AMAZON COM INC 10-Q

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, 2019 2020 2019 2020 2019 2020 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD $ 22,965 $ 37,842 $ 32,173 $ 36,410 $ 21,032 $ 23,554 OPERATING ACTIVITIES: Net income 2,134 6,331 8,320 14,109 11,347 17,377 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 5,563 6,523 15,619 17,633 19,881 23,803 Stock-based compensation 1,779 2,288 5,024 6,646 6,441 8,486 Other operating expense (income), net 47 67 114 416 186 466 Other expense (income), net 388 ( 1,051 ) 246 ( 1,255 ) 443 ( 1,749 ) Deferred income taxes 92 295 612 1,082 784 1,267 Changes in operating assets and liabilities: Inventories ( 381 ) ( 3,899 ) ( 1,762 ) ( 3,178 ) ( 3,112 ) ( 4,694 ) Accounts receivable, net and other ( 1,181 ) ( 2,016 ) ( 3,776 ) ( 3,608 ) ( 5,172 ) ( 7,515 ) Accounts payable 226 3,658 ( 2,490 ) 4,231 4,393 14,914 Accrued expenses and other ( 722 ) ( 310 ) ( 4,277 ) ( 1,375 ) ( 1,612 ) 1,520 Unearned revenue ( 53 ) 78 1,225 932 1,753 1,417 Net cash provided by (used in) operating activities 7,892 11,964 18,855 35,633 35,332 55,292 INVESTING ACTIVITIES: Purchases of property and equipment ( 4,697 ) ( 11,063 ) ( 11,549 ) ( 25,317 ) ( 15,282 ) ( 30,629 ) Proceeds from property and equipment sales and incentives 1,312 1,255 2,800 3,467 3,414 4,838 Acquisitions, net of cash acquired, and other ( 398 ) ( 1,735 ) ( 1,684 ) ( 1,945 ) ( 2,015 ) ( 2,722 ) Sales and maturities of marketable securities 7,251 13,135 15,056 32,899 16,994 40,525 Purchases of marketable securities ( 8,542 ) ( 17,468 ) ( 25,368 ) ( 51,678 ) ( 27,428 ) ( 58,122 ) Net cash provided by (used in) investing activities ( 5,074 ) ( 15,876 ) ( 20,745 ) ( 42,574 ) ( 24,317 ) ( 46,110 ) FINANCING ACTIVITIES: Proceeds from short-term debt, and other 415 1,311 722 4,361 1,292 5,042 Repayments of short-term debt, and other ( 341 ) ( 1,349 ) ( 704 ) ( 3,886 ) ( 1,129 ) ( 4,701 ) Proceeds from long-term debt 287 — 453 9,994 589 10,412 Repayments of long-term debt ( 14 ) ( 1,198 ) ( 115 ) ( 1,439 ) ( 124 ) ( 2,490 ) Principal repayments of finance leases ( 2,307 ) ( 2,857 ) ( 6,848 ) ( 8,274 ) ( 8,754 ) ( 11,054 ) Principal repayments of financing obligations — ( 12 ) ( 3 ) ( 44 ) ( 129 ) ( 68 ) Net cash provided by (used in) financing activities ( 1,960 ) ( 4,105 ) ( 6,495 ) 712 ( 8,255 ) ( 2,859 ) Foreign currency effect on cash, cash equivalents, and restricted cash ( 269 ) 377 ( 234 ) 21 ( 238 ) 325 Net increase (decrease) in cash, cash equivalents, and restricted cash 589 ( 7,640 ) ( 8,619 ) ( 6,208 ) 2,522 6,648 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD $ 23,554 $ 30,202 $ 23,554 $ 30,202 $ 23,554 $ 30,202 See accompanying notes to consolidated financial statements. 3 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, 2019 2020 2019 2020 Net product sales $ 39,726 $ 52,774 $ 109,866 $ 144,859 Net service sales 30,255 43,371 83,220 115,650 Total net sales 69,981 96,145 193,086 260,509 Operating expenses: Cost of sales 41,302 57,106 111,559 154,023 Fulfillment 10,167 14,705 28,040 40,043 Technology and content 9,200 10,976 26,191 30,691 Marketing 4,752 5,434 12,707 14,605 General and administrative 1,348 1,668 3,791 4,700 Other operating expense (income), net 55 62 136 421 Total operating expenses 66,824 89,951 182,424 244,483 Operating income 3,157 6,194 10,662 16,026 Interest income 224 118 621 455 Interest expense ( 396 ) ( 428 ) ( 1,145 ) ( 1,233 ) Other income (expense), net ( 353 ) 925 ( 215 ) 1,165 Total non-operating income (expense) ( 525 ) 615 ( 739 ) 387 Income before income taxes 2,632 6,809 9,923 16,413 Provision for income taxes ( 494 ) ( 569 ) ( 1,588 ) ( 2,298 ) Equity-method investment activity, net of tax ( 4 ) 91 ( 15 ) ( 6 ) Net income $ 2,134 $ 6,331 $ 8,320 $ 14,109 Basic earnings per share $ 4.31 $ 12.63 $ 16.87 $ 28.24 Diluted earnings per share $ 4.23 $ 12.37 $ 16.53 $ 27.72 Weighted-average shares used in computation of earnings per share: Basic 495 501 493 500 Diluted 504 512 503 509 See accompanying notes to consolidated financial statements. 