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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________
FORM 10-Q
____________________________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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)
 ____________________________________
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  x    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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
Accelerated filer
 
¨
 
 
 
 
 
 
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  x
488,968,628 shares of common stock, par value $0.01 per share, outstanding as of October 17, 2018
 


Table of Contents

AMAZON.COM, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2018
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.


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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,
 
2017
 
2018
 
2017

2018
 
2017
 
2018
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD
13,851

 
20,536

 
19,934

 
21,856

 
14,124

 
13,960

OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Net income
256

 
2,883

 
1,176

 
7,046

 
1,926

 
8,902

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
 
 
 
 
 
 
 
Depreciation of property and equipment, including internal-use software and website development, and other amortization, including capitalized content costs
2,912

 
3,778

 
7,980

 
11,079

 
10,277

 
14,577

Stock-based compensation
1,085

 
1,350

 
3,036

 
4,001

 
3,923

 
5,180

Other operating expense, net
43

 
62

 
146

 
202

 
177

 
258

Other expense (income), net
(128
)
 
96

 
(288
)
 
22

 
(267
)
 
17

Deferred income taxes
(74
)
 
266

 
279

 
268

 
(2
)
 
(40
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
Inventories
(1,593
)
 
(1,094
)
 
(1,328
)
 
36

 
(2,371
)
 
(2,220
)
Accounts receivable, net and other
(1,760
)
 
(2,884
)
 
(2,016
)
 
(3,220
)
 
(3,938
)
 
(5,983
)
Accounts payable
2,974

 
3,894

 
(1,803
)
 
(3,618
)
 
5,479

 
5,285

Accrued expenses and other
(122
)
 
237

 
(1,778
)
 
(2,193
)
 
476

 
(131
)
Unearned revenue
184

 

 
603

 
623

 
1,316

 
759

Net cash provided by (used in) operating activities
3,777

 
8,588

 
6,007

 
14,246

 
16,996

 
26,604

INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment, including internal-use software and website development
(3,074
)
 
(3,352
)
 
(8,336
)
 
(9,693
)
 
(10,750
)
 
(13,312
)
Proceeds from property and equipment incentives
415

 
825

 
1,314

 
1,490

 
1,723

 
2,073

Acquisitions, net of cash acquired, and other
(13,213
)
 
(976
)
 
(13,891
)
 
(1,855
)
 
(13,893
)
 
(1,936
)
Sales and maturities of marketable securities
2,211

 
1,964

 
6,191

 
6,301

 
7,384

 
9,787

Purchases of marketable securities
(4,817
)
 
(4,033
)
 
(10,381
)
 
(5,040
)
 
(13,633
)
 
(7,390
)
Net cash provided by (used in) investing activities
(18,478
)
 
(5,572
)
 
(25,103
)
 
(8,797
)
 
(29,169
)
 
(10,778
)
FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Proceeds from long-term debt and other
16,049

 
143

 
16,119

 
363

 
16,653

 
472

Repayments of long-term debt and other
(71
)
 
(183
)
 
(159
)
 
(533
)
 
(217
)
 
(1,675
)
Principal repayments of capital lease obligations
(1,267
)
 
(2,247
)
 
(3,327
)
 
(5,544
)
 
(4,331
)
 
(7,016
)
Principal repayments of finance lease obligations
(49
)
 
(82
)
 
(134
)
 
(211
)
 
(175
)
 
(277
)
Net cash provided by (used in) financing activities
14,662

 
(2,369
)
 
12,499

 
(5,925
)
 
11,930

 
(8,496
)
Foreign currency effect on cash, cash equivalents, and restricted cash
148

 
(151
)
 
623

 
(348
)
 
79

 
(258
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
109

 
496

 
(5,974
)
 
(824
)
 
(164
)
 
7,072

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
13,960

 
21,032

 
13,960

 
21,032

 
13,960

 
21,032

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
 
 
 
 
 
 
 
Cash paid for interest on long-term debt
5

 
283

 
155

 
733

 
299

 
907

Cash paid for interest on capital and finance lease obligations
112

 
165

 
235

 
419

 
296

 
503

Cash paid for income taxes, net of refunds
172

 
200

 
865

 
1,013

 
960

 
1,106

Property and equipment acquired under capital leases
2,256

 
2,329

 
6,867

 
6,934

 
8,905

 
9,704

Property and equipment acquired under build-to-suit leases
750

 
962

 
2,698

 
2,498

 
3,114

 
3,340

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,
 
2017
 
2018
 
2017
 
2018
Net product sales
$
28,768

 
$
33,746

 
$
77,248

 
$
97,215

Net service sales
14,976

 
22,830

 
40,165

 
63,289

Total net sales
43,744

 
56,576

 
117,413

 
160,504

Operating expenses:
 
 
 
 
 
 
 
Cost of sales
27,549

 
33,003

 
73,439

 
94,370

Fulfillment
6,420

 
8,275

 
16,275

 
23,999

Marketing
2,479

 
3,303

 
6,629

 
8,902

Technology and content
5,944

 
7,162

 
16,306

 
21,168

General and administrative
960

 
1,041

 
2,630

 
3,219

Other operating expense, net
45

 
68

 
155

 
211

Total operating expenses
43,397

 
52,852

 
115,434

 
151,869

Operating income
347

 
3,724

 
1,979

 
8,635

Interest income
54

 
117

 
137

 
290

Interest expense
(228
)
 
(358
)
 
(510
)
 
(1,030
)
Other income (expense), net
143

 
(93
)
 
329

 
16

Total non-operating income (expense)
(31
)
 
(334
)
 
(44
)
 
(724
)
Income before income taxes
316

 
3,390

 
1,935

 
7,911

Provision for income taxes
(58
)
 
(508
)
 
(755
)
 
(870
)
Equity-method investment activity, net of tax
(2
)
 
1

 
(4
)
 
5

Net income
$
256

 
$
2,883

 
$
1,176

 
$
7,046

Basic earnings per share
$
0.53

 
$
5.91

 
$
2.46

 
$
14.49

Diluted earnings per share
$
0.52

 
$
5.75

 
$
2.39

 
$
14.10

Weighted-average shares used in computation of earnings per share:
 
 
 
 
 
 
 
Basic
481

 
488

 
479

 
486

Diluted
494

 
501

 
492

 
500

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,
 
2017
 
2018
 
2017
 
2018
Net income
$
256

 
$
2,883

 
$
1,176

 
$
7,046

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax of $10, $2, $(5), and $19
104

 
(101
)
 
486

 
(512
)
Net change in unrealized gains (losses) on available-for-sale debt securities:
 
 
 
 
 
 
 
Unrealized gains (losses), net of tax of $(1), $0, $1, and $8
(2
)
 

 
(10
)
 
(43
)
Reclassification adjustment for losses (gains) included in “Other income (expense), net,” net of tax of $0, $0, $0, and $0
3

 
1

 
8

 
5

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

 
1

 
(2
)
 
(38
)
Total other comprehensive income (loss)
105

 
(100
)
 
484

 
(550
)
Comprehensive income
$
361

 
$
2,783

 
$
1,660

 
$
6,496

See accompanying notes to consolidated financial statements.


