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8-K_1067983_0001193125-21-240173(1).htm
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8-K
BERKSHIRE HATHAWAY INC DE false 0001067983 0001067983 2021-08-07 2021-08-07 0001067983 us-gaap:CommonClassAMember 2021-08-07 2021-08-07 0001067983 us-gaap:CommonClassBMember 2021-08-07 2021-08-07 0001067983 brka:M0.750SeniorNotesDue202310Member 2021-08-07 2021-08-07 0001067983 brka:M1.125SeniorNotesDue20271Member 2021-08-07 2021-08-07 0001067983 brka:M1.625SeniorNotesDue20352Member 2021-08-07 2021-08-07 0001067983 brka:M1.300SeniorNotesDue20243Member 2021-08-07 2021-08-07 0001067983 brka:M2.150SeniorNotesDue20284Member 2021-08-07 2021-08-07 0001067983 brka:M0.625SeniorNotesDue20235Member 2021-08-07 2021-08-07 0001067983 brka:M0.000SeniorNotesDue20256Member 2021-08-07 2021-08-07 0001067983 brka:M2.375SeniorNotesDue20397Member 2021-08-07 2021-08-07 0001067983 brka:M0.500SeniorNotesDue20418Member 2021-08-07 2021-08-07 0001067983 brka:M2.625SeniorNotesDue20599Member 2021-08-07 2021-08-07 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) August 7, 2021 BERKSHIRE HATHAWAY INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
001-14905
47-0813844
(STATE OR OTHER JURISDICTION OF INCORPORATION)
(COMMISSION FILE NUMBER)
(I.R.S. EMPLOYER IDENTIFICATION NO.)
3555 Farnam Street
Omaha, Nebraska
68131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE) (402) 346-1400 REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbols
Name of each exchange on which registered
Class A Common Stock
BRK.A
New York Stock Exchange
Class B Common Stock
BRK.B
New York Stock Exchange
0.750% Senior Notes due 2023
BRK23
New York Stock Exchange
1.125% Senior Notes due 2027
BRK27
New York Stock Exchange
1.625% Senior Notes due 2035
BRK35
New York Stock Exchange
1.300% Senior Notes due 2024
BRK24
New York Stock Exchange
2.150% Senior Notes due 2028
BRK28
New York Stock Exchange
0.625% Senior Notes due 2023
BRK23A
New York Stock Exchange
0.000% Senior Notes due 2025
BRK25
New York Stock Exchange
2.375% Senior Notes due 2039
BRK39
New York Stock Exchange
0.500% Senior Notes due 2041
BRK41
New York Stock Exchange
2.625% Senior Notes due 2059
BRK59
New York Stock Exchange Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
ITEM 2.02
Results of Operations and Financial Condition. On August 7, 2021, Berkshire Hathaway Inc. issued a press release announcing the Company’s earnings for the second quarter and first six months ended June 30, 2021. A copy of this press release is furnished with this report as an exhibit to this Form 8-K.
ITEM 9.01
Financial Statements and Exhibits
Exhibit 99.1
Berkshire Hathaway Inc. Earnings Release Dated August 7, 2021.
Exhibit 104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
August 9, 2021
BERKSHIRE HATHAWAY INC.
/s/ Marc D. Hamburg
By: Marc D. Hamburg
Senior Vice President and Chief Financial Officer
|
8-K_1045810_0001045810-23-000171.htm
|
nvda-202308230001045810false00010458102023-08-232023-08-23UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549______________FORM 8-K CURRENT REPORTPURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934Date of Report (Date of earliest event reported): August 23, 2023 NVIDIA CORPORATION(Exact name of registrant as specified in its charter)Delaware0-2398594-3177549(State or other jurisdiction(Commission(IRS Employerof incorporation)File Number)Identification No.)2788 San Tomas Expressway, Santa Clara, CA 95051 (Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (408) 486-2000 Not Applicable(Former name or former address, if changed since last report)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock, $0.001 par value per shareNVDAThe Nasdaq Global Select MarketIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐Item 2.02 Results of Operations and Financial Condition.On August 23, 2023, NVIDIA Corporation, or the Company, issued a press release announcing its results for the quarter ended July 30, 2023. The press release is attached as Exhibit 99.1 and is incorporated herein by reference.Attached hereto as Exhibit 99.2 and incorporated by reference herein is financial information and commentary by Colette M. Kress, Executive Vice President and Chief Financial Officer of the Company, regarding results of the quarter ended July 30, 2023, or the CFO Commentary. The CFO Commentary will be posted to http://investor.nvidia.com immediately after the filing of this Current Report.The press release and CFO Commentary are furnished and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or subject to the liabilities of that Section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended. The information in this Current Report shall not be incorporated by reference in any filing with the U.S. Securities and Exchange Commission made by the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.Item 9.01. Financial Statements and Exhibits.(d) Exhibits ExhibitDescription99.1Press Release, dated August 23 2023, entitled "NVIDIA Announces Financial Results for Second Quarter Fiscal 2024"99.2CFO Commentary on Second Quarter Fiscal 2024 Results104The cover page of this Current Report on Form 8-K, formatted in inline XBRL (included as Exhibit 101)SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NVIDIA CorporationDate: August 23, 2023By: /s/ Colette M. Kress Colette M. Kress Executive Vice President and Chief Financial Officer
|
8-K_320193_0001193125-14-277193.htm
|
8-K
1
d757212d8k.htm
FORM 8-K
FORM 8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 8-K
CURRENT REPORT Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
July 23, 2014 Date of Report (Date of earliest event reported)
APPLE INC.
(Exact name of registrant as specified in its charter)
California
000-10030
94-2404110
(State or other jurisdiction of incorporation)
(Commission File Number)
(IRS Employer Identification No.)
1 Infinite Loop Cupertino, California 95014 (Address of principal executive offices)
(Zip Code) Registrants telephone number, including area code
(408) 996-1010 Not applicable
(Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 8.01
Other Events. The Description of Common
Stock set forth in Exhibit 99.1 is being filed for the purpose of providing an updated description of the capital stock of Apple Inc. (the Company). The Description of Common Stock set forth in Exhibit 99.1 is incorporated herein by
reference, modifies and supersedes any prior description of the capital stock of the Company in any registration statement or report filed with the Securities and Exchange Commission (the Commission) and will be available for
incorporation by reference into certain of the Companys filings with the Commission pursuant to the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the rules and forms promulgated thereunder.