4 Table of Contents AMAZON.COM, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in millions) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2019 2020 2019 2020 Net income $ 2,134 $ 6,331 $ 8,320 $ 14,109 Other comprehensive income (loss): Net change in foreign currency translation adjustments: Foreign currency translation adjustments, net of tax of $ 1 , $( 15 ), $( 6 ) and $( 2 ) ( 368 ) 408 ( 369 ) ( 260 ) Reclassification adjustment for foreign currency translation included in “Other operating expense (income), net,” net of tax of $ 29 , $ 0 , $ 29 and $ 0 ( 108 ) — ( 108 ) — Net foreign currency translation adjustments ( 476 ) 408 ( 477 ) ( 260 ) Net change in unrealized gains (losses) on available-for-sale debt securities: Unrealized gains (losses), net of tax of $( 2 ), $( 10 ), $( 13 ) and $( 73 ) 9 35 85 239 Reclassification adjustment for losses (gains) included in “Other income (expense), net,” net of tax of $ 0 , $ 5 , $ 0 and $ 7 ( 2 ) ( 17 ) ( 2 ) ( 22 ) Net unrealized gains (losses) on available-for-sale debt securities 7 18 83 217 Total other comprehensive income (loss) ( 469 ) 426 ( 394 ) ( 43 ) Comprehensive income $ 1,665 $ 6,757 $ 7,926 $ 14,066 See accompanying notes to consolidated financial statements. 5 Table of Contents AMAZON.COM, INC. CONSOLIDATED BALANCE SHEETS (in millions, except per share data) December 31, 2019 September 30, 2020 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 36,092 $ 29,930 Marketable securities 18,929 38,472 Inventories 20,497 23,735 Accounts receivable, net and other 20,816 20,832 Total current assets 96,334 112,969 Property and equipment, net 72,705 99,981 Operating leases 25,141 34,119 Goodwill 14,754 14,960 Other assets 16,314 20,150 Total assets $ 225,248 $ 282,179 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 47,183 $ 58,334 Accrued expenses and other 32,439 34,327 Unearned revenue 8,190 9,251 Total current liabilities 87,812 101,912 Long-term lease liabilities 39,791 48,589 Long-term debt 23,414 32,929 Other long-term liabilities 12,171 15,974 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 — 521 and 525 Outstanding shares — 498 and 502 5 5 Treasury stock, at cost ( 1,837 ) ( 1,837 ) Additional paid-in capital 33,658 40,307 Accumulated other comprehensive income (loss) ( 986 ) ( 1,029 ) Retained earnings 31,220 45,329 Total stockholders’ equity 62,060 82,775 Total liabilities and stockholders’ equity $ 225,248 $ 282,179 See accompanying notes to consolidated financial statements. 6 Table of Contents AMAZON.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1 — ACCOUNTING POLICIES AND SUPPLEMENTAL DISCLOSURES 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 2020 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 2019 Annual Report on Form 10-K. Prior Period Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. Proceeds from and repayments of short-term debt, and other were reclassified from proceeds from and repayments of long-term debt, 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 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, stock-based compensation forfeiture rates, vendor funding, inventory valuation, collectability of receivables, and valuation and impairment of investments. Given the global economic climate and additional or unforeseen effects from the COVID-19 pandemic, these estimates have become more challenging, and actual results could differ materially from these estimates. We review the useful lives of equipment on an ongoing basis, and effective January 1, 2020 we changed our estimate of the useful life for our servers from three to four years . The longer useful life is due to continuous improvements in our hardware, software, and data center designs. The effect of this change in estimate for Q3 2020, based on servers that were included in “Property and equipment, net” as of June 30, 2020 and those acquired during the quarter ended September 30, 2020, was a reduction in depreciation and amortization expense of $ 634 million and an increase in net income of $ 479 million, or $ 0.95 per basic share and $ 0.93 per diluted share. The effect of this change in estimate for the nine months ended September 30, 2020, based on servers that were included in “Property and equipment, net” as of December 31, 2019 and those acquired during the nine months ended September 30, 2020, was a reduction in depreciation and amortization expense of $ 2.1 billion and an increase in net income of $ 1.6 billion, or $ 3.23 per basic share and $ 3.18 per diluted share. 