61,053)
5,657
(63,645)
5,324
(52,729)
4,596
Net cash provided by (used in) operating activities
INVESTING ACTIVITIES:
Purchases of property and equipment
Proceeds from property and equipment sales and incentives
Acquisitions, net of cash acquired, non-marketable investments, and other
(1,985)
(8,316)
(5,839)
Sales and maturities of marketable securities
Purchases of marketable securities
59,384
(60,157)
31,601
(2,565)
5,627
(1,488)
(58,154)
(37,601)
(49,833)
Common stock repurchased
Proceeds from short-term debt, and other
Repayments of short-term debt, and other
—
7,956
(7,753)
(6,000)
41,553
(37,554)
—
18,129
(25,677)
Proceeds from long-term debt
19,003
21,166
—
Repayments of long-term debt
(1,590)
(1,258)
(3,676)
Principal repayments of finance leases
Principal repayments of financing obligations
(11,163)
(162)
(7,941)
(248)
(4,384)
(271)
(15,879)
Net cash provided by (used in) investing activities
FINANCING ACTIVITIES:
Net cash provided by (used in) financing activities
6,291
9,718
Foreign currency effect on cash, cash equivalents, and restricted cash
(364)
(1,093)
403
Net increase (decrease) in cash, cash equivalents, and restricted cash
(5,900)
17,776
19,637
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
$
See accompanying notes to consolidated financial statements.
37
36,477
$
54,253
$
73,890
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AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Year Ended December 31,
2021
Net product sales
$
Net service sales
2022
241,787
$
2023
242,901
$
255,887
228,035
271,082
318,898
469,822
513,983
574,785
272,344
288,831
304,739
Fulfillment
75,111
84,299
90,619
Technology and infrastructure
56,052
73,213
85,622
Sales and marketing
32,551
42,238
44,370
General and administrative
8,823
11,891
11,816
62
1,263
767
Total net sales
Operating expenses:
Cost of sales
Other operating expense (income), net
444,943
501,735
537,933
Operating income
Total operating expenses
24,879
12,248
36,852
Interest income
448
989
2,949
Interest expense
(1,809)
(2,367)
(3,182)
Other income (expense), net
14,633
(16,806)
938
13,272
(18,184)
705
Income (loss) before income taxes
38,151
(5,936)
37,557
Benefit (provision) for income taxes
(4,791)
3,217
(7,120)
4
(3)
(12)
Total non-operating income (expense)
Equity-method investment activity, net of tax
Net income (loss)
$
33,364
$
(2,722) $
30,425
Basic earnings per share
$
3.30
$
(0.27) $
2.95
Diluted earnings per share
$
3.24
$
(0.27) $
2.90
Weighted-average shares used in computation of earnings per share:
Basic
10,117
10,189
10,304
Diluted
10,296
10,189
10,492
See accompanying notes to consolidated financial statements.
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AMAZON.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
December 31,
2022
2023
ASSETS
Current assets:
Cash and cash equivalents
$
53,888
$
73,387
Marketable securities
16,138
13,393
Inventories
34,405
33,318
Accounts receivable, net and other
42,360
52,253
146,791
172,351
Property and equipment, net
186,715
204,177
Operating leases
66,123
72,513
Goodwill
20,288
22,789
Total current assets
Other assets
42,758
Total assets
56,024
$
462,675
$
527,854
$
79,600
$
84,981
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other
62,566
64,709
Unearned revenue
13,227
15,227
155,393
164,917
Long-term lease liabilities
Total current liabilities
72,968
77,297
Long-term debt
67,150
58,314
Other long-term liabilities
21,121
25,451
Preferred stock ($0.01 par value; 500 shares authorized; no shares issued or outstanding)
—
—
Common stock ($0.01 par value; 100,000 shares authorized; 10,757 and 10,898 shares issued; 10,242 and
10,383 shares outstanding)
108
109
Commitments and contingencies (Note 7)
Stockholders’ equity:
Treasury stock, at cost
(7,837)
(7,837)
Additional paid-in capital
75,066
99,025
Accumulated other comprehensive income (loss)
(4,487)
(3,040)
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
See accompanying notes to consolidated financial statements.
40
83,193
113,618
146,043
201,875
462,675
$
527,854
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AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
Common Stock
Shares
Balance as of January 1, 2021
(180) $
52,551
—
—
—
—
33,364
33,364
Other comprehensive income (loss)
—
—
—
—
(1,196)
—
(1,196)
Stock-based compensation and issuance of employee
benefit plan stock
Balance as of December 31, 2021
109
1
—
12,672
—
—
12,673
10,175
—
106
—
(1,837)
—
55,437
—
(1,376)
—
85,915
(2,722)
138,245
(2,722)
—
—
—
—
(3,111)
—
(3,111)
113
(46)
2
—
—
(6,000)
19,629
—
—
—
—
—
19,631
(6,000)
10,242
—
—
108
—
—
(7,837)
—
—
75,066
—
—
(4,487)
—
1,447
83,193
30,425
—
146,043
30,425
1,447
141
1
—
23,959
—
—
23,960
(7,837) $
99,025
Balance as of December 31, 2022
Net income
Other comprehensive income (loss)
Stock-based compensation and issuance of employee
benefit plan stock
Balance as of December 31, 2023
10,383
$
105
109
$
$
(1,837) $
42,765
$
Total
Stockholders’
Equity
Retained
Earnings
—
Other comprehensive income (loss)
Stock-based compensation and issuance of employee
benefit plan stock
Common stock repurchased
$
Accumulated Other
Comprehensive
Income (Loss)
Net income
Net loss
10,066
Additional
Paid-In
Capital
Treasury
Stock
Amount
$
See accompanying notes to consolidated financial statements.
41
(3,040) $
113,618
$
$
93,404
201,875
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AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — DESCRIPTION OF BUSINESS, ACCOUNTING POLICIES, AND SUPPLEMENTAL DISCLOSURES
Description of Business
We seek to be Earth’s most customer-centric company. In each of our segments, we serve our primary customer sets, consisting of consumers, sellers,
developers, enterprises, content creators, advertisers, and employees. We serve consumers through our online and physical stores and focus on selection, price,
and convenience. We offer programs that enable sellers to grow their businesses, sell their products in our stores, and fulfill orders using our services, and
programs that allow authors, independent publishers, musicians, filmmakers, Twitch streamers, skill and app developers, and others to publish and sell content.
We serve developers and enterprises of all sizes through AWS, which offers a broad set of on-demand technology services, including compute, storage,
database, analytics, and machine learning, and other services. We also manufacture and sell electronic devices. In addition, we provide advertising services to
sellers, vendors, publishers, authors, and others, through programs such as sponsored ads, display, and video advertising.
We have organized our operations into three segments: North America, International, and AWS. See “Note 10 — Segment Information.”
Common Stock Split
On May 27, 2022, we effected a 20-for-1 stock split of our common stock and proportionately increased the number of authorized shares of common
stock. All share, restricted stock unit (“RSU”), and per share or per RSU information throughout this Annual Report on Form 10-K has been retroactively
adjusted to reflect the stock split. The shares of common stock retain a par value of $0.01 per share. Accordingly, an amount equal to the par value of the
increased shares resulting from the stock split was reclassified from “Additional paid-in capital” to “Common stock.”
Prior Period Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. “Other assets” were reclassified out of “Accounts
receivable, net and other” on our consolidated statements of cash flows.
Principles of Consolidation
The consolidated financial statements include the accounts of Amazon.com, Inc. and its consolidated entities (collectively, the “Company”), consisting of
its wholly-owned subsidiaries and those entities in which we have a variable interest and of which we are the primary beneficiary, including certain entities in
India and certain entities that support our health care services and seller lending financing activities. 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, income taxes, useful lives of equipment, commitments and contingencies, valuation of acquired intangibles and goodwill, stockbased compensation forfeiture rates, vendor funding, inventory valuation, collectability of receivables, impairment of property and equipment and operating
leases, valuation and impairment of investments, self-insurance liabilities, and viewing patterns of capitalized video content. Actual results could differ
materially from these estimates. For example, in Q4 2023 we completed a useful life study for our servers and are increasing the useful life from five years to
six years in January 2024, which, based on servers that are included in “Property and equipment, net” as of December 31, 2023, will have an anticipated impact
to our 2024 operating income of $3.1 billion. We had previously increased the useful life of our servers from four years to five years in January 2022.
For the year ended December 31, 2022, we recorded approximately $1.1 billion, of which $720 million was recorded in the fourth quarter, of
impairments of property and equipment and operating leases primarily related to physical stores. These charges were recorded in “Other operating expense
(income), net” on our consolidated statements of operations and primarily impacted our North America segment. For the year ended December 31, 2022, we
also recorded expenses of approximately $480 million, primarily in “Fulfillment”, on our consolidated statements of operations primarily relating to
terminating contracts for certain leases not yet commenced as well as other purchase commitments, which primarily impacted our North America segment.
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Advertising services - We provide advertising services to sellers, vendors, publishers, authors, and others, through programs such as sponsored ads,
display, and video advertising. Revenue is recognized as ads are delivered based on the number of clicks or impressions.
Subscription services - Our subscription sales include fees associated with Amazon Prime memberships and access to content including digital video,
audiobooks, digital music, e-books, and other non-AWS subscription services. Prime memberships provide our customers with access to an evolving suite of
benefits that represent a single stand-ready obligation. Subscriptions are paid for at the time of or in advance of delivering the services. Revenue from such
arrangements is recognized over the subscription period.
AWS - Our AWS arrangements include global sales of compute, storage, database, and other services. Revenue is allocated to services using stand-alone
selling prices and is primarily recognized when the customer uses these services, based on the quantity of services rendered, such as compute or storage
capacity delivered on-demand. Certain services, including compute and database, are also offered as a fixed quantity over a specified term, for which revenue is
recognized ratably. Sales commissions we pay in connection with contracts that exceed one year are capitalized and amortized over the contract term.
Other - Other revenue includes sales related to various other offerings, such as certain licensing and distribution of video content, health care services,
and shipping services, and our co-branded credit card agreements. Revenue is recognized when content is licensed or distributed and as or when services are
performed.
Return Allowances
Return allowances, which reduce revenue and cost of sales, are estimated using historical experience. Liabilities for return allowances are included in
“Accrued expenses and other” and were $1.0 billion, $1.3 billion, and $1.4 billion as of December 31, 2021, 2022, and 2023. Additions to the allowance were
$5.1 billion, $5.5 billion, and $5.2 billion and deductions from the allowance were $4.9 billion, $5.2 billion, and $5.1 billion in 2021, 2022, and 2023. Included
in “Inventories” on our consolidated balance sheets are assets totaling $882 million, $948 million, and $992 million as of December 31, 2021, 2022, and 2023,
for the rights to recover products from customers associated with our liabilities for return allowances.
Cost of Sales
Cost of sales primarily consists of the purchase price of consumer products, inbound and outbound shipping costs, including costs related to sortation and
delivery centers and where we are the transportation service provider, and digital media content costs where we record revenue gross, including video and
music. 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. 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 consideration primarily for cooperative marketing efforts, promotions, incentives, and volume
rebates. We generally consider these amounts received from vendors to be a reduction of the prices we pay for their goods, including property and equipment,
or services, and are recorded as a reduction of the cost of inventory, cost of services, or cost of property and equipment. Volume rebates typically depend on
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.
Fulfillment
Fulfillment costs primarily consist of those costs incurred in operating and staffing our North America and International segments’ fulfillment centers,
physical stores, and customer service centers, including facilities and equipment expenses, such as depreciation and amortization, and rent; 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.
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Technology and Infrastructure
Technology and infrastructure costs include payroll and related expenses for employees involved in the research and development of new and existing
products and services, development, design, and maintenance of our stores, curation and display of products and services made available in our online stores,
and infrastructure costs. Infrastructure costs include servers, networking equipment, and data center related depreciation and amortization, rent, utilities, and
other expenses necessary to support AWS and other Amazon businesses. Collectively, these costs reflect the investments we make in order to offer a wide
variety of products and services to our customers, including expenditures related to initiatives to build and deploy innovative and efficient software and
electronic devices and the development of a satellite network for global broadband service and autonomous vehicles for ride-hailing services. Technology and
infrastructure costs are generally expensed as incurred.
Sales and Marketing
Sales and marketing costs include advertising and payroll and related expenses for personnel engaged in marketing and selling activities, including sales
commissions related to AWS. We pay commissions to third parties when their customer referrals result in sales. We also participate in cooperative advertising
arrangements with certain of our vendors, and other third parties.
Advertising and other promotional costs to market our products and services are expensed as incurred and were $16.9 billion, $20.6 billion, and $20.3
billion in 2021, 2022, and 2023.
General and Administrative
General and administrative expenses primarily consist of costs for corporate functions, including payroll and related expenses; facilities and equipment
expenses, such as depreciation and amortization expense and rent; and professional fees.
Stock-Based Compensation
Compensation cost for all equity-classified 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. Such value is
recognized as expense over the service period, net of estimated forfeitures, using the accelerated method. Under this method, approximately 50% of the grant
date fair value is recognized as expense in the first year of grant for the majority of our stock-based compensation awards. The accelerated method also adds a
higher level of sensitivity and complexity in estimating forfeitures. If an award is forfeited early in its life, the adjustment to compensation expense is much
greater under an accelerated method than under a straight-line method. 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 historical forfeiture experience by grant year and employee
level. Additionally, stock-based compensation includes stock appreciation rights that are expected to settle in cash. These liability-classified awards are
remeasured to fair value at the end of each reporting period until settlement or expiration.
Other Operating Expense (Income), Net
Other operating expense (income), net, consists primarily of the amortization of intangible assets, and asset impairments for physical store closures in
2022 and for fulfillment network facilities and physical store closures in 2023.
Other Income (Expense), Net
Other income (expense), net, is as follows (in millions):
Year Ended December 31,
2021
Marketable equity securities valuation gains (losses)
$
2022
(13,870) $
984
Equity warrant valuation gains (losses)
1,315
(2,132)
26
Upward adjustments relating to equity investments in private companies
1,866
76
40
Foreign currency gains (losses)
(55)
(340)
65
Other, net
(19)
(540)
(177)
(16,806) $
938
$
Total other income (expense), net
45
11,526
14,633
$
2023
$
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Included in other income (expense), net in 2022 and 2023 is a marketable equity securities valuation gain (loss) of $(12.7) billion and $797 million from
our equity investment in Rivian Automotive, Inc. (“Rivian”). Our investment in Rivian’s preferred stock was accounted for at cost, with adjustments for
observable changes in prices or impairments, prior to Rivian’s initial public offering in November 2021, which resulted in the conversion of our preferred stock
to Class A common stock. As of December 31, 2023, we held 158 million shares of Rivian’s Class A common stock, representing an approximate 16%
ownership interest, and an approximate 15% voting interest. We determined that we have the ability to exercise significant influence over Rivian through our
equity investment, our commercial arrangement for the purchase of electric vehicles and jointly-owned intellectual property, and one of our employees serving
on Rivian’s board of directors. We elected the fair value option to account for our equity investment in Rivian, which is included in “Marketable securities” on
our consolidated balance sheets, and had a fair value of $2.9 billion and $3.7 billion as of December 31, 2022 and December 31, 2023. The investment was
subject to regulatory sales restrictions resulting in a discount for lack of marketability of approximately $800 million as of December 31, 2021, which expired
in Q1 2022.
Required summarized financial information of Rivian as disclosed in its most recent SEC filings is as follows (in millions):
Year Ended
December 31, 2021
Revenues
$
Gross profit
Year Ended
December 31, 2022
55
$
1,658
Nine Months Ended
September 30, 2023
$
3,119
(465)
(3,123)
(1,424)
Loss from operations
(4,220)
(6,856)
(4,158)
Net loss
(4,688)
(6,752)
(3,911)
December 31, 2022
Total current assets
$
13,130
September 30, 2023
$
12,086
Total assets
17,876
16,456
Total current liabilities
2,424
2,624
Total liabilities
4,077
5,904
Income Taxes
Income tax expense includes U.S. (federal and state) and foreign income taxes. Certain foreign subsidiary earnings and losses are subject to current U.S.
taxation and the subsequent repatriation of those earnings is not subject to tax in the U.S. We intend to invest substantially all of our foreign subsidiary
earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we would incur significant, additional
costs upon repatriation of such amounts.
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as
well as net operating loss and tax credit carryforwards, and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered.
Deferred tax assets represent amounts available to reduce income taxes payable in future periods. 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 recent cumulative loss experience and expectations of future earnings, capital gains and investment in such
jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors.