Item 9.01
Financial Statements and Exhibits.
(d)
Exhibits The following exhibit is filed
herewith:
ExhibitNumber
Description
99.1
Description of Common Stock.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
APPLE INC.
(Registrant)
Date: July 23, 2014
By:
/s/ D. Bruce Sewell
D. Bruce Sewell Senior Vice
President, General Counsel and Secretary
EXHIBIT INDEX
ExhibitNumber
Description
99.1
Description of Common Stock.
|
8-K_320193_0000320193-23-000005.htm
|
aapl-20230202false000032019300003201932023-02-022023-02-020000320193us-gaap:CommonStockMember2023-02-022023-02-020000320193aapl:A1.375NotesDue2024Member2023-02-022023-02-020000320193aapl:A0.000Notesdue2025Member2023-02-022023-02-020000320193aapl:A0.875NotesDue2025Member2023-02-022023-02-020000320193aapl:A1.625NotesDue2026Member2023-02-022023-02-020000320193aapl:A2.000NotesDue2027Member2023-02-022023-02-020000320193aapl:A1.375NotesDue2029Member2023-02-022023-02-020000320193aapl:A3.050NotesDue2029Member2023-02-022023-02-020000320193aapl:A0.500Notesdue2031Member2023-02-022023-02-020000320193aapl:A3.600NotesDue2042Member2023-02-022023-02-02UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 8-KCURRENT REPORTPursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934February 2, 2023Date of Report (Date of earliest event reported)Apple Inc.(Exact name of Registrant as specified in its charter)California 001-36743 94-2404110(State or other jurisdictionof incorporation) (CommissionFile Number) (I.R.S. EmployerIdentification No.)One Apple Park Way Cupertino, California 95014 (Address of principal executive offices) (Zip Code)(408) 996-1010 (Registrant’s telephone number, including area code)Not applicable(Former name or former address, if changed since last report.)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading symbol(s)Name of each exchange on which registeredCommon Stock, $0.00001 par value per shareAAPLThe Nasdaq Stock Market LLC1.375% Notes due 2024—The Nasdaq Stock Market LLC0.000% Notes due 2025—The Nasdaq Stock Market LLC0.875% Notes due 2025—The Nasdaq Stock Market LLC1.625% Notes due 2026—The Nasdaq Stock Market LLC2.000% Notes due 2027—The Nasdaq Stock Market LLC1.375% Notes due 2029—The Nasdaq Stock Market LLC3.050% Notes due 2029—The Nasdaq Stock Market LLC0.500% Notes due 2031—The Nasdaq Stock Market LLC3.600% Notes due 2042—The Nasdaq Stock Market LLCIndicate by check mark whether the Registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).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. ☐Item 2.02 Results of Operations and Financial Condition.On February 2, 2023, Apple Inc. (“Apple”) issued a press release regarding Apple’s financial results for its first fiscal quarter ended December 31, 2022. A copy of Apple’s press release is attached hereto as Exhibit 99.1.The information contained in this Current Report shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. Item 9.01 Financial Statements and Exhibits.(d)Exhibits.ExhibitNumberExhibit Description99.1Press release issued by Apple Inc. on February 2, 2023.104Inline XBRL for the cover page of this Current Report on Form 8-K.SIGNATUREPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.Date:February 2, 2023Apple Inc.By:/s/ Luca MaestriLuca MaestriSenior Vice President,Chief Financial Officer
|
8-K_1067983_0001193125-18-156189.htm
|
8-K
1
d539337d8k.htm
8-K
8-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
May 5, 2018
BERKSHIRE HATHAWAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
001-14905
47-0813844
(STATE OR OTHER JURISDICTION
(COMMISSION
(I.R.S. EMPLOYER
OF INCORPORATION)
FILE NUMBER)
IDENTIFICATION NO.)
3555 Farnam Street
Omaha, Nebraska
68131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(402) 346-1400
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below): ☐ Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425) ☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this
chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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.
☐
ITEM 2.02 Results of Operations and Financial Condition.
On May 5, 2018, Berkshire Hathaway Inc. issued a press release announcing the Companys earnings for the first quarter ended
March 31, 2018. A copy of this press release is furnished with this report as an exhibit to this Form 8-K. ITEM 5.07 Submission of Matters to a
Vote of Security Holders On May 5, 2018, Berkshire Hathaway Inc. held an annual meeting of its shareholders. The agenda items for
the meeting along with the vote of the Companys Class A and Class B common shareholders voting together as a single class with respect to each of the agenda items are shown below. There were three items acted on at that meeting as
follows: 1) Election of Directors; 2) a shareholder proposal requesting the issuance of a report to review Berkshires policies, to measure, monitor, mitigate, disclose and set quantitative reduction targets for methane emissions resulting from
all operations; and 3) a shareholder proposal requesting the adoption of a policy to encourage more Berkshire subsidiary companies to issue annual sustainability reports. Berkshires shareholders reelected all of Berkshires directors in
an uncontested election. Following are the votes cast for and against each director.
Proposal 1 Election of Directors
For
Against
Warren E. Buffett
617,852
11,301
Charles T. Munger
613,395
15,758
Gregory E. Abel
615,952
13,201
Howard G. Buffett
614,478
14,676
Stephen B. Burke
627,515
1,639
Susan L. Decker
623,242
5,911
William H. Gates III
621,514
7,640
David S. Gottesman
623,267
5,887
Charlotte Guyman
623,479
5,675
Ajit Jain
615,962
13,191
Thomas S. Murphy
620,826
8,328
Ronald L. Olson
613,965
15,188
Walter Scott, Jr.
614,549
14,605
Meryl B. Witmer
624,184
4,970
The results of the other matters acted upon at the meeting were as follows.
