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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________
FORM 10-Q
____________________________________ 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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
____________________________________
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
 
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
495,797,220 shares of common stock, par value $0.01 per share, outstanding as of October 16, 2019
 


Table of Contents

AMAZON.COM, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2019
INDEX
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
PART II. OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Twelve Months Ended
September 30,
 
2018
 
2019
 
2018

2019
 
2018
 
2019
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD
$
20,536

 
$
22,965

 
$
21,856

 
$
32,173

 
$
13,960

 
$
21,032

OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Net income
2,883

 
2,134

 
7,046

 
8,320

 
8,902

 
11,347

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization of property and equipment and capitalized content costs, operating lease assets, and other
3,778

 
5,563

 
11,079

 
15,619

 
14,577

 
19,881

Stock-based compensation
1,350

 
1,779

 
4,001

 
5,024

 
5,180

 
6,441

Other operating expense (income), net
62

 
47

 
202

 
114

 
258

 
186

Other expense (income), net
96

 
388

 
22

 
246

 
17

 
443

Deferred income taxes
266

 
92

 
268

 
612

 
(40
)
 
784

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
Inventories
(1,094
)
 
(381
)
 
36

 
(1,762
)
 
(2,220
)
 
(3,112
)
Accounts receivable, net and other
(2,884
)
 
(1,181
)
 
(3,220
)
 
(3,776
)
 
(5,983
)
 
(5,172
)
Accounts payable
3,894

 
226

 
(3,618
)
 
(2,490
)
 
5,285

 
4,393

Accrued expenses and other
237

 
(722
)
 
(2,193
)
 
(4,277
)
 
(131
)
 
(1,612
)
Unearned revenue

 
(53
)
 
623

 
1,225

 
759

 
1,753

Net cash provided by (used in) operating activities
8,588

 
7,892

 
14,246

 
18,855

 
26,604

 
35,332

INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
(3,352
)
 
(4,697
)
 
(9,693
)
 
(11,549
)
 
(13,312
)
 
(15,282
)
Proceeds from property and equipment sales and incentives
825

 
1,312

 
1,490

 
2,800

 
2,073

 
3,414

Acquisitions, net of cash acquired, and other
(976
)
 
(398
)
 
(1,855
)
 
(1,684
)
 
(1,936
)
 
(2,015
)
Sales and maturities of marketable securities
1,964

 
7,251

 
6,301

 
15,056

 
9,787

 
16,994

Purchases of marketable securities
(4,033
)
 
(8,542
)
 
(5,040
)
 
(25,368
)
 
(7,390
)
 
(27,428
)
Net cash provided by (used in) investing activities
(5,572
)
 
(5,074
)
 
(8,797
)
 
(20,745
)
 
(10,778
)
 
(24,317
)
FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Proceeds from long-term debt and other
143

 
702

 
363

 
1,175

 
472

 
1,581

Repayments of long-term debt and other
(183
)
 
(355
)
 
(533
)
 
(819
)
 
(1,675
)
 
(953
)
Principal repayments of finance leases
(2,247
)
 
(2,307
)
 
(5,544
)
 
(6,848
)
 
(7,016
)
 
(8,754
)
Principal repayments of financing obligations
(82
)
 

 
(211
)
 
(3
)
 
(277
)
 
(129
)
Net cash provided by (used in) financing activities
(2,369
)
 
(1,960
)
 
(5,925
)
 
(6,495
)
 
(8,496
)
 
(8,255
)
Foreign currency effect on cash, cash equivalents, and restricted cash
(151
)
 
(269
)
 
(348
)
 
(234
)
 
(258
)
 
(238
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
496

 
589

 
(824
)
 
(8,619
)
 
7,072

 
2,522

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
$
21,032

 
$
23,554

 
$
21,032

 
$
23,554

 
$
21,032

 
$
23,554

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
 
 
 
 
 
 
 
Cash paid for interest on long-term debt
$
283

 
$
287

 
$
733

 
$
720

 
$
907

 
$
842

Cash paid for operating leases

 
872

 

 
2,420

 

