UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 ____________________________________

FORM 10-Q

____________________________________ 

 ____________________________________

 ____________________________________

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.   ¨ 

INDEX

 

 

 

 

Note 1 — ACCOUNTING POLICIES

Unaudited Interim Financial Information

We have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our consolidated balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for 20172018 due to seasonal and other factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of our 20162017 Annual Report on Form 10-K.

Principles of Consolidation

The consolidated financial statements include the accounts of Amazon.com, Inc., its wholly-owned subsidiaries, and those entities in which we have a variable interest and of which we are the primary beneficiary, including certain entities in India and China and that support our seller lending financing activities (collectively, the “Company”). Intercompany balances and transactions between consolidated entities are eliminated. The financial results of Whole Foods Market, Inc. (“Whole Foods Market”) have been included in our consolidated financial statements from the date of acquisition on August 28, 2017.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, determining the selling price of products and services in multiple element revenue arrangements and determining the amortization period of these elements, incentive discount offers, sales returns, vendor funding, stock-based compensation forfeiture rates, income taxes, valuationcommitments and impairment of investments, inventory valuation and inventory purchase commitments, collectability of receivables,contingencies, valuation of acquired intangibles and goodwill, depreciable lives of propertystock-based compensation forfeiture rates, vendor funding, and equipment, internal-use software and website development costs, acquisition purchase price allocations, investments in equity interests, and contingencies.inventory valuation. Actual results could differ materially from those estimates.

Earnings per Share

Basic earnings per share is calculated using our weighted-average outstanding common shares. Diluted earnings per share is calculated using our weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method. In periods when we have a net loss, stock awards are excluded from our calculation of earnings per share as their inclusion would have an antidilutive effect.

The following table shows the calculation of diluted shares (in millions):

Cost of sales primarily consists of the purchase price of consumer products, digital media content costs, including video and music, packaging supplies, sortation and delivery centers and related equipment costs, and inbound and outbound shipping costs, including where we will continueare the transportation service provider. Shipping costs to estimate expected forfeitures. Additionally, we retrospectively adjustedreceive 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 cash flowsoperations.

Accounting Pronouncements Not YetRecently Adopted

In May 2014, the FASB issued an ASUAccounting Standards Update (“ASU”) amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We will adoptadopted this ASU on January 1, 2018 for all revenue contracts with a cumulative adjustment that will increaseour customers using the modified retrospective approach and increased retained earnings as opposed to retrospectively adjusting prior periods.by approximately $650 million. The adjustment will primarily relaterelates to the unredeemed portion of our gift cards, which we will begin to recognizeare now recognized over the expected customer redemptionusage period which is substantially within nine months, rather than waiting until gift cards expire or when the likelihood of redemption becomes remote, generally two years from the date of issuance. Prospectively, revenue related to Amazon-branded electronic devices sold through retailers will be recognized upon sale to the retailer rather than to end customers.remote. We also anticipate a change tochanged the recognition and classification of Amazon Prime memberships, which are currently considered arrangements with multiple deliverables that are allocated among products sales and service sales. Upon adoption of the ASU, Amazon Prime memberships will benow accounted for as a single performance obligation and recognized ratably over the membership period as service sales. Previously, Prime memberships were considered to be arrangements with multiple deliverables and will be classified aswere allocated among product sales and service sales. Other changes that we have identified relate primarily to the presentation of revenue. Certain advertising services will beare now classified as revenue rather than a reduction in cost of sales, and sales of apps, and in-app content, will primarily beand certain digital media content are presented on a net basis. Our assessment

The impact of policy changes resulting fromapplying this ASU is substantially completefor the six months ended June 30, 2018 primarily resulted in a decrease in product sales and wean increase in service sales driven by a reclassification of Prime membership fees of approximately $1.7 billion, which are currently evaluatingnow accounted for as a single performance obligation and recognized over the quantitative impactmembership period. Service sales also increased by approximately $1.2 billion for the six months ended June 30, 2018 due to the reclassification of these changes in bothcertain advertising services that were previously classified as a reduction of cost of sales.

In January 2016, the FASB issued an ASU that updates certain aspects of recognition, andmeasurement, presentation, and disclosure of financial instruments. Under this ASU, certain equity investments are measured at fair value with changes recognized in net income. We adopted this ASU in Q1 2018 with no material impact to our consolidated financial statements.

In October 2016, the related disclosures.FASB issued an ASU amending the accounting for income taxes. The new guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. We adopted this ASU in Q1 2018 with an increase of approximately $250 million to retained earnings and deferred tax assets net of valuation allowances.