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AMAZON.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
 
 
December 31, 2017
 
September 30, 2018
 

 
(unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
20,522

 
$
20,425

Marketable securities
10,464

 
9,340

Inventories
16,047

 
15,862

Accounts receivable, net and other
13,164

 
14,258

Total current assets
60,197

 
59,885

Property and equipment, net
48,866

 
58,019

Goodwill
13,350

 
14,553

Other assets
8,897

 
11,238

Total assets
$
131,310

 
$
143,695

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
34,616

 
$
30,904

Accrued expenses and other
18,170

 
18,420

Unearned revenue
5,097

 
6,000

Total current liabilities
57,883

 
55,324

Long-term debt
24,743

 
24,684

Other long-term liabilities
20,975

 
24,562

Commitments and contingencies (Note 3)


 


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 — 507 and 512
 
 
 
Outstanding shares — 484 and 489
5

 
5

Treasury stock, at cost
(1,837
)
 
(1,837
)
Additional paid-in capital
21,389

 
25,375

Accumulated other comprehensive loss
(484
)
 
(1,034
)
Retained earnings
8,636

 
16,616

Total stockholders’ equity
27,709

 
39,125

Total liabilities and stockholders’ equity
$
131,310

 
$
143,695

See accompanying notes to consolidated financial statements.


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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 balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2018 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 2017 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 addition of restricted cash to cash and cash equivalents on the consolidated statements of cash flows as a result of the adoption of new accounting guidance.
Principles of Consolidation
The consolidated financial statements include the accounts of Amazon.com, Inc., its wholly-owned subsidiaries, and those entities in which we have a variable interest and of which we are the primary beneficiary, including certain entities in India and China and that support our seller lending financing activities (collectively, the “Company”). Intercompany balances and transactions between consolidated entities are eliminated. The financial results of Whole Foods Market, Inc. (“Whole Foods Market”) have been included in our consolidated financial statements from the date of acquisition on August 28, 2017.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, income taxes, 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,
 
2017
 
2018
 
2017
 
2018
Shares used in computation of basic earnings per share
481

 
488

 
479

 
486

Total dilutive effect of outstanding stock awards
13

 
13

 
13

 
14

Shares used in computation of diluted earnings per share
494

 
501

 
492

 
500


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Revenue
Revenue is measured based on the amount of consideration that we expect to receive, reduced by estimates for return allowances, promotional discounts, and rebates. Revenue also excludes any amounts collected on behalf of third parties, including sales and indirect taxes. In arrangements where we have multiple performance obligations, the transaction price is allocated to each performance obligation using the relative stand-alone selling price. We generally determine stand-alone selling prices based on the prices charged to customers or using expected cost plus a margin.
A description of our principal revenue generating activities is as follows:
Retail sales - We offer consumer products through our online and physical stores. Revenue is recognized when control of the goods is transferred to the customer, which generally occurs upon our delivery to a third-party carrier or, in the case of an Amazon delivery, to the customer.
Third-party seller services - We offer programs that enable sellers to sell their products on our websites and their own branded websites, and fulfill orders through us. We are not the seller of record in these transactions. The commissions and any related fulfillment and shipping fees we earn from these arrangements are recognized when the services are rendered, which generally occurs upon delivery of the related products to a third-party carrier or, in the case of an Amazon delivery, to the customer.
Subscription services - Our subscription sales include fees associated with Amazon Prime memberships and access to content including audiobooks, digital video, e-books, digital music, and other non-AWS subscription services. Prime memberships provide our customers with access to an evolving suite of benefits that represent a single stand-ready obligation. Subscriptions are paid for at the time of or in advance of delivering the services. Revenue from such arrangements is recognized over the subscription period.
AWS - Our AWS arrangements include global sales of compute, storage, database, and other services. Revenue is allocated to services using stand-alone selling prices and is primarily recognized when the customer uses these services, based on the quantity of services rendered, such as compute or storage capacity delivered on-demand. Certain services, including compute and database, are also offered as a fixed quantity over a specified term, for which revenue is recognized ratably. Sales commissions we pay in connection with contracts that exceed one year are capitalized and amortized over the contract term.
Other - Other revenue primarily includes sales of advertising services, which are recognized as ads are delivered based on the number of clicks or impressions.
Return Allowances
Return allowances, which reduce revenue and cost of sales, are estimated using historical experience. Liabilities for return allowances are included in “Accrued expenses and other” and were $468 million and $407 million as of December 31, 2017 and September 30, 2018. Included in “Inventories” on our consolidated balance sheets are assets totaling $406 million and $310 million as of December 31, 2017 and September 30, 2018, for the rights to recover products from customers associated with our liabilities for return allowances.
Cost of Sales
Cost of sales primarily consists of the purchase price of consumer products, digital media content costs where we recognize revenue gross, including video and music, packaging supplies, sortation and delivery centers and related equipment costs, and inbound and outbound shipping costs, including where we are the transportation service provider. Shipping costs to receive products from our suppliers are included in our inventory, and recognized as cost of sales upon sale of products to our customers. Payment processing and related transaction costs, including those associated with seller transactions, are classified in “Fulfillment” on our consolidated statements of operations.
Vendor Agreements
We have agreements with our vendors to receive funds primarily for cooperative marketing efforts, promotions, incentives, and volume rebates. We generally consider these amounts received from vendors to be a reduction of the prices we pay for their goods, including property and equipment, or services, and are recorded as a reduction of the cost of inventory, cost of services, or cost of property and equipment. Volume rebates typically depend on reaching minimum purchase thresholds. We evaluate the likelihood of reaching purchase thresholds using past experience and current year forecasts. When volume rebates can be reasonably estimated, we record a portion of the rebate as we make progress towards the purchase threshold.

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Table of Contents

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, 2017 and September 30, 2018, customer receivables, net, were $6.4 billion and $8.4 billion, vendor receivables, net, were $2.6 billion and $2.1 billion, and seller receivables, net, were $692 million and $689 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 known troubled accounts and historical experience of losses incurred. Receivables are considered impaired and written-off when it is probable that all contractual payments due will not be collected in accordance with the terms of the agreement. The allowance for doubtful accounts was $348 million and $457 million as of December 31, 2017 and September 30, 2018.
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 Amazon Prime memberships and AWS services. Our total unearned revenue as of December 31, 2017 was $6.1 billion, of which $4.9 billion was recognized as revenue during the nine months ended September 30, 2018, including adjustments related to the new revenue recognition guidance. Included in “Other long-term liabilities” on our consolidated balance sheets was $1.0 billion and $1.2 billion of unearned revenue as of December 31, 2017 and September 30, 2018.
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, the amount of revenue not yet recognized was $17.8 billion as of September 30, 2018. The weighted average remaining life of our long-term contracts is 3.5 years. However, the timing of revenue recognition is largely driven by customer usage, which can extend beyond the original contractual term.
Accrued Expenses and Other
Included in “Accrued expenses and other” on our consolidated balance sheets are amounts primarily related to unredeemed gift cards, customer liabilities, leases and asset retirement obligations, current debt, acquired digital media content, and other operating expenses.
As of December 31, 2017 and September 30, 2018, our liabilities for unredeemed gift cards were $3.0 billion and $1.7 billion. We reduce the liability for a gift card when redeemed by a customer. The portion of gift cards that we do not expect to be redeemed is recognized based on customer usage patterns.
Accounting Pronouncements Recently Adopted
In May 2014, the FASB issued an Accounting Standards Update (“ASU”) amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We adopted this ASU on January 1, 2018 for all revenue contracts with our customers using the modified retrospective approach and increased retained earnings by approximately $650 million. The adjustment primarily relates to the unredeemed portion of our gift cards, which are now recognized over the expected customer usage period rather than waiting until gift cards expire or when the likelihood of redemption becomes remote. We changed the recognition and classification of Amazon Prime memberships, which are now accounted for as a single performance obligation and recognized ratably over the membership period as service sales. Previously, Prime memberships were considered to be arrangements with multiple deliverables and were allocated among product sales and service sales. Other changes relate primarily to the presentation of revenue. Certain advertising services are now classified as revenue rather than a reduction in cost of sales, and sales of apps, in-app content, and certain digital media content are presented on a net basis.
The impact of applying this ASU for the nine months ended September 30, 2018 primarily resulted in a decrease in product sales and an increase in service sales driven by the reclassification of Prime membership fees of approximately $2.6 billion. Service sales also increased by approximately $2.0 billion for the nine months ended September 30, 2018 due to the reclassification of certain advertising services.
In January 2016, the FASB issued an ASU that updates certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Under this ASU, certain equity investments are measured at fair value with changes recognized in net income. We adopted this ASU in Q1 2018 with no material impact to our consolidated financial statements.
In October 2016, the FASB issued an ASU amending the accounting for income taxes. The new guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the