 
2,420

Cash paid for interest on finance leases
118

 
167

 
277

 
481

 
335

 
585

Cash paid for interest on financing obligations
47

 
14

 
142

 
20

 
168

 
72

Cash paid for income taxes, net of refunds
200

 
241

 
1,013

 
692

 
1,106

 
863

Assets acquired under operating leases

 
2,299

 

 
5,393

 

 
5,393

Property and equipment acquired under finance leases
2,329

 
3,606

 
6,934

 
9,541

 
9,704

 
13,222

Property and equipment acquired under build-to-suit arrangements
962

 
390

 
2,498

 
1,109

 
3,340

 
2,252

See accompanying notes to consolidated financial statements.

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Table of Contents

AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
 
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2019
 
2018
 
2019
Net product sales
$
33,746

 
$
39,726

 
$
97,215

 
$
109,866

Net service sales
22,830

 
30,255

 
63,289

 
83,220

Total net sales
56,576

 
69,981

 
160,504

 
193,086

Operating expenses:
 
 
 
 
 
 
 
Cost of sales
33,003

 
41,302

 
94,370

 
111,559

Fulfillment
8,275

 
10,167

 
23,999

 
28,040

Marketing
3,303

 
4,752

 
8,902

 
12,707

Technology and content
7,162

 
9,200

 
21,168

 
26,191

General and administrative
1,041

 
1,348

 
3,219

 
3,791

Other operating expense (income), net
68

 
55

 
211

 
136

Total operating expenses
52,852

 
66,824

 
151,869

 
182,424

Operating income
3,724

 
3,157

 
8,635

 
10,662

Interest income
117

 
224

 
290

 
621

Interest expense
(358
)
 
(396
)
 
(1,030
)
 
(1,145
)
Other income (expense), net
(93
)
 
(353
)
 
16

 
(215
)
Total non-operating income (expense)
(334
)
 
(525
)
 
(724
)
 
(739
)
Income before income taxes
3,390

 
2,632

 
7,911

 
9,923

Provision for income taxes
(508
)
 
(494
)
 
(870
)
 
(1,588
)
Equity-method investment activity, net of tax
1

 
(4
)
 
5

 
(15
)
Net income
$
2,883

 
$
2,134

 
$
7,046

 
$
8,320

Basic earnings per share
$
5.91

 
$
4.31

 
$
14.49

 
$
16.87

Diluted earnings per share
$
5.75

 
$
4.23

 
$
14.10

 
$
16.53

Weighted-average shares used in computation of earnings per share:
 
 
 
 
 
 
 
Basic
488

 
495

 
486

 
493

Diluted
501

 
504

 
500

 
503

See accompanying notes to consolidated financial statements.


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AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
 
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2019
 
2018
 
2019
Net income
$
2,883

 
$
2,134

 
$
7,046

 
$
8,320

Other comprehensive income (loss):
 
 
 
 
 
 
 
Net change in foreign currency translation adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax of $2, $1, $19, and $(6)
(101
)
 
(368
)
 
(512
)
 
(369
)
Reclassification adjustment for foreign currency translation included in “Other operating expense (income), net,” net of tax of $0, $29, $0, and $29

 
(108
)
 

 
(108
)
Net foreign currency translation adjustments
(101
)
 
(476
)
 
(512
)
 
(477
)
Net change in unrealized gains (losses) on available-for-sale debt securities:
 
 
 
 
 
 
 
Unrealized gains (losses), net of tax of $0, $(2), $8, and $(13)

 
9

 
(43
)
 
85

Reclassification adjustment for losses (gains) included in “Other income (expense), net,” net of tax of $0, $0, $0, and $0
1

 
(2
)
 
5

 
(2
)
Net unrealized gains (losses) on available-for-sale debt securities
1

 
7

 
(38
)
 
83

Total other comprehensive income (loss)
(100
)
 
(469
)
 
(550
)
 
(394
)
Comprehensive income
$
2,783

 
$
1,665

 
$
6,496

 
$
7,926

See accompanying notes to consolidated financial statements.