We utilize a two-step approach to recognizing and measuring uncertain income tax positions (income 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 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 income tax contingencies in
income tax expense.
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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.
We measure the fair value of money market funds and certain marketable equity securities based on quoted prices in active markets for identical assets or
liabilities. Other marketable securities 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 significant amounts of marketable securities
categorized as Level 3 assets as of December 31, 2022 and 2023.
We hold equity warrants giving us the right to acquire stock of other companies. As of December 31, 2022 and 2023, these warrants had a fair value of
$2.1 billion and $2.2 billion, and are recorded within “Other assets” on our consolidated balance sheets with gains and losses recognized in “Other income
(expense), net” on our consolidated statements of operations. These warrants are classified as Level 2 and 3 assets.
Cash and Cash Equivalents
We classify all highly liquid instruments with an original maturity of three months or less as cash equivalents.
Inventories
Inventories, consisting of products available for sale, are primarily accounted for using the first-in, first-out method, and are valued at the lower of cost
and net realizable 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. The
inventory valuation allowance, representing a write-down of inventory, was $2.8 billion and $3.0 billion as of December 31, 2022 and 2023.
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 supply, we enter into agreements
with contract manufacturers and suppliers for certain electronic device components. We have certain non-cancellable purchase commitments arising from these
agreements. These commitments are based on forecasted customer demand. If we reduce these commitments, we may incur additional costs. We also have
firm, non-cancellable commitments for certain products offered in our Whole Foods Market stores.
Accounts Receivable, Net and Other
Included in “Accounts receivable, net and other” on our consolidated balance sheets are receivables primarily related to customers, vendors, and sellers,
as well as prepaid expenses and other current assets. As of December 31, 2022 and 2023, customer receivables, net, were $26.6 billion and $34.1 billion,
vendor receivables, net, were $6.9 billion and $8.5 billion, seller receivables, net, were $1.3 billion and $1.0 billion, and other receivables, net, were $3.1
billion and $3.3 billion. Seller receivables are amounts due from sellers related to our seller lending program, which provides funding to sellers primarily to
procure inventory. Prepaid expenses and other current assets were $4.5 billion and $5.4 billion as of December 31, 2022 and December 31, 2023.
We estimate losses on receivables based on expected losses, including our historical experience of actual losses. 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 $1.1 billion, $1.4 billion, and $1.7 billion as of December 31, 2021, 2022, and 2023. Additions to the allowance were $1.0 billion, $1.6
billion, and $1.9 billion, and deductions to the allowance were $1.1 billion, $1.3 billion, and $1.6 billion in 2021, 2022, and 2023.
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Software Development Costs
We incur software development costs related to products to be sold, leased, or marketed to external users, internal-use software, and our websites.
Software development costs capitalized were not significant for the years presented. All other costs, including those related to design or maintenance, are
expensed as incurred.
Property and Equipment, Net
Property and equipment are stated at cost less accumulated depreciation and amortization. Incentives that we receive from property and equipment
vendors are recorded as a reduction to our costs. Property includes buildings and land that we own, along with property we have acquired under build-to-suit
lease arrangements when we have control over the building during the construction period and finance lease arrangements. Equipment includes assets such as
servers and networking equipment, heavy equipment, and other fulfillment equipment. Depreciation and amortization 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, four years prior to January 1, 2022 and
five years subsequent to January 1, 2022 for our servers, five years prior to January 1, 2022 and six years subsequent to January 1, 2022 for our networking
equipment, ten years for heavy equipment, and three to ten years for other fulfillment equipment). Depreciation and amortization expense is classified within
the corresponding operating expense categories on our consolidated statements of operations.
Leases
We categorize leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those leases that allow
us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance leases are recorded in “Property and equipment, net.”
All other leases are categorized as operating leases. Our leases generally have terms that range from one to ten years for equipment and one to twenty years for
property.
Certain lease contracts include obligations to pay for other services, such as operations and maintenance. For leases of property, we account for these
other services as a component of the lease. For substantially all other leases, the services are accounted for separately and we allocate payments to the lease and
other services components based on estimated stand-alone prices.
Lease liabilities are recognized at the present value of the fixed lease payments, reduced by landlord incentives using a discount rate based on similarly
secured borrowings available to us. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives,
plus any direct costs from executing the leases or lease prepayments reclassified from “Other assets” upon lease commencement. Leasehold improvements are
capitalized at cost and amortized over the lesser of their expected useful life or the lease term.
When we have the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and it is
reasonably certain that we will exercise the option, we consider the option in determining the classification and measurement of the lease. Our leases may
include variable payments based on measures that include changes in price indices, market interest rates, or the level of sales at a physical store, which are
expensed as incurred.
Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease. Finance lease
assets are amortized within operating expenses on a straight-line basis over the shorter of the estimated useful lives of the assets or, in the instance where title
does not transfer at the end of the lease term, the lease term. The interest component of a finance lease is included in interest expense and recognized using the
effective interest method over the lease term.
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 amortized over the lease period into operating expense, and the recorded liabilities are accreted to the future value of the estimated retirement costs.
Financing Obligations
We record assets and liabilities for estimated construction costs under build-to-suit lease arrangements when we have control over the building during the
construction period. If we continue to control the building after the construction period, the arrangement is classified as a financing obligation instead of a
lease. The building is depreciated over the shorter of its useful life or the term of the obligation.
If we do not control the building after the construction period ends, the assets and liabilities for construction costs are derecognized, and we classify the
lease as operating.
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Consolidated Statements of Cash Flows Reconciliation
The following table provides a reconciliation of the amount of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets
to the total of the same such amounts shown in the consolidated statements of cash flows (in millions):
December 31, 2022
Cash and cash equivalents
$
Restricted cash included in accounts receivable, net and other
Restricted cash included in other assets
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows
December 31, 2023
53,888
$
$
73,387
358
497
7
6
54,253
$
73,890
Note 3 — PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of the following (in millions):
December 31,
2022
2023
Gross property and equipment (1):
Land and buildings
$
Equipment
91,650
$
157,458
105,293
185,039
Other assets
4,602
5,116
Construction in progress
30,020
28,840
283,730
324,288
97,015
120,111
Gross property and equipment
Total accumulated depreciation and amortization (1)
Total property and equipment, net
$
186,715
$
204,177
__________________
(1) Includes the original cost and accumulated depreciation of fully-depreciated assets.
Depreciation and amortization expense on property and equipment was $22.9 billion, $24.9 billion, and $30.2 billion which includes amortization of
property and equipment acquired under finance leases of $9.9 billion, $6.1 billion, and $5.9 billion for 2021, 2022, and 2023.
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Note 4 — LEASES
We have entered into non-cancellable operating and finance leases for fulfillment network, data center, office, and physical store facilities as well as
server and networking equipment, aircraft, and vehicles. Gross assets acquired under finance leases, including those where title transfers at the end of the lease,
are recorded in “Property and equipment, net” and were $68.0 billion and $62.5 billion as of December 31, 2022 and 2023. Accumulated amortization
associated with finance leases was $45.2 billion and $44.7 billion as of December 31, 2022 and 2023.
Lease cost recognized in our consolidated statements of operations is summarized as follows (in millions):
Year Ended December 31,
2021
Operating lease cost
$
2022
7,199
2023
$
8,847
$
10,550
Finance lease cost:
Amortization of lease assets
9,857
6,097
5,899
Interest on lease liabilities
473
361
304
Finance lease cost
10,330
6,458
6,203
1,556
1,852
2,165
Variable lease cost
Total lease cost
$
19,085
$
17,157
$
18,918
Other information about lease amounts recognized in our consolidated financial statements is as follows:
December 31, 2022
December 31, 2023
Weighted-average remaining lease term – operating leases
11.6 years
11.3 years
Weighted-average remaining lease term – finance leases
10.3 years
11.9 years
Weighted-average discount rate – operating leases
2.8 %
3.3 %
Weighted-average discount rate – finance leases
2.3 %
2.7 %
Our lease liabilities were as follows (in millions):
December 31, 2022
Operating Leases
Gross lease liabilities
$
Less: imputed interest
Present value of lease liabilities
Less: current portion of lease liabilities
81,273
Finance Leases
$
$
$
99,292
(12,233)
(2,236)
(14,469)
69,040
15,783
84,823
(7,458)
Total long-term lease liabilities
18,019
Total
61,582
(4,397)
$
11,386
(11,855)
$
72,968
December 31, 2023
Operating Leases
Gross lease liabilities
$
Less: imputed interest
90,777
Finance Leases
$
14,106
Total
$
104,883
(15,138)
(1,997)
Present value of lease liabilities
75,639
12,109
87,748
Less: current portion of lease liabilities
(8,419)
(2,032)
(10,451)
Total long-term lease liabilities
$
55
67,220
$
10,077
(17,135)
$
77,297
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Intangible Assets
Acquired identifiable intangible assets are valued primarily by using discounted cash flows. These assets are included within “Other assets” on our
consolidated balance sheets and consist of the following (in millions):
December 31,
2022
Acquired
Intangibles,
Gross (1)
2023
Acquired
Intangibles,
Net
Accumulated
Amortization (1)
Acquired
Intangibles,
Gross (1)
Acquired
Intangibles,
Net
Accumulated
Amortization (1)
Weighted
Average Life
Remaining
Finite-lived intangible assets (2):
Marketing-related
$
(601) $
1,806
1,905
17.5
3,661
(813)
2,848
4,800
(1,129)
3,671
11.7
Technology- and contentbased
883
(643)
240
743
(340)
403
5.1
Customer-related
184
(128)
56
749
(188)
561
6.6
(2,395) $
6,540
12.5
$
1,147
(2,395) $
7,687
Contract-based
Total finite-lived
intangible assets
2,407
$
7,135
$
1,147
Total acquired intangibles $
8,282
IPR&D and other (3)
$
$
$
$
2,643
(2,185) $
4,950
$
8,935
$
1,147
$
1,147
(2,185) $
6,097
$
10,082
$
$
$
(738) $
___________________
(1) Excludes the original cost and accumulated amortization of fully-amortized intangibles.
(2) Finite-lived intangible assets, excluding acquired video content, have estimated useful lives of between one and twenty-five years, and are being amortized
to operating expenses on a straight-line basis.
(3) Intangible assets acquired in a business combination that are in-process and used in research and development activities are considered indefinite-lived
until the completion or abandonment of the research and development efforts. Once the research and development efforts are completed, we determine the
useful life and begin amortizing the assets.
Amortization expense for acquired finite-lived intangibles was $512 million, $604 million, and $706 million in 2021, 2022, and 2023. Expected future
amortization expense of acquired finite-lived intangible assets as of December 31, 2023 is as follows (in millions):
Year Ended December 31,
2024
$
715
2025
631
2026
563
2027
552
2028
534
Thereafter
3,545
$
57
6,540
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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, 2021
303.3
$
100
Units granted
127.3
167
Units vested
(108.4)
85
Units forfeited
(42.3)
116
279.9
134
Units granted
262.8
142
Units vested
(113.3)
114
Outstanding as of December 31, 2021
Units forfeited
(45.0)
143
384.4
144
Units granted
218.1
106
Units vested
(139.9)
143
(56.8)
135
405.8
125
Outstanding as of December 31, 2022
Units forfeited
Outstanding as of December 31, 2023
Scheduled vesting for outstanding restricted stock units as of December 31, 2023, is as follows (in millions):
Year Ended
2024
Scheduled vesting — restricted stock units
218.3
2025
124.6
2026
48.7
2027
11.2
2028
Thereafter
1.3
1.7
Total
405.8
As of December 31, 2023, there was $18.3 billion of net unrecognized compensation cost related to unvested stock-based compensation arrangements.
This compensation is recognized on an accelerated basis with more than half of the compensation expected to be expensed in the next twelve months, and has a
remaining weighted-average recognition period of 0.9 years. The estimated forfeiture rate as of December 31, 2021, 2022, and 2023 was 26.5%, 26.5%, and
26.1%.
During 2021, 2022, and 2023, the fair value of restricted stock units that vested was $18.2 billion, $12.8 billion, and $17.6 billion.
Common Stock Available for Future Issuance
As of December 31, 2023, common stock available for future issuance to employees is 1.6 billion shares.
Note 9 — INCOME TAXES
In 2021, 2022, and 2023, we recorded a net tax provision (benefit) of $4.8 billion, $(3.2) billion, and $7.1 billion. Our U.S. taxable income is reduced by
accelerated depreciation deductions and increased by the impact of capitalized research and development expenses. Cash paid for income taxes, net of refunds,
was $3.7 billion, $6.0 billion, and $11.2 billion for 2021, 2022, and 2023.
Certain foreign subsidiary earnings and losses are subject to current U.S. taxation and the subsequent repatriation of those earnings is not subject to tax in
the U.S. The U.S. tax rules also provide for enhanced accelerated depreciation deductions by allowing us to expense a portion of qualified property, primarily
equipment. These enhanced deductions are scheduled to phase out annually from 2023 through 2026. Our federal tax provision included a partial accelerated
depreciation deduction election for 2021, and a full election for 2022 and 2023. Effective January 1, 2022, research and development expenses are required to
be capitalized and amortized for U.S. tax purposes.
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The components of the provision (benefit) for income taxes, net are as follows (in millions):
Year Ended December 31,
2021
2022
2023
U.S. Federal:
Current
$
2,129
$
2,175
$
8,652
Deferred
155
(6,686)
(5,505)
Total
2,284
(4,511)
3,147
Current
763
1,074
2,158
Deferred
(178)
(1,302)
(498)
Total
585
(228)
1,660
Current
2,209
1,682
2,186
Deferred
(287)
(160)
127
Total
1,922
1,522
2,313
(3,217) $
7,120
U.S. State:
International:
Provision (benefit) for income taxes, net
$
4,791
$
U.S. and international components of income (loss) before income taxes are as follows (in millions):
Year Ended December 31,
2021
U.S.
$
2022
35,879
International
$
32,328
2,289
5,229
(5,936) $
37,557
2,272
Income (loss) before income taxes
$
38,151
$
2023
(8,225) $
The items accounting for differences between income taxes computed at the federal statutory rate and the provision (benefit) recorded for income taxes
are as follows (in millions):
Year Ended December 31,
2021
Income taxes computed at the federal statutory rate
$
2022
8,012
$
2023
(1,246) $
7,887
Effect of:
Tax impact of foreign earnings and losses
(1,349)
(370)
594
465
(173)
1,307
Tax credits
(1,136)
(1,006)
(2,362)
Stock-based compensation (1)
(1,094)
612
1,047
Foreign income deduction (2)
(301)
(1,258)
(1,429)
Other, net
194
224
76
(3,217) $
7,120
State taxes, net of federal benefits
Total
$
4,791
$
___________________
(1) Includes non-deductible stock-based compensation and excess tax benefits or shortfalls from stock-based compensation. Our tax provision includes $1.9
billion of excess tax benefits from stock-based compensation for 2021, and $33 million and $519 million of tax shortfalls from stock-based compensation
for 2022 and 2023.
(2) U.S. companies are eligible for a deduction that lowers the effective tax rate on certain foreign income. This regime is referred to as the Foreign-Derived
Intangible Income deduction and is dependent on the amount of our U.S. taxable income.
We generated an income tax benefit in 2022 as compared to a provision for income taxes in 2021 primarily due to a decrease in pretax income and an
increase in the foreign income deduction. This was partially offset by a reduction in excess tax benefits from stock-based compensation and a decrease in the
tax impact of foreign earnings and losses driven by a decline in the favorable effects of corporate restructuring transactions. The foreign income deduction
benefit recognized in 2022 reflects a change in our application of tax regulations related to the computation of qualifying foreign income and includes a tax
benefit of approximately $655 million related to years prior to 2022.
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We recorded a provision for income taxes in 2023 as compared to an income tax benefit in 2022 primarily due to an increase in pretax income, a decrease
in the tax impact of foreign earnings and losses driven by a decline in the favorable effects of corporate restructuring transactions, and an increase in tax
shortfalls from stock-based compensation. This was partially offset by an increase in federal research and development credits, which included approximately
$600 million of tax benefit recorded in 2023 related to a change in the estimated qualifying expenditures associated with our 2022 U.S. federal R&D credit.
We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S.
in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts.