7 Table of Contents Supplemental Cash Flow Information The following table shows supplemental cash flow information (in millions): Three Months Ended September 30, Nine Months Ended September 30, Twelve Months Ended September 30, 2019 2020 2019 2020 2019 2020 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest on debt $ 287 $ 285 $ 720 $ 715 $ 842 $ 869 Cash paid for operating leases 872 1,159 2,420 3,275 2,420 4,215 Cash paid for interest on finance leases 167 155 481 484 585 650 Cash paid for interest on financing obligations 14 28 20 71 72 90 Cash paid for income taxes, net of refunds 241 502 692 1,293 863 1,481 Assets acquired under operating leases 2,299 6,115 5,393 11,870 5,393 14,346 Property and equipment acquired under finance leases 3,606 3,571 9,541 8,892 13,222 13,075 Property and equipment acquired under build-to-suit arrangements 390 366 1,109 1,228 2,252 1,480 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, 2019 2020 2019 2020 Shares used in computation of basic earnings per share 495 501 493 500 Total dilutive effect of outstanding stock awards 9 11 10 9 Shares used in computation of diluted earnings per share 504 512 503 509 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 $ 1.6 billion and $ 1.9 billion as of December 31, 2019 and September 30, 2020. 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, 2019 and September 30, 2020, customer receivables, net, were $ 12.6 billion and $ 13.1 billion, vendor receivables, net, were $ 4.2 billion and $ 3.3 billion, and seller receivables, net, were $ 863 million and $ 446 million. Seller receivables are amounts due from sellers related to our seller lending program, which provides funding to sellers primarily to procure inventory. We estimate losses on receivables based on expected losses, including our historical experience of actual losses. The allowance for doubtful accounts was $ 718 million and $ 968 million as of December 31, 2019 and September 30, 2020. Digital Video and Music Content The total capitalized costs of video, which is primarily released content, and music as of December 31, 2019 and September 30, 2020 were $ 5.8 billion and $ 6.3 billion. Total video and music expense was $ 1.9 billion and $ 2.8 billion in Q3 2019 and Q3 2020, and $ 5.5 billion and $ 8.0 billion for the nine months ended September 30, 2019 and 2020. 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, 2019 was $ 10.2 billion, of which $ 7.1 billion was recognized as 8 Table of Contents revenue during the nine months ended September 30, 2020. Included in “Other long-term liabilities” on our consolidated balance sheets was $ 2.0 billion and $ 1.9 billion of unearned revenue as of December 31, 2019 and September 30, 2020. 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 consolidated financial statements. For contracts with original terms that exceed one year, those commitments not yet recognized were $ 44.8 billion as of September 30, 2020. The weighted average remaining life of our long-term contracts is 3.4 years. However, the amount and timing of revenue recognition is largely driven by customer usage, which can extend beyond the original contractual term. Note 2 — FINANCIAL INSTRUMENTS Cash, Cash Equivalents, Restricted Cash, and Marketable Securities As of December 31, 2019 and September 30, 2020, 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, 2019 and September 30, 2020. 