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Table of Contents

AMAZON.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
 
 
December 31, 2018
 
September 30, 2019
 

 
(unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
31,750

 
$
23,255

Marketable securities
9,500

 
20,146

Inventories
17,174

 
18,766

Accounts receivable, net and other
16,677

 
16,887

Total current assets
75,101

 
79,054

Property and equipment, net
61,797

 
67,662

Operating leases

 
23,114

Goodwill
14,548

 
14,734

Other assets
11,202

 
14,535

Total assets
$
162,648

 
$
199,099

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
38,192

 
$
35,794

Accrued expenses and other
23,663

 
28,961

Unearned revenue
6,536

 
7,381

Total current liabilities
68,391

 
72,136

Long-term lease liabilities
9,650

 
37,058

Long-term debt
23,495

 
22,472

Other long-term liabilities
17,563

 
10,925

Commitments and contingencies (Note 4)


 


Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value:
 
 
 
Authorized shares — 500
 
 
 
Issued and outstanding shares — none

 

Common stock, $0.01 par value:
 
 
 
Authorized shares — 5,000
 
 
 
Issued shares — 514 and 519
 
 
 
Outstanding shares — 491 and 495
5

 
5

Treasury stock, at cost
(1,837
)
 
(1,837
)
Additional paid-in capital
26,791

 
31,817

Accumulated other comprehensive loss
(1,035
)
 
(1,429
)
Retained earnings
19,625

 
27,952

Total stockholders’ equity
43,549

 
56,508

Total liabilities and stockholders’ equity
$
162,648

 
$
199,099

See accompanying notes to consolidated financial statements.


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Table of Contents

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1 — ACCOUNTING POLICIES
Unaudited Interim Financial Information
We have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our consolidated cash flows, operating results, and balance sheets for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2019 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 2018 Annual Report on Form 10-K.
Prior Period Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation, including the reclassification of long-term capital lease obligations that existed at December 31, 2018 from “Other long-term liabilities” to “Long-term lease liabilities” within the consolidated balance sheets, as a result of the adoption of new accounting guidance for leases. See “Accounting Pronouncements Recently Adopted.”
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 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, depreciable lives of equipment, commitments and contingencies, valuation of acquired intangibles and goodwill, stock-based compensation forfeiture rates, vendor funding, and 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):
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2019
 
2018
 
2019
Shares used in computation of basic earnings per share
488

 
495

 
486

 
493

Total dilutive effect of outstanding stock awards
13

 
9

 
14

 
10

Shares used in computation of diluted earnings per share
501

 
504

 
500

 
503


Accounts Receivable, Net and Other
Included in “Accounts receivable, net and other” on our consolidated balance sheets are amounts primarily related to customers, vendors, and sellers. As of December 31, 2018 and September 30, 2019, customer receivables, net, were $9.4 billion and $10.6 billion, vendor receivables, net, were $3.2 billion and $2.5 billion, and seller receivables, net, were $710 million and $790 million. Seller receivables are amounts due from sellers related to our seller lending program, which provides funding to sellers primarily to procure inventory.

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Table of Contents

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. Lease assets are tested for impairment in the same manner as long-lived assets used in operations. 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 these options 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 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.
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 either operating or finance.
Digital Video and Music Content
We obtain video content, inclusive of episodic television and movies, and music content for customers through licensing agreements that have a wide range of licensing provisions including both fixed and variable payment schedules. When the license fee for a specific video or music title is determinable or reasonably estimable and the content is available to us, we recognize an asset and a corresponding liability for the amounts owed. We reduce the liability as payments are made and we amortize the asset to “Cost of sales” on an accelerated basis, based on estimated usage or viewing patterns, or on a straight-line basis. If the licensing fee is not determinable or reasonably estimable, no asset or liability is recorded and licensing costs are expensed as incurred. We also develop original video content for which the production costs are capitalized and amortized to “Cost of sales” predominantly on an accelerated basis that follows the viewing patterns associated with the content. The weighted average remaining life of our capitalized video content is 2.6 years.
Our produced and licensed video content is primarily monetized together as a unit, referred to as a film group, in each major geography where we offer Amazon Prime memberships. These film groups are evaluated for impairment whenever an event occurs or circumstances change indicating the fair value is less than the carrying value. The total capitalized costs of video, which is primarily released content, and music as of December 31, 2018 and September 30, 2019 were $3.8 billion and $5.0 billion. Total video and music expense was $1.7 billion and $1.9 billion in Q3 2018 and Q3 2019, and $4.9 billion and $5.5 billion for the nine months ended September 30, 2018 and 2019. Total video and music expense includes licensing and production costs associated with content offered within Amazon Prime memberships, and costs associated with digital subscriptions and sold or rented content.
Unearned Revenue
Unearned revenue is recorded when payments are received or due in advance of performing our service obligations and is recognized over the service period. Unearned revenue primarily relates to prepayments of AWS services and Amazon Prime memberships. Our total unearned revenue as of December 31, 2018 was $7.9 billion, of which $5.7 billion was recognized as revenue during the nine months ended September 30, 2019. Included in “Other long-term liabilities” on our consolidated balance sheets was $1.4 billion and $1.6 billion of unearned revenue as of December 31, 2018 and September 30, 2019.