In February 2016, the FASB issued an ASU amending the accounting for leases. The new guidance requires the recognition of lease assets and liabilities for operating leases with terms of more than 12 months, in addition to those currently recorded, on our consolidated balance sheets. Presentation of leases within the consolidated statements of operations and consolidated statements of cash flows will be generally consistent with the current lease accounting guidance. The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We plan to adopt this ASU beginning in Q1 2019. We are currently evaluatingcontinuing to evaluate the impact and expect the ASU will have a material impact on our consolidated financial statements, primarily to the consolidated balance sheets and related disclosures.

Note 2 — CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND MARKETABLE SECURITIES

As of December 31, 2016,2017 and SeptemberJune 30, 2017,2018, our cash, cash equivalents, restricted cash, and marketable securities primarily consisted of cash, U.S. and foreign government and agency securities, AAA-rated money market funds, and other investment grade securities. Cash equivalents and marketable securities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

The following table summarizes, by major security type, our cash, cash equivalents, restricted cash, and marketable securities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in millions):

___________________

We also hold equity warrant assets giving us the right to acquire stock of other companies. As of December 31, 2016,2017 and SeptemberJune 30, 2017,2018, these warrants had a fair value of $223$441 million and $455$577 million, and are recorded within “Other assets” on our consolidated balance sheets. The related gain (loss) recorded in “Other income (expense), net” was $9$54 million and $76$40 million in Q3 2016 and Q3Q2 2017 and $(11)Q2 2018, and $69 million and $145$86 million for the ninesix months ended SeptemberJune 30, 20162017 and 2017.2018. These assets are primarily classified as Level 2 assets.

Note 3 — COMMITMENTS AND CONTINGENCIES

Commitments

The following summarizes our principal contractual commitments, excluding open orders for purchases that support normal operations and are generally cancellable, as of SeptemberJune 30, 20172018 (in millions): 

___________________

Pledged Assets

As of December 31, 2016,2017 and SeptemberJune 30, 2017,2018, we have pledged or otherwise restricted $715$1.4 billion and $803 million and $1.3 billion of our cash, cash equivalents, and marketable securities, and certain property and equipment as collateral for real estate leases, workers’ compensation obligations, amounts due to third-party sellers in certain jurisdictions, debt, and standby and trade letters of credit.

The Company is involved from time to time in claims, proceedings, and litigation, including the matters described in Item 8 of Part II, “Financial Statements and Supplementary Data — Note 7 — Commitments and Contingencies — Legal Proceedings” of our 20162017 Annual Report on Form 10-K and in Item 1 of Part I, “Financial Statements — Note 3 — Commitments and Contingencies — Legal Proceedings” of our Quarterly ReportsReport on Form 10-Q for the periodsperiod ended March 31, 2017 and June 30, 2017,2018 as supplemented by the following:

In March 2014, Kaavo, Inc. filed a complaint against Amazon.com, Inc. and Amazon Web Services, Inc. for patent infringement in the United States District Court for the District of Delaware. The complaint alleges, among other things, that Amazon Web Services’ Elastic Beanstalk and CloudFormation infringe U.S. Patent No. 8,271,974, entitled “Cloud Computing Lifecycle Management For N-Tier Applications.” The complaint seeks injunctive relief, an unspecified amount of damages, costs, and interest. In July 2015, Kaavo Inc. filed another complaint against Amazon.com, Inc. and Amazon Web Services, Inc. in the United States District Court for the District of Delaware. The 2015 complaint alleges, among other things, that CloudFormation infringes U.S. Patent No. 9,043,751, entitled “Methods And Devices For Managing A Cloud Computing Environment.” The 2015 complaint seeks injunctive relief, an unspecified amount of damages, enhanced damages, attorneys’ fees, costs, and interest. In September 2017, the 2015 case was stayed pending resolution of a review petition we filed with the United States Patent and Trademark Office. We disputeIn June 2018, the allegations of wrongdoing and intend to defend ourselves vigorously in these matters.

In October 2017, SRC Labs,May 2018, Rensselaer Polytechnic Institute and CF Dynamic Advances LLC and Saint Regis Mohawk Tribe filed a complaint against Amazon.com, Inc. in the United States District Court for the EasternNorthern District of Virginia a complaint for patent infringement against Amazon Web Services, Inc., Amazon.com, Inc., and VADATA, Inc.New York. The complaint alleges, among other things, that EC2 F1 Instances“Alexa Voice Software and Alexa enabled devices” infringe U.S. Patent No. 7,177,798, entitled “Natural Language Interface Using Constrained Intermediate Dictionary of Results.” The complaint seeks an injunction, an unspecified amount of damages, enhanced damages, an ongoing royalty, pre- and post-judgment interest, attorneys’ fees, and costs. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter.