For
Against
Abstain
Proposal 2 Shareholder proposal
52,382
563,405
13,367
For
Against
Abstain
Proposal 3 Shareholder proposal
72,060
548,598
8,495
ITEM 9.01 Financial Statements and Exhibits
Exhibit 99.1 Berkshire Hathaway Inc. Earnings Release Dated May 5, 2018.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
May 8, 2018
BERKSHIRE HATHAWAY INC.
/s/ Marc D. Hamburg
By: Marc D. Hamburg
Senior Vice President and Chief Financial Officer
|
8-K_1067983_0001193125-19-212469.htm
|
8-K
BERKSHIRE HATHAWAY INC DE false 0001067983 0001067983 2019-08-03 2019-08-03 0001067983 us-gaap:CommonClassAMember 2019-08-03 2019-08-03 0001067983 us-gaap:CommonClassBMember 2019-08-03 2019-08-03 0001067983 brka:M0.750SeniorNotesDue2023Member 2019-08-03 2019-08-03 0001067983 brka:M1.125SeniorNotesDue2027Member 2019-08-03 2019-08-03 0001067983 brka:M1.625SeniorNotesDue2035Member 2019-08-03 2019-08-03 0001067983 brka:M0.500SeniorNotesDue2020Member 2019-08-03 2019-08-03 0001067983 brka:M1.300SeniorNotesDue2024Member 2019-08-03 2019-08-03 0001067983 brka:M2.150SeniorNotesDue2028Member 2019-08-03 2019-08-03 0001067983 brka:M0.250SeniorNotesDue2021Member 2019-08-03 2019-08-03 0001067983 brka:M0.625SeniorNotesDue2023Member 2019-08-03 2019-08-03 0001067983 brka:M2.375SeniorNotesDue2039Member 2019-08-03 2019-08-03 0001067983 brka:M2.625SeniorNotesDue2059Member 2019-08-03 2019-08-03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) August 3, 2019 BERKSHIRE HATHAWAY INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
001-14905
47-0813844
(STATE OR OTHER JURISDICTION OF INCORPORATION)
(COMMISSION FILE NUMBER)
(I.R.S. EMPLOYER IDENTIFICATION NO.)
3555 Farnam Street Omaha, Nebraska
68131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE) (402) 346-1400 REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐ Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbols
Name of each exchange on which registered
Class A Common Stock
BRK.A
New York Stock Exchange
Class B Common Stock
BRK.B
New York Stock Exchange
0.750% Senior Notes due 2023
BRK23
New York Stock Exchange
1.125% Senior Notes due 2027
BRK27
New York Stock Exchange
1.625% Senior Notes due 2035
BRK35
New York Stock Exchange
0.500% Senior Notes due 2020
BRK20
New York Stock Exchange
1.300% Senior Notes due 2024
BRK24
New York Stock Exchange
2.150% Senior Notes due 2028
BRK28
New York Stock Exchange
0.250% Senior Notes due 2021
BRK21
New York Stock Exchange
0.625% Senior Notes due 2023
BRK23A
New York Stock Exchange
2.375% Senior Notes due 2039
BRK39
New York Stock Exchange
2.625% Senior Notes due 2059
BRK59
New York Stock Exchange
ITEM 2.02
Results of Operations and Financial Condition. On August 3, 2019, Berkshire Hathaway Inc. issued a press release announcing the Company’s earnings for the second quarter and first six months ended June 30, 2019. A copy of this press release is furnished with this report as an exhibit to this Form 8-K.
ITEM 9.01
Financial Statements and Exhibits Exhibit 99.1 Berkshire Hathaway Inc. Earnings Release Dated August 3, 2019.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
August 5, 2019
BERKSHIRE HATHAWAY INC.
/s/ Marc D. Hamburg
By:
Marc D. Hamburg
Senior Vice President and Chief Financial Officer
|
8-K_320193_0001193125-22-278435.htm
|
8-K
false 0000320193 0000320193 2022-11-06 2022-11-06 0000320193 us-gaap:CommonStockMember 2022-11-06 2022-11-06 0000320193 aapl:A1.000NotesDue2022Member 2022-11-06 2022-11-06 0000320193 aapl:A1.375NotesDue2024Member 2022-11-06 2022-11-06 0000320193 aapl:A0.000Notesdue2025Member 2022-11-06 2022-11-06 0000320193 aapl:A0.875NotesDue2025Member 2022-11-06 2022-11-06 0000320193 aapl:A1.625NotesDue2026Member 2022-11-06 2022-11-06 0000320193 aapl:A2.000NotesDue2027Member 2022-11-06 2022-11-06 0000320193 aapl:A1.375NotesDue2029Member 2022-11-06 2022-11-06 0000320193 aapl:A3.050NotesDue2029Member 2022-11-06 2022-11-06 0000320193 aapl:A0.500Notesdue2031Member 2022-11-06 2022-11-06 0000320193 aapl:A3.600NotesDue2042Member 2022-11-06 2022-11-06 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934 November 6, 2022 Date of Report (Date of earliest event reported)
Apple Inc. (Exact name of Registrant as specified in its charter)
California
001-36743
94-2404110
(State or other jurisdiction of incorporation)
(Commission File Number)
(I.R.S. Employer Identification No.) One Apple Park Way Cupertino, California 95014 (Address of principal executive offices) (Zip Code) (408) 996-1010 (Registrant’s telephone number, including area code) Not applicable (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Tradingsymbol(s)
Name of each exchangeon which registered
Common Stock, $0.00001 par value per share
AAPL
The Nasdaq Stock Market LLC
1.000% Notes due 2022
—
The Nasdaq Stock Market LLC
1.375% Notes due 2024
—
The Nasdaq Stock Market LLC
0.000% Notes due 2025
—
The Nasdaq Stock Market LLC
0.875% Notes due 2025
—
The Nasdaq Stock Market LLC
1.625% Notes due 2026
—
The Nasdaq Stock Market LLC
2.000% Notes due 2027
—
The Nasdaq Stock Market LLC
1.375% Notes due 2029
—
The Nasdaq Stock Market LLC
3.050% Notes due 2029
—
The Nasdaq Stock Market LLC
0.500% Notes due 2031
—
The Nasdaq Stock Market LLC
3.600% Notes due 2042
—
The Nasdaq Stock Market LLC Indicate by check mark whether the Registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
Item 7.01
Regulation FD Disclosure. On November 6, 2022, Apple Inc. (“Apple”) issued an investor update. A copy of Apple’s update is attached hereto as Exhibit 99.1. The information contained in this Current Report shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
Item 9.01
Financial Statements and Exhibits. (d) Exhibits.