9 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, 2019 September 30, 2020 Total Estimated Fair Value Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Total Estimated Fair Value Cash $ 9,776 $ 9,553 $ — — $ 9,553 Level 1 securities: Money market funds 18,850 17,701 — — 17,701 Equity securities (1) 202 452 Level 2 securities: Foreign government and agency securities 4,794 10,270 1 — 10,271 U.S. government and agency securities 7,080 7,656 34 ( 3 ) 7,687 Corporate debt securities 11,881 18,849 276 ( 5 ) 19,120 Asset-backed securities 2,360 3,245 31 ( 5 ) 3,271 Other fixed income securities 394 500 8 — 508 Equity securities (1) 5 114 $ 55,342 $ 67,774 $ 350 $ ( 13 ) $ 68,677 Less: Restricted cash, cash equivalents, and marketable securities (2) ( 321 ) ( 275 ) Total cash, cash equivalents, and marketable securities $ 55,021 $ 68,402 ___________________ (1) The related unrealized gain (loss) recorded in “Other income (expense), net” was $( 55 ) million and $ 150 million in Q3 2019 and Q3 2020, and $ 27 million and $ 351 million for the nine months ended September 30, 2019 and 2020. (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, 2020 (in millions): Amortized Cost Estimated Fair Value Due within one year $ 38,791 $ 38,803 Due after one year through five years 16,106 16,400 Due after five years through ten years 753 758 Due after ten years 2,571 2,597 Total $ 58,221 $ 58,558 Actual maturities may differ from the contractual maturities because borrowers may have certain prepayment conditions. Equity Warrants and Non-Marketable Equity Investments We hold equity warrants giving us the right to acquire stock of other companies. As of December 31, 2019 and September 30, 2020, these warrants had a fair value of $ 669 million and $ 1.4 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 primarily classified as Level 2 assets. As of December 31, 2019 and September 30, 2020, equity investments not accounted for under the equity-method and without readily determinable fair values, had a carrying value of $ 1.5 billion and $ 2.6 billion, and are recorded within “Other assets” on our consolidated balance sheets with adjustments recognized in “Other income (expense), net” on our consolidated statements of operations. 10 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, 2019 September 30, 2020 Cash and cash equivalents $ 36,092 $ 29,930 Restricted cash included in accounts receivable, net and other 276 239 Restricted cash included in other assets 42 33 Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows $ 36,410 $ 30,202 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 $ 57.4 billion and $ 64.9 billion as of December 31, 2019 and September 30, 2020. Accumulated amortization associated with finance leases was $ 30.0 billion and $ 34.2 billion as of December 31, 2019 and September 30, 2020. Lease cost recognized in our consolidated statements of operations is summarized as follows (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2019 2020 2019 2020 Operating lease cost $ 934 $ 1,334 $ 2,644 $ 3,551 Finance lease cost: Amortization of lease assets 2,609 2,200 7,319 6,123 Interest on lease liabilities 164 154 479 474 Finance lease cost 2,773 2,354 7,798 6,597 Variable lease cost 244 308 775 866 Total lease cost $ 3,951 $ 3,996 $ 11,217 $ 11,014 Other information about lease amounts recognized in our consolidated financial statements is summarized as follows: December 31, 2019 September 30, 2020 Weighted-average remaining lease term – operating leases 11.5 years 11.1 years Weighted-average remaining lease term – finance leases 5.5 years 6.1 years Weighted-average discount rate – operating leases 3.1 % 2.6 % Weighted-average discount rate – finance leases 2.7 % 2.3 % 11 Table of Contents Our lease liabilities were as follows (in millions): December 31, 2019 Operating Leases Finance Leases Total Gross lease liabilities $ 31,963 $ 28,875 $ 60,838 Less: imputed interest ( 6,128 ) ( 1,896 ) ( 8,024 ) Present value of lease liabilities 25,835 26,979 52,814 Less: current portion of lease liabilities ( 3,139 ) ( 9,884 ) ( 13,023 ) Total long-term lease