Deferred income tax assets and liabilities are as follows (in millions):
December 31,
2022
2023
Deferred tax assets (1):
Loss carryforwards U.S. - Federal/States
386
610
Loss carryforwards - Foreign
2,831
2,796
Accrued liabilities, reserves, and other expenses
3,280
3,751
Stock-based compensation
4,295
5,279
Depreciation and amortization
1,009
1,114
Operating lease liabilities
Capitalized research and development
18,285
19,922
6,824
Other items
1,023
14,800
745
Tax credits
950
1,582
Total gross deferred tax assets
38,883
50,599
Less valuation allowances (2)
(4,374)
(4,811)
34,509
45,788
Depreciation and amortization
(9,039)
(12,454)
Operating lease assets
(17,140)
(18,648)
Other items
(817)
(1,489)
Deferred tax assets, net of valuation allowances
Deferred tax liabilities:
Net deferred tax assets (liabilities), net of valuation allowances
$
7,513
$
13,197
___________________
(1) Deferred tax assets are presented after tax effects and net of tax contingencies.
(2) Relates primarily to deferred tax assets that would only be realizable upon the generation of net income in certain foreign taxing jurisdictions or future
capital gains, as well as tax credits.
Our valuation allowances primarily relate to foreign deferred tax assets, including substantially all of our foreign net operating loss carryforwards as of
December 31, 2023. Our foreign net operating loss carryforwards for income tax purposes as of December 31, 2023 were approximately $10.2 billion before
tax effects and certain of these amounts are subject to annual limitations under applicable tax law. If not utilized, a portion of these losses will begin to expire in
2024.
Income 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 tax-related 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.
66
EXCERPTS
FROM
10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Transition Period From
to
Commission file number 1-8400
American Airlines Group Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
4333 Amon Carter Blvd., Fort Worth, Texas 76155
(Address of principal executive offices, including zip code)
75-1825172
(I.R.S. Employer
Identification No.)
(817) 963-1234
Registrant’s telephone number, including area code
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange on Which Registered
NASDAQ
Common Stock, $0.01 par value per share
Securities registered pursuant to Section 12(g) of the Act: None
Commission file number 1-2691
American Airlines, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
13-1502798
(I.R.S. Employer
Identification No.)
4333 Amon Carter Blvd., Fort Worth, Texas 76155
(Address of principal executive offices, including zip code)
(817) 963-1234
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
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.
American Airlines Group Inc.
Yes
☒
No
☐
American Airlines, Inc.
Yes
☒
No
☐
Other Revenue
Other revenue includes revenue associated with our loyalty program, which is comprised principally of the marketing component of mileage
sales to co-branded credit card and other partners and other marketing related payments. The accounting and recognition for the loyalty program
marketing services are discussed above in “Loyalty Revenue.” The remaining amounts included within other revenue relate to airport clubs,
advertising and vacation-related services.
Long-lived Assets
Long-lived assets consist of flight equipment, as well as other fixed assets and finite-lived intangible assets such as certain domestic airport
slots, customer relationships, marketing agreements, tradenames and airport gate leasehold rights. In addition to the original cost, the recorded
value of our fixed assets is impacted by a number of estimates made, including estimated useful lives, salvage values and our determination as to
whether aircraft are temporarily or permanently grounded. Finite-lived intangible assets are originally recorded at their acquired fair values and are
subsequently amortized over their estimated useful lives. See Note 1 to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 1
to American’s Consolidated Financial Statements in Part II, Item 8B for further information.
We assess impairment on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired. An
asset or group of assets is considered impaired when the undiscounted cash flows estimated to be generated by the assets are less than the
carrying amount of the assets and the net book value of the assets exceeds their estimated fair value. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the
assets. Estimates of fair value represent management’s best estimate based on appraisals, industry trends and reference to market rates and
transactions.
The majority of American’s aircraft fleet types are depreciated over 25-30 years. It is possible that the ultimate lives of our aircraft will be
significantly different than the current estimate due to unforeseen events in the future that impact our fleet plan, including positive or negative
developments in the areas described above. For example, operating the aircraft for a longer period will result in higher maintenance, fuel and other
operating costs than if we replaced the aircraft.
Leases
We adopted ASU 2016-02: Leases (Topic 842) (the New Lease Standard) as of January 1, 2018. See “ Recent Accounting Pronouncements”
below for further discussion about the New Lease Standard and its impact on our consolidated balance sheet. We determine if an arrangement is a
lease at inception. Operating leases are included in operating lease right-of-use (ROU) assets, current operating lease liabilities and noncurrent
operating lease liabilities in our consolidated balance sheet. Finance leases are included in property and equipment, current maturities of long-term
debt and finance leases and long-term debt and finance leases, net of current maturities, in our consolidated balance sheet.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease
payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present
value of lease payments over the lease term.
We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining
the present value of lease payments. We give consideration to our recent debt issuances as well as publicly available data for instruments with
similar characteristics when calculating our incremental borrowing rates. A 100 basis point decrease in our estimate of the incremental borrowing
rate at January 1, 2018 (the date of our adoption of the New Lease Standard) would increase our operating lease liability by approximately $275
million.
Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12
months or less are not recorded on the balance sheet. Our lease agreements do not contain any residual value guarantees.
Under certain of our capacity purchase agreements with third-party regional carriers, we do not own the underlying aircraft. However, since we
control the marketing, scheduling, ticketing, pricing and seat inventories of these aircraft and therefore control the asset, the aircraft is deemed to
be leased for accounting purposes. For these capacity purchase agreements, we account for the lease and non-lease components separately. The
lease component consists of the aircraft and the non-lease components consist of services, such as the crew and maintenance. We allocate the
consideration in the capacity purchase agreements to the lease and non-lease components using their estimated relative standalone prices. See
Note 12(b) to AAG’s Consolidated Financial Statements in Part II, Item 8A and Note 10(b) to American’s Consolidated Financial Statements in
Part II, Item 8B for additional information on our capacity purchase agreements.
For real estate, we account for the lease and non-lease components as a single lease component.
73
ASU 2016-02: Leases (Topic 842) (the New Lease Standard)
The New Lease Standard requires lessees to recognize a lease liability and a right-of-use (ROU) asset on the balance sheet for operating
leases. Accounting for finance leases is substantially unchanged. The New Lease Standard is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted.
In the fourth quarter of 2018, we elected to early adopt the New Lease Standard as of January 1, 2018 using a modified retrospective transition,
with the cumulative-effect adjustment to the opening balance of retained earnings as of the effective date (the effective date method). Under the
effective date method, financial results reported in periods prior to 2018 are unchanged. We also elected the package of practical expedients,
which among other things, does not require reassessment of lease classification.
The adoption of the New Lease Standard had a significant impact on our consolidated balance sheet due to the recognition of approximately $10
billion of lease liabilities with corresponding right-of-use assets for operating leases.
Additionally, we recognized a $197 million cumulative effect adjustment credit, net of tax, to retained earnings. The adjustment to retained
earnings was driven principally by sale-leaseback transactions including the recognition of unamortized deferred aircraft sale-leaseback gains.
Prior to the adoption of the New Lease Standard, gains on sale-leaseback transactions were generally deferred and recognized in the income
statement over the lease term. Under the New Lease Standard, gains on sale-leaseback transactions (subject to adjustment for off-market terms)
are recognized immediately.
Finally, our 2018 pre-tax income decreased by $16 million as a result of adoption of the New Lease Standard.
ASU 2016-01: Financial Instruments - Overall (Subtopic 825-10)
This ASU made several modifications to Subtopic 825-10, including the elimination of the available-for-sale classification of equity investments,
and it required equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net
income. This standard was adopted prospectively as of January 1, 2018 and resulted in a $60 million cumulative effect adjustment credit to
retained earnings, net of tax, related to our investment in China Southern Airlines, which was previously accounted for under the cost method.
ASU 2016-18: Statement of Cash Flows (Topic 230): Restricted Cash
This ASU required that the change in the total cash balance, cash at the beginning of the period and cash at the end of the period on the
statement of cash flows include restricted cash, and also required companies that report cash and restricted cash separately on the balance sheet
to reconcile those amounts to the statement of cash flows. This standard was applied retrospectively, which resulted in the recast of prior reporting
periods in the statement of cash flows. For the years ended December 31, 2018, 2017 and 2016, $11 million, $103 million and $113 million,
respectively, of restricted cash is included in the total cash and restricted cash balance at the end of the period. A reconciliation of cash and
restricted cash reported on our consolidated statements of cash flows to the amounts reported on our consolidated balance sheets is provided in a
table below the Consolidated Statements of Cash Flows in Part II, Item 8A - AAG’s Consolidated Financial Statements.
76
ITEM 8A. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF AMERICAN AIRLINES GROUP INC.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
American Airlines Group Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of American Airlines Group Inc. and subsidiaries (the Company) as of
December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity for
each of the years in the three‑year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In
our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018, 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) (PCAOB), the
Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2019
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue from contracts with
customers and leases in 2018 due to the full retrospective adoption of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with
Customers (Topic 606), as amended, and the modified retrospective adoption of ASU 2016-02, Leases (Topic 842), as amended.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/
We have served as the Company’s auditor since 2014.
Dallas, Texas
February 25, 2019
80
KPMG LLP
AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except shares and per share amounts)
Year Ended December 31,
2018
2017
2016
Operating revenues:
Passenger
Cargo
Other
Total operating revenues
$
40,676
1,013
2,852
$
39,131
890
2,601
$
37,045
785
2,312
44,541
42,622
40,142
Operating expenses:
Aircraft fuel and related taxes
Salaries, wages and benefits
Regional expenses
Maintenance, materials and repairs
Other rent and landing fees
Aircraft rent
Selling expenses
Depreciation and amortization
Special items, net
Other
Total operating expenses
8,053
12,251
7,133
2,050
1,900
1,264
1,520
1,839
787
5,088
6,128
11,954
6,546
1,959
1,806
1,197
1,477
1,702
712
4,910
5,071
10,967
6,044
1,834
1,772
1,203
1,323
1,525
709
4,634
41,885
38,391
35,082
Operating income
2,656
4,231
5,060
Nonoperating income (expense):
Interest income
Interest expense, net
Other income, net
Total nonoperating expense, net
118
(1,056)
166
94
(1,053)
123
63
(991)
20
Income before income taxes
Income tax provision
Net income
Earnings per common share:
Basic
Diluted
Weighted average shares outstanding (in thousands):
Basic
Diluted
Cash dividends declared per common share
(772)
(836)
(908)
1,884
472
3,395
2,113
4,152
1,568
$
1,412
$
1,282
$
2,584
$
$
3.04
3.03
$
$
2.62
2.61
$
$
4.68
4.65
$
464,236
465,660
0.40
$
489,164
491,692
0.40
$
552,308
556,099
0.40
See accompanying notes to consolidated financial statements.
81
AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Year Ended December 31,
2018
Net income
$
Other comprehensive income (loss), net of tax:
Pension, retiree medical and other postretirement benefits
Investments
Total other comprehensive loss, net of tax
Total comprehensive income
$
2017
1,412
2016
1,282
$
2,584
(117)
(3)
(70)
(1)
(358)
7
(120)
(71)
(351)
1,292
See accompanying notes to consolidated financial statements.
82
$
$
1,211
$
2,233
AMERICAN AIRLINES GROUP INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except shares and par value)
December 31,
2018
2017
ASSETS
Current assets
Cash
$
Short-term investments
275
$
4,485
Restricted cash and short-term investments
295
4,771
154
318
Accounts receivable, net
1,706
1,752
Aircraft fuel, spare parts and supplies, net
1,522
1,359
Prepaid expenses and other
495
651
Total current assets
8,637
9,146
Flight equipment
41,499
40,318
Ground property and equipment
8,764
8,267
Equipment purchase deposits
1,278
1,217
51,541
49,802
(17,443)
(15,646)
34,098
34,156
9,151
—
Goodwill
4,091
4,091
Intangibles, net of accumulated amortization of $663 and $622, respectively
2,137
2,203
Deferred tax asset
1,145
1,816
Other assets
1,321
1,373
Operating property and equipment
Total property and equipment, at cost
Less accumulated depreciation and amortization
Total property and equipment, net
Operating lease right-of-use assets
Other assets
Total other assets
8,694
Total assets
9,483
$
60,580
$
52,785
$
3,294
$
2,554
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Current maturities of long-term debt and finance leases
Accounts payable
1,773
1,688
Accrued salaries and wages
1,427
1,672
Air traffic liability
4,339
4,042
Loyalty program liability
3,267
3,121
Operating lease liabilities
1,654
—
Other accrued liabilities
2,342
2,281
Total current liabilities
18,096
15,358
Long-term debt and finance leases, net of current maturities
21,179
22,511
Pension and postretirement benefits
6,907
7,497
Loyalty program liability
5,272
5,701
Operating lease liabilities
7,902
—
Other liabilities
1,393
2,498
42,653
38,207
Noncurrent liabilities
Total noncurrent liabilities
Commitments and contingencies (Note 12)
Stockholders' equity (deficit)
Common stock, $0.01 par value; 1,750,000,000 shares authorized, 460,610,870 shares issued and outstanding at
December 31, 2018; 475,507,887 shares issued and outstanding at December 31, 2017
5
5
Additional paid-in capital
4,964
5,714
Accumulated other comprehensive loss
(5,274)
(5,154)
136
(1,345)
Retained earnings (deficit)
Total stockholders' deficit
(169)
Total liabilities and stockholders’ equity (deficit)
$
See accompanying notes to consolidated financial statements.
83
60,580
(780)
$
52,785
AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
December 31,
2018
2017
2016
Cash flows from operating activities:
Net income
$
1,412
$
1,282
$
2,584
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization
2,159
2,017
1,818
Debt discount and lease amortization
(92)
(114)
(119)
Special items, non-cash
458
272
270
Pension and postretirement
(300)
(132)
(68)
Deferred income tax provision
440
2,089
1,556
Share-based compensation
86
90
100
Other, net
(64)
(39)
(18)
Decrease (increase) in accounts receivable
222
(190)
(160)
Increase in other assets
(390)
(433)
(184)
Increase (decrease) in accounts payable and accrued liabilities
(147)
299
307
Increase in air traffic liability
297
65
158
Increase (decrease) in loyalty program liability
(283)
(308)
417
Contributions to pension plans
(475)
(286)
(32)
Increase (decrease) in other liabilities
210
132
(105)
3,533
4,744
6,524
Capital expenditures and aircraft purchase deposits
(3,745)
(5,971)
(5,731)
Proceeds from sale of property and equipment and sale-leaseback transactions
1,207
947
125
Purchases of short-term investments
(3,412)
(4,633)
(6,241)
Sales of short-term investments
3,705
5,915
6,092
Proceeds from sale of investments
207
—
—
Decrease in restricted short-term investments
72
309
53
Purchase of equity investment
—
(203)
—
Other investing activities
(7)
—
—
(1,973)
(3,636)
(5,702)
Changes in operating assets and liabilities:
Net cash provided by operating activities
Cash flows from investing activities:
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of long-term debt
2,354
3,058
7,701
Payments on long-term debt and finance leases
(2,941)
(2,332)
(3,827)
Deferred financing costs
(59)
(85)
(77)
Treasury stock repurchases
(837)
(1,615)
(4,500)
Dividend payments
(186)
(198)
(224)
(3)
27
33
Net cash used in financing activities
(1,672)
(1,145)
(894)
Net decrease in cash and restricted cash
(112)
(37)
(72)
Cash and restricted cash at beginning of year
398
435
507
Other financing activities
Cash and restricted cash at end of year (a)
$
286
$
398
$
435
$
322
(a) The following table provides a reconciliation of cash and restricted cash to amounts reported within the consolidated balance sheets:
Cash
$
Restricted cash included in restricted cash and short-term investments
275
$
11
$
Total cash and restricted cash
286
See accompanying notes to consolidated financial statements.