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Table of Contents

Additionally, we have performance obligations, primarily related to AWS, associated with commitments in customer contracts for future services that have not yet been recognized in our financial statements. For contracts with original terms that exceed one year, those commitments not yet recognized were $27.4 billion as of September 30, 2019. The weighted average remaining life of our long-term contracts is 3.3 years. However, the amount and timing of revenue recognition is largely driven by customer usage, which can extend beyond the original contractual term.
Accounting Pronouncements Recently Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) amending the accounting for leases, primarily requiring the recognition of lease assets and liabilities for operating leases with terms of more than twelve months on our consolidated balance sheets. Under the new guidance, leases previously described as capital lease obligations and finance lease obligations are now referred to as finance leases and financing obligations, respectively. We adopted this ASU on January 1, 2019 by recording an immaterial cumulative adjustment to retained earnings rather than retrospectively adjusting prior periods. Prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting policies resulting in a balance sheet presentation that is not comparable to the prior period in the first year of adoption. The adoption of this ASU resulted in the recognition of operating lease assets and liabilities of approximately $21 billion, which included the reclassification of finance lease obligations to operating leases of $1.2 billion. As of December 31, 2018, amounts related to finance lease obligations and construction liabilities totaled $9.6 billion, of which $1.5 billion was derecognized for buildings that we do not control during the construction period and $5.4 billion and $1.5 billion were reclassified to finance leases and operating leases, respectively.
In March 2019, the FASB issued an ASU amending the accounting for film costs, inclusive of episodic television and movie costs. The new guidance aligns the accounting for production costs of episodic television with that of movies by requiring production costs to be capitalized. Previously, we only capitalized a portion of the production costs related to our produced episodic television content. We adopted this ASU as of January 1, 2019 and began capitalizing substantially all of our production costs. Adoption of this ASU resulted in approximately $631 million of incremental capitalized film costs classified in “Other Assets” for the nine months ended September 30, 2019.
Note 2 — FINANCIAL INSTRUMENTS
Cash, Cash Equivalents, Restricted Cash, and Marketable Securities
As of December 31, 2018 and September 30, 2019, our cash, cash equivalents, restricted cash, and marketable securities primarily consisted of cash, AAA-rated money market funds, U.S. and foreign government and agency securities, and other investment grade securities. Cash equivalents and marketable securities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
We measure the fair value of money market funds and 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 cash, cash equivalents, restricted cash, or marketable securities categorized as Level 3 assets as of December 31, 2018 and September 30, 2019.