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transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. We adopted this ASU in Q1 2018 with an increase of approximately $250 million to retained earnings and deferred tax assets net of valuation allowances.
In November 2016, the FASB issued an ASU amending the presentation of restricted cash within the consolidated statements of cash flows. The new guidance requires that restricted cash be added to cash and cash equivalents on the consolidated statements of cash flows. We adopted this ASU in Q1 2018 on a retrospective basis with the following impacts to our consolidated statements of cash flows (in millions):
Three Months Ended September 30, 2017
Previously Reported
 
Adjustments
 
As Revised
Operating activities
$
3,851

 
$
(74
)
 
$
3,777

Investing activities
(19,120
)
 
642

 
(18,478
)
Financing activities
14,685

 
(23
)
 
14,662

Net change in cash, cash equivalents, and restricted cash
$
(584
)
 
$
545

 
$
(39
)
Nine Months Ended September 30, 2017
Previously Reported
 
Adjustments
 
As Revised
Operating activities
$
6,090

 
$
(83
)
 
$
6,007

Investing activities
(25,787
)
 
684

 
(25,103
)
Financing activities
12,507

 
(8
)
 
12,499

Net change in cash, cash equivalents, and restricted cash
$
(7,190
)
 
$
593

 
$
(6,597
)
Twelve Months Ended September 30, 2017
Previously Reported
 
Adjustments
 
As Revised
Operating activities
$
17,077

 
$
(81
)
 
$
16,996

Investing activities
(29,961
)
 
792

 
(29,169
)
Financing activities
11,916

 
14

 
11,930

Net change in cash, cash equivalents, and restricted cash
$
(968
)
 
$
725

 
$
(243
)
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued an ASU amending the accounting for leases. The new guidance requires the recognition of lease assets and liabilities for operating leases with terms of more than 12 months, in addition to those currently recorded, on our consolidated balance sheets. Presentation of leases within the consolidated statements of operations and consolidated statements of cash flows will be generally consistent with the current lease accounting guidance. The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We will adopt this ASU on January 1, 2019 with a cumulative adjustment to retained earnings rather than retrospectively adjusting prior periods. This adoption approach will result in a balance sheet presentation that is not comparable to the prior period in the first year of adoption. To illustrate the magnitude of this change, the amount of our off-balance sheet operating leases at September 30, 2018 is disclosed in “Note 3 — Commitments and Contingencies.” Beginning on January 1, 2019, our operating leases, excluding those with terms less than 12 months, will be discounted and recorded as assets and liabilities on our consolidated balance sheet.
Note 2 — CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND MARKETABLE SECURITIES
As of December 31, 2017 and September 30, 2018, our cash, cash equivalents, restricted cash, and marketable securities primarily consisted of cash, U.S. and foreign government and agency securities, AAA-rated money market funds, and other investment grade securities. Cash equivalents and marketable securities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
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.

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We measure the fair value of money market funds and equity securities based on quoted prices in active markets for identical assets or liabilities. All other financial instruments were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. We did not hold any cash, cash equivalents, restricted cash, or marketable securities categorized as Level 3 assets as of December 31, 2017 and September 30, 2018.
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, 2017
 
September 30, 2018
  
Total
Estimated
Fair Value
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Total
Estimated
Fair Value
Cash
$
9,982

 
$
8,053

 
$

 
$

 
$
8,053

Level 1 securities:
 
 
 
 
 
 
 
 
 
Money market funds
11,343

 
11,128

 

 

 
11,128

Equity securities
53

 
28

 
137

 

 
165

Level 2 securities:
 
 
 
 
 
 
 
 
 
Foreign government and agency securities
620

 
481

 

 

 
481

U.S. government and agency securities
4,823

 
5,544

 
1

 
(26
)
 
5,519

Corporate debt securities
4,257

 
4,006

 
1

 
(17
)
 
3,990

Asset-backed securities
905

 
826

 

 
(5
)
 
821

Other fixed income securities
338

 
189

 

 
(3
)
 
186

Equity securities

 
28

 
3

 

 
31

 
$
32,321

 
$
30,283

 
$
142


$
(51
)
 
$
30,374

Less: Restricted cash, cash equivalents, and marketable securities (1)
(1,335
)
 
 
 
 
 
 
 
(609
)
Total cash, cash equivalents, and marketable securities
$
30,986

 
 
 
 
 
 
 
$
29,765

___________________
(1)
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 3 — Commitments and Contingencies.”
The following table summarizes the remaining contractual maturities of our cash equivalents and marketable fixed income securities as of September 30, 2018 (in millions):
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$
18,390

 
$
18,380

Due after one year through five years
3,079

 
3,053

Due after five years through ten years
224

 
221

Due after ten years
481

 
471

Total
$
22,174

 
$
22,125

Actual maturities may differ from the contractual maturities because borrowers may have certain prepayment conditions.
We also hold equity warrant assets giving us the right to acquire stock of other companies. As of December 31, 2017 and September 30, 2018, these warrants had a fair value of $441 million and $573 million, and are recorded within “Other assets” on our consolidated balance sheets. The related gain (loss) recorded in “Other income (expense), net” was $76 million and $(62) million in Q3 2017 and Q3 2018, and $145 million and $25 million for the nine months ended September 30, 2017 and 2018. These assets are primarily classified as Level 2 assets.

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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, 2017
 
September 30, 2018
Cash and cash equivalents
$
20,522

 
$
20,425

Restricted cash included in accounts receivable, net and other
1,329

 
604

Restricted cash included in other assets
5

 
3

Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows
$
21,856

 
$
21,032


Note 3 — COMMITMENTS AND CONTINGENCIES
Commitments
We have entered into non-cancellable operating, capital, and finance leases for equipment and office, fulfillment, sortation, delivery, data center, physical store, and renewable energy facilities. Rental expense under operating lease agreements was $553 million and $859 million for Q3 2017 and Q3 2018, and $1.4 billion and $2.5 billion for the nine months ended September 30, 2017 and 2018.
The following summarizes our principal contractual commitments, excluding open orders for purchases that support normal operations and are generally cancellable, as of September 30, 2018 (in millions): 
 
Three Months Ended December 31,
 
Year Ended December 31,
 
 
 
 
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
Debt principal and interest
$
213

 
$
2,186

 
$
2,111

 
$
1,833

 
$
2,049

 
$
31,769

 
$
40,161

Capital lease obligations, including interest (1)
1,363

 
6,912

 
4,753

 
1,740

 
583

 
773

 
16,124

Finance lease obligations, including interest (2)
145

 
609

 
625

 
636

 
647

 
5,654

 
8,316

Operating leases
748

 
2,902

 
2,752

 
2,468

 
2,200

 
13,453

 
24,523

Unconditional purchase obligations (3)
137

 
3,760

 
3,488

 
3,265

 
3,054

 
8,096

 
21,800

Other commitments (4) (5)
841

 
1,734

 
1,157

 
1,184

 
649

 
7,936

 
13,501

Total commitments
$
3,447

 
$
18,103

 
$
14,886

 
$
11,126

 
$
9,182

 
$
67,681

 
$
124,425

___________________
(1)
Excluding interest, current capital lease obligations of $5.8 billion and $6.9 billion are recorded within “Accrued expenses and other” as of December 31, 2017 and September 30, 2018, and $8.4 billion and $8.7 billion are recorded within “Other long-term liabilities” as of December 31, 2017 and September 30, 2018.
(2)
Excluding interest, current finance lease obligations of $282 million and $391 million are recorded within “Accrued expenses and other” as of December 31, 2017 and September 30, 2018, and $4.7 billion and $6.5 billion are recorded within “Other long-term liabilities” as of December 31, 2017 and September 30, 2018.
(3)
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.
(4)
Includes the estimated timing and amounts of payments for rent and tenant improvements associated with build-to-suit lease arrangements and equipment lease arrangements that have not been placed in service and digital media content liabilities associated with long-term digital media content assets with initial terms greater than one year.
(5)
Excludes approximately $3.4 billion of accrued tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period of payment, if any.