84
295
103
$
398
113
$
435
AMERICAN AIRLINES GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except share amounts)
Common
Stock
Balance at December 31, 2015
$
6
Accumulated
Other
Comprehensive
Loss
Additional
Paid-in
Capital
$
11,591
$
(4,732)
Retained
Earnings
(Deficit)
$
Total
(1,230)
$ 5,635
Net income
—
—
—
2,584
2,584
Other comprehensive loss
—
—
(351)
—
(351)
Cash tax withholding on shares issued
Purchase and retirement of 119,823,621 shares of AAG common stock
—
(56)
—
—
(56)
(1)
(4,415)
—
—
(4,416)
Dividends declared on AAG common stock ($0.40 per share)
—
—
—
(224)
(224)
Issuance of 2,506,067 shares of AAG common stock pursuant to employee
stock plans
—
—
—
—
—
Settlement of single-dip unsecured claims held in distributed claims reserve
—
3
—
—
3
Share-based compensation expense
—
100
—
—
100
Impact of adoption of Accounting Standards Update (ASU) 2016-09 related
to share-based compensation
—
—
—
418
418
(3,977)
Impact of adoption of ASU 2014-09 related to revenue recognition (See
Note 1(b))
Balance at December 31, 2016
—
—
—
(3,977)
5
7,223
(5,083)
(2,429)
(284)
Net income
—
—
—
1,282
1,282
Other comprehensive loss
—
—
(71)
—
(71)
Cash tax withholding on shares issued
—
(51)
—
—
(51)
Purchase and retirement of 33,953,127 shares of AAG common stock
—
(1,563)
—
—
(1,563)
Dividends declared on AAG common stock ($0.40 per share)
—
—
—
(198)
(198)
Issuance of 2,166,861 shares of AAG common stock pursuant to employee
stock plans
Settlement of single-dip unsecured claims held in distributed claims reserve
—
—
—
—
—
—
15
—
—
15
Share-based compensation expense
—
90
—
—
90
Balance at December 31, 2017
5
5,714
(5,154)
(1,345)
(780)
Net income
—
—
—
1,412
1,412
Other comprehensive loss
—
—
(120)
—
(120)
Cash tax withholding on shares issued
—
(37)
—
—
(37)
Purchase and retirement of 16,606,157 shares of AAG common stock
—
(799)
—
—
(799)
Dividends declared on AAG common stock ($0.40 per share)
—
—
—
(188)
(188)
Issuance of 1,709,140 shares of AAG common stock pursuant to employee
stock plans
Share-based compensation expense
—
—
—
—
—
—
86
—
—
86
Impact of adoption of ASU 2016-01 related to financial instruments (See
Note 1(b))
Impact of adoption of ASU 2016-02 related to leases (See Note 1(b))
—
—
—
60
60
—
—
—
197
197
Balance at December 31, 2018
$
5
$
4,964
$
See accompanying notes to consolidated financial statements.
85
(5,274)
$
136
$
(169)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(f) Operating Property and Equipment
Operating property and equipment is recorded at cost and depreciated or amortized to residual values over the asset’s estimated useful life or
the lease term, whichever is less, using the straight-line method. Residual values for aircraft, engines and related rotable parts are generally 5% to
10% of original cost. Costs of major improvements that enhance the usefulness of the asset are capitalized and depreciated or amortized over the
estimated useful life of the asset or the lease term, whichever is less. The estimated useful lives for the principal property and equipment
classifications are as follows:
Principal Property and Equipment Classification
Estimated Useful Life
Aircraft, engines and related rotable parts
Buildings and improvements
Furniture, fixtures and other equipment
Capitalized software
20 – 30 years
5 – 30 years
3 – 10 years
5 – 10 years
We assess impairment on operating property and equipment when events and circumstances indicate that the assets may be impaired. An
asset or group of assets is considered impaired when the undiscounted cash flows estimated to be generated by the assets are less than the
carrying amount of the assets and the net book value of the assets exceeds their estimated fair value. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell.
Total depreciation and amortization expense was $2.4 billion, $2.2 billion and $1.9 billion for the years ended December 31, 2018, 2017 and
2016, respectively.
(g) Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, current operating lease
liabilities and noncurrent operating lease liabilities in our consolidated balance sheet. Finance leases are included in property and equipment,
current maturities of long-term debt and finance leases and long-term debt and finance leases, net of current maturities, in our consolidated
balance sheet.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease
payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present
value of lease payments over the lease term.
We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining
the present value of lease payments. We give consideration to our recent debt issuances as well as publicly available data for instruments with
similar characteristics when calculating our incremental borrowing rates.
Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12
months or less are not recorded on the balance sheet. Our lease agreements do not contain any residual value guarantees.
Under certain of our capacity purchase agreements with third-party regional carriers, we do not own the underlying aircraft. However, since we
control the marketing, scheduling, ticketing, pricing and seat inventories of these aircraft and therefore control the asset, the aircraft is deemed to
be leased for accounting purposes. For these capacity purchase agreements, we account for the lease and non-lease components separately. The
lease component consists of the aircraft and the non-lease components consist of services, such as the crew and maintenance. We allocate the
consideration in the capacity purchase agreements to the lease and non-lease components using their estimated relative standalone prices. See
Note 12(b) for additional information on our capacity purchase agreements.
For real estate, we account for the lease and non-lease components as a single lease component.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are recorded net as noncurrent deferred income
taxes.
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
6. Leases
We lease certain aircraft and engines, including aircraft under capacity purchase agreements. As of December 31, 2018, we had 660 leased
aircraft, with remaining terms ranging from less than one year to 12 years.
At each airport where we conduct flight operations, we have agreements, generally with a governmental unit or authority, for the use of
passenger, operations and baggage handling space as well as runways and taxiways. These agreements, particularly in the U.S., often contain
provisions for periodic adjustments to rates and charges applicable under such agreements. These rates and charges also vary with our level of
operations and the operations of the airport. Additionally, at our hub locations and in certain other cities we serve, we lease administrative offices,
catering, cargo, training, maintenance and other facilities.
The components of lease expense were as follows (in millions):
Year Ended
December 31, 2018
Operating lease cost
Finance lease cost:
Amortization of assets
Interest on lease liabilities
Variable lease cost
$
Total net lease cost
$
1,907
78
48
2,353
4,386
Included in the table above is $226 million of operating lease cost under our capacity purchase agreement with Republic. We hold a 25% equity
interest in Republic Holdings, the parent company of Republic.
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Supplemental balance sheet information related to leases was as follows (in millions, except lease term and discount rate):
December 31, 2018
Operating leases:
Operating lease ROU assets
$
9,151
Current operating lease liabilities
Noncurrent operating lease liabilities
$
1,654
7,902
Total operating lease liabilities
$
9,556
Finance leases:
Property and equipment, at cost
Accumulated amortization
$
936
(391)
Property and equipment, net
$
545
Current obligations of finance leases
Finance leases, net of current obligations
$
81
613
Total finance lease liabilities
$
694
Weighted average remaining lease term (in years):
Operating leases
Finance leases
7.6
7.4
Weighted average discount rate:
Operating leases
Finance leases
4.6%
6.5%
Supplemental cash flow and other information related to leases was as follows (in millions):
Year Ended
December 31, 2018
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
$
ROU assets obtained in exchange for lease liabilities:
Operating leases
1,931
48
78
1,292
Gain on sale leaseback transactions, net
59
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
Maturities of lease liabilities were as follows (in millions):
December 31, 2018
Operating Leases
2019
$
Finance Leases
2020
2021
2022
2023
2024 and thereafter
1,912
1,838
1,636
1,438
1,255
3,620
Total lease payments
Less: Imputed interest
11,699
(2,143)
871
(177)
Total lease obligations
Less: Current obligations
9,556
(1,654)
694
(81)
$
Long-term lease obligations
7,902
$
124
120
118
122
105
282
$
613
As of December 31, 2018, we have additional operating lease commitments that have not yet commenced of approximately $1.9 billion for 22
787-8 aircraft to be delivered in 2020 and 2021 with lease terms of 10 years.
Disclosures related to periods prior to adoption of the New Lease Standard
Operating lease rent expense, excluding landing fees, was approximately $3.2 billion in each of 2017 and 2016, which includes the lease of
certain aircraft under capacity purchase agreements. As of December 31, 2017, future minimum lease payment obligations under noncancellable
operating leases, including payments for the lease of certain aircraft under capacity purchase agreements, as well as payments under capital
lease obligations were as follows (in millions):
December 31, 2017
Operating Leases
2018
$
2,572
2,329
2,104
1,621
1,398
3,965
$
13,989
2019
2020
2021
2022
2023 and thereafter
Total lease payments
Capital Leases
$
126
123
120
118
122
387
996
Less: Imputed interest
(225)
Total lease obligations
Less: Current obligations
771
(78)
$
Long-term lease obligations
106
693
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
7. Income Taxes
The significant components of the income tax provision were (in millions):
Year Ended December 31,
2018
2017
2016
Current income tax provision:
State and Local
Foreign
Current income tax provision
$
3
29
$
10
14
$
3
9
32
24
12
390
50
2,026
63
1,456
100
Deferred income tax provision:
Federal
State and Local
Deferred income tax provision
440
Total income tax provision
$
472
2,089
$
1,556
2,113
$
1,568
The income tax provision differed from amounts computed at the statutory federal income tax rate as follows (in millions):
Year Ended December 31,
2018
2017
2016
Statutory income tax provision
$
$
1,188
59
7
33
1
823
(3)
5
$
State income tax provision, net of federal tax effect
Foreign income taxes, net of federal tax effect
Book expenses not deductible for tax purposes
Bankruptcy administration expenses
2017 Tax Act
Change in valuation allowance
Other, net
Income tax provision
396
44
23
12
—
—
(6)
3
1,453
56
6
35
1
—
7
10
$
472
$
2,113
$
1,568
We provide a valuation allowance for our deferred tax assets, which include our net operating losses (NOLs), when it is more likely than not that
some portion, or all of our deferred tax assets, will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income. We consider all available positive and negative evidence and make certain assumptions in evaluating the realizability of
our deferred tax assets. Many factors are considered that impact our assessment of future profitability, including conditions which are beyond our
control, such as the health of the economy, the level and volatility of fuel prices and travel demand.
The total decrease to the valuation allowance was $6 million in 2018. In 2017, the total increase to the valuation allowance was $7 million, $10
million of which is included in the 2017 Tax Act amount in the table above. In 2016, the total increase to the valuation allowance was $7 million.
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
The components of our deferred tax assets and liabilities were (in millions):
December 31,
2018
2017
Deferred tax assets:
Operating loss carryforwards
Leases
Pensions
Loyalty program liability
Alternative minimum tax (AMT) credit carryforwards
Postretirement benefits other than pensions
Rent expense
Reorganization items
Other
Total deferred tax assets
$
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Accelerated depreciation and amortization
Leases
Other
Total deferred tax liabilities
2,343
2,189
1,430
1,770
175
145
136
33
631
$
8,852
(30)
7,143
(36)
8,822
7,107
(5,280)
(2,081)
(326)
(5,045)
—
(279)
(7,687)
Net deferred tax asset
$
2,281
107
1,559
1,809
344
170
160
35
678
1,135
(5,324)
$
1,783
At December 31, 2018, we had approximately $10.2 billion of federal NOLs carried over from prior taxable years (NOL Carryforwards) to reduce
future federal taxable income, substantially all of which we expect to be available for use in 2019. The federal NOL Carryforwards will expire
beginning in 2022 if unused. We also had approximately $3.2 billion of NOL Carryforwards to reduce future state taxable income at December 31,
2018, which will expire in years 2019 through 2038 if unused. Our ability to deduct our NOL Carryforwards and to utilize certain other available tax
attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred.
Substantially all of our remaining federal NOL Carryforwards attributable to US Airways Group are subject to limitation under Section 382; however,
our ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation. We elected to be covered
by certain special rules for federal income tax purposes that permitted approximately $9.0 billion (with $8.4 billion of unlimited NOL still remaining
at December 31, 2018) of our federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382.
Similar limitations may apply for state income tax purposes. Our ability to utilize any new NOL Carryforwards arising after the ownership changes
is not affected by the annual limitation rules imposed by Section 382 unless another future ownership change occurs. Under the Section 382
limitation, cumulative stock ownership changes among material stockholders exceeding 50% during a rolling three-year period can potentially limit
a company’s future use of NOLs and tax credits. See Part I, Item 1A. Risk Factors – “Our ability to utilize our NOL Carryforwards may be limited”
for unaudited additional discussion of this risk.
A t December 31, 2018, we had an AMT credit carryforward of approximately $339 million available for federal income tax purposes, which is
now expected to be fully refundable over the next several years as a result of the repeal of corporate AMT.
In 2018, we recorded an income tax provision of $472 million, with an effective rate of approximately 25%, which was substantially non-cash.
The 2018 income tax provision included an $18 million special income tax charge related to an international income tax matter. Substantially all of
our income before income taxes is attributable to the United States.
We file our tax returns as prescribed by the tax laws of the jurisdictions in which we operate. Our 2015 through 2017 tax years are still subject
to examination by the Internal Revenue Service. Various state and foreign jurisdiction tax years remain open to examination and we are under
examination, in administrative appeals, or engaged in tax litigation in certain jurisdictions. We believe that the effect of any assessments will not
be material to our consolidated financial statements.
108
PART III:
FORECASTING &
VALUATION
• GETTING TO KNOW MCDONALDS
• MCDONALDS 4Q 2024 EARNINGS CALL
TRANSCRIPT
• EXCERPTS FROM 2024 10-K
GETTING TO
KNOW
MCDONALDS
McDonald’s Corporation
Investor Overview
McDonald’s
The World’s Largest Restaurant Company
43K+
2.2M
100+
Restaurants
People
Countries
Working for McDonald’s
or Franchisees
~70 Million
Customers
Served every day
7
McDonald’s Business Model
Revenues from rent, royalties and initial fees and profits from directly operating
restaurants
Conventional License
~50% of Restaurants
Developmental License
~20% of Restaurants
Foreign-Affiliated
~25% of Restaurants
Investment
$ Profits
Investment
Investment
Equipment
Operating
profits
(Cash flow)
Building
+
Real estate
Equipment
+
Building
+
Real estate
Rent
+
Royalties
Rent and royalties to the
Company based upon a
percent of sales with
minimum rent payments
$ Profits
Operating
profits
+
Rent
(Cash flow)
Equipment
+
Building
+
Real estate
Royalties
Royalties to the Company
based upon a percent of
sales; licensees provide
the capital to develop
restaurants
Illustrative as of 12/31/2024
McDonald’s
$ Profits
Operating
profits
+
Rent
(Cash flow)
Royalties
+
Equity in
Earnings
Royalties to the Company
based upon a percent of
sales and equity in
earnings representing
McDonald’s ownership
stake
McOpCo
~5% of Restaurants
Investment
$ Profits
Equipment
+
Building
+
Real estate
All
Operating
Profits
Profits to the Company
from directly operating
restaurants
Franchisee
9
McDonald’s Global Business Operates Under 3 Segments
U.S., Intl Operated Markets, and Intl Developmental Licensed Markets & Corporate
U.S. Market
McDonald’s largest market in
terms of Systemwide sales
International
Operated Markets (IOM)
19+ markets or countries
including Australia, Canada,
France, Germany and the U.K.
International
Developmental Licensees &
Corporate (IDL)
75+ markets or countries
including Brazil, China and Japan
As of 12/31/2024
For a complete list of markets and store counts, see the Supplemental Information on the Financial Information page of the McDonald’s Investor Relations website
10
McDonald’s Segment Breakdown
U.S. and IOM segments are ~90% of FY’24 revenue and adj. operating income***
10%
14%
25%
31%
41%
45%
41%
42%
49%
Restaurants*
44%
34%
24%
FY’24 Revenues
FY’24 Systemwide Sales**
U.S.
IOM
FY’24 Adj. Operating Income***
IDL
* As of 12/31/2024
** Systemwide sales is a non-GAAP financial measure; see “Important Disclaimers”
*** Excludes Corporate activities from IDL segment. Adjusted operating income consists of approximately 35% U.S. Dollars and 65% International currencies, of which
approximately 70% is in EUR, GBP, AUD, and CAD. Adjusted operating income is a non-GAAP financial measure; see “Important Disclaimers”
11
U.S. Segment
Unrivaled drive-thru presence and strong unit economics with a 95% franchised
ownership mix*
Average Unit Volumes*
(In millions U.S. $)
% Drive Thru Restaurants*
$5.5M
% Franchised Restaurants
100%
95.2%
95.1%
95.2%
94.9%
94.8%
95.1%
90%
$0M
* As of 12/31/2024
Over 95% of Restaurants
have a Drive Thru
80%
2019 2020 2021 2022 2023 2024
12
IOM Segment
Powerful brand presence and largely reimaged asset base with an 89% franchised
ownership mix*
10%
33%
12%
32%
14%
12%
32%
10%
16%
15%
15%
20%
13%
Restaurants*
18%
17%
10%
FY’24 Revenues
Australia
10%
Canada
France
Germany
11%
FY’24 Adj. Operating Income**
U.K.
Other
* As of 12/31/2024
** Adjusted operating income is a non-GAAP financial measure; see “Important Disclaimers”
13
IOM Segment
High average unit volumes across markets
Average Unit Volumes*
(In millions US $)
% Drive Thru Restaurants*
$6.5M
% Franchised Restaurants**
100%
Australia
85%
Canada
80%
France
80%
Germany
80%
89.1%
90%
89.1%
89.0%
83.7%
U.K.