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Table of Contents

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):
 
December 31, 2018
 
September 30, 2019
  
Total
Estimated
Fair Value
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Total
Estimated
Fair Value
Cash
$
10,406

 
$
8,900

 
$

 
$

 
$
8,900

Level 1 securities:
 
 
 
 
 
 
 
 
 
Money market funds
12,515

 
9,869

 

 

 
9,869

Equity securities (1)
170

 
 
 
 
 
 
 
225

Level 2 securities:
 
 
 
 
 
 
 
 
 
Foreign government and agency securities
815

 
4,170

 

 

 
4,170

U.S. government and agency securities
11,667

 
6,875

 
13

 
(4
)
 
6,884

Corporate debt securities
4,990

 
11,132

 
37

 
(1
)
 
11,168

Asset-backed securities
892

 
2,180

 
8

 
(1
)
 
2,187

Other fixed income securities
188

 
293

 
2

 

 
295

Equity securities (1)
33

 
 
 
 
 
 
 
5

 
$
41,676

 
$
43,419

 
$
60

 
$
(6
)
 
$
43,703

Less: Restricted cash, cash equivalents, and marketable securities (2)
(426
)
 
 
 
 
 
 
 
(302
)
Total cash, cash equivalents, and marketable securities
$
41,250

 
 
 
 
 
 
 
$
43,401

___________________
(1)
The related unrealized gain (loss) recorded in “Other income (expense), net” was $(55) million in Q3 2019 and $27 million for the nine months ended September 30, 2019.
(2)
We are required to pledge or otherwise restrict a portion of our cash, cash equivalents, and marketable securities as collateral for real estate leases, amounts due to third-party sellers in certain jurisdictions, debt, and standby and trade letters of credit. We classify cash, cash equivalents, and marketable securities with use restrictions of less than twelve months as “Accounts receivable, net and other” and of twelve months or longer as non-current “Other assets” on our consolidated balance sheets. See “Note 4 — Commitments and Contingencies.”
The following table summarizes the remaining contractual maturities of our cash equivalents and marketable fixed income securities as of September 30, 2019 (in millions):
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$
24,194

 
$
24,202

Due after one year through five years
9,104

 
9,146

Due after five years through ten years
309

 
310

Due after ten years
912

 
915

Total
$
34,519

 
$
34,573


Actual maturities may differ from the contractual maturities because borrowers may have certain prepayment conditions.
Equity Warrants and Non-Marketable Equity Securities
We hold equity warrants giving us the right to acquire stock of other companies. As of December 31, 2018 and September 30, 2019, these warrants had a fair value of $440 million and $526 million, and are recorded within “Other assets” on our consolidated balance sheets. The related gain (loss) recorded in “Other income (expense), net” was $(62) million and $(151) million in Q3 2018 and Q3 2019, and $25 million and $(79) million for the nine months ended September 30, 2018 and 2019. These assets are primarily classified as Level 2 assets.
As of December 31, 2018 and September 30, 2019, equity securities not accounted for under the equity-method and without readily determinable fair values, had a carrying value of $282 million and $894 million, and are recorded within “Other assets” on our consolidated balance sheets.

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Table of Contents

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, 2018
 
September 30, 2019
Cash and cash equivalents
$
31,750

 
$
23,255

Restricted cash included in accounts receivable, net and other
418

 
257

Restricted cash included in other assets
5

 
42

Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows
$
32,173

 
$
23,554


Note 3 — LEASES
Gross assets acquired under finance leases, inclusive of those where title transfers at the end of the lease, are recorded in “Property and equipment, net” and were $36.1 billion and $53.7 billion as of December 31, 2018 and September 30, 2019. Accumulated amortization associated with finance leases was $19.8 billion and $27.8 billion as of December 31, 2018 and September 30, 2019.
Lease cost recognized in our consolidated statements of operations is summarized as follows (in millions):
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
 
 
 
 
Operating lease cost (1)
$
934

 
$
2,644

Finance lease cost:
 
 
 
Amortization of lease assets
2,609

 
7,319

Interest on lease liabilities
164

 
479

Finance lease cost
2,773

 
7,798

Variable lease cost
244

 
775

Total lease cost
$
3,951

 
$
11,217

__________________
(1)
Rental expense under operating lease agreements was $859 million for Q3 2018 and $2.5 billion for the nine months ended September 30, 2018.
Other information about lease amounts recognized in our consolidated financial statements is summarized as follows:
 
September 30, 2019
 
 
Weighted-average remaining lease term – operating leases
11.7 years

Weighted-average remaining lease term – finance leases
5.7 years

Weighted-average discount rate – operating leases
3.2
%
Weighted-average discount rate – finance leases
2.8
%