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Pledged Assets
As of December 31, 2017 and September 30, 2018, we have pledged or otherwise restricted $1.4 billion and $688 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. We believe the assessment is without merit. If South Carolina or other states were successfully to seek additional adjustments of a similar nature, we could be subject to significant additional tax liabilities. We intend to defend ourselves vigorously in this matter.
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 2017 Annual Report on Form 10-K and in Item 1 of Part I, “Financial Statements — Note 3 — Commitments and Contingencies — Legal Proceedings” of our Quarterly Reports on Form 10-Q for the periods ended March 31, 2018 and June 30, 2018.
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 4 — ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS
2018 Acquisition Activity
On April 12, 2018, we acquired Ring Inc. (“Ring”) for cash consideration of approximately $839 million, net of cash acquired, and on September 11, 2018, we acquired PillPack, Inc. (“PillPack”) for cash consideration of approximately $753 million, net of cash acquired, to expand our product and service offerings. During the nine months ended September 30, 2018, we also acquired certain other companies for an aggregate purchase price of $46 million. The primary reason for our other 2018 acquisitions was to acquire technologies and know-how to enable Amazon to serve customers more effectively.

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Acquisition-related costs were expensed as incurred and were not significant. Due to the limited amount of time since the PillPack acquisition, the valuation of certain assets and liabilities is preliminary and subject to change. The aggregate purchase price of Ring, PillPack, and the other 2018 acquisitions was allocated as follows (in millions):
Purchase Price
 
Cash paid, net of cash acquired
$
1,609

Indemnification holdback
29

 
$
1,638

 
 
Allocation
 
Goodwill
$
1,222

Intangible assets (1):
 
Marketing-related
186

Contract-based
13

Technology-based
279

Customer-related
193

 
671

Property and equipment
11

Deferred tax assets
174

Other assets acquired
282

Long-term debt
(176
)
Deferred tax liabilities
(159
)
Other liabilities assumed
(387
)
 
$
1,638

___________________
(1)
Acquired intangible assets have estimated useful lives of between two and seven years, with a weighted-average amortization period of six years.
We determined the estimated fair value of identifiable intangible assets acquired primarily by using the income approach. These assets are included within “Other assets” on our consolidated balance sheets and are being amortized to operating expenses on a straight-line basis over their estimated useful lives.
Pro forma results of operations have not been presented because the effects of these acquisitions, individually and in the aggregate, were not material to our consolidated results of operations.
Goodwill
The goodwill of the acquired companies is primarily related to expected improvements in technology performance and functionality, as well as sales growth from future product and service offerings and new customers, together with certain intangible assets that do not qualify for separate recognition. The goodwill of acquired companies is generally not deductible for tax purposes. The following summarizes our goodwill activity in the first nine months of 2018 by segment (in millions):
 
North
America
 
International
 
AWS
 
Consolidated
Goodwill - December 31, 2017
$
11,165

 
$
1,108

 
$
1,077

 
$
13,350

New acquisitions (1)
1,030

 
177

 
15

 
1,222

Other adjustments (2)
(2
)
 
(10
)
 
(7
)
 
(19
)
Goodwill - September 30, 2018
$
12,193

 
$
1,275

 
$
1,085

 
$
14,553

 ___________________
(1)
Primarily includes the acquisitions of Ring and PillPack in the North America and International segments.
(2)
Primarily includes changes in foreign exchange rates.


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Note 5 — DEBT
As of September 30, 2018, we had $24.3 billion of unsecured senior notes outstanding (the “Notes”). As of December 31, 2017 and September 30, 2018, the net unamortized discount and debt issuance costs on the Notes was $99 million and $101 million. We also have other long-term debt with a carrying amount, including the current portion and borrowings under our credit facility, of $692 million and $579 million as of December 31, 2017 and September 30, 2018. The face value of our total long-term debt obligations is as follows (in millions):
 
December 31, 2017
 
September 30, 2018
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
592

 
535

Other long-term debt
100

 
44

Total debt
24,942

 
24,829

Less current portion of long-term debt
(100
)
 
(44
)
Face value of long-term debt
$
24,842

 
$
24,785

_____________________________
(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-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 $25.7 billion and $24.2 billion as of December 31, 2017 and September 30, 2018, 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 $600 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 $592 million and $535 million of borrowings outstanding under the Credit Facility as of December 31, 2017 and September 30, 2018, with weighted-average interest rates of 2.7% and 3.0% as of December 31, 2017 and September 30, 2018. As of December 31, 2017 and September 30, 2018, we have pledged $686 million and $620 million of our cash and seller receivables

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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, 2017 and September 30, 2018.
The other debt, including the current portion, had a weighted-average interest rate of 5.8% and 7.3% as of December 31, 2017 and September 30, 2018. We used the net proceeds from the issuance of this debt primarily to fund certain business operations. The estimated fair value of the other long-term debt, which is based on Level 2 inputs, approximated its carrying value as of December 31, 2017 and September 30, 2018.
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 September 30, 2018.
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, 2017 and September 30, 2018.
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, 2017 or 2018.
Stock Award Activity
Common shares outstanding plus shares underlying outstanding stock awards totaled 504 million and 507 million as of December 31, 2017 and September 30, 2018. 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,
 
2017
 
2018
 
2017
 
2018
Cost of sales
$
13

 
$
19

 
$
33

 
$
52

Fulfillment
230

 
269

 
655

 
834

Marketing
135

 
201

 
363

 
552

Technology and content
595

 
719

 
1,668

 
2,138

General and administrative
112

 
142

 
317

 
426

Total stock-based compensation expense
$
1,085

 
$
1,350

 
$
3,036

 
$
4,002

The following table summarizes our restricted stock unit activity for the nine months ended September 30, 2018 (in millions):
 
Number of Units
 
Weighted-Average
Grant-Date
Fair Value
Outstanding as of December 31, 2017
20.1

 
$
725

Units granted
4.4

 
1,512

Units vested
(4.8
)
 
551

Units forfeited
(1.7
)
 
831

Outstanding as of September 30, 2018
18.0

 
$
954


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Scheduled vesting for outstanding restricted stock units as of September 30, 2018, is as follows (in millions):
 
Three Months Ended December 31,
 
Year Ended December 31,
 
 
 
 
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
Scheduled vesting—restricted stock units
2.3