Exhibit Number
Exhibit Description
99.1
Press Release issued by Apple Inc. on November 6, 2022.
104
Inline XBRL for the cover page of this Current Report on Form 8-K. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: November 7, 2022
Apple Inc.
By:
/s/ Luca Maestri
Luca Maestri
Senior Vice President, Chief Financial Officer
|
8-K_1067983_0001193125-22-060362.htm
|
8-K
BERKSHIRE HATHAWAY INC DE false 0001067983 0001067983 2022-02-26 2022-02-26 0001067983 brka:ClassACommonStockMember 2022-02-26 2022-02-26 0001067983 brka:ClassBCommonStockMember 2022-02-26 2022-02-26 0001067983 brka:M0.750SeniorNotesDue20232Member 2022-02-26 2022-02-26 0001067983 brka:MOnePointOneTwoFiveSeniorNotesDueTwoThousandTwentySevenMember 2022-02-26 2022-02-26 0001067983 brka:MOnePointSixTwoFiveSeniorNotesDueTwoThousandThirtyFiveMember 2022-02-26 2022-02-26 0001067983 brka:MOnePointThreeZeroZeroSeniorNotesDueTwoThousandTwentyFourMember 2022-02-26 2022-02-26 0001067983 brka:MTwoPointOneFiveZeroSeniorNotesDueTwoThousandTwentyEightMember 2022-02-26 2022-02-26 0001067983 brka:M0.625SeniorNotesDue20231Member 2022-02-26 2022-02-26 0001067983 brka:MZeroPointZeroZeroZeroSeniorNotesDueTwoThousandTwentyFiveMember 2022-02-26 2022-02-26 0001067983 brka:MTwoPointThreeSevenFiveSeniorNotesDueTwoThousandThirtyNineMember 2022-02-26 2022-02-26 0001067983 brka:MZeroPointFiveZeroZeroSeniorNotesDueTwoThousandFortyOneMember 2022-02-26 2022-02-26 0001067983 brka:MTwoPointSixTwoFiveSeniorNotesDueTwoThousandFiftyNineMember 2022-02-26 2022-02-26 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) February 26, 2022 BERKSHIRE HATHAWAY INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
001-14905
47-0813844
(STATE OR OTHER JURISDICTION OF INCORPORATION)
(COMMISSION FILE NUMBER)
(I.R.S. EMPLOYER IDENTIFICATION NO.)
3555 Farnam Street Omaha, Nebraska
68131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE) (402) 346-1400 REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbols
Name of each exchange on which registered
Class A Common Stock
BRK.A
New York Stock Exchange
Class B Common Stock
BRK.B
New York Stock Exchange
0.750% Senior Notes due 2023
BRK23
New York Stock Exchange
1.125% Senior Notes due 2027
BRK27
New York Stock Exchange
1.625% Senior Notes due 2035
BRK35
New York Stock Exchange
1.300% Senior Notes due 2024
BRK24
New York Stock Exchange
2.150% Senior Notes due 2028
BRK28
New York Stock Exchange
0.625% Senior Notes due 2023
BRK23A
New York Stock Exchange
0.000% Senior Notes due 2025
BRK25
New York Stock Exchange
2.375% Senior Notes due 2039
BRK39
New York Stock Exchange
0.500% Senior Notes due 2041
BRK41
New York Stock Exchange
2.625% Senior Notes due 2059
BRK59
New York Stock Exchange Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
ITEM 2.02
Results of Operations and Financial Condition. On February 26, 2022, Berkshire Hathaway Inc. issued a press release announcing the Company’s earnings for the fourth quarter and year ended December 31, 2021 and subsequently on February 26, 2022, issued a corrected press release. A copy of the corrected press release is furnished with this report as an exhibit to this Form 8-K.
ITEM 9.01
Financial Statements and Exhibits
Exhibit 99.1
Berkshire Hathaway Inc. Corrected News Release Dated February 26, 2022
Exhibit 104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
February 28, 2022
BERKSHIRE HATHAWAY INC.
/s/ Marc D. Hamburg
By: Marc D. Hamburg
Senior Vice President and Chief Financial Officer
|
8-K_789019_0001193125-18-134732.htm
|
8-K
1
d576671d8k.htm
FORM 8-K
Form 8-K
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) April 26, 2018
Microsoft Corporation (Exact Name of
Registrant as Specified in Its Charter)
Washington
(State or Other Jurisdiction of
Incorporation)
001-37845
91-1144442
(Commission
File Number)
(IRS Employer
Identification No.)
One Microsoft Way, Redmond, Washington
98052-6399
(Address of Principal Executive Offices)
(Zip Code)
(425) 882-8080
(Registrants Telephone Number, Including Area Code)
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box
below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c)) Indicate by check mark whether the registrant is an emerging growth company as
defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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.
☐
Item 2.02. Results of Operations and Financial Condition
On April 26, 2018, Microsoft Corporation issued a press release announcing its financial results for the fiscal quarter ended March 31, 2018. A
copy of the press release is furnished as Exhibit 99.1 to this report. In accordance with General Instruction B.2 of Form 8-K, the information in this Current Report on Form 8-K, including Exhibit 99.1, shall not be deemed to be filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of
1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. Item 9.01. Financial Statements and
Exhibits (d) Exhibits:
99.1
Press release, dated April 26, 2018, issued by Microsoft Corporation
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MICROSOFT CORPORATION
(Registrant)
Date: April 26, 2018
/S/ FRANK H. BROD
Frank H. Brod
Corporate Vice President, Finance and
Administration; Chief Accounting Officer
|
8-K_1326801_0000950103-22-013666.htm
|
0001326801
false
0001326801
2022-08-04
2022-08-04
iso4217:USD
xbrli:shares
iso4217:USD
xbrli:shares
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
August 4, 2022
Meta Platforms, Inc.