As of September 30, 2019, our lease liabilities were as follows (in millions):
 
Operating Leases
 
Finance Leases
 
Total
 
 
 
 
 
 
Gross lease liabilities
$
30,550

 
$
27,310

 
$
57,860

Less: imputed interest
(6,646
)
 
(1,936
)
 
(8,582
)
Present value of lease liabilities
23,904

 
25,374

 
49,278

Less: current portion of lease liabilities
(2,842
)
 
(9,378
)
 
(12,220
)
Total long-term lease liabilities
$
21,062

 
$
15,996

 
$
37,058



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Table of Contents

Note 4 — COMMITMENTS AND CONTINGENCIES
Commitments
We have entered into non-cancellable operating and finance leases and financing obligations for equipment and office, fulfillment, sortation, delivery, data center, physical store, and renewable energy facilities.
The following summarizes our principal contractual commitments, excluding open orders for purchases that support normal operations and are generally cancellable, as of September 30, 2019 (in millions): 
 
Three Months Ended December 31,
 
Year Ended December 31,
 
 
 
 
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
Debt principal and interest
$
1,556

 
$
2,345

 
$
1,928

 
$
2,144

 
$
1,848

 
$
30,047

 
$
39,868

Operating lease liabilities
795

 
3,594

 
3,337

 
2,977

 
2,657

 
17,190

 
30,550

Finance lease liabilities, including interest
2,124

 
9,364

 
6,355

 
2,754

 
1,158

 
5,555

 
27,310

Financing obligations, including interest
21

 
100

 
102

 
103

 
105

 
1,796

 
2,227

Unconditional purchase obligations (1)
270

 
3,864

 
3,388

 
3,126

 
2,991

 
5,219

 
18,858

Other commitments (2) (3)
1,377

 
2,589

 
1,554

 
1,434

 
1,011

 
10,521

 
18,486

Total commitments
$
6,143

 
$
21,856

 
$
16,664

 
$
12,538

 
$
9,770

 
$
70,328

 
$
137,299

___________________
(1)
Includes unconditional purchase obligations related to certain products offered in our Whole Foods Market stores and long-term agreements to acquire and license digital media content that are not reflected on the consolidated balance sheets. For those digital media content agreements with variable terms, we do not estimate the total obligation beyond any minimum quantities and/or pricing as of the reporting date. Purchase obligations associated with renewal provisions solely at the option of the content provider are included to the extent such commitments are fixed or a minimum amount is specified.
(2)
Includes the estimated timing and amounts of payments for rent and tenant improvements associated with build-to-suit lease arrangements and lease arrangements prior to the lease commencement date and digital media content liabilities associated with long-term digital media content assets with initial terms greater than one year.
(3)
Excludes approximately $3.8 billion of accrued tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period of payment, if any.
Pledged Assets
As of December 31, 2018 and September 30, 2019, we have pledged or otherwise restricted $575 million and $686 million of our cash, cash equivalents, and marketable securities, and certain property and equipment as collateral for real estate leases, amounts due to third-party sellers in certain jurisdictions, debt, and standby and trade letters of credit.
Other Contingencies
In 2016, we determined that we processed and delivered orders of consumer products for certain individuals and entities located outside Iran covered by the Iran Threat Reduction and Syria Human Rights Act or other United States sanctions and export control laws. The consumer products included books, music, other media, apparel, home and kitchen, health and beauty, jewelry, office, consumer electronics, software, lawn and patio, grocery, and automotive products. Our review is ongoing and we have voluntarily reported these orders to the United States Treasury Department’s Office of Foreign Assets Control and the United States Department of Commerce’s Bureau of Industry and Security. We intend to cooperate fully with OFAC and BIS with respect to their review, which may result in the imposition of penalties. For additional information, see Item 5 of Part II, “Other Information — Disclosure Pursuant to Section 13(r) of the Exchange Act.”
We are subject to claims related to various indirect taxes (such as sales, value added, consumption, service, and similar taxes), including in jurisdictions in which we already collect and remit such taxes. If the relevant taxing authorities were successfully to pursue these claims, we could be subject to significant additional tax liabilities. For example, in June 2017, the State of South Carolina issued an assessment for uncollected sales and use taxes for the period from January 2016 to March 2016, including interest and penalties. South Carolina is alleging that we should have collected sales and use taxes on transactions by our third-party sellers. In September 2019, the South Carolina Administrative Law Court ruled in favor of the Department of Revenue and we have appealed the decision to the state Court of Appeals. We believe the assessment is without merit and intend to defend ourselves vigorously in this matter. If other tax authorities were successfully to seek additional adjustments of a similar nature, we could be subject to significant additional tax liabilities.