 
7.0

 
5.6

 
2.3

 
0.6

 
0.2

 
18.0

As of September 30, 2018, there was $7.3 billion of net unrecognized compensation cost related to unvested stock-based compensation arrangements. This compensation is recognized on an accelerated basis with approximately half of the compensation expected to be expensed in the next twelve months, and has a weighted-average recognition period of 1.1 years. The estimated forfeiture rate as of December 31, 2017 and September 30, 2018 was 28% and 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.
Note 7 — INCOME TAXES
Our tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant variation due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, intercompany transactions, the applicability of special tax regimes, changes in how we do business, acquisitions (including integrations) and investments, audit-related developments, changes in our stock price, changes in our deferred tax assets and liabilities and their valuation, foreign currency gains (losses), changes in statutes, regulations, case law, and administrative practices, principles, and interpretations related to tax, accounting, and other areas, including European Union state aid rules, and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.
The 2017 Tax Act was signed into law on December 22, 2017. The 2017 Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. We have not completed our determination of the accounting implications of the 2017 Tax Act on our tax accruals. However, we reasonably estimated the effects of the 2017 Tax Act and recorded provisional amounts in our financial statements as of December 31, 2017. We recorded a provisional tax benefit for the impact of the 2017 Tax Act of approximately $789 million. This amount was primarily comprised of the remeasurement of federal net deferred tax liabilities resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%, after taking into account the mandatory one-time tax on the accumulated earnings of our foreign subsidiaries. The amount of this one-time tax is not material. As we complete our analysis of the 2017 Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes in the period in which the adjustments are made.
For 2018, we estimate that our effective tax rate will be favorably affected by the impact of excess tax benefits from stock-based compensation and the U.S. federal research and development credit and adversely affected by state income taxes and losses incurred in certain foreign jurisdictions for which we may not realize a tax benefit. Losses for which we may not realize a related tax benefit, primarily due to losses of foreign subsidiaries, reduce our pre-tax income without a corresponding reduction in our tax expense, and therefore increase our effective tax rate. We record valuation allowances against the deferred tax assets associated with losses for which we may not realize a related tax benefit.
Our income tax provision for the nine months ended September 30, 2017 was $755 million, which included $422 million of net discrete tax benefits primarily attributable to excess tax benefits from stock-based compensation, partially offset by the estimated impact of audit-related developments. Our income tax provision for the nine months ended September 30, 2018 was $870 million, which included $1.3 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 $172 million and $200 million in Q3 2017 and Q3 2018, and $865 million and $1.0 billion for the nine months ended September 30, 2017 and 2018.

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As of December 31, 2017 and September 30, 2018, tax contingencies were approximately $2.3 billion and $3.4 billion. We expect the total amount of tax contingencies will grow in 2018. In addition, changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax examinations in one or more jurisdictions. These assessments or settlements could result in changes to our contingencies related to positions on tax filings 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 2005 and thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses with respect to years under examination as well as subsequent periods. As previously disclosed, we have received Notices of Proposed Adjustment (“NOPAs”) from the IRS for transactions undertaken in the 2005 and 2006 calendar years relating to transfer pricing with our foreign subsidiaries. The IRS is seeking to increase our U.S. taxable income by an amount that would result in additional federal tax of approximately $1.5 billion, subject to interest. On March 23, 2017, the U.S. Tax Court issued its decision regarding the issues raised in the IRS NOPAs. The Tax Court rejected the approach from the IRS NOPAs in determining transfer pricing adjustments in 2005 and 2006 for the transactions undertaken with our foreign subsidiaries and adopted, with adjustments, our suggested approach. In September 2017, the IRS appealed the decision to the U.S. Court of Appeals for the Ninth Circuit. We will continue to defend ourselves vigorously in this matter. If the Tax Court decision were reversed on appeal or if the IRS were to successfully assert transfer pricing adjustments of a similar nature to the NOPAs for transactions in subsequent years, we could be subject to significant additional tax liabilities.
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 Canada, 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 2008 and thereafter.
Note 8 — SEGMENT INFORMATION
We have organized our operations into three segments: North America, International, and AWS. We allocate to segment results the operating expenses “Fulfillment,” “Marketing,” “Technology and content,” and “General and administrative” based on usage, which is generally reflected in the segment in which the costs are incurred. The majority of technology infrastructure costs are allocated to the AWS segment based on usage. The majority of the remaining non-infrastructure technology costs are incurred in the U.S. and are allocated to our North America segment. The results of Whole Foods Market are included in our North America and International segments based on physical location. There are no internal revenue transactions between our reportable segments. These segments reflect the way our chief operating decision maker evaluates the Company’s business performance and manages its operations.
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 websites and physical stores. This segment includes export sales from these websites.
International
The International segment primarily consists of amounts earned from retail sales of consumer products (including from sellers) and subscriptions through internationally-focused websites. This segment includes export sales from these internationally-focused websites (including export sales from these sites to customers in the U.S., Mexico, and Canada), but excludes export sales from our North America-focused websites.

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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.
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,
 
2017
 
2018
 
2017
 
2018
North America
 
 
 
 
 
 
 
Net sales
$
25,446

 
$
34,348

 
$
68,808

 
$
97,242

Operating expenses
25,334

 
32,316

 
67,664

 
92,227

Operating income
$
112

 
$
2,032

 
$
1,144

 
$
5,015

 
 
 
 
 
 
 
 
International
 
 
 
 
 
 
 
Net sales
$
13,714

 
$
15,549

 
$
36,259

 
$
45,037

Operating expenses
14,650

 
15,934

 
38,401

 
46,536

Operating income (loss)
$
(936
)
 
$
(385
)
 
$
(2,142
)
 
$
(1,499
)
 
 
 
 
 
 
 
 
AWS
 
 
 
 
 
 
 
Net sales
$
4,584

 
$
6,679

 
$
12,346

 
$
18,225

Operating expenses
3,413

 
4,602

 
9,369

 
13,106

Operating income
$
1,171

 
$
2,077

 
$
2,977

 
$
5,119

 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
Net sales
$
43,744

 
$
56,576

 
$
117,413

 
$
160,504

Operating expenses
43,397

 
52,852

 
115,434

 
151,869

Operating income
347

 
3,724

 
1,979

 
8,635

Total non-operating income (expense)
(31
)
 
(334
)
 
(44
)
 
(724
)
Provision for income taxes
(58
)
 
(508
)
 
(755
)
 
(870
)
Equity-method investment activity, net of tax
(2
)
 
1

 
(4
)
 
5

Net income
$
256

 
$
2,883

 
$
1,176

 
$
7,046



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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,
 
2017
 
2018
 
2017
 
2018
Net Sales:
 
 
 
Online stores (1)
$
26,392

 
$
29,061

 
$
72,971

 
$
83,165

Physical stores (2)
1,276

 
4,248

 
1,276

 
12,824

Third-party seller services (3)
7,928

 
10,395

 
21,357

 
29,361

Subscription services (4)
2,441

 
3,698

 
6,544

 
10,209

AWS
4,584

 
6,679

 
12,346

 
18,225

Other (5)
1,123

 
2,495

 
2,919

 
6,720

Consolidated
$
43,744

 
$
56,576

 
$
117,413

 
$
160,504

____________________________
(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.
(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 membership, as well as audiobook, digital video, e-book, digital music, and other non-AWS subscription services.
(5)
Primarily includes sales of advertising services, as well as sales related to our other service offerings.