liabilities $ 22,696 $ 17,095 $ 39,791 September 30, 2020 Operating Leases Finance Leases Total Gross lease liabilities $ 42,014 $ 29,801 $ 71,815 Less: imputed interest ( 6,759 ) ( 2,051 ) ( 8,810 ) Present value of lease liabilities 35,255 27,750 63,005 Less: current portion of lease liabilities ( 4,156 ) ( 10,260 ) ( 14,416 ) Total long-term lease liabilities $ 31,099 $ 17,490 $ 48,589 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, 2020 (in millions): Three Months Ended December 31, Year Ended December 31, 2020 2021 2022 2023 2024 Thereafter Total Long-term debt principal and interest $ 282 $ 2,188 $ 2,647 $ 3,271 $ 4,272 $ 38,738 $ 51,398 Operating lease liabilities 1,139 5,032 4,584 4,204 3,865 23,190 42,014 Finance lease liabilities, including interest 2,363 10,145 6,507 2,753 1,291 6,742 29,801 Financing obligations, including interest 48 211 214 217 220 3,694 4,604 Unconditional purchase obligations (1) 416 4,027 3,562 3,194 3,049 2,296 16,544 Other commitments (2) (3) 1,260 3,963 3,290 2,268 2,238 23,612 36,631 Total commitments $ 5,508 $ 25,566 $ 20,804 $ 15,907 $ 14,935 $ 98,272 $ 180,992 ___________________ (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, liabilities associated with digital media content agreements with initial terms greater than one year, and asset retirement obligations. (3) Excludes approximately $ 3.0 billion of accrued tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period of payment, if any. 12 Table of Contents Pledged Assets As of December 31, 2019 and September 30, 2020, we have pledged or otherwise restricted $ 994 million and $ 921 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. Additionally, we have pledged our cash and seller receivables for debt related to our Credit Facility. See “Note 5 — Debt.” Other Contingencies 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. 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 2019 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, 2020 and June 30, 2020. In addition, we are regularly subject to claims, litigation, and other proceedings, including potential regulatory proceedings, involving patent and other intellectual property matters, taxes, labor and employment, competition and antitrust, privacy and data protection, consumer protection, commercial disputes, goods and services offered by us and by third parties, and other matters. 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. We evaluate, on a regular basis, developments in our legal proceedings and other contingencies that could affect the amount of liability, including amounts in excess of any previous accruals and reasonably possible losses disclosed, and make adjustments and changes to our accruals and disclosures as appropriate. 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. Until the final resolution of such matters, if any of our estimates and assumptions change or prove to have been incorrect, we may experience losses in excess of the amounts recorded, which could have a material effect on our business, consolidated financial position, results of operations, or cash flows. See also “Note 7 — Income Taxes.” 13 Table of Contents Note 5 — DEBT As of September 30, 2020, we had $ 32.2 billion of unsecured senior notes outstanding (the “Notes”), including $ 10.0 billion issued in June 2020 for general corporate purposes. We also have other long-term debt and borrowings under our credit facility of $ 1.6 billion and $ 1.0 billion as of December 31, 2019 and September 30, 2020. Our total long-term debt obligations are as follows (in millions): Maturities (1) Stated Interest Rates Effective Interest Rates December 31, 2019 September 30, 2020 2012 Notes issuance of $ 3.0 billion 2022 2.50 % 2.66 % 1,250 1,250 2014 Notes issuance of $ 6.0 billion 2021 - 2044 3.30 % - 4.95 % 3.43 % - 5.11 % 5,000 5,000 2017 Notes issuance of $ 17.0 billion 2023 - 2057 2.40 % - 5.20 % 2.56 % - 4.33 % 17,000 16,000 2020 Notes issuance of $ 10.0 billion 2023 - 2060 0.40 % - 2.70 % 0.56 % - 2.77 % — 10,000 Credit Facility 740 413 Other long-term debt 830 625 Total face value of long-term debt 24,820 33,288 Unamortized discount and issuance costs, net ( 101 ) ( 204 ) Less current portion of long-term debt ( 1,305 ) ( 155 ) Long-term debt $ 23,414 $ 32,929 ___________________ (1) The weighted average remaining lives of the 2012, 2014, 2017, and 2020 Notes were 2.2 , 12.1 , 16.5 , and 19.0 years as of September 30, 2020. The combined weighted average remaining life of the Notes was 16.0 years as of September 30, 2020. Interest on the Notes is payable semi-annually in arrears. 