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Legal Proceedings
The Company is involved from time to time in claims, proceedings, and litigation, including the matters described in Item 8 of Part II, “Financial Statements and Supplementary Data — Note 7 — Commitments and Contingencies — Legal Proceedings” of our 2018 Annual Report on Form 10-K and in Item 1 of Part I, “Financial Statements — Note 4 — Commitments and Contingencies — Legal Proceedings” of our Quarterly Reports on Form 10-Q for the periods ended March 31, 2019 and June 30, 2019.
The outcomes of our legal proceedings and other contingencies are inherently unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular period. In addition, for the matters we disclose that do not include an estimate of the amount of loss or range of losses, such an estimate is not possible or is immaterial, and we may be unable to estimate the possible loss or range of losses that could potentially result from the application of non-monetary remedies.
See also “Note 7 — Income Taxes.”
Note 5 — DEBT
As of September 30, 2019, we had $24.3 billion of unsecured senior notes outstanding (the “Notes”). As of December 31, 2018 and September 30, 2019, the net unamortized discount and debt issuance costs on the Notes was $101 million. We also have other long-term debt with a carrying amount, including the current portion and borrowings under our credit facility, of $715 million and $1.2 billion as of December 31, 2018 and September 30, 2019. The face value of our total long-term debt obligations is as follows (in millions):
 
December 31, 2018
 
September 30, 2019
2.600% Notes due on December 5, 2019 (2)
1,000

 
1,000

1.900% Notes due on August 21, 2020 (3)
1,000

 
1,000

3.300% Notes due on December 5, 2021 (2)
1,000

 
1,000

2.500% Notes due on November 29, 2022 (1)
1,250

 
1,250

2.400% Notes due on February 22, 2023 (3)
1,000

 
1,000

2.800% Notes due on August 22, 2024 (3)
2,000

 
2,000

3.800% Notes due on December 5, 2024 (2)
1,250

 
1,250

5.200% Notes due on December 3, 2025 (4)
1,000

 
1,000

3.150% Notes due on August 22, 2027 (3)
3,500

 
3,500

4.800% Notes due on December 5, 2034 (2)
1,250

 
1,250

3.875% Notes due on August 22, 2037 (3)
2,750

 
2,750

4.950% Notes due on December 5, 2044 (2)
1,500

 
1,500

4.050% Notes due on August 22, 2047 (3)
3,500

 
3,500

4.250% Notes due on August 22, 2057 (3)
2,250

 
2,250

Credit Facility
594

 
603

Other long-term debt
121

 
558

Total debt
24,965

 
25,411

Less current portion of long-term debt
(1,371
)
 
(2,841
)
Face value of long-term debt
$
23,594

 
$
22,570


_____________________________
(1)
Issued in November 2012, effective interest rate of the 2022 Notes was 2.66%.
(2)
Issued in December 2014, effective interest rates of the 2019, 2021, 2024, 2034, and 2044 Notes were 2.73%, 3.43%, 3.90%, 4.92%, and 5.11%.
(3)
Issued in August 2017, effective interest rates of the 2020, 2023, 2024, 2027, 2037, 2047, and 2057 Notes were 2.16%, 2.56%, 2.95%, 3.25%, 3.94%, 4.13%, and 4.33%.
(4)
Consists of $872 million of 2025 Notes issued in December 2017 in exchange for notes assumed in connection with the acquisition of Whole Foods Market and $128 million of 2025 Notes issued by Whole Foods Market that did not participate in our December 2017 exchange offer. The effective interest rate of the 2025 Notes was 3.02%.
Interest on the Notes issued in 2012 is payable semi-annually in arrears in May and November. Interest on the Notes issued in 2014 is payable semi-annually in arrears in June and December. Interest on the Notes issued in 2017 is payable semi-