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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects, or future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results could differ materially for a variety of reasons, including, among others, fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, world events, the rate of growth of the Internet, online commerce, and cloud services, the amount that Amazon.com invests in new business opportunities and the timing of those investments, the mix of products and services sold to customers, the mix of net sales derived from products as compared with services, the extent to which we owe income or other taxes, competition, management of growth, potential fluctuations in operating results, international growth and expansion, the outcomes of legal proceedings and claims, fulfillment, sortation, delivery, and data center optimization, risks of inventory management, seasonality, the degree to which we enter into, maintain, and develop commercial agreements, proposed and completed acquisitions and strategic transactions, payments risks, and risks of fulfillment throughput and productivity. In addition, the current global economic climate amplifies many of these risks. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management’s expectations, are described in greater detail in Item 1A of Part II, “Risk Factors.”
For additional information, see Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” of our 2017 Annual Report on Form 10-K.
Critical Accounting Judgments
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. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business and Accounting Policies,” of our 2017 Annual Report on Form 10-K and Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies,” of this Form 10-Q. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.
Inventories
Inventories, consisting of products available for sale, are primarily accounted for using the first-in first-out method, and are valued at the lower of cost and net realizable value. This valuation requires us to make judgments, based on currently-available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category. These assumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future. As a measure of sensitivity, for every 1% of additional inventory valuation allowance as of September 30, 2018, we would have recorded an additional cost of sales of approximately $175 million.
In addition, we enter into supplier commitments for certain electronic device components and certain products. These commitments are based on forecasted customer demand. If we reduce these commitments, we may incur additional costs.
Income Taxes
We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. Our effective tax rates could be affected by numerous factors, such as intercompany transactions, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, the applicability

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of special tax regimes, losses incurred in jurisdictions for which we are not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies, changes to our existing businesses and operations, acquisitions (including integrations) and investments and how they are financed, changes in our stock price, changes in our deferred tax assets and liabilities and their valuation, and changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, accounting, and other areas, including European Union state aid rules. In addition, a number of countries are actively pursuing changes to their tax laws applicable to corporate multinationals, such as the recently enacted U.S. tax reform legislation commonly referred to as the U.S. Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). Finally, foreign governments may enact tax laws in response to the 2017 Tax Act that could result in further changes to global taxation and materially affect our financial position and results of operations.
The 2017 Tax Act significantly changes how the U.S. taxes corporations. The 2017 Tax Act requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the 2017 Tax Act and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the 2017 Tax Act will be applied or otherwise administered that is different from our interpretation. As we complete our analysis of the 2017 Tax Act, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made.
We are also currently subject to audit in various jurisdictions, and these jurisdictions may assess additional income tax liabilities against us. Developments in an audit, litigation, or the relevant laws, regulations, administrative practices, principles, and interpretations could have a material effect on our operating results or cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods. Although we believe our tax estimates are reasonable, the final outcome of tax audits, investigations, and any related litigation could be materially different from our historical income tax provisions and accruals.
Recent Accounting Pronouncements
See Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies.”



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Liquidity and Capital Resources
Cash flow information, which reflects retrospective adjustments to our consolidated statements of cash flows as described in Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies,” is as follows (in millions):
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Twelve Months Ended
September 30,
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
Cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
 
Operating activities
$
3,777

 
$
8,588

 
$
6,007

 
$
14,246

 
$
16,996

 
$
26,604

Investing activities
(18,478
)
 
(5,572
)
 
(25,103
)
 
(8,797
)
 
(29,169
)
 
(10,778
)
Financing activities
14,662

 
(2,369
)
 
12,499

 
(5,925
)
 
11,930

 
(8,496
)
Our principal sources of liquidity are cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, which, at fair value, were $31.0 billion and $29.8 billion as of December 31, 2017 and September 30, 2018. Amounts held in foreign currencies were $11.1 billion and $9.0 billion as of December 31, 2017 and September 30, 2018, and were primarily Euros, Japanese Yen, and British Pounds.
Cash provided by (used in) operating activities was $3.8 billion and $8.6 billion for Q3 2017 and Q3 2018, and $6.0 billion and $14.2 billion for the nine months ended September 30, 2017 and 2018. Our operating cash flows result primarily from cash received from our consumer, seller, developer, enterprise, and content creator customers, and advertising agreements, offset by cash payments we make for products and services, employee compensation (less amounts capitalized related to internal-use software that are reflected as cash used in investing activities), payment processing and related transaction costs, operating leases, and interest payments on our long-term obligations. Cash received from our customers and other activities generally corresponds to our net sales. Because consumers primarily use credit cards to buy from us, our receivables from consumers settle quickly. The increase in operating cash flow for the trailing twelve months ended September 30, 2018, compared to the comparable prior year period, was primarily due to the increase in net income, excluding non-cash charges such as depreciation, amortization, and stock-based compensation. Cash provided by (used in) operating activities is also subject to changes in working capital. Working capital at any specific point in time is subject to many variables, including seasonality, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates.
Cash provided by (used in) investing activities corresponds with cash capital expenditures, including leasehold improvements, internal-use software and website development costs, incentives received from property and equipment vendors, intellectual property rights, and purchases, sales, and maturities of marketable securities. Cash provided by (used in) investing activities was $(18.5) billion and $(5.6) billion for Q3 2017 and Q3 2018, and $(25.1) billion and $(8.8) billion for the nine months ended September 30, 2017 and 2018, with the variability caused primarily by our decision to purchase or lease property and equipment, and purchases, maturities, and sales of marketable securities. Cash capital expenditures were $2.7 billion and $2.5 billion during Q3 2017 and Q3 2018, and $7.0 billion and $8.2 billion for the nine months ended September 30, 2017 and 2018, which primarily reflect additional capacity to support our fulfillment operations and additional investments in support of continued business growth in technology infrastructure (the majority of which is to support AWS). Capital expenditures included $71 million and $63 million for internal-use software and website development during Q3 2017 and Q3 2018, and $235 million and $181 million for the nine months ended September 30, 2017 and 2018. Stock-based compensation capitalized for internal-use software and website development costs does not affect cash flows. We made cash payments, net of acquired cash, related to acquisition and other investment activity of $13.2 billion and $976 million during Q3 2017 and Q3 2018, and $13.9 billion and $1.9 billion for the nine months ended September 30, 2017 and 2018.
Cash provided by (used in) financing activities was $14.7 billion and $(2.4) billion for Q3 2017 and Q3 2018, and $12.5 billion and $(5.9) billion for the nine months ended September 30, 2017 and 2018. Cash outflows from financing activities result from principal repayments on obligations related to capital leases and finance leases and repayments of long-term debt and other, which were $1.4 billion and $2.5 billion in Q3 2017 and Q3 2018, and $3.6 billion and $6.3 billion for the nine months ended September 30, 2017 and 2018. Property and equipment acquired under capital leases was $2.3 billion and $2.3 billion during Q3 2017 and Q3 2018, and $6.9 billion and $6.9 billion for the nine months ended September 30, 2017 and 2018, reflecting investments in support of continued business growth primarily due to investments in technology infrastructure for AWS, which investments we expect to continue over time. Cash inflows from financing activities primarily result from proceeds from long-term debt and other. Proceeds from long-term debt and other were $16.0 billion and $143 million in Q3 2017 and Q3 2018, and $16.1 billion and $363 million for the nine months ended September 30, 2017 and 2018. During 2017, cash inflows from financing activities consisted primarily of proceeds from the issuance of $16.0 billion of senior unsecured notes in seven tranches maturing in 2020 through 2057. 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.