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 estimated fair value of the Notes was approximately $ 26.2 billion and $ 37.3 billion as of December 31, 2019 and September 30, 2020, which is based on quoted prices for our debt as of those dates. 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 $ 740 million and may from time to time increase in the future subject to lender approval (the “Credit Facility”). The Credit Facility is available until October 2022, bears interest at the London interbank offered rate (“LIBOR”) plus 1.40 %, and has a commitment fee of 0.50 % on the undrawn portion. There were $ 740 million and $ 413 million of borrowings outstanding under the Credit Facility as of December 31, 2019 and September 30, 2020, which had a weighted-average interest rate of 3.4 % and 3.1 %, respectively. As of December 31, 2019 and September 30, 2020, we have pledged $ 852 million and $ 475 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, 2019 and September 30, 2020. Other long-term debt, including the current portion, had a weighted-average interest rate of 4.1 % and 2.9 % as of December 31, 2019 and September 30, 2020. 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, 2019 and September 30, 2020. 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. In June 2020, we increased the size of the Commercial Paper Program to $ 10.0 billion. There were no borrowings outstanding under the Commercial Paper Program as of December 31, 2019. There were $ 725 million of borrowings outstanding under the Commercial Paper Program as of September 30, 2020, which are included in “Accrued expenses and other” on our consolidated balance sheets and have a weighted average effective interest rate, including issuance costs, of 0.13 %. We use the net proceeds from the issuance of commercial paper for general corporate purposes. 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. In June 2020, we further amended and restated the Credit Agreement to extend the term to June 2023, and 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 14 Table of Contents undrawn portion of the credit facility. There were no borrowings outstanding under the Credit Agreement as of December 31, 2019 and September 30, 2020. We also utilize other short-term credit facilities for working capital purposes. These amounts are included in “Accrued expenses and other” on our consolidated balance sheets. 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, 2019 or 2020. Stock Award Activity Common shares outstanding plus shares underlying outstanding stock awards totaled 512 million and 518 million as of December 31, 2019 and September 30, 2020. 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, 2019 2020 2019 2020 Cost of sales $ 39 $ 75 $ 106 $ 193 Fulfillment 301 316 895 993 Technology and content 966 1,267 2,719 3,649 Marketing 298 446 813 1,233 General and administrative 175 184 491 578 Total stock-based compensation expense $ 1,779 $ 2,288 $ 5,024 $ 6,646 The following table summarizes our restricted stock unit activity for the nine months ended September 30, 2020 (in millions): Number of Units Weighted-Average Grant-Date Fair Value Outstanding as of December 31, 2019 14.3 $ 1,458 Units granted 7.1 2,281 Units vested ( 4.0 ) 1,168 Units forfeited ( 1.0 ) 1,571 Outstanding as of September 30, 2020 16.4 1,879 Scheduled vesting for outstanding restricted stock units as of September 30, 2020, is as follows (in millions): Three