(Exact name of registrant as specified in its charter)
Delaware
001-35551
20-1665019
(State or Other Jurisdiction
of Incorporation)
(Commission
File Number)
(IRS Employer
Identification No.)
1601 Willow Road, Menlo Park, California 94025
(Address of principal executive offices and Zip
Code)
(650) 543-4800
(Registrant’s telephone number, including
area code)
N/A
(Former name or former address, if changed since
last report)
Check the appropriate box below if the Form 8-K filing is intended
to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b)
of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, $0.000006 par value
META
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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.
☐
Item 8.01 Other Events.
On August 4, 2022, Meta Platforms,
Inc. (“Meta”) commenced an offering of senior unsecured notes (the “Notes”) to persons reasonably believed to
be qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”),
and outside the United States in accordance with Regulation S under the Securities Act.
The timing of pricing and
terms of the Notes are subject to market conditions and other factors. Meta intends to use the net proceeds from the offering for general
corporate purposes, which may include, but are not limited to, capital expenditures, repurchases of outstanding shares of its common stock,
acquisitions, or investments.
The Notes will not be registered
under the Securities Act or the securities laws of any other jurisdiction and may not be offered or sold in the United States absent registration
or an applicable exemption from registration requirements.
This report does not constitute
an offer to sell or a solicitation of an offer to buy the securities described herein, and shall not constitute an offer, solicitation
or sale in any state or other jurisdiction in which such an offer, solicitation or sale would be unlawful.
SIGNATURES
Pursuant to the requirements
of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
META PLATFORMS, INC.
Date:
August 4, 2022
By:
/s/ Katherine R. Kelly
Name:
Katherine R. Kelly
Title:
Vice President, Deputy General Counsel and Secretary
|
8-K_320193_0000320193-22-000069.htm
|
aapl-20220728false000032019300003201932022-07-282022-07-280000320193us-gaap:CommonStockMember2022-07-282022-07-280000320193aapl:A1.000NotesDue2022Member2022-07-282022-07-280000320193aapl:A1.375NotesDue2024Member2022-07-282022-07-280000320193aapl:A0.000Notesdue2025Member2022-07-282022-07-280000320193aapl:A0.875NotesDue2025Member2022-07-282022-07-280000320193aapl:A1.625NotesDue2026Member2022-07-282022-07-280000320193aapl:A2.000NotesDue2027Member2022-07-282022-07-280000320193aapl:A1.375NotesDue2029Member2022-07-282022-07-280000320193aapl:A3.050NotesDue2029Member2022-07-282022-07-280000320193aapl:A0.500Notesdue2031Member2022-07-282022-07-280000320193aapl:A3.600NotesDue2042Member2022-07-282022-07-28UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 8-KCURRENT REPORTPursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934July 28, 2022Date of Report (Date of earliest event reported)Apple Inc.(Exact name of Registrant as specified in its charter)California 001-36743 94-2404110(State or other jurisdictionof incorporation) (CommissionFile Number) (I.R.S. EmployerIdentification No.)One Apple Park Way Cupertino, California 95014 (Address of principal executive offices) (Zip Code)(408) 996-1010 (Registrant’s telephone number, including area code)Not applicable(Former name or former address, if changed since last report.)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading symbol(s)Name of each exchange on which registeredCommon Stock, $0.00001 par value per shareAAPLThe Nasdaq Stock Market LLC1.000% Notes due 2022—The Nasdaq Stock Market LLC1.375% Notes due 2024—The Nasdaq Stock Market LLC0.000% Notes due 2025—The Nasdaq Stock Market LLC0.875% Notes due 2025—The Nasdaq Stock Market LLC1.625% Notes due 2026—The Nasdaq Stock Market LLC2.000% Notes due 2027—The Nasdaq Stock Market LLC1.375% Notes due 2029—The Nasdaq Stock Market LLC3.050% Notes due 2029—The Nasdaq Stock Market LLC0.500% Notes due 2031—The Nasdaq Stock Market LLC3.600% Notes due 2042—The Nasdaq Stock Market LLCIndicate by check mark whether the Registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).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. ☐Item 2.02 Results of Operations and Financial Condition.On July 28, 2022, Apple Inc. (“Apple”) issued a press release regarding Apple’s financial results for its third fiscal quarter ended June 25, 2022. A copy of Apple’s press release is attached hereto as Exhibit 99.1.The information contained in this Current Report shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. Item 9.01 Financial Statements and Exhibits.(d)Exhibits.ExhibitNumberExhibit Description99.1Press release issued by Apple Inc. on July 28, 2022.104Inline XBRL for the cover page of this Current Report on Form 8-K.SIGNATUREPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.Date:July 28, 2022Apple Inc.By:/s/ Luca MaestriLuca MaestriSenior Vice President,Chief Financial Officer
|
8-K_1730168_0001193125-20-148648.htm
|
8-K
false 0001730168 0001730168 2020-05-21 2020-05-21 0001730168 us-gaap:CommonStockMember 2020-05-21 2020-05-21 0001730168 us-gaap:SeriesAPreferredStockMember 2020-05-21 2020-05-21 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): May 21, 2020 BROADCOM INC. (Exact Name of Registrant as Specified in Charter)
Delaware
001-38449
35-2617337
(State or other jurisdictionof incorporation)
(CommissionFile Number)
(IRS EmployerIdentification No.)
1320 Ridder Park Drive, San Jose, California
95131
(Address of principal executive offices)
(Zip Code) (408) 433-8000 (Registrant’s telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
AVGO
The NASDAQ Global Select Market
8.00% Mandatory Convertible Preferred Stock, Series A, $0.001 par value
AVGOP
The NASDAQ Global Select Market Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). 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. ☐
Item 1.01
Entry into a Material Definitive Agreement On May 21, 2020, Broadcom Inc. (the “Company”) completed the early settlement of its previously announced private offers to exchange (each, an “Exchange Offer” and, collectively, the “Exchange Offers”) certain specified series of its or its subsidiaries’ issued and outstanding notes (collectively, the “Existing Notes”) for new 3.459% Senior Notes due 2026 (the “New 2026 Notes”) and new 4.110% Senior Notes due 2028 (the “New 2028 Notes” and, together with the New 2026 Notes, the “New Notes”), as applicable. Pursuant to the Exchange Offers, the aggregate principal amount of each series of the Existing Notes set forth below was validly tendered, accepted for exchange by the Company and subsequently cancelled:
i.