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Table of Contents

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 September 30, 2018.
We had no borrowings outstanding under the Credit Agreement and $535 million of borrowings outstanding under our Credit Facility as of September 30, 2018. See Item 1 of Part I, “Financial Statements — Note 5 — Debt” for additional information.
We recorded net tax provisions of $58 million and $508 million in Q3 2017 and Q3 2018, and $755 million and $870 million for the nine months ended September 30, 2017 and 2018. The 2017 Tax Act includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, we intend to continue to invest most or all of these earnings, as well as our capital in these subsidiaries, indefinitely outside of the U.S. and do not expect to incur any significant, additional taxes related to such amounts.
We have tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions that are being utilized to reduce our U.S. taxable income. The 2017 Tax Act extended through 2026 and enhanced the option to claim accelerated depreciation deductions on qualifying property. Cash taxes paid (net of refunds) were $172 million and $200 million for Q3 2017 and Q3 2018, and $865 million and $1.0 billion for the nine months ended September 30, 2017 and 2018. As of December 31, 2017, our federal net operating loss carryforward was approximately $226 million and we had approximately $855 million of federal tax credits potentially available to offset future tax liabilities. Our federal tax credits are primarily related to the U.S. federal research and development credit. As we utilize our federal net operating losses and tax credits we expect cash paid for taxes to increase. We endeavor to manage our global taxes on a cash basis, rather than on a financial reporting basis. In connection with the European Commission’s October 2017 decision against us on state aid, Luxembourg computed an initial recovery amount, consistent with the European Commission’s decision, of approximately €250 million, that we deposited into escrow in March 2018, subject to adjustment pending conclusion of all appeals.
Our liquidity is also affected by restricted cash balances that are pledged as collateral for real estate leases, amounts due to third-party sellers in certain jurisdictions, debt, and standby and trade letters of credit. To the extent we process payments for third-party sellers or offer certain types of stored value to our customers, some jurisdictions may restrict our use of those funds. These restrictions would result in the reclassification of a portion of our cash and cash equivalents from “Cash and cash equivalents” to restricted cash, which is classified within “Accounts receivable, net and other” on our consolidated balance sheets. As of December 31, 2017 and September 30, 2018, restricted cash, cash equivalents, and marketable securities were $1.3 billion and $609 million. See Item 1 of Part I, “Financial Statements — Note 3 — Commitments and Contingencies” for additional discussion of our principal contractual commitments, as well as our pledged assets. Additionally, purchase obligations and open purchase orders, consisting of inventory and significant non-inventory commitments, were $15.7 billion as of September 30, 2018. These purchase obligations and open purchase orders are generally cancellable in full or in part through the contractual provisions.
We believe that cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, as well as our borrowing arrangements, will be sufficient to meet our anticipated operating cash needs for at least the next 12 months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. See Item 1A of Part II, “Risk Factors.” We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities, obtain capital, finance, and operating lease arrangements, repurchase common stock, pay dividends, or repurchase, refinance, or otherwise restructure our debt for strategic reasons or to further strengthen our financial position.
The sale of additional equity or convertible debt securities would likely be dilutive to our shareholders. In addition, we will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, capital infrastructure, and technologies, which might affect our liquidity requirements or cause us to secure additional financing, or issue additional equity or debt securities. There can be no assurance that additional credit lines or financing instruments will be available in amounts or on terms acceptable to us, if at all.

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Results of Operations
We have organized our operations into three segments: North America, International, and AWS. Our results reflect the operations of Whole Foods Market from the date of acquisition in August 2017. These segments reflect the way the Company evaluates its business performance and manages its operations. See Item 1 of Part I, “Financial Statements — Note 8 — Segment Information.”
Net Sales
Net sales include product and service sales. Product sales represent revenue from the sale of products and related shipping fees and digital media content where we record revenue gross. Service sales primarily represent third-party seller fees earned (including commissions) and related shipping fees, AWS sales, Amazon Prime membership fees, advertising services, and certain digital content subscriptions. Net sales information is as follows (in millions):
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2018
 
2017
 
2018
Net Sales:
 
 
 
 
 
 
 
North America
$
25,446

 
$
34,348

 
$
68,808

 
$
97,242

International
13,714

 
15,549

 
36,259

 
45,037

AWS
4,584

 
6,679

 
12,346

 
18,225

Consolidated
$
43,744

 
$
56,576

 
$
117,413

 
$
160,504

Year-over-year Percentage Growth:
 
 
 
 
 
 
 
North America
35
%
 
35
%
 
29
%
 
41
%
International
29

 
13

 
21

 
24

AWS
42

 
46

 
42

 
48

Consolidated
34

 
29

 
27

 
37

Year-over-year Percentage Growth, excluding the effect of foreign exchange rates:
 
 
 
 
 
 
 
North America
35
%
 
35
%
 
28
%
 
41
%
International
28

 
15

 
24

 
19

AWS
42

 
46

 
42

 
48

Consolidated
33

 
30

 
28

 
35

Net sales mix:
 
 
 
 
 
 
 
North America
58
%
 
61
%
 
59
%
 
61
%
International
31

 
27

 
31

 
28

AWS
11

 
12

 
10

 
11

Consolidated
100
%
 
100
%
 
100
%
 
100
%
Sales increased 29% in Q3 2018 and 37% for the nine months ended September 30, 2018, compared to the comparable prior year periods. Changes in foreign currency exchange rates impacted net sales by $(260) million for Q3 2018, and by $2.1 billion for the nine months ended September 30, 2018. For a discussion of the effect on sales growth of foreign exchange rates, see “Effect of Foreign Exchange Rates” below.
North America sales increased 35% in Q3 2018 and 41% for the nine months ended September 30, 2018, compared to the comparable prior year periods. The sales growth primarily reflects increased unit sales, including sales by third-party sellers, and the impact of the acquisition of Whole Foods Market. Increased unit sales were driven largely by our continued efforts to reduce prices for our customers, including from our shipping offers, increased in-stock inventory availability, and increased selection.
International sales increased 13% in Q3 2018 and 24% for the nine months ended September 30, 2018, compared to the comparable prior year periods. The sales growth primarily reflects increased unit sales, including sales by third-party sellers. Increased unit sales were driven largely by our continued efforts to reduce prices for our customers, including from our shipping offers, increased in-stock inventory availability, and increased selection. Changes in foreign currency exchange rates impacted International net sales by $(202) million for Q3 2018, and by $2.0 billion for the nine months ended September 30, 2018.

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Table of Contents

AWS sales increased 46% in Q3 2018 and 48% for the nine months ended September 30, 2018, compared to the comparable prior year periods. The sales growth primarily reflects increased customer usage, partially offset by pricing changes. Pricing changes were driven largely by our continued efforts to reduce prices for our customers.
Operating Income (Loss)
Operating income (loss) by segment is as follows (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2018
 
2017
 
2018
Operating Income (Loss):
 
 
 
 
 
 
 
North America
$
112

 
$
2,032

 
$
1,144

 
$
5,015

International
(936
)
 
(385
)
 
(2,142
)
 
(1,499
)
AWS
1,171

 
2,077

 
2,977

 
5,119

Consolidated
$
347

 
$
3,724

 
$
1,979

 
$
8,635

Operating income increased from $347 million in Q3 2017 to $3.7 billion in Q3 2018, and increased from $2.0 billion for the nine months ended September 30, 2017, to $8.6 billion for the nine months ended September 30, 2018. We believe that operating income is a more meaningful measure than gross profit and gross margin due to the diversity of our product categories and services.
The increase in North America operating income in absolute dollars in Q3 2018 and for the nine months ended September 30, 2018, compared to the comparable prior year periods, is primarily due to increased unit sales, including sales by third-party sellers, advertising sales, and slower growth in certain operating expenses, partially offset by costs to expand our fulfillment network.
The decrease in International operating loss in absolute dollars in Q3 2018 and for the nine months ended September 30, 2018, compared to the comparable prior year periods, is primarily due to increased unit sales, including sales by third-party sellers, advertising sales, and slower growth in certain operating expenses, partially offset by costs to expand our fulfillment network. Changes in foreign exchange rates impacted operating loss by $47 million for Q3 2018, and by $203 million for the nine months ended September 30, 2018.
The increase in AWS operating income in absolute dollars in Q3 2018 and for the nine months ended September 30, 2018, compared to the comparable prior year periods, is primarily due to increased customer usage and cost structure productivity, partially offset by pricing changes and increased spending on technology infrastructure and payroll and related expenses, which was primarily driven by additional investments to support the business growth. Changes in foreign exchange rates impacted operating income by $34 million for Q3 2018, and by $(100) million for the nine months ended September 30, 2018.