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annually in arrears in February and August. Interest on the 2025 Notes is payable semi-annually in arrears in June and December. We may redeem the Notes at any time in whole, or from time to time, in part at specified redemption prices. We are not subject to any financial covenants under the Notes. The proceeds from the November 2012 and the December 2014 Notes were used for general corporate purposes. The proceeds from the August 2017 Notes were used to fund the consideration for the acquisition of Whole Foods Market, to repay notes due in 2017, and for general corporate purposes. The estimated fair value of the Notes was approximately $24.3 billion and $27.4 billion as of December 31, 2018 and September 30, 2019, which is based on Level 2 inputs.
In October 2016, we entered into a $500 million secured revolving credit facility with a lender that is secured by certain seller receivables, which we subsequently increased to $650 million and may from time to time increase in the future subject to lender approval (the “Credit Facility”). The Credit Facility is available for a term of three years, bears interest at the London interbank offered rate (“LIBOR”) plus 1.65%, and has a commitment fee of 0.50% on the undrawn portion. There were $594 million and $603 million of borrowings outstanding under the Credit Facility as of December 31, 2018 and September 30, 2019, with weighted-average interest rates of 3.2% and 3.4% as of December 31, 2018 and September 30, 2019. As of December 31, 2018 and September 30, 2019, we have pledged $686 million and $698 million of our cash and seller receivables as collateral for debt related to our Credit Facility. The estimated fair value of the Credit Facility, which is based on Level 2 inputs, approximated its carrying value as of December 31, 2018 and September 30, 2019.
Other long-term debt, including the current portion, had a weighted-average interest rate of 6.0% and 4.7% as of December 31, 2018 and September 30, 2019. We used the net proceeds from the issuance of this debt primarily to fund certain business operations. The estimated fair value of other long-term debt, which is based on Level 2 inputs, approximated its carrying value as of December 31, 2018 and September 30, 2019.
In April 2018, we established 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 December 31, 2018 and September 30, 2019.
In April 2018, in connection with our Commercial Paper Program, we amended and restated our unsecured revolving credit facility (the “Credit Agreement”) with a syndicate of lenders to increase our borrowing capacity thereunder to $7.0 billion. As amended and restated, the Credit Agreement has a term of three years, but it may be extended for up to three additional one-year terms if approved by the lenders. The interest rate applicable to outstanding balances under the amended and restated Credit Agreement is LIBOR plus 0.50%, with a commitment fee of 0.04% on the undrawn portion of the credit facility. There were no borrowings outstanding under the Credit Agreement as of December 31, 2018 and September 30, 2019.
Note 6 — STOCKHOLDERS’ EQUITY
Stock Repurchase Activity
In February 2016, the Board of Directors authorized a program to repurchase up to $5.0 billion of our common stock, with no fixed expiration. There were no repurchases of common stock during the nine months ended September 30, 2018 or 2019.
Stock Award Activity
Common shares outstanding plus shares underlying outstanding stock awards totaled 507 million and 511 million as of December 31, 2018 and September 30, 2019. These totals include all vested and unvested stock awards outstanding, including those awards we estimate will be forfeited. Stock-based compensation expense is as follows (in millions):
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2019
 
2018
 
2019
Cost of sales
$
19

 
$
39

 
$
52

 
$
106

Fulfillment
269

 
301

 
834

 
895

Marketing
201

 
298

 
552

 
813

Technology and content
719

 
966

 
2,137

 
2,719

General and administrative
142

 
175

 
426

 
491

Total stock-based compensation expense
$
1,350

 
$
1,779

 
$
4,001

 
$
5,024



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The following table summarizes our restricted stock unit activity for the nine months ended September 30, 2019 (in millions):
 
Number of Units
 
Weighted-Average
Grant-Date
Fair Value
Outstanding as of December 31, 2018
15.9

 
$
1,024

Units granted
5.8