Months Ended December 31, Year Ended December 31, 2020 2021 2022 2023 2024 Thereafter Total Scheduled vesting—restricted stock units 1.8 5.7 5.4 2.4 0.9 0.2 16.4 As of September 30, 2020, there was 13.9 billion of net unrecognized compensation cost related to unvested stock-based compensation arrangements. This compensation is recognized on an accelerated basis with approximately half of the compensation expected to be expensed in the next twelve months, and has a remaining weighted-average recognition period of 1.2 years. The estimated forfeiture rate as of December 31, 2019 and September 30, 2020 was 27 %. Changes in our estimates and assumptions relating to forfeitures may cause us to realize material changes in stock-based compensation expense in the future. 15 Table of Contents Changes in Stockholders’ Equity The following table shows the changes in stockholders’ equity (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2019 2020 2019 2020 Total beginning stockholders’ equity $ 53,061 $ 73,728 $ 43,549 $ 62,060 Beginning and ending common stock 5 5 5 5 Beginning and ending treasury stock ( 1,837 ) ( 1,837 ) ( 1,837 ) ( 1,837 ) Beginning additional paid-in capital 30,035 38,017 26,791 33,658 Stock-based compensation and issuance of employee benefit plan stock 1,782 2,290 5,026 6,649 Ending additional paid-in capital 31,817 40,307 31,817 40,307 Beginning accumulated other comprehensive income (loss) ( 960 ) ( 1,455 ) ( 1,035 ) ( 986 ) Other comprehensive income (loss) ( 469 ) 426 ( 394 ) ( 43 ) Ending accumulated other comprehensive income (loss) ( 1,429 ) ( 1,029 ) ( 1,429 ) ( 1,029 ) Beginning retained earnings 25,818 38,998 19,625 31,220 Cumulative effect of changes in accounting principles (1) — — 7 — Net income 2,134 6,331 8,320 14,109 Ending retained earnings 27,952 45,329 27,952 45,329 Total ending stockholders’ equity $ 56,508 $ 82,775 $ 56,508 $ 82,775 ___________________ (1) We recorded cumulative effect adjustments related to the new lease standard in Q1 2019 and the new measurement of credit losses standard in Q1 2020. 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, investments, audit-related developments, 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, and the effects of the COVID-19 pandemic on our business make estimates of future income more challenging. For 2020, 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 state income taxes. Our income tax provisions for the nine months ended September 30, 2019 and 2020 were $ 1.6 billion and $ 2.3 billion, which included $ 1.0 billion and $ 1.5 billion of net discrete tax benefits primarily attributable to excess tax benefits from stock-based compensation. Cash paid for income taxes, net of refunds was $ 241 million and $ 502 million in Q3 2019 and Q3 2020, and $ 692 million and $ 1.3 billion for the nine months ended September 30, 2019 and 2020. 16 Table of Contents As of December 31, 2019 and September 30, 2020, tax contingencies were approximately $ 3.9 billion and $ 3.0 billion. The decrease in tax contingencies in 2020 was primarily a result of developments in our ongoing global tax controversies. Changes in tax laws, regulations, administrative practices, principles, and interpretations may impact our tax contingencies. The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next twelve months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax examinations in one or more jurisdictions. These assessments or settlements could result in changes to our contingencies related to positions on prior years’ tax filings. We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for the calendar year 2013 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. During Q3 2020, we resolved the audits of tax years 2007 through 2012 with the IRS for amounts that were materially consistent with our accrual. 