$117,133,000 aggregate principal amount of 2.200% Senior Notes due 2021, issued by Broadcom Corporation, a California corporation (“Broadcom Corporation”);
ii.
$200,499,000 aggregate principal amount of 3.125% Senior Notes due 2021, issued by the Company;
iii.
$297,061,000 aggregate principal amount of 3.000% Senior Notes due 2022, issued by Broadcom Corporation;
iv.
$216,359,000 aggregate principal amount of 3.600% Senior Notes due 2022, issued by CA, Inc., a Delaware corporation (“CA, Inc.”);
v.
$806,970,000 aggregate principal amount of 3.125% Senior Notes due 2022, issued by the Company;
vi.
$1,146,823,000 aggregate principal amount of 3.625% Senior Notes due 2024, issued by Broadcom Corporation; and
vii.
$955,389,000 aggregate principal amount of 3.625% Senior Notes due 2024, issued by the Company. Following such cancellation, the aggregate principal amount of each series of Existing Notes set forth below remain outstanding:
i.
$281,737,000 aggregate principal amount of 2.200% Senior Notes due 2021, issued by Broadcom Corporation;
ii.
$525,342,000 aggregate principal amount of 3.125% Senior Notes due 2021, issued by the Company;
iii.
$841,913,000 aggregate principal amount of 3.000% Senior Notes due 2022, issued by Broadcom Corporation;
iv.
$283,641,000 aggregate principal amount of 3.600% Senior Notes due 2022, issued by CA, Inc.;
v.
$693,030,000 aggregate principal amount of 3.125% Senior Notes due 2022, issued by the Company;
vi.
$1,353,177,000 aggregate principal amount of 3.625% Senior Notes due 2024, issued by Broadcom Corporation; and
vii.
$1,044,611,000 aggregate principal amount of 3.625% Senior Notes due 2024, issued by the Company. The New Notes and Indenture In connection with the early settlement of the Exchange Offers, the Company issued (i) $1,694,847,000 aggregate principal amount of its 2026 New Notes and (ii) $2,221,096,000 aggregate principal amount of its New 2028 Notes in exchange for validly tendered and accepted Existing Notes. The New Notes were issued pursuant to an Indenture, dated May 21, 2020, among the Company, the Guarantors and Wilmington Trust, National Association, as trustee (the “Indenture”). Each series of New Notes pays interest semi-annually in arrears on March 15 and September 15 of each year. The New Notes were offered in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside of the United States in reliance on Regulation S under the Securities Act. Optional Redemption Provisions and Change of Control Purchase Right The Company may, at its option, redeem or purchase, in whole or in part, the 2026 New Notes and 2028 New Notes at any time prior to July 15, 2026 (two months prior to maturity) and June 15, 2028 (three months prior to maturity), respectively, at a price equal to 100% of the principal amount of the applicable New Notes redeemed, plus a corresponding “make-whole” premium as set forth in the Indenture, plus accrued and unpaid interest thereon to, but excluding, the redemption date. In addition, the Company may, at its option, redeem or purchase, in whole or in part, the 2026 New Notes and 2028 New Notes on or after July 15, 2026 (two months prior to maturity) and June 15, 2028 (three months prior to maturity), respectively, at a redemption price equal to 100% of the principal amount of the applicable New Notes redeemed, plus accrued and unpaid interest thereon, if any, to, but excluding, the redemption date. In the event that certain changes in the tax law of any relevant jurisdiction would impose withholding taxes on payments on the New Notes, the Company may redeem a series of New Notes in whole, but not in part, at any time, at a redemption price of 100% of the principal amount, plus accrued and unpaid interest thereon, if any, and Additional Amounts (as defined in the Indenture), if any, to the redemption date. The holders of the New Notes will also have the right to require the Company to purchase their New Notes upon the occurrence of a Change of Control Triggering Event, as defined in the Indenture, at an offer price equal to 101% of the aggregate principal amount of the New Notes purchased plus accrued and unpaid interest thereon to, but excluding, the date of purchase. Ranking Under the terms of the Indenture, the New Notes and the guarantees are the Company’s and the Guarantors’ respective senior unsecured obligations and (i) rank equal in right of payment with all of the Company’s and the Guarantors’ respective existing and future senior unsecured indebtedness, (ii) rank senior in right of payment to the Company’s and the Guarantors’ respective existing and future subordinated indebtedness, (iii) are effectively subordinated in right of payment to the Company’s and the Guarantors’ respective existing and future secured obligations, to the extent of the assets securing such obligations and (iv) are structurally subordinated in right of payment to any existing and future indebtedness or other liabilities, including trade payables, of the Company’s subsidiaries (excluding the Guarantors) and the Guarantors’ respective subsidiaries. Restrictive Covenants The Indenture contains covenants that, subject to certain qualifications and exceptions, limit the ability of the Company, the Guarantors and their subsidiaries to, among other things, (i) incur certain secured debt; (ii) enter into certain sale and lease-back transactions and (iii) consolidate, merge, sell or otherwise dispose of all or substantially all of their assets.