In June 2018, VoIP-Pal.com, Inc. filed a complaint against Amazon Technologies, Inc. and Amazon.com, Inc. in the United States District Court for the District of Nevada. The complaint alleges, among other things, that the Alexa calling and messaging system, the Alexa app, and Echo, Tap, and Fire devices with Alexa support infringe U.S. Patent Nos. 6,434,687,9,537,762; 9,813,330; 9,826,002; and 9,948,549, all entitled “System and method for accelerating web site access and processing utilizing a computer system incorporating reconfigurable processors operating under a single operating system image”; 7,149,867, entitled “System and method of enhancing efficiency and utilization of memory bandwidth in reconfigurable hardware”; 7,225,324 and 7,620,800, both entitled “Multi-adaptive processing systems and techniques for enhancing parallelism and performance of computational functions”; and 9,153,311, entitled “System and method for retaining DRAM data when reprogramming reconfigurable devices with DRAM memory controllers.“Producing Routing Messages For Voice Over IP Communications.” The complaint seeks an unspecified amount of damages, enhanced damages, interest,attorneys’ fees, costs, and a compulsory on-going royalty.interest. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter.

See also “Note 7 — Income Taxes.”

Note 4 — ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS

On MayApril 12, 2017,2018, we acquired Souq Group Ltd.Ring Inc. (“Souq”Ring”), an e-commerce company, for cash consideration of approximately $579$853 million, net of cash acquired, and on August 28, 2017, we acquired Whole Foods Market, a grocery store chain, for approximately $13.2 billion, net of cash acquired. Both acquisitions are intended to expand our retail presence.product and service offerings. During the ninesix months ended SeptemberJune 30, 2017,2018, we also acquired certain other companies for an aggregate purchase price of $126$39 million. The primary reason for our other 20172018 acquisitions was to acquire technologies and know-how to enable Amazon to serve customers more effectively.

 ___________________

In November 2012, December 2014, and August 2017,As of June 30, 2018, we issued $3.0 billion, $6.0 billion, and $16.0had $24.3 billion of unsecured senior notes and in August 2017, with our acquisition of Whole Foods Market, we assumed $1.0 billion of unsecured senior notes (collectively, theoutstanding (the “Notes”). As described in the table below, $25.3 billion was outstanding as of September 30, 2017. As of December 31, 2016,2017 and SeptemberJune 30, 2017,2018, the net unamortized discount and debt issuance costs on the Notes was $90$99 million and $100$101 million. We also have other long-term debt with a carrying amount, including the current portion and borrowings under our credit facility, of $588$692 million and $597$520 million as of December 31, 2016,2017 and SeptemberJune 30, 2017.2018. The face value of our total long-term debt obligations is as follows (in millions):

_____________________________

The other debt, including the current portion, had a weighted-average interest rate of 3.4%5.8% and 1.9%4.3% as of December 31, 2016,2017 and SeptemberJune 30, 2017.2018. We used the net proceeds from the issuance of this debt primarily to fund certain business operations. The estimated fair value of the other long-term debt, which is based on Level 2 inputs, approximated its carrying value as of December 31, 2016,2017 and SeptemberJune 30, 2017.2018.

In May 2016,April 2018, we entered into anestablished a commercial paper program (the “Commercial Paper Program”) under which we may from time to time issue unsecured commercial paper up to a total of $7.0 billion at any time, with individual maturities that may vary but will not exceed 397 days from the date of issue. There were no borrowings outstanding under the Commercial Paper Program as of June 30, 2018.

Note 6 — STOCKHOLDERS’ EQUITY

The following table summarizes our restricted stock unit activity for the ninesix months ended SeptemberJune 30, 20172018 (in millions):

Note 7 — INCOME TAXES

Our tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.

Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant variation due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, intercompany transactions, the applicability of special tax regimes, changes in how we do business, acquisitions (including integrations) and investments, audit-related developments, changes in our stock price, changes in our deferred tax assets and liabilities and their valuation, foreign currency gains (losses), tax law developments (including changes in statutes, regulations, case law, and administrative practices),practices, principles, and interpretations related to tax, accounting, and other areas, including European Union state aid rules, and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.