$0M
70%
84.0%
80%
83.6%
2019 2020 2021 2022 2023 2024
* As of 12/31/2024
** Reflects the sale of the Company’s business in Russia in the second quarter of 2022 (Majority of restaurants in Russia were Company-owned)
14
IDL Segment
Geographically diverse segment comprised primarily of developmental licensees
with a 99% franchised ownership mix*
17%
26%
27%
13%
53%
58%
70%
15%
Restaurants*
21%
FY’24 Revenues
Asia
Latin America
FY’24 Adj. Operating Income**
EMEA (Europe + Middle East)
* As of 12/31/2024
** Excludes Corporate activities. Adjusted operating income is a non-GAAP financial measure; see “Important Disclaimers”
15
IDL Segment
Highly franchised segment
Average Unit Volumes*
(In millions US $)
% Drive Thru Restaurants*
$5.5M
% Franchised Restaurants
100%
Brazil
50%
China
15%
97.9%
98.1%
98.0%
98.2%
98.1%
98.8%
90%
Japan
$0M
* As of 12/31/2024
55%
80%
2019 2020 2021 2022 2023 2024
16
Evolution of Accelerating the Arches Strategic Plan
Additions of Restaurant Development and Our Platforms
17
For more information on McDonald’s strategy, see the Accelerating the Arches page of the McDonald’s website
McDonald’s Purpose
To feed and foster communities
Food Quality
and Sourcing
Community
Connection
Job, Inclusion &
Empowerment
Working toward
responsibly sourcing
priority commodities,
prioritizing animal health
and welfare and making
safe, quality food
accessible to families
across the world
Helping feed and support
people when and where
they need it most
Serving up bright futures
in our communities,
nurturing skills, helping
to accelerate equity and
respecting human rights
Our Planet
Helping to drive climate
action, protecting
natural resources,
reducing waste and
transitioning to more
sustainable packaging
and toys
For more information, including important details and notes, see the Purpose & Impact Report on the Purpose & Impact page of the McDonald’s Website
18
McDonald’s Impact and Progress
McDonald’s continued to have a positive impact on people and the planet
Food Quality
and Sourcing
Community
Connection
As of the end of 2023, McDonald's
has achieved its goal of sourcing
100% cage-free eggs in all U.S.
restaurants by 2025 - two years
ahead of schedule.
$20 million donated to RMHC in
2023 by McDonald's Corporation
as part of its five-year, $100 million
commitment to help support
families when they need it most.
In aggregate, over 99% of our
primary commodities, such as
beef, soy (for chicken feed), palm
oil, coffee, and fiber (used in
primary guest packaging)
continued to be sourced from
suppliers supporting
deforestation-free supply chains
as of the end of 2023.
$53 million raised in 2023 for the
“Round-Up for RMHC” program,
which allows customers at
participating restaurants to round
up their purchase to the nearest
whole number of their local
currency, with the difference being
donated to RMHC.
In 2023, we maintained the
removal of artificial flavors,
added colors from artificial
sources, and artificial
preservatives where feasible from
Happy Meal Offerings in our 20 inscope markets.
Job, Inclusion &
Empowerment
Reduced barriers to employment
for 2.2 million young people in
communities around the world
through training programs and
employment opportunities –
exceeding our target goal two
years early.
Our 2023 pay gap analysis shows
that McDonald’s substantially
attained equal pay, and in 2024
intends to close the small gaps
identified in line with our
commitment.
In 2023, we expanded Hamburger
University with a new Learning
Center in Riyadh, Saudi Arabia,
bringing the total number of
physical Hamburger University
locations to nine as of year-end
2023. We also brought HU Online to
eight additional markets in 2023.
HU Online is live in 70 markets
around the globe as of year-end
2023.
Our Planet
In 2023, The Science Based Targets
initiative (SBTi) validated our global
2050 net-zero emission reduction
target. During a year of strong
growth, we also reduced
emissions (from a 2018 baseline)
through initiatives such as
improving efficiencies in restaurant
operations and engaging suppliers.
We’re continuing to reduce plastics
in Happy Meal Toys around the
globe and transition to more
sustainable materials, progressing
to a 63.7% reduction in virgin
fossil fuel-based plastic in Happy
Meal toys since 2018 (15.9%
improvement on YE 2022).
For more information, including important details and notes, see the Purpose & Impact Report on the Purpose & Impact page of the McDonald’s Website
19
McDonald’s Values
The backbone of our Brand is a commitment to a set of core values that define who
we are and how we run our business and restaurants
Serve
We put our customers
and people first
Inclusion
We open our doors
to everyone
Integrity
We do the right
thing
Community
We are good
neighbors
Family
We get better
together
McDonald’s values are the filter through which all business decisions
are made because actions are bigger than words
20
Maximize Our Marketing Growth Pillar
Tapping into the rituals and memories that are already special to McDonald’s fans
World Class Creative
Value Proposition
Brand at the Center
Value at every tier of the menu;
providing delicious & affordable
menu options is a cornerstone of
the McDonald’s Brand
Fan Truths that build on
customer affinity through
relatability and cultural moments
Building brand equity by
embracing bold creative and
staying connected to culture
Scaling feel good marketing
around the globe to connect with
customers in authentic ways
Communicating the story of our
brand, food and purpose in
creative ways that resonate with
our fans
Meet customer needs through
everyday low-price options,
affordable meal bundles, limitedtime deals, and digital offers
available in our mobile app
21
Commit to the Core Growth Pillar
Global core menu items represent nearly 65% of total sales*
Cultural Relevance
Global Core Menu
Menu Innovation
Tap into customer demand for
familiar favorites, serving our
iconic products that are beloved
by customers like our World
Famous Fries® and Chicken
McNuggets®
17 unique brand equities with
>$1B in sales including the Big
Mac®, McCrispy® and McMuffins®
Focused on gaining share in
Chicken by aggressively growing
our chicken brands
Improving classics via “Best
Burger”; a series of operational
and formulation changes
designed to deliver hotter, juicer,
tastier burgers
Scaling emerging favorites,
including McCrispy® and McSpicy®
*In FY’23
22
Double Down on the 4Ds Growth Pillar
Unlocking growth by delivering a personalized and convenient customer experience
Digital
Delivery
Drive Thru
Loyalty users are highly
engaged, with over 175M
90-day active users in 60
markets around the world
Delivery is in ~100
markets, representing
nearly 90% of restaurants
Nearly 28K drive thru
locations globally, including
over 95% of U.S. locations
Accelerating our pace of
development to capture
demand
Competitive advantage in
providing convenience and
meeting customers’
demand for flexibility &
choice
Targeting expansion to
50,000 restaurants by the
end of 2027, which would
make it the fastest period
of restaurant unit growth
in Company history
~$30B in Systemwide
sales* to loyalty members
in 2024
Integrated McDelivery
within the McDonald’s app
Long-term strategic
partnerships with delivery
providers
As of 12/31/2024
* Systemwide sales is a non-GAAP financial measure; see “Important Disclaimers”
Development
Foundation
Speed, accuracy, friendliness, and quality are correlated with business performance
Speed of Service
PACE
Customer Satisfaction
Grading and consulting program
active in nearly all major markets
Customer satisfaction improving
across almost all markets
Increasingly faster despite a
challenging labor environment
Operational improvements in
several key markets driven by
dedicated support at lowerperforming restaurants
Even greater ambitions are fueled
by gains in customer satisfaction
and are a testament to the
dedication of our restaurant teams
“Ready on Arrival,” enables crew
to begin assembling a customer’s
mobile order prior to their arrival at
the restaurant to expedite service
and elevate customer satisfaction
24
Platforms
Build on our competitive advantages and unlock new growth opportunities
Consumer
Restaurant
Company
Creating one of the world’s
largest consumer platforms,
which will bring together the best
of our brand and utilize our
physical and digital competitive
advantages
Building the easiest and most
efficient restaurant operating
platform, enabling franchisees to
run restaurants more efficiently
and make the crew’s jobs easier
Building a modern operating
platform that will unlock speed
and innovation throughout the
organization, becoming faster,
more innovative and more efficient
at solving problems
25
2024 Global and Segment Comp Sales
Driven by continued execution of the Accelerating the Arches strategy
1-Year Comp Sales*
2-Year Comp Sales Stack**
0.2%
8.9%
8.9%
9.0%
9.1%
Global
U.S.
IOM
IDL
-0.1%
-0.2%
-0.3%
Global
U.S.
IOM
IDL
26
* Reflects growth over the prior year; **Reflects growth over FY’22
2024 Global Financial Overview
Strong growth over the last 5 years is a testament to the resilience of the business
Total Revenue
Systemwide Sales*
+$30.5B
+$4.5B
Other Financial Metrics
Global G&A % of
Systemwide Sales*
2.2%
Global
McOpCo Margin
14.8%
Global
Franchised Margin
83.9%
$130.7B
$25.9B
$21.4B
$100.2B
Franchised Revenue
% of Franchised Sales**
2019
2024
2019
2024
US
14.3%
IOM
17.2%
IDL & Corp
5.6%
Free Cash Flow
Conversion*
81.1%
*Systemwide sales and free cash flow conversion are non-GAAP financial measures; see “Important Disclaimers”
**Calculated as: Franchised Revenues divided by Franchised Sales for the segment
27
Adjusted Operating Margin*
Franchise margin represented ~90% of margin dollars in 2024, driving continued
business model stability
Total Restaurant Margin $s
$14.6B
$15B
Adjusted Operating Margin %*
50%
10%
46.3%
$11.1B
$10B
42.8%
15%
40%
90%
$5B
$0B
85%
2019
% Company-Operated Margins
2024
% Franchised Margins
* Adjusted operating margin is a non-GAAP financial measure; see “Important Disclaimers.”
30%
2019
2024
28
Capital Allocation Philosophy
Optimize and prioritize returning free cash flow to shareholders
Invest in the Business
Payout Dividends
Repurchase Shares
Prioritize the Dividend
Invest in opportunities to grow the
business and drive strong returns,
including capital expenditures and
investments in technology, digital,
and our Global Business
Services(GBS) organization
48 consecutive years of dividend
increases
Repurchase shares with remaining
free cash flow over time
Maintain a strong balance sheet
while repurchasing shares
29
Capital Expenditures
Shift in capital expenditures from reinvestment to new units
% Other
4%
% New
25%
% Reinvestment
Total Capital
Expenditures
71%
3%
33%
65%
2%
2%
41%
45%
57%
53%
4%
4%
52%
56%
44%
40%
2019
2020
2021
2022
2023
2024
$2.4B
$1.6B
$2.0B
$1.9B
$2.4B
$2.8B
30
Restaurant Openings
The pace of restaurant openings has increased
2,067
1,494
U.S.
New Units
(Gross)
IOM
IDL
Net Openings
Net Unit Growth
69
1,231
40
292
899
2,116
112
147
308
326
1,647
1,643
1,576
69
266
326
977
24
234
1,099
1,241
719
2019
2020
2021
2022*
2023
2024
840
2.2%
503
1.3%
838
1,092
1,547
1,655
2.1%
2.7%
3.8%
4.0%
* Excludes the sale of the Company’s business in Russia in the second quarter of 2022
31
Cash Returned to Shareholders
McDonald’s has consistently returned cash to shareholders via dividends and share
repurchases over time
$8.6B
Dividends
$8.1B
$7.6B
$7.7B
$4.5B
$4.9B
$3.1B
$2.8B
$3.6B
$4.2B
Share Repurchases
$5.0B
$4.7B
$4.8B
$3.8B
$3.9B
$3.9B
$0.9B
Free Cash Flow
Conversion**
$0.9B
2019
2020
2021*
2022*
2023
2024
95%
98%
94%
89%
86%
81%
* Paused share repurchases March 2020 – September 2021
** Free cash flow conversion is a non-GAAP financial measure; see “Important Disclaimers”
32
Capital Structure
McDonald’s maintains a strong investment grade credit rating
$37.4B
$34.3B
$39.3B
$35.6B
$35.9B
$38.4B
Total Debt $
2019
2020
2021
2022
2023
2024
Debt/EBITDA
3.2x
4.1x
3.0x
2.9x
2.8x
2.7x
Moody’s Rating
Baa1
Baa1
Baa1
Baa1
Baa1
Baa1
Stable Outlook
S&P Rating
BBB+
BBB+
BBB+
BBB+
BBB+
BBB+
Stable Outlook 33
Total Shareholder Return Performance History
3-Year CAGR
Jan’22 – Dec’24
1-Year
Jan’24 – Dec’24
McDonald’s 0.0%
DJIA
S&P 500
5.0%
14.9%
7.3%
25.7%
8.7%
6-Year CAGR
Jan’19 – Dec’24
11.2%
12.9%
17.2%
34
2025 Outlook*
Based on current conditions, the following is provided to assist in forecasting the
Company's future results for 2025:
•
The Company expects net restaurant unit expansion will contribute slightly over 2% to 2025 Systemwide sales**
growth, in constant currencies
•
The Company expects full year 2025 Selling, general and administrative expenses of about 2.2% of Systemwide sales**
•
•
The Company expects 2025 operating margin percent to be in the mid-to-high 40% range
Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year
2025 to increase about 4% driven primarily by higher average debt balances and higher average interest rates
•
The Company expects the effective income tax rate for the full year 2025 to be between 20% and 22%. Some volatility
may result in a quarterly tax rate outside of the annual range
•
The Company expects 2025 capital expenditures to be between $3.0 and $3.2 billion, with the majority directed
towards new restaurant unit expansion across the U.S. and International Operated Markets. Globally, the Company
expects to open approximately 2,200 restaurants. The Company expects to open about 600 restaurants in the U.S. and
International Operated Markets segments, and that developmental licensees and affiliates will contribute capital
towards about 1,600 restaurant openings in their respective markets. The Company expects nearly 1,800 net restaurant
additions in 2025
•
The Company expects to achieve a free cash flow conversion** rate in the low-to-mid 80% range
* Excerpted from the Company’s Form 10-Q; see "Important Disclaimers"
** Systemwide sales and free cash flow conversion are non-GAAP financial measures; see "Important Disclaimers"
35
Long-Term Outlook*
Over the long-term, the Company expects to achieve the following average annual financial
targets:
•
Net restaurant unit expansion of about 2.5% of Systemwide sales** growth, in constant currencies
•
Continued operating margin expansion
•
•
Sequential increases in capital expenditures of about $300 million to $500 million each year through 2027
Between 4% and 5% net new restaurant unit growth, targeting 50,000 global units by 2027 with a run rate of about
1,000 gross restaurant openings across the U.S. and International Operated Markets segments in 2027
•
Free cash flow conversion** rate targeted to be in the 90% range, with the conversion percentage likely below this
target during a period of heightened investments
* Excerpted from the Company’s Form 10-K; see "Important Disclaimers"
** Systemwide sales and free cash flow conversion are non-GAAP financial measures; see "Important Disclaimers"
36
Our Strategic Plan is Guiding Our Ambition
Our Growth Pillars
Maximize
our Marketing
Commit to
the Core
Double Down
on the 4Ds
• Driving scale
through marketing
• Piloting a new large burger
equity
• Deploying Ready on Arrival technology in
the top 6 markets by the end of 2025
• Maximizing the return on
investment
• Scaling McCrispy to nearly all
markets by the end of 2025
• Creating a more personalized
approach to value
• Extending McCrispy into wraps
and tenders, delivering an
additional point of chicken share
• Reaching 250 million 90-day active loyalty
members and $45 billion in annual loyalty
Systemwide sales by the end of 2027
• Deploying Best Burger to nearly
all markets by the end of 2026
• Generating 30% of delivery sales through
integrated delivery by the end of 2027
• Surpassing 50,000 restaurants globally by
the end of 2027
Leveraging technology to unlock greater innovation, speed and efficiency for customers, restaurant teams, and employees
© McDonald’s
37
Appendix: GAAP Reconciliations
Adjusted Operating Income & Adjusted Operating Margin
(dollars in millions)
2024
2019
$11,712
$9,070
Strategic restructuring charges
$221
$74
South Korea & Israel transactions
$70
$-
Adjusted operating income
$12,003
$9,144
Total revenues
$25,920
$21,365
Adjusted operating margin
46.3%
42.8%
Operating income
38
Appendix: GAAP Reconciliations
Free Cash Flow & Free Cash Flow Conversion
(dollars in millions)
2024
2023
2022
2021
2020
2019
Cash provided by operations
$9,447
$9,612
$7,387
$9,142
$6,265
$8,122
Less: Capital expenditures
$2,775
$2,357
$1,899
$2,040
$1,641
$2,394
Free cash flow
$6,672
$7,255
$5,488
$7,102
$4,624
$5,728
Net income
$8,223
$8,469
$6,177
$7,545
$4,731
$6,025
Free cash flow conversion
81.1%
85.7%
88.8%
94.1%
97.8%
95.1%
39
CONFERENCE
CALL
TRANSCRIPT
February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
CORPORATE PARTICIPANTS
•
Scott Meader McDonald's Corp - Interim Treasurer
•
Christopher Kempczinski McDonald's Corp - Chairman of the Board, President, Chief Executive Officer
•
Ian Borden McDonald's Corp - Executive Vice President, Chief Financial Officer
CONFERENCE CALL PARTICIPANTS
•
Operator
•
Dennis Geiger UBS Equities - Analyst
•
David Palmer Evercore ISI - Analyst
•
David Tarantino Robert W. Baird & Co., Inc. - Analyst
•
Sara Senatore BofA Global Research - Analyst
•
Brian Harbour Morgan Stanley - Analyst
•
Lauren Silberman Deutsche Bank - Analyst
•
John Ivankoe JPMorgan - Analyst
•
Eric Gonzalez KeyBanc Capital Markets Inc. - Analyst
•
Andrew Charles TD Cowen - Analyst
•
Jon Tower Citi - Analyst
•
Jeff Bernstein Barclays - Analyst
PRESENTATION
Operator
Hello, and welcome to McDonald's fourth-quarter 2024 investor conference call. At the request of McDonald's Corporation, this
conference is being recorded. (Operator Instructions)
I would now like to turn the conference over to Mr. Scott Meader, Interim Treasurer for McDonald's Corporation. Mr. Meader, you
may begin.