Events of Default Upon the occurrence of an event of default under the Indenture with respect to the New Notes, which includes payment defaults, defaults in the performance of certain covenants and bankruptcy and insolvency related defaults, the Company’s obligations under the New Notes may be accelerated, in which case the entire principal amount of the New Notes would be immediately due and payable. The foregoing description of the Indenture does not purport to be complete and is qualified in its entirety by reference to the full text of the Indenture. A copy of the Indenture is attached as Exhibit 4.1 to this Current Report on Form 8-K, and is incorporated by reference herein. Registration Rights Agreement On May 21, 2020, the Company, the Guarantors and Barclays Capital Inc. and Credit Suisse Securities (USA) LLC, as dealer-managers in connection with the Exchange Offers, entered into a registration rights agreement with respect to the New Notes (the “Registration Rights Agreement”). The Company and the Guarantors agreed under the Registration Rights Agreement to use commercially reasonable efforts to (i) file a registration statement on an appropriate registration form with respect to a registered offer to exchange each series of the New Notes for new notes, with terms substantially identical in all material respects to such series of New Notes and (ii) cause the registration statement to be declared effective under the Securities Act. If the exchange offer is not completed on or before May 21, 2025, the Company and the Guarantors will use commercially reasonable efforts to file and to have declared effective a shelf registration statement relating to resales of the New Notes and keep such shelf registration statement effective until the date that the New Notes cease to be Transfer Restricted Securities (as defined in the Registration Rights Agreement). If the Company and the Guarantors fail to satisfy this obligation with respect to a series of the New Notes (a “registration default”) under the Registration Rights Agreement, then additional interest will accrue on the principal amount of the New Notes of such series at an annual rate of 0.250%. The annual interest rate on such series of the New Notes will increase by an additional 0.250% for each subsequent 90-day period during which the registration default continues, up to a maximum of 1.000%. The additional interest will accrue to and including the date such registration default ends, at which time the interest rate on the applicable series of New Notes will revert to the original level. A registration default ends with respect to any New Notes when such New Notes cease to be Transfer Restricted Securities. If the Company is required to pay additional interest due to a registration default, the Company will pay such additional interest to the holders of the New Notes in cash on the same dates that the Company makes other interest payments on the New Notes, until the applicable registration default is cured. The foregoing description of the Registration Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Registration Rights Agreement. A copy of the Registration Rights Agreement is attached as Exhibit 4.4 to this Current Report on Form 8-K, and is incorporated by reference herein.
Item 2.03
Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement The information disclosed above under Item 1.01 is incorporated herein by reference. Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements (including within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act) concerning the Company. These statements include, but are not limited to, statements that address our expected future business and financial
performance and other statements identified by words such as “will”, “expect”, “believe”, “anticipate”, “estimate”, “should”, “intend”, “plan”, “potential”, “predict”, “project”, “aim”, and similar words, phrases or expressions. These forward-looking statements are based on current expectations and beliefs of the management of the Company, as well as assumptions made by, and information currently available to, such management, current market trends and market conditions and involve risks and uncertainties, many of which are outside the Company’s and management’s control, and which may cause actual results to differ materially from those contained in forward-looking statements. Accordingly, you should not place undue reliance on such statements. Particular uncertainties that could materially affect future results include risks associated with: our acquisition of Symantec Corporation’s Enterprise Security business (“Symantec Business”), including (1) potential difficulties in employee retention, (2) unexpected costs, charges or expenses, and (3) our ability to successfully integrate the Symantec Business and achieve the anticipated benefits of the transaction; any loss of our significant customers and fluctuations in the timing and volume of significant customer demand; our dependence on contract manufacturing and outsourced supply chain; our dependency on a limited number of suppliers; global economic conditions and concerns; international political and economic conditions; any acquisitions we may make, such as delays, challenges and expenses associated with receiving governmental and regulatory approvals and satisfying other closing conditions, and with integrating acquired businesses with our existing businesses and our ability to achieve the benefits, growth prospects and synergies expected by such acquisitions, including our recent acquisition of the Symantec Business; government regulations and trade restrictions; our significant indebtedness and the need to generate sufficient cash flows to service and repay such debt; dependence on and risks associated with distributors and resellers of our products; dependence on senior management and our ability to attract and retain qualified personnel; involvement in legal or administrative proceedings; quarterly and annual fluctuations in operating results; our ability to accurately estimate customers’ demand and adjust our manufacturing and supply chain accordingly; cyclicality in the semiconductor industry or in our target markets; our competitive performance and ability to continue achieving design wins with our customers, as well as the timing of any design wins; prolonged disruptions of our or our contract manufacturers’ manufacturing facilities, warehouses or other significant operations; our ability to improve our manufacturing efficiency and quality; our dependence on outsourced service providers for certain key business services and their ability to execute to our requirements; our ability to maintain or improve gross margin; our ability to protect our intellectual property and the unpredictability of any associated litigation expenses; compatibility of our software products with operating environments, platforms or third-party products; our ability to enter into satisfactory software license agreements; sales to our government clients; availability of third party software used in our products; use of open source code sources in our products; any expenses or reputational damage associated with resolving customer product warranty and indemnification claims; market acceptance of the end products into which our products are designed; our ability to sell to new types of customers and to keep pace with technological advances; our compliance with privacy and data security laws; our ability to protect against a breach of security systems; changes in accounting standards; fluctuations in foreign exchange rates; our provision for income taxes and overall cash tax costs, legislation that may impact our overall cash tax costs and our ability to maintain tax concessions in certain jurisdictions; and other events and trends on a national, regional and global scale, including those of a political, economic, business, competitive and regulatory nature. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result.
Item 9.01
Financial Statements and Exhibits. (d) Exhibits
ExhibitNo.
Description
4.1
Indenture, dated as of May 21, 2020, by and among the Company, the Guarantors and Wilmington Trust, National Association, as trustee.
4.2
Form of 3.459% Senior Notes due 2026 (included in Exhibit 4.1)
4.3
Form of 4.110% Senior Notes due 2028 (included in Exhibit 4.1)
4.4
Registration Rights Agreement, dated as of May 21, 2020, by and among the Company, the Guarantors and Barclays Capital Inc. and Credit Suisse Securities (USA) LLC, as dealer-managers in connection with the Exchange Offers.
104
Cover Page Interactive Data File (formatted as Inline XBRL).
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
BROADCOM INC.
Date: May 21, 2020
By:
/s/ Thomas H. Krause, Jr.
Name:
Thomas H. Krause, Jr.