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Table of Contents

Operating Expenses
Information about operating expenses is as follows (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2018
 
2017
 
2018
Operating Expenses:
 
 
 
 
 
 
 
Cost of sales
$
27,549

 
$
33,003

 
$
73,439

 
$
94,370

Fulfillment
6,420

 
8,275

 
16,275

 
23,999

Marketing
2,479

 
3,303

 
6,629

 
8,902

Technology and content
5,944

 
7,162

 
16,306

 
21,168

General and administrative
960

 
1,041

 
2,630

 
3,219

Other operating expense, net
45

 
68

 
155

 
211

Total operating expenses
$
43,397

 
$
52,852

 
$
115,434

 
$
151,869

Year-over-year Percentage Growth:
 
 
 
 
 
 
 
Cost of sales
30
%
 
20
%
 
24
%
 
29
%
Fulfillment
48

 
29

 
37

 
47

Marketing
43

 
33

 
40

 
34

Technology and content
44

 
20

 
41

 
30

General and administrative
50

 
8

 
53

 
22

Other operating expense, net
39

 
52

 
16

 
37

Percent of Net Sales:
 
 
 
 
 
 
 
Cost of sales
63.0
%
 
58.3
%
 
62.5
%
 
58.8
%
Fulfillment
14.7

 
14.6

 
13.9

 
15.0

Marketing
5.7

 
5.8

 
5.6

 
5.5

Technology and content
13.6

 
12.7

 
13.9

 
13.2

General and administrative
2.2

 
1.8

 
2.2

 
2.0

Other operating expense, net
0.1

 
0.1

 
0.1

 
0.1

Cost of Sales
Cost of sales primarily consists of the purchase price of consumer products, digital media content costs where we record revenue gross, including video and music, packaging supplies, sortation and delivery centers and related equipment costs, and inbound and outbound shipping costs, including where we are the transportation service provider.
The increase in cost of sales in absolute dollars in Q3 2018 and for the nine months ended September 30, 2018, compared to the comparable prior year periods, is primarily due to increased product and shipping costs resulting from increased sales.
Shipping costs to receive products from our suppliers are included in our inventory and recognized as cost of sales upon sale of products to our customers. Shipping costs, which include sortation and delivery center and transportation costs, were $5.4 billion and $6.6 billion in Q3 2017 and Q3 2018, and $14.4 billion and $18.6 billion for the nine months ended September 30, 2017 and 2018. We expect our cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate, we reduce shipping rates, we use more expensive shipping methods, and we offer additional services. We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing our fulfillment network, negotiating better terms with our suppliers, and achieving better operating efficiencies. We believe that offering low prices to our customers is fundamental to our future success, and one way we offer lower prices is through shipping offers.
Costs to operate our AWS segment are primarily classified as “Technology and content” as we leverage a shared infrastructure that supports both our internal technology requirements and external sales to AWS customers.
Fulfillment
Fulfillment costs primarily consist of those costs incurred in operating and staffing our North America and International fulfillment centers, customer service centers, and physical stores and payment processing costs. While AWS payment processing and related transaction costs are included in fulfillment, AWS costs are primarily classified as “Technology and content.” Fulfillment costs as a percentage of net sales may vary due to several factors, such as payment processing and related transaction

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costs, our level of productivity and accuracy, changes in volume, size, and weight of units received and fulfilled, timing of fulfillment network and physical store expansion, the extent we utilize fulfillment services provided by third parties, mix of products and services sold, and our ability to affect customer service contacts per unit by implementing improvements in our operations and enhancements to our customer self-service features. Additionally, because payment processing and fulfillment costs associated with seller transactions are based on the gross purchase price of underlying transactions, and payment processing and related transaction and fulfillment costs are higher as a percentage of sales versus our retail sales, sales by our sellers have higher fulfillment costs as a percent of net sales.
The increase in fulfillment costs in absolute dollars in Q3 2018 and for the nine months ended September 30, 2018, compared to the comparable prior year periods, is primarily due to variable costs corresponding with increased product and service sales volume and inventory levels, and costs from expanding our fulfillment network, which includes physical stores.
We seek to expand our fulfillment network to accommodate a greater selection and in-stock inventory levels and to meet anticipated shipment volumes from sales of our own products as well as sales by third parties for which we provide the fulfillment services. We regularly evaluate our facility requirements.
Marketing
We direct customers to our websites primarily through a number of targeted online marketing channels, such as our sponsored search, Associates program, social and online advertising, television advertising, and other initiatives. Our marketing costs are largely variable, based on growth in sales and changes in rates. To the extent there is increased or decreased competition for these traffic sources, or to the extent our mix of these channels shifts, we would expect to see a corresponding change in our marketing costs.
The increase in marketing costs in absolute dollars in Q3 2018 and for the nine months ended September 30, 2018, compared to the comparable prior year periods, is primarily due to payroll and related expenses, as well as increased spending on online marketing channels.
While costs associated with Amazon Prime memberships and other shipping offers are not included in marketing expense, we view these offers as effective worldwide marketing tools, and intend to continue offering them indefinitely.
Technology and Content
Technology and content costs include payroll and related expenses for employees involved in the research and development of new and existing products and services, development, design, and maintenance of our websites, curation and display of products and services made available on our websites, and infrastructure costs. Infrastructure costs include servers, networking equipment, and data center related depreciation, rent, utilities, and other expenses necessary to support AWS, as well as these and other efforts. Collectively, these costs reflect the investments we make in order to offer a wide variety of products and services to our customers.
We seek to invest efficiently in numerous areas of technology and content so we may continue to enhance the customer experience and improve our process efficiency through rapid technology developments, while operating at an ever increasing scale. Our technology and content investment and capital spending projects often support a variety of product and service offerings due to geographic expansion and the cross-functionality of our systems and operations. We expect spending in technology and content to increase over time as we continue to add employees and technology infrastructure. These costs are allocated to segments based on usage. The increase in technology and content costs in absolute dollars in Q3 2018 and for the nine months ended September 30, 2018, compared to the comparable prior year periods, is primarily due to an increase in spending on technology infrastructure and increased payroll and related costs associated with technical teams responsible for expanding our existing products and services and initiatives to introduce new products and service offerings. See Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” of our 2017 Annual Report on Form 10-K for a discussion of how management views advances in technology and the importance of innovation.
During Q3 2017 and Q3 2018, we capitalized $93 million (including $22 million of stock-based compensation) and $78 million (including $15 million of stock-based compensation) of costs associated with internal-use software and website development. For the nine months ended September 30, 2017 and 2018, we capitalized $298 million (including $63 million of stock-based compensation) and $226 million (including $45 million of stock-based compensation) of costs associated with internal-use software and website development. Amortization of previously capitalized amounts was $128 million and $97 million for Q3 2017 and Q3 2018, and $424 million and $313 million for the nine months ended September 30, 2017 and 2018.
General and Administrative
The increase in general and administrative costs in absolute dollars in Q3 2018 and for the nine months ended September 30, 2018, compared to the comparable prior year periods, is primarily due to increases in payroll and related expenses.

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Other Operating Expense, Net
Other operating expense, net was