─────────────────────────────────────────────────────────────────────────────────────
Scott Meader McDonald's Corp - Interim Treasurer
Good morning, everyone, and thank you for joining us. With me on the call today are Chairman and Chief Executive Officer, Chris
Kempczinski; and Chief Financial Officer, Ian Borden.
As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today.
Both of those documents are available on our website, as are reconciliations of any non-GAAP financial measures on today's call,
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2
February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
along with their corresponding GAAP measures.
Following prepared remarks this morning, we will take your questions. Please limit yourself to one question and then re-enter the
queue for any additional questions. Today's conference call is being webcast and is also being recorded for replay via our website.
And now, I'll turn it over to Chris.
─────────────────────────────────────────────────────────────────────────────────────
Christopher Kempczinski McDonald's Corp - Chairman of the Board, President, Chief Executive
Officer
Thanks, Scott, and good morning, everyone. Thank you for joining us today to review our fourth quarter and fiscal year results.
Obviously, our performance in 2024 did not meet our expectations, but I'm still immensely proud of our McDonald's system.
It was a busy year, and at times, it felt like McDonald's was a part of almost every major news story, reflecting the reach and visibility
of our brand. Throughout it all, McDonald's people were resilient and responsive. We stayed focused on our customers, acted swiftly
when needed and continue to run our restaurant at a high level. To our employees, franchisees, and suppliers, I want to say thank
you.
In 2024, Global comp sales decreased 0.1% for the full year, with comps up 0.4% in the fourth quarter, including positive comps
across our IDL and IOM segments. In the US, comp sales were down 1.4% for Q4 amidst the impact of the E. coli outbreak linked to
slivered onions on our Quarter Pounders. Ian will provide you with more texture on these results in just a minute.
As we transition into 2025, several factors give me confidence that our performance turned to proper form over the next several
quarters. First, we have the right strategy, Accelerating the Arches. Our MCD growth pillars still offer significant growth opportunities,
and I'm pleased with the 2025 market plans, particularly the balance of value and full margin food innovation.
Second, US food safety issue is now largely behind us, and we expect to have fully recovered by the beginning of Q2. At
McDonald's, we always say that food safety is our number one priority, and this unfortunate incident is an important reminder of that
fact. The strength of our brand depends upon the absolute trust of our customers, and I'm pleased by the positive feedback we've
received from so many regarding our rapid and transparent handling of this issue.
And third, we'll continue to realize incremental benefits as global markets deploy new solutions from each of our three strategic
technology platforms: consumer, restaurant and company. Later, I'll come back and provide more visibility into our 2025 plans.
But for now, let's move on to Ian who will discuss Q4 and full year results.
─────────────────────────────────────────────────────────────────────────────────────
Ian Borden McDonald's Corp - Executive Vice President, Chief Financial Officer
Thanks, Chris, and good morning, everyone. As Chris noted, the QSR industry remained challenged and our performance in 2024
fell short of our expectations. Pressure on spending persists, in particular, with two significant cohorts of our consumer base, low
income and families, particularly in Europe. Still, we're confident that our Accelerating the Arches, which is rooted in customer
insights and built on our inherent competitive advantages, is right for our business to win in 2025 and beyond.
With respect to our quarter four performance, global comp sales growth was slightly positive. In the US, quarter four comp sales
were negative, reflecting the impact of the food safety incident. When we met last quarter, we committed to bringing the full
resources of McDonald's to bear to reengage the customer, and we did just that. As Chris mentioned, by the beginning of Q2, we
expect to have fully recovered.
The immediate actions we took to identify the cause allowed us to quickly shift the focus to regaining our customers' trust and
reigniting their brand affinity. Throughout November and December, we saw a sequential improvement in baseline traffic
performance, including slightly positive comp guest count growth for the month of December, and had a positive comp guest count
gap to most near-end competitors for the fourth quarter.
These results were driven by our marketing efforts to amplify traffic drivers. This includes additional investment in our National Value
campaign and Always-On digital and media plans to drive momentum.
In our International Operated Markets segment, comp sales performance this quarter was slightly positive due to mixed results
across the individual markets, including negative comps in the UK. While QSR industry traffic was positive in only two of our big five
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3
February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
markets, we had a positive comp guest count gap to most near-end competitors across the majority of our largest markets.
During a difficult time for the industry, we have acted with urgency and remain steadfast in continuing to focus on what's within our
control, including refining and providing compelling value propositions, introducing exciting menu innovation and leaning into our
One McDonald's Way approach to marketing by driving brand strength, building cultural relevance and connecting with our
customers and crew in exciting ways.
For example, on our value propositions, Canada has paired Everyday Affordable Price, or EDAP, menus with strong meal bundles
through the Canadian McValue menu, which features the $5.79 meal bundle and a $1 coffee EDAP offering, which drove coffee
share gains in the quarter. Canada not only provided great value offers but paired them with full margin promotions that connected
with our fans through culturally relevant campaigns.
One example is the Grinch Meal, which generated nearly 30 million impressions on social media, our highest user-generated
content ever in Canada. These all helped to drive positive sales and guest count performance in the market, including positive guest
count gap to near-end competitors for the entirety of the fourth quarter.
And in Germany, we've continued to meet customers where they are, even with a difficult industry backdrop. While QSR industry
traffic in Germany has continued to contract further since the third quarter, we have continued to drive market share gains by
expanding upon the already successful McSmart menu, now offering a range of meal bundle options introduced at the end of
September.
We are seeing incrementality to the business driven by the extended value meals and by layering on exciting menu news with full
margin items such as Der M or the Big Arch, as well as the Big Rosti which has made its annual return.
In other markets such as Spain, we have continued to outperform the competition by driving strong execution of our Accelerating the
Arches strategy including continuing to focus on value through Menu for You, which is a branded equity that we have been able to
capitalize on for over three years; and delivering on digital execution with a month-long Christmas calendar boosting engagement on
the app and identified users.
We also saw success from our One McDonald's Way approach to marketing, combining cultural relevance with global reach through
Friends TV show themed Adult Happy Meal featuring our core menu items, including six Friends characters and a themed dipping
sauce. The campaign provided a significant lift to our top line, with a social media reach expanding well beyond just Spain. All of this
contributed to the market's strong comp sales and guest count performance in the quarter as well as share gains for both the quarter
and the year.
France, a market that we've talked about all year, started to see signs of improvement with positive comp sales and guest count
gaps to near-end competitors for the fourth quarter. These results were driven by partnership with Hot Ones, providing three fiery
sauces to fans, each one spicier than the next, being one of the most sought-out campaigns over the last few years in the market.
We've also seen the EUR4 Happy Meal, which has resonated driving an improvement in their brand perceptions around value and
affordability and a lift in the happy meal category. We are encouraged by the signs of progress internationally and we'll continue to
build upon the actions taken in 2024, so that we have a strong foundation for growth in 2025.
In our International Developmental License segment, comp sales for the quarter were over 4%, largely driven by positive results in
the Middle East and Japan. In the Middle East, the positive sales comp largely reflected lapping the impact of the war that began in
October of 2023. And in China, we're seeing encouraging signs of stabilization.
In short, while the global QSR industry remains challenging, we're confident in our competitive strengths across our MCD growth
pillars and our strong execution against the value expectations of our customers. our ability to continually evolve to stay ahead of the
customer positions us for success in any economic environment.
Turning to the P&L. Adjusted earnings per share were $2.83 for the quarter, a 4% decrease compared to the prior year in constant
currencies, reflecting the pressure on our top line. Results also reflect higher other operating expense as well as the comparison to a
prior year property sale gain.
For the full year, adjusted operating margin was just over 46%, with top line results generating more than $14.5 billion in restaurant
margin dollars for the year, providing evidence of the resiliency of this model.
Lastly, before I hand it back over to Chris, I want to touch briefly on our capital expenditures and free cash flow profile. Our CapEx
for the year was just under $2.8 billion. More than half was invested in new restaurant unit expansion across our US and IOM
segments, which enabled us to deliver on our openings target for the year.
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4
February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
Our CapEx spend was slightly above the high end of the range we provided for the year as we invested more toward our future year
development pipeline, setting us up for success as we continue to increase our pace of openings. Our free cash flow conversion for
the year 81%, below our expected 90% range due to pressure on top line performance and higher capital spend to accelerate new
restaurants.
We have continued to follow our capital allocation priorities for the year. After investing to support long-term growth of the business,
we returned $7.7 billion of cash to shareholders through a combination of dividends and share buybacks. We remain committed to
returning all excess free cash flow to shareholders over time.
I'll talk about our 2025 outlook shortly, but first, let me hand it back over to Chris.
─────────────────────────────────────────────────────────────────────────────────────
Christopher Kempczinski McDonald's Corp - Chairman of the Board, President, Chief Executive
Officer
Thanks, Ian. Our ability to stay ahead of customers' changing needs and reimagine the McDonald's experience for tomorrow is the
key to achieving our 2025 ambitions. We're moving forward with agility and urgency, getting back to guest count and winning share
from our competitors.
Our unwavering focus on the MCD growth pillars will continue to unlock executional excellence and drive growth across our
business. Our marketing efforts are reclaiming leadership in value and affordability through initiatives like Everyday Affordable Price
menus and meal bundles.
In the US, the January launch of the McValue platform provides consistent, compelling value with the choice and flexibility our
customers want. In many of our international markets, we are making further enhancements to our value programs in the first
quarter to ensure that we are offering industry-leading value.
And with good value at the foundation, we will overlay a strong pipeline of creative marketing ideas that will delight our fans and will
provide full margin check growth.
Our core menu remains at the heart of our business. We're excited about the significant opportunity we see within our chicken
portfolio and see the potential to add another point of chicken market share by the end of 2026. We continue to roll out McCrispy,
which is now in over 70 markets and will be available in nearly all markets by the end of 2025.
This year, there is incredible energy for the return of Snack Wraps in the US along with a few other markets, and the US will also
launch a new chicken strip offering. We'll continue to pulse in the Chicken Big Mac as a limited time-only offering over time. In 2024,
the Chicken Big Mac helped generate chicken market share growth in the France and the US markets with positive incrementality.
Deployment of Best Burger continues. It's currently available in over 80 countries, and we're on track to implement it in nearly all
markets by the end of 2026. And we're excited to capture incremental growth through the Big Arch as we roll it out to more
international markets this year.
Our 4Ds continue to drive growth, and we're actively doubling down on digital and development. For digital, we know loyalty
customers spend more than their nondigital counterparts. We've made strong progress, and we're on track toward our long-term
targets of 250 million 90-day active users and $45 billion in annual system-wide sales by the end of 2027. To date, our 90-day active
users total has reached over 170 million across 60 markets, with system-wide sales to loyalty members totaling approximately $30
billion in 2024.
We will also continue to redefine convenience for our customers through Ready on Arrival, with deployment underway in markets
across the world. For development, we delivered on our 2024 restaurant openings target across the globe and we're on track to
reach 50,000 restaurants by the end of 2027.
Finally, our close partnership with our world-class franchisees, including the recent renewal of our master franchise agreement with
Arcos Dorados will be critical to driving our continued growth.
Let me now turn it back over to Ian for details on our 2025 outlook.
─────────────────────────────────────────────────────────────────────────────────────
Ian Borden McDonald's Corp - Executive Vice President, Chief Financial Officer
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5
February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
Thanks, Chris. We're confident that our Accelerating the Arches strategy will continue to drive growth in '25 and over the longer
term. But as we discussed, there are varying levels of near-term headwinds across markets.
Our approach to our 2025 outlook reflects the current environment of softer declining restaurant industry traffic in the US and many
of our larger markets. That said, as Chris noted, regardless of the operating environment, we remain steadfast on the execution of
our Accelerating the Arches strategy and the continued rollout of the actions we began to take in 2024 across the system to drive
guest count-led growth and grow market share by outperforming our competitors.
Our financial targets for 2025 reflect the benefit of these initiatives as well as our expectation of gradual stabilization of the
macroeconomic and consumer environment but does not include any impact from potential new tariffs. Should the underlying
environment improve under our initial expectations, especially with respect to lower-income consumers, we would expect to benefit
disproportionately relative to our competitors.
Particularly for 2025, driven by the durability of our business model, we're targeting our full year operating margin percent to be in
the mid- to high-40% range and above the 46.3% adjusted operating margin from 2024, primarily due to franchise margin
performance. This includes our expectation that our full year company operated margin percent will be slightly higher than the 14.8%
we delivered in 2024, driven by top line growth and partly offset by continued cost pressures.
With respect to G&A, our systems financial strength enables us to invest in areas that we expect will drive long-term efficiencies for
our people and for our stakeholders. Even with the muted top line growth in 2024, we maintain the right long-term investment
mindset as we were able to prioritize our run-the-business spend.
We expect 2025 G&A as a percentage of system-wide sales for the full year to be about 2.2%. Our 2025 target reflects continued
investments, technology digital and Global Business Services, or GBS.
You heard Chris mention the three strategic technology platforms earlier. Through the investments in these platforms, we plan to
continue to get more efficient in running this over time, and ultimately, free up more resources to continue to drive long-term growth.
We still have significant investment years ahead of us before these efficiencies are realized.
Below the operating line, we're projecting interest expense this year to increase between 4% and 6% compared to 2024 due to
higher average debt balances and interest rates and expect our full year effective tax rate to be between 20% and 22%.
Turning to restaurant development and capital expenditures. We expect net restaurant expansion in 2025, along with restaurants we
opened in 2024, will contribute slightly over 2% to system-wide sales growth as we continue to accelerate our new unit development.
We plan to spend between $3 billion and $3.2 billion this year, with the majority invested in new unit openings across our US and
IOM segments.
This increase in CapEx versus the prior year is in line with our expectation of about $300 million to $500 million increases each year
through 2027, as we outlined at our December 2023 Investor Day. Globally, we plan to open approximately 2,200 restaurants this
year, with about 1/4 of these openings in our US and IOM segments. We expect to open more than 1,600 restaurants in our IDL
segment, including about 1,000 in China. Overall, we anticipate slightly over 4%-unit growth from the nearly 1,800 net restaurant
additions in 2025.
Our capital allocation priorities remain unchanged. First, to invest in the business to drive growth, including capital expenditures as
well as investments in technology, digital and GBS. Second, to prioritize our dividend. And third, to repurchase shares with
remaining free cash flow over time.
In 2025, we expect our net income to free cash flow conversion to be in the low to mid-80% range as we continue to step up
strategic investments to drive sustainable long-term growth of the business.
Over longer term, we continue to target free cash flow conversion in the 90% range, reflecting the resiliency of our business model.
However, we do expect that the conversion percentage will be below that long-term target during the peaks in an investment cycle.
Lastly, with a strong US dollar that may continue to strengthen into 2025, we expect from foreign currency to be a full year headwind
to 2025 EPS, totaling in the range of $0.20 to $0.30 based on current exchange rates. As always, this is directional only as rates will
likely change as we move through the remainder of the year.
The resilience of our business and our overall financial strength have put us in a position to succeed in any environment. And I'm
confident that the continued execution of our Accelerating the Arches strategy sets us up to deliver long-term growth for our system
and create value for our shareholders.
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February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
Now, let me turn it back over to Chris.