For 2017,2018, we estimate that our effective tax rate will be favorably affected by the impact of excess tax benefits from stock-based compensation and the U.S. federal research and development credit and adversely affected by the recordinglosses incurred in certain foreign jurisdictions for which we may not realize a tax benefit. Losses for which we may not realize a related tax benefit, primarily due to losses of foreign subsidiaries, reduce our pre-tax income without a corresponding reduction in our tax expense, and therefore increase our effective tax rate. We record valuation allowances against the deferred tax assets associated with losses for which we may not realize a related to net operating losses generated in Luxembourg and state income taxes.tax benefit.

Our income tax provision for the ninesix months ended September 30, 2016 was $1.0 billion, which included $50 million of discrete tax benefits primarily attributable to audit-related and tax law developments. Our income tax provision for the nine months ended SeptemberJune 30, 2017 was $755$695 million, which included $422$197 million of net discrete tax benefits primarily attributable to excess tax benefits from stock-based compensation, partially offset by a valuation allowance we recorded against the deferred tax assets related to net operating losses generated in Luxembourg and the estimated impact of audit-related developments.

Cash paid for income taxes, net of refunds was $91$447 million and $172$300 million in Q3 2016 and Q3Q2 2017 and $317Q2 2018, and $693 million and $865$813 million for the ninesix months ended SeptemberJune 30, 20162017 and 2017.2018.

We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for the calendar year 2005 and thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes or

our net operating losses with respect to years under examination as well as subsequent periods. As previously disclosed, we have received Notices of Proposed Adjustment (“NOPAs”) from the IRS for transactions undertaken in the 2005 and 2006

Certain of our subsidiaries are under examination or investigation or may be subject to examination or investigation by the French Tax Administration (“FTA”) for calendar year 2006 and thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes. In September 2012, we received proposed tax assessment notices for calendar years 2006 through 2010 relating to the allocation of income between foreign jurisdictions. In June 2015, we received final tax collection notices for these years assessing additional French tax of €196 million, including interest and penalties through September 2012. We disagree with the assessment and intend to contest it vigorously. We plan to pursue all available administrative remedies, and if we are not able to resolve this matter, we plan to pursue judicial remedies. In addition to the risk of additional tax for years 2006 through 2010, if this litigation is adversely determined or if the FTA were to seek adjustments of a similar nature for subsequent years, we could be subject to significant additional tax liabilities. In addition, in October 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Luxembourg with regard to the corporate income tax paid by certain of our subsidiaries comply with European Union rules on state aid. On October 4, 2017, the European Commission announced its decision that determinations by the tax authorities in Luxembourg did not comply with European Union rules on state aid. ThisBased on that decision orders Luxembourg to calculate and recover additional taxes from us for the period May 2006 through June 2014. We believe this decision to be without merit and will consider our legal options, including an appeal. While the European Commission announced an estimated recovery amount of approximately €250 million, plus interest, for the period May 2006 through June 2014, and ordered Luxembourg tax authorities to calculate the actual amount of additional taxes subject to recovery. Luxembourg computed an initial recovery is to be calculated by the Luxembourg tax authorities in accordanceamount, consistent with the European Commission’s guidance. Once the recovery amount is computed by Luxembourg,decision, that we anticipate funding it, including interest,deposited into escrow where it will remainin March 2018, subject to adjustment pending conclusion of all appeals. In December 2017, Luxembourg appealed the European Commission’s decision. In May 2018, we appealed. We believe the European Commission’s decision to be without merit and will continue to defend ourselves vigorously in this matter. We are also subject to taxation in various states and other foreign jurisdictions including Canada, China, Germany, India, Italy, Japan, Luxembourg, and the United Kingdom. We are under, or may be subject to, audit or examination and additional assessments by the relevant authorities in respect of these particular jurisdictions primarily for 2008 and thereafter.

Note 8 — SEGMENT INFORMATION

We have organized our operations into three segments: North America, International, and AWS. We allocate to segment results the operating expenses “Fulfillment,” “Marketing,” “Technology and content,” and “General and administrative” based on usage, which is generally reflected in the segment in which the costs are incurred. The majority of technology infrastructure costs are allocated to the AWS segment based on usage. The majority of the remaining non-infrastructure technology costs are incurred in the U.S. and are allocated to our North America segment. In Q1 2017, we combined stock-based compensation and “Other operating expense, net” with operating expenses in our presentation of segment results. While we continue to evaluate the integrationThe results of Whole Foods Market within our segments, we haveare included Whole Foods Market in our North America and International segments based on physical location. There are no internal revenue transactions between our reportable segments. These segments reflect the way our chief operating decision maker evaluates the Company’s business performance and manages its operations.

Information on reportable segments and reconciliation to consolidated net income is as follows (in millions):