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. Based on that decision 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 amount, consistent with the European Commission’s decision, that we deposited into escrow in 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 China, Germany, India, 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 2009 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,” “Technology and content,” “Marketing,” 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. 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. North America The North America segment primarily consists of amounts earned from retail sales of consumer products (including from sellers) and subscriptions through North America-focused online and physical stores. This segment includes export sales from these online stores. International The International segment primarily consists of amounts earned from retail sales of consumer products (including from sellers) and subscriptions through internationally-focused online stores. This segment includes export sales from these internationally-focused online stores (including export sales from these online stores to customers in the U.S., Mexico, and Canada), but excludes export sales from our North America-focused online stores. AWS The AWS segment consists of amounts earned from global sales of compute, storage, database, and other service offerings for start-ups, enterprises, government agencies, and academic institutions. 17 Table of Contents Information on reportable segments and reconciliation to consolidated net income is as follows (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2019 2020 2019 2020 North America Net sales $ 42,638 $ 59,373 $ 117,104 $ 160,936 Operating expenses 41,356 57,121 111,971 155,232 Operating income $ 1,282 $ 2,252 $ 5,133 $ 5,704 International Net sales $ 18,348 $ 25,171 $ 50,910 $ 66,945 Operating expenses 18,734 24,764 51,986 66,590 Operating income (loss) $ ( 386 ) $ 407 $ ( 1,076 ) $ 355 AWS Net sales $ 8,995 $ 11,601 $ 25,072 $ 32,628 Operating expenses 6,734 8,066 18,467 22,661 Operating income $ 2,261 $ 3,535 $ 6,605 $ 9,967 Consolidated Net sales $ 69,981 $ 96,145 $ 193,086 $ 260,509 Operating expenses 66,824 89,951 182,424 244,483 Operating income 3,157 6,194 10,662 16,026 Total non-operating income (expense) ( 525 ) 615 ( 739 ) 387 Provision for income taxes ( 494 ) ( 569 ) ( 1,588 ) ( 2,298 ) Equity-method investment activity, net of tax ( 4 ) 91 ( 15 ) ( 6 ) Net income $ 2,134 $ 6,331 $ 8,320 $ 14,109 Net sales by groups of similar products and services, which also have similar economic characteristics, is as follows (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2019 2020 2019 2020 Net Sales: Online stores (1) $ 35,039 $ 48,350 $ 95,590 $ 130,899 Physical stores (2) 4,192 3,788 12,829 12,201 Third-party seller services (3) 13,212 20,436 36,316 53,121 Subscription services (4) 4,957 6,572 13,975 18,146 AWS 8,995 11,601 25,072 32,628 Other (5) 3,586 5,398 9,304 13,514 Consolidated $ 69,981 $ 96,145 $ 193,086 $ 260,509 ____________________________ (1) Includes product sales and digital media content where we record revenue gross. We leverage our retail infrastructure to offer a wide selection of consumable and durable goods that includes media products available in both a physical and digital format, such as books, music, videos, games, and software. These product sales include digital products sold on a transactional basis. Digital product subscriptions that provide unlimited viewing or usage rights are included in “Subscription services.” (2) Includes product sales where our customers physically select items in a store. Sales from customers who order goods online for delivery or pickup at our physical stores are included in “Online stores.” (3) Includes commissions and any related fulfillment and shipping fees, and other third-party seller services. (4) Includes annual and monthly fees associated with Amazon Prime memberships, as well as audiobook, digital video, digital music, e-book, and other non-AWS subscription services. (5) Primarily includes sales of advertising services, as well as sales related to our other service offerings. 18 Table of Contents