─────────────────────────────────────────────────────────────────────────────────────
Christopher Kempczinski McDonald's Corp - Chairman of the Board, President, Chief Executive
Officer
Thank you, Ian. This year, McDonald's will celebrate its 70th anniversary, 70 years of defining what it means to be the leader in our
industry. Through generations of ever-changing global economies, technological booms extraordinary social and political evolution
and resounding connection to the center of culture, we've grown stronger year after year by staying true to what we do best, serving
delicious food with unmatched value to our customers while feeding and fostering communities around the world.
McDonald's remains uniquely positioned to do just that. By staying true to our golden rule of treating everyone with dignity, fairness,
and respect, we continue to build connections that strengthen our brand and make positive impacts through our 40,000-plus local
businesses around the world.
Our unwavering commitment to inclusion requires ongoing focus. And while we recently evolved our approach, McDonald's
commitment to inclusion is steadfast. So if I think about the road ahead for 2025.
I'm reminded out from our founder, Ray Kroc. He said that the two most important requirements for major success are: first, being
the right place at the right time; and second, doing something about it. We believe no one is better positioned than McDonald's to
seize on the opportunities ahead, face complexities head on and, in the words of Ray, do something about it.
We have all the tools we need to focus on what matters most to our communities and customers. As we look to 2025, we want up.
We're playing to win. We have the right playbook in Accelerating the Arches. We have the right advantages, our size, our scale, our
brand relevance. We have the right mindset and a strong legacy of acting on our biggest and boldest ideas. We have the power of
our three-legged stool.
Thank you to our remarkable franchisees, suppliers, and employees. Your dedication to our McFamily and the communities you
serve is unparalleled. We are grateful for your passion and so very proud of our partnership. Together, I look forward to making the
Arches shine even brighter in 2025 and beyond.
With that, we'll take questions.
─────────────────────────────────────────────────────────────────────────────────────
QUESTIONS AND ANSWERS
Operator
(Operator Instructions)
─────────────────────────────────────────────────────────────────────────────────────
Scott Meader McDonald's Corp - Interim Treasurer
Our first question is from Dennis Geiger with UBS.
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Dennis Geiger UBS Equities - Analyst
Great. Morning, guys. Thank you. Wondering if you could talk a little bit more about the early customer response to McValue? Sort
of any updates to the latest on customer value perceptions in the US? And have any thoughts to share sort of on the guest count
check and margin impacts from the new platform? Thank you.
─────────────────────────────────────────────────────────────────────────────────────
Christopher Kempczinski McDonald's Corp - Chairman of the Board, President, Chief Executive
Officer
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7
February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
Sure, Dennis. So we are -- it's obviously early days still with McValue value, but we're pleased with how it's getting out of the gate.
One of the things that we're looking at is take rates. We look at take rates on the $5 Meal Deal. We look at take rates on the Buy 1
Add 1 for $1. And those take rates are very much in line with what our expectations were for that. So we're pleased with how that's
getting out of the gate.
From a perception standpoint, as we have increased our focus on value in the US, starting last year when we did launch the $5 Meal
Deal and then extending into Q1, I've been pleased to see that we're seeing our improvement in getting back to leadership, most
recent -- particularly on the most recent visit with value and affordability. So I think we're seeing the customers giving us credit for
the value programs that we have put in place there. So feel good about that.
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Ian Borden McDonald's Corp - Executive Vice President, Chief Financial Officer
And maybe just, Dennis, I'll just build on Chris, because you were asking about check and margins. And so I think just talking
specifically about the Buy 1 Add 1 for $1, where I think we're seeing some kind of check in those transactions, and in fact, accretive
to our overall check transactions that have a Buy 1 Add 1 in.
Good margins, obviously. And I think just building on what Chris was talking about, I mean, I think consumers really appreciate the
flexibility with that offer because it allows them to kind of build an outcome to what they want to get to from a product choice
standpoint.
I think the other thing I would just highlight is breakfast, in particular, we've seen really strong take-up of that offer. And breakfast has
been a really strong daypart for the US business through '24. It's an area where we're taking share. And I think if you think ahead a
little bit, this will be the 50th anniversary of breakfast in the US this year. And I think there will be some really kind of interesting and
exciting things that the US business does over the next little while around breakfast. So more to come on that later.
─────────────────────────────────────────────────────────────────────────────────────
Christopher Kempczinski McDonald's Corp - Chairman of the Board, President, Chief Executive
Officer
Yes. Just to maybe add one other thing to what Ian was talking about. If you look at the $5 Meal Deal, even though that's compelling
value, it's driving other purchases. So the average check on $5 Meal Deal for us in the US is north of $10. So it's doing what we
were hoping for when we launched that.
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Scott Meader McDonald's Corp - Interim Treasurer
Our next question is from David Palmer with Evercore.
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David Palmer Evercore ISI - Analyst
Thanks. A quick follow-up on that. In the fourth quarter, US comp reflected a negative check, slightly positive traffic. Could you give
us a sense of price versus mix in the quarter and why we saw what we saw there?
And my main question is really on IOM. Any color that you can offer there? A lot of brands, US brands, slowed in the back half of
fourth quarter '23. Did you see an acceleration through fourth quarter of '24, better exit rate in key IOM markets? And I know you've
been doing some tinkering with value relaunches in key IOM markets, any color on that would be helpful. Thank you.
─────────────────────────────────────────────────────────────────────────────────────
Christopher Kempczinski McDonald's Corp - Chairman of the Board, President, Chief Executive
Officer
Sure. I'll just hit some high-level comments. And then as always, I'll let Ian give the details. In the US, we were seeing, as you know,
in early October, we were seeing strong performance in the US with both good check as well as positive GCs. And then, of course,
we had the unfortunate E. coli incident.
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8
February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
As you think about how then the quarter started to play out, we kind of hit our nadir in, I'd say, early November and then we saw
sequential improvement through the balance of the quarter, which has now continued into Q1. But what you're seeing is you're
seeing that we are driving GCs and stealing share on GC standpoint.
But not surprisingly, particularly now as we're into Q1, and we're launching a broader McValue platform, GCs are running ahead of
check. And that's very much consistent with our experience. As you're putting in new value programs, you will see check run ahead
of GCs. I think, Joe -- or run ahead of check. I think Joe has talked about that in the past. And then as you get that sort of bedded
down and you introduce food news and other things on top of that, you get the one, two punch of check plus GC growth. So that's
what we're expecting in the US.
From IOM, you're right to acknowledge that we're seeing improving trends there. But it really is almost on a market-by-market basis
there. So we've talked about for basically about a year, some of the opportunities that we had in France. I've been very pleased to
see how that French business has continued to improve their performance, and that's continuing into Q1. So we feel good about
France.
We feel good about Canada. We continue to outperform in Germany. We continue to outperform in Italy. Our opportunities in IOM,
the two markets that we are spending the most time thinking about right now or the UK in Australia, where one, it's both a
challenged market; and two, frankly, we're not performing to our full potential. So I'd say net-net, on balance for being IOM improve. I
think you saw that in the results, but there's still work to do in a few of our specific markets.
─────────────────────────────────────────────────────────────────────────────────────
Ian Borden McDonald's Corp - Executive Vice President, Chief Financial Officer
So David, I'll just maybe double-click on a couple of things because Chris' response was pretty comprehensive. I think just maybe
the reminder in the US, and we talked about this in the Q3 call, was pre-food safety incident, we were seeing almost kind of a midsingle-digit comp sale and comp traffic just below that. So I think that's -- the reason I highlight that is because we get kind of valuedriving momentum and then we start layering in kind of, as we've talked about before, a whole margin food news, like the Chicken
Big Mac in that instance, or the great marketing execution, you start driving volume and really profitable transactions and that's
where we were at.
Obviously, the food safety incident had a disruptive impact on the US in the quarter. And there were a couple of specific things
obviously that happened. First is you had an impact from Quarter Pounder sales, which is a high-margin, high-check driving
transaction item. And then obviously, to kind of regain momentum, regain trust. Obviously, we invested a fair bit in value and
affordability and obviously, in digital offers to get consumers back.
And so that certainly, I would call it, we're kind of time-bound impacts on check through the quarter that we certainly expect to
dissipate as we get kind of momentum where we want it to be through quarter one this year.
On IOM, the only thing I'd add to what Chris said is, I mean, I think we're certainly, as you heard us in our upfront remarks,
continuing to operate in uneven conditions. And so we're really pleased, while we're really proud with the progress that we've driven
through the actions we've taken, in particular in areas like value and affordability, we're still dealing in a number of markets in our
targets where the industry is contracting. And so I think our momentum is certainly moving in the right direction, as you heard from
Chris, but it's still -- certainly, there's an element of headwind that we're continuing to navigate.
─────────────────────────────────────────────────────────────────────────────────────
Scott Meader McDonald's Corp - Interim Treasurer
Our next question is from David Tarantino with Baird.
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David Tarantino Robert W. Baird & Co., Inc. - Analyst
Hi. Good morning. Just a clarification on how you're thinking about the US recovery. I think you mentioned you expected a full
recovery from the E. coli incident by the beginning of Q2. I guess one question is what's -- I guess, what does that sort of mean in
terms of kind of what the comp momentum you're thinking once you get fully recovered? And then I guess, what's giving you the line
of sight to that?
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9
February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
Christopher Kempczinski McDonald's Corp - Chairman of the Board, President, Chief Executive
Officer
Yes. Thank you, David. So on the US recovery from E. coli, I think right now, what we're seeing is that the E. coli impact is now just
localized to the areas that had the biggest impact. So think about that as sort of the Rocky Mountain Range, that was really the
epicenter of the issue. And that continues to be down versus where we were heading into that impact. But very much seeing it at this
point is just contained to that region, whereas the rest of the US, we don't see an impact on that.
I think importantly, what it gives us encouragement is we're looking at the trends in those affected areas, and that's what led to our
comment around thinking that we'll have it behind us as we begin in Q2. To your point around what that actually means, it's going to
be a function of us executing. So it's not just that we get E. coli behind us, but it goes to -- we've got to make sure that we've got
McValue off to a good start, and we've got to make sure that we have strong marketing programs along with food innovation that
goes with it.
I think what you see is that when we do that and we do that well, this business has the potential to be putting up both positive GCs
as well as positive check. And ultimately, that drives comp. So that's our expectation. That's the plan that we've put in place, which
is, if we execute that we get this business, as I described in my comments, back to proper form.
─────────────────────────────────────────────────────────────────────────────────────
Ian Borden McDonald's Corp - Executive Vice President, Chief Financial Officer
And David, maybe just a couple of builds to Chris' comments. I mean, I think you heard us in our upfront remarks talk about the fact
that we've recovered trust levels at a national basis back to where they were pre incident level. We still got the isolated impacts that
Chris talked about.
I think, obviously, what we're trying to do is get US business back to the momentum that we were seeing to start Q4. I mean we're
very encouraged by the fact that, as we talked about, we ended the year in December with positive -- slightly positive comp guest
counts in the US. We know Q4 total basis that we were taking comparable traffic share versus the industry still in the US. But we still
got, as Chris talked about, just I think a little more to do to get that momentum kind of fully back to where we think it can be as we
work through Q1.
─────────────────────────────────────────────────────────────────────────────────────
Scott Meader McDonald's Corp - Interim Treasurer
Our next question is from Sara Senatore with Bank of America.
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Sara Senatore BofA Global Research - Analyst
Thanks. I just wanted to sort of follow up, I guess, on check a little bit, which is you mentioned digital and loyalty growth is very
strong. Those checks tend to be higher, but ultimately, I guess, same-store sales growth was fairly muted. As you noted, there are a
lot of puts and takes. Perhaps breakfast has a negative check impact, too.
But I guess I'm trying to understand as you think about loyalty growth and digital orders, whether you would expect to see that
materialize as an inflection in same-store sales? Or how you're thinking about it? Because it does seem like we broadly see higher
checks, but not necessarily kind of a trajectory change.
And then just quickly on the UK, that's market that has historically I think, been very strong for McDonald's. So is there anything to
note there? Just that it's negative or sort of talking it as a weak point surprised me a little bit.
─────────────────────────────────────────────────────────────────────────────────────
Christopher Kempczinski McDonald's Corp - Chairman of the Board, President, Chief Executive
Officer
Yes. Why don't -- I'll take the UK and then let Ian address the other question that you had, Sara. So I think in the UK, if you think
about that, you're right, it's one that historically has performed quite well for us, been one of our strongest performers. I think what
we've seen in the UK, certainly, the consumer there is under pressure. The cost-of-living issue, that exists in the UK, that is putting
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10
February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
pressure on the low-income consumers, consistent with what we've seen in the US.
That's also putting pressure on families. We have a very big family business in the UK. That has impacted us. As families are
looking to economize, that has an impact on us. And you have a very strong local competitor there who's been very aggressive from
a value standpoint, particularly on breakfast. And so you put all those things together and we're not seeing the UK business perform,
certainly at a level that we're used to historically.
I think that said, we understand what needs to go in place, and there's been a lot of work with our local franchisees there to do that.
It goes to making sure that we have a strong savers platform. It's something that's been in the market for quite a while. We've
introduced a GBP5 Meal Deal, similar to what we have in the US. And there's also been a focus on the Happy Meal program to
reengage that family business.
I think paired with that, though, is we need to have better marketing in the UK. I think we frankly didn't have the level of marketing
execution in the back half of last year that we're used to. And so that time, the big priorities for us as we head into 2025, is we've got
to get that marketing to be kicking in so that we do this one-two punch of being competitive on value, which I feel very confident we
now have in the UK, but you ought to be able to pair that with strong marketing programs, strong food innovation that can give you
that sort of full margin balance.
We've run this book. Many of the things that I'm describing were the same issues that we faced in France. The progress and the
momentum that we're seeing on the French business now is what gives us confidence that we'll be able to get to the same place in
the UK. But certainly, work to do in the UK.
─────────────────────────────────────────────────────────────────────────────────────
Ian Borden McDonald's Corp - Executive Vice President, Chief Financial Officer
Just, Sara, to circle back on your check question, and I'm going to exclude kind of the US, obviously, the food safety kind of specific
disruptions, which again are kind of temporary and time on. I think more broadly, I mean, obviously, you've got a few things going
on. I think with check, you've got, obviously, pricing that's continuing to moderate because of the levels of inflation that are coming
down.
You've got us kind of making what I'll call some structural adjustments on value and affordability to ensure that we're kind of meeting
the needs of consumer that's having kind of a reset on check. But obviously, I think when you get kind of past those adjustments, I
mean, I think there's -- we've got a lot of ability to kind of continue to drive strong check.
Obviously, we've got to start doing that by getting the right levels of momentum in the business. I mean the US and kind of where we
were pre-food safety incident is, I think, the best demonstration of that. Again, I think about where we were for the first three weeks
of October with that kind of strong sales and then strong guest count build, obviously, kind of building on each other as we've had
momentum, and then kind of layer in these exciting food or marketing events.
France is another example. Obviously, as you know, from all the conversations we had on France, throughout '24, again, as we
started to see that kind of positive momentum come into effect, and when you look at Q4 where we had the Chicken Big Mac
activation, we had this kind of hot sauce, fiery sauce kind of activation, which were strong food events with great marketing
execution. Again, we were able to both guest count and check volume.
I think talking about digital specifically, digital certainly, and loyalty, in particular, are going to be really important ways for us to
continue to drive check. As you know, we've talked a lot about the fact that loyalty drives more visits, and those customers spend
more over time. And as we are continuing to build new and incremental capabilities and sources of value for consumers, now we're
going to be able to get those customers to spend more as they visit us. So I think digital will be a really important component of how
we drive check and frequency as we look forward.
─────────────────────────────────────────────────────────────────────────────────────
Scott Meader McDonald's Corp - Interim Treasurer
Our next question is from Brian Harbour, Morgan Stanley.
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Brian Harbour Morgan Stanley - Analyst
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11
February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
Yeah. Thanks. Good morning, guys. A quick one, just could you kind of spell out roughly where we expect unit growth to be in the
US versus IOM? I know you kind of gave it together. But -- and then maybe just a broader question. How has new unit performance
been? Obviously, you seem to have leaned into that even more so than you spoke about a little over a year ago, and you talked
about kind of pulling forward some of that growth. But could you just comment on how you've seen that fare over the last year?
─────────────────────────────────────────────────────────────────────────────────────
Ian Borden McDonald's Corp - Executive Vice President, Chief Financial Officer
Yes. Morning, Brian, I think on unit growth, we expect as a system, about 2,200 gross openings and about 1/4 of that to be in our
wholly owned market. I would say, of the quarter, about 70% of those openings would be in IOM and rest roughly in the US. I mean,
I think as you heard us say, we hit our development plans in '24. And you -- based on what we talked about at Investor Day, that
we're kind of stepping up in our wholly owned markets to get to a gross opening rate of 1,000 units a year in '27. So each year is
kind of a continual step up, '25 is a big step up over '24.
And we feel confident about our pipelines. We've done a lot of work, as you've heard us talk about previously to identify where we
need to be. We've done a lot of work to get the resourcing in place to build the pipeline, which obviously, you need to do well in
advance of kind of actually opening units, and we feel good about the health of our pipeline.
And I think most importantly, obviously, the quality of the openings we're seeing are kind of in line with our expectations. We're
getting those kind of strong kind of starting year volumes and seeing our first year returns in that low to mid mid-teens area where
we expect them to be. And knowing the vast majority of our new unit openings are freestanding drive-thrus, we know those sites
kind of build to the sweet spot over the first couple of years as they kind of established their trading area.
So I think we're on pace. We're confident in getting to our 50,000 target by end of '27. And obviously, the wholly owned openings are
a really important part of that.
─────────────────────────────────────────────────────────────────────────────────────
Scott Meader McDonald's Corp - Interim Treasurer
Our next question is from Lauren Silberman with Deutsche Bank.
─────────────────────────────────────────────────────────────────────────────────────
Lauren Silberman Deutsche Bank - Analyst
Hey. Thank you very much. So it sounds like you're optimistic in the US about getting back to prior momentum. Good to hear about
the return to positive comps internationally. Can you help level set how you're thinking about comps on a full year basis in the US
and IOM? And then any color on progression through the year? What we should expect for 1Q sequential improvement?
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Ian Borden McDonald's Corp - Executive Vice President, Chief Financial Officer
Lauren, let me maybe give a bit of context there. Look, I think if you think about at least maybe pacing and progression through '25, I
can comment a bit on that. I won't get into kind of specific comp numbers. But I think it's certainly reasonable to think of Q1 as kind
of a low point quarter for the year. I mean there are some very, I think, natural reasons for that.
I mean we've got a leap year lapping, which is obviously a negative headwind in Q1. I think we've certainly seen a sluggish start to
the broader US industry in January in the US. And I think if you think about everything that Chris and I have been talking about
today, you've got our momentum kind of building on the back of the actions that we've put in place through '24, particularly obviously
in regards to value and affordability.
And some of those actions, I would say, still going into place in a couple of marks through Q1. And I think as we talked about in our
opening remarks, I mean, I do think we think the kind of operating conditions get kind of gradually and progressively better as we
work through the year. So I think that's a bit of the color I would give you on maybe texture.
I mean, obviously, I think most importantly, as always, what we're focused on is what we -- is within our control, which is obviously
our Accelerating the Arches plan, the fundamentals around that and kind of MCD levers that underpin our strategic plan. And I think
we feel confident about the progress we're making, and that we're doing everything we need to do to ensure that we're taking share
consistently across all of our top markets despite, I think, some of these more challenging conditions that we continue to navigate.
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12
February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
─────────────────────────────────────────────────────────────────────────────────────
Scott Meader McDonald's Corp - Interim Treasurer
Our next question is from John Ivankoe with JPMorgan.
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John Ivankoe JPMorgan - Analyst
Hi. Thank you. We've been talking about Accelerating the Organization, leading into global business services for some time. And I
understand the last couple of years, there was a lot of work done beneath the surface on GBS specifically, and the thought that we
would start to see some benefits in '25 and '26. It doesn't sound like we're going to see leverage in '25 and '26 based on your earlier
comments.
So I did just want you to address maybe reasons why we're not seeing some leverage given some of the restructurings that would
happen, is kind of the first point. And then secondly, if you can talk about some of the qualitative improvement in the business that
have come specifically through GBS that we could see potentially benefit the business into 2026. Thank you.
─────────────────────────────────────────────────────────────────────────────────────
Christopher Kempczinski McDonald's Corp - Chairman of the Board, President, Chief Executive
Officer
John, well, you're right to acknowledge there's been a lot of work going on in getting this GBS organization set up. I'd say we
certainly didn't expect to see us getting any of the benefits of that in '24 or '25 because we're very much in an investment phase. I
don't think we communicated at all that we expected to see any benefit sort of in the early years of this.
But the whole reason why we're doing this is, of course, because of the capabilities that we think it's going to bring as it comes more
fully online in '26, and then I think probably steady state '27. And it's the new capabilities paired with, I think, a much more efficient
operating platform where you're going to start to see the benefits of that.
So we're very much on track. We're pleased with the work there. As you I'm sure now from other organizations that you cover,
setting these things up is a Herculean effort and there's a lot of people involved in getting this done. But I'm pleased with where
we're at. We're very much on track. But I don't expect to see in '25 that you're going to be getting any material bits out of this, which
is very consistent with how we've built the whole business case on this.
Ian, I don't know if you have anything to add.
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Ian Borden McDonald's Corp - Executive Vice President, Chief Financial Officer
Yes, John, just maybe a couple of points of texture. I think as Chris touched on, we're kind of in our peak investment years, '25, '26
and into, frankly, part of '27. As you've heard me talk about before, we've kind of got four key work streams. We've got finance,
people, indirect sourcing and then what we call data and analytics. We're pleased with the progress. But these things take time and
effort. We certainly believe when we get past these kind of more significant investment years, we'll see substantive efficiencies being
driven.
And I think maybe just to give you a bit of a kind of a textural example, we put kind of the first deployment of our people system in
place in kind of 2024. And it just -- it goes to kind of the ways of working, which if you remember, it was really about what
accelerating the organization was about. It was about moving us from vertical to kind of horizontal ways of working across the
organization.
And a small example would be, I think, we reduced the kind of time to hire for restaurant managers in Australia, which was one of
the first markets to go live with our new people system by 50%. So there'll be many examples like that just as we get to these kind of
common systems and processes. And we remain really enthusiastic about the opportunities ahead, but as Chris said, this obviously
always takes a bit of time to kind of get to the full benefit.
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13
February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
Christopher Kempczinski McDonald's Corp - Chairman of the Board, President, Chief Executive
Officer
Yes. The only thing I would add to what Ian said is, if you look at G&A as a percent of system-wide sales, we've been able to hold
that constant in 2024, even as we're making all of these investments. And we're certainly looking to continue to stay very disciplined
on our overall absolute G&A spend, with the potential over time as we bring these on to get further reductions on that as a percent of
sales. So stay tuned, more to come on this.
─────────────────────────────────────────────────────────────────────────────────────
Scott Meader McDonald's Corp - Interim Treasurer
Our next question is from Eric Gonzalez with KeyBanc.
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Eric Gonzalez KeyBanc Capital Markets Inc. - Analyst
Thanks. The second half of '24 was difficult from a capital market perspective. In the fourth quarter, particularly the E. coli incident in
the US and the traffic and check you discussed earlier. I think you said you expect the comp margins to improve year-over-year in
'25 driven by top line growth.
And beyond that recoveries of E. coli, can you discuss how much of that margin degradation that you saw in the second half of the
year you expect to get back, just given the heavier ends on value and value initiatives that you rolled out at the start of the year and
what the drivers of that improvement will be for the year for that business.
─────────────────────────────────────────────────────────────────────────────────────
Christopher Kempczinski McDonald's Corp - Chairman of the Board, President, Chief Executive
Officer
Yes. Let me take that one, Eric. Well, look, I mean I think as you've heard me say previously, I think we remain really confident in
our ability to kind of drive margin improvement over time as we get that stronger top line growth. So certainly, nothing fundamentally
has changed, I think, in that regard.
I mean, obviously, as you highlighted, '24 was clearly a year where we didn't get the strong top line growth that we need to kind of
drive margin improvement. And I think that, combined with kind of some of the inflationary pressure areas, like food and paper and
labor, as well as what you highlighted, which is kind of are the mix shifts as we kind of get stronger value and affordability in place,
certainly put pressure on margins through the course of the year.
And then as you know, in the US, we had those specific impacts through quarter four, which was obviously, as I talked about earlier,
that kind of impacts specifically the Quarter Pounder sales, which is a very strong profitable margin. And then the investments that
we made in kind of customer recovery, which had impact.
So I think the actions that we've taken across the business to get that really strong guest count momentum back in place, combined
with, as you always hear us talk about, then adding on kind of the full margin food news and the great marketing execution, are what
get us back to growing improvement. That's obviously what we're expecting in '25, which is why we've said we expect margins to be
slightly up from where they were in '24 on a percentage basis. And I think that's despite obviously the fact that there is kind of
continued inflation pressure and more limited pricing ability in the current context.
So I think we feel confident getting momentum back. And it's obviously volume ultimately, and then that pairings for that kind of onetwo punch that gives us confidence in our ability to grow margin in '25 and then certainly beyond, as we continue to get that strong
top line growth.
─────────────────────────────────────────────────────────────────────────────────────
Scott Meader McDonald's Corp - Interim Treasurer
Our next question is from Andrew Charles with TD Cowen.
─────────────────────────────────────────────────────────────────────────────────────
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14
February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
Andrew Charles TD Cowen - Analyst
Great. Thanks. Ian, just a good segue from the last question. Based on the McOpCo disclosure, we're estimating about a 4% decline
in US McOpCo's 2024 store cash flow. So I'm curious, if first, that's a fair proxy for the owner operators in the past year? And then
looking ahead, curious about your confidence in the US store level cash flow growth in 2025, just as the industry does not appear to
be backing down on value in '25? Thanks.
─────────────────────────────────────────────────────────────────────────────────────
Ian Borden McDonald's Corp - Executive Vice President, Chief Financial Officer
Yes. Well, I won't, Andrew, try and reconcile the numbers. I think the team can do that with you in follow-up just -- and where you're
kind of getting your numbers from. But there are a few things, I think, that are kind of moving within margin, including some kind of
structural changes, and I think you can give more texture, too.
But I think on a broad basis, we feel -- I mean, there's certainly some pressure points in '25 when you think about some of the
inflationary headwinds, particularly in some of our European markets where there's a little bit more inflationary pressure on '25 on
food and paper, for example, beef prices.
But I think if we look at our plans in total across the majority of our markets, we certainly feel good that can drive improvement to
cash flow. And that will be based on, obviously, driving that strong top line volume and then obviously taking McOpCo margin from a
percentage basis up slightly versus where it was in 2024.
─────────────────────────────────────────────────────────────────────────────────────
Christopher Kempczinski McDonald's Corp - Chairman of the Board, President, Chief Executive
Officer
Yes. And the only thing I would add is, certainly, we had a number of things in the US business that we were navigating last year:
inflation, investment in value, we had E. coli. All that said, our US franchisees still achieved very strong cash flows north of $0.5
million per unit. So those business -- that business continues to perform well. Franchisee cash flow continues to be strong. And as
we get some of those headwinds behind us and hopefully back to stronger momentum, that obviously we work its way through to the
bottom line.
─────────────────────────────────────────────────────────────────────────────────────
Scott Meader McDonald's Corp - Interim Treasurer
Our next question is from Jon Tower with Citi.
─────────────────────────────────────────────────────────────────────────────────────
Jon Tower Citi - Analyst
Great. Thanks for taking the question. I'm just curious, Chris, you outlined a number of the initiatives that you're going after in '25
with respect to new product news. And noticeably absent was any commentary on kind of your beverage platform, specifically in the
US. And I know at your Investor Day in late '23, there was a lot of discussion around McCafe and how large of a platform that is
globally and the opportunity there to improve consistency across the globe.
So I'm just hoping you could provide some color around where you see that platform going over time? And do you see that as a
strategic opportunity over the next several years?
─────────────────────────────────────────────────────────────────────────────────────
Christopher Kempczinski McDonald's Corp - Chairman of the Board, President, Chief Executive
Officer
Sure. Thanks, John. Well, certainly, we are very bullish on the opportunity in beverages, and we think there's a lot of growth
potential in beverages, both in coffee, the coffee side, whether it's hot or iced, but also in some of these other beverage areas that
you're seeing emerging, like refreshers, like energy drinks, et cetera, et cetera. So a lot of opportunity in beverages. That industry is
or that category is growing about 2x the rest of the business with very strong margins. So excited about that.
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15
February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
As you noted, at Investor Day, we talked about kind of going after it in a couple of different ways. Looking at how do we do that
within the restaurant, that work continues. And then we also talked about a test that we're doing around this CosMc's brand that we
put in Texas and looking at a number of stores there. I'd say that the learning with CosMc's continues.
So you saw us announced a few months ago we're closing some stores, we're adding some stores. I think what we're learning there
is that there's certainly an opportunity in that space. The smaller units tend to perform better. You want a drive-thru with that. Some
of the things that we're closing were sort of end caps with no drive-thrus. So I think we're continuing to learn there.
And as we further refine our plans, I think you'll hear more from us about how much of that opportunity needs to come through new
units with something stand-alone like CosMc's, or how much of the potential do we think we can capture by doing more within the
existing restaurants. And there's a lot of work going to thinking about what we might be able to do to capture that opportunity in the
current restaurant. So our focus is still very much on it, but I don't have a whole lot more new news to share on that at this point.
─────────────────────────────────────────────────────────────────────────────────────
Scott Meader McDonald's Corp - Interim Treasurer
We have time for one more question with Jeff Bernstein of Barclays.
─────────────────────────────────────────────────────────────────────────────────────
Jeff Bernstein Barclays - Analyst
Great. Thank you very much. A question on the US commentary you have been made on the call. I think you mentioned at one point
seeing sequential improvement in the US comps since the trough with E. coli in November. Yes, I know in response to a different
question, you said that you noticed maybe a sluggish start to 2025 for the QSR segment.
So I was wondering, first and foremost, whether you can comment on whether or not that sluggish start is really weather-led or
whether you think there's some engine consumer behavior in recent weeks or the past month or 2? And I know separately, you
mentioned new product news. So I'm just wondering if there's color you can share on the Snack Wrap relaunch timing. And I think
you mentioned something about chicken strips, so any color on those two new products that seem like exciting new news would be
great. Thank you.
─────────────────────────────────────────────────────────────────────────────────────
Christopher Kempczinski McDonald's Corp - Chairman of the Board, President, Chief Executive
Officer
Thanks, Jeff, for the question. So I think, yes, we were seeing improvement certainly from kind of the trough of where we were with
E. coli. I think the important thing to just recognize in the US is broadly both in Q4, but frankly continues into Q1, there is -- the
overall market is pretty muted. And a big -- that sort of, I think, more mix can still add that low-income consumer.
So if you look at the low-income consumer in the US, and I'm talking industry numbers right now, but that low-income consumer in
the US, in Q4, was still down double digits. And as you know that low-income consumer is overweighted in the industry relative to
the US in total. I think about middle and higher income, a very robust consumer in those areas.
So that's the landscape that we're looking to navigate through. It's so important that we make sure that we have a strong value
program, which is the focusing on Q1 and getting McValue launched. And then as you alluded to, we do have, I think, some very
exciting food news, food innovation coming in the US. But my US team would kill me if I gave any more information about the when
and the exact specifics of how we're going to plan on doing that but certainly expect that to come line later in the year.
Ian, I don't know if you can else to add.
─────────────────────────────────────────────────────────────────────────────────────
Ian Borden McDonald's Corp - Executive Vice President, Chief Financial Officer
Well, just I think just double clicking on what Chris already talked about, Jeff, which is sequential improvement. But -- and I think
what we've talked a fair bit about is obviously what we're focused on and what we can control, which is our share performance.
Obviously, we can grow share from a trend point. But as Chris said, the industry is still seeing a fair bit of headwind, and that's
certainly what we we're seeing, an indication of in terms of January. So even though we may continue -- we expect to continue to
grow share, I think the industry itself has certainly had a sluggish start.
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16
February 10, 2025 / 1:30PM UTC, Q4 2024 McDonald's Corp Earnings Call
And that's certainly, as Chris said, partly due to that lower income consumer. Although we continue to do well with lower income
consumers. In fact, quarter four was our high point for '24 in terms of share with that particular consumer group even though they
are under a fair bit of pressure, as you heard from Chris. So that's just a bit of texture maybe to kind of put the context of our
comments together.
─────────────────────────────────────────────────────────────────────────────────────
Scott Meader McDonald's Corp - Interim Treasurer
Okay. That concludes our call. Thank you, Chris. Thank you, Ian. Thanks, everyone, for joining. Have a great day.
─────────────────────────────────────────────────────────────────────────────────────
Operator
This concludes the McDonald's Corporation investor call. You may now disconnect and have a great day.
─────────────────────────────────────────────────────────────────────────────────────
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prohibited without the prior written consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its
affiliated companies.
17
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