Title:
Chief Financial Officer
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8-K_59478_0001193125-21-033302.htm
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8-K
ELI LILLY & Co false 0000059478 --12-31 0000059478 2021-02-09 2021-02-09 0000059478 us-gaap:CommonClassAMember 2021-02-09 2021-02-09 0000059478 lly:A1.000NotesDueJune22022Member 2021-02-09 2021-02-09 0000059478 lly:A718NotesDueJune12025Member 2021-02-09 2021-02-09 0000059478 lly:A1.625NotesDueJune22026Member 2021-02-09 2021-02-09 0000059478 lly:A2.125NotesDueJune32030Member 2021-02-09 2021-02-09 0000059478 lly:A625Notesdue2031Member 2021-02-09 2021-02-09 0000059478 lly:A6.77NotesDueJanuary12036Member 2021-02-09 2021-02-09 0000059478 lly:A1.700Notesdue2049Member 2021-02-09 2021-02-09 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): February 9, 2021 ELI LILLY AND COMPANY (Exact Name of Registrant as Specified in its Charter)
Indiana
001-06351
35-0470950
(State or Other Jurisdiction of Incorporation)
(Commission File Number)
(I.R.S. Employer Identification No.)
Lilly Corporate Center Indianapolis, Indiana
46285
(Address of Principal Executive Offices)
(Zip Code) Registrant’s Telephone Number, Including Area Code: (317) 276-2000 Not Applicable (Former Name or Former Address, if Changed Since Last Report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2.):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock (no par value)
LLY
New York Stock Exchange
1.000% Notes due 2022
LLY22
New York Stock Exchange
7 1/8% Notes due 2025
LLY25
New York Stock Exchange
1.625% Notes due 2026
LLY26
New York Stock Exchange
2.125% Notes due 2030
LLY30
New York Stock Exchange
0.625% Notes due 2031
LLY31
New York Stock Exchange
6.77% Notes due 2036
LLY36
New York Stock Exchange
1.700% Notes due 2049
LLY49A
New York Stock Exchange Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). 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. ☐
Item 5.02.
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. On February 9, 2021, Eli Lilly and Company (the “Company” or “Lilly”) announced that the Board of Directors of the Company elected Anat Ashkenazi, age 48, as senior vice president and chief financial officer of the Company. Since joining Lilly in 2001, Ms. Ashkenazi has held a range of roles across strategy and finance. Most recently, she served as senior vice president, controller and chief financial officer of Lilly Research Laboratories. In this role, she oversaw the chief financial officers of the Company’s commercial business areas (BioMedicine, Diabetes, Oncology, and International), as well as those for research and development, manufacturing and quality, G&A, and accounting and financial reporting functions. She also led the corporate strategic planning team and business transformation office. She previously served as vice president, finance and chief financial officer, Lilly Diabetes and Lilly Global Manufacturing and Quality, and chief financial officer, Lilly Oncology. In connection with her election as senior vice president and chief financial officer, effective February 9, 2021, Ms. Ashkenazi will receive an annualized base salary of $900,000 and will be eligible for an annualized target bonus of $900,000. In addition, Ms. Ashkenazi received equity awards with an aggregate target grant date value (calculated based on the most recent closing price of the Company’s common stock) of $2,200,000 in the form of (i) a shareholder value award with a target value of $770,000 for the 2021-2023 performance period, (ii) a relative value award with a target value of $770,000 for the 2021-2023 performance period, and (iii) a performance award with a target value of $660,000 for the 2021-2022 performance period. There are no arrangements or understandings between Ms. Ashkenazi and any person pursuant to which Ms. Ashkenazi was selected as an officer. There is no family relationship between Ms. Ashkenazi and any director or executive officer of the Company, and Ms. Ashkenazi is not a party to any transaction subject to Section 404(a) of Regulation S-K involving the Company or any of its subsidiaries. On February 9, 2021, the Company also announced that Joshua L. Smiley, senior vice president and chief financial officer of the Company, informed the Company of his resignation from the Company. The Company was recently made aware of allegations of an inappropriate personal relationship between Mr. Smiley and a Lilly employee. Lilly immediately engaged external counsel to conduct a thorough, independent investigation. That investigation revealed consensual though inappropriate personal communications between Mr. Smiley and certain Lilly employees and behavior that Lilly leadership concluded exhibited poor judgment by Mr. Smiley. Lilly holds all employees accountable to its core values and strongly believes its executive officers carry an even higher burden in ensuring those values are upheld. Mr. Smiley did not meet that standard. Mr. Smiley’s conduct in question was not related to financial controls, financial statements or any other business matters or judgments. In connection with Mr. Smiley’s resignation, he and the Company entered into a Separation Agreement (the “Separation Agreement”), which provides that Mr. Smiley immediately resign from his position as senior vice president and chief financial officer of the Company, as well as forego all of his $1 million 2020 cash bonus, approximately $3 million of his 2018-2020 shareholder value award, and all other current and future equity incentive awards, totaling over $20 million at target value (calculated based on the most recent closing price of the Company’s common stock). Mr. Smiley will be available to the Company’s chief executive officer Dave Ricks and Ms. Ashkenazi through July 2021 to facilitate the transition of his responsibilities, at reduced cash compensation of $9,000 every two weeks. The Separation Agreement includes customary provisions regarding confidentiality and a release of claims against the Company, as well as a 24-month non-solicitation agreement and an 18-month non-competition agreement. The foregoing is a summary description of certain terms of the Separation Agreement and, by its nature, is incomplete. It is qualified in its entirety by the full text of the Separation Agreement, a copy of which will be filed with the Company’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2021. A copy of the press release announcing Ms. Ashkenazi’s election and Mr. Smiley’s resignation is attached as Exhibit 99.1 to this Current Report on Form 8-K.
Item 5.03
Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year. On February 4, 2021, the Board of Directors of the Company approved an amendment to the Company’s bylaws (the “Bylaws”), effective February 9, 2021, to remove a provision providing the temporary authority to assume the duties and exercise the powers of the chief executive officer to specified officers in the event of the sudden death or incapacity of the incumbent. Going forward, the Company’s Board of Directors will exercise its discretion to determine an appropriate course of action should such a circumstance arise. The amendment is set forth below. Deletions are indicated by strikeouts. A marked version of the Bylaws is attached as Exhibit 3.2 to this Current Report on Form 8-K and the foregoing description is qualified by reference to the full text of the Bylaws. SECTION 3.7. Chief Executive Officer. The Chief Executive Officer shall, subject to the control of the Board of Directors, have general supervision over the management and direction of the business of the Corporation. He or she shall see that all orders and resolutions of the Board of Directors are carried into effect. The Chief Executive Officer shall have such other powers and perform such other duties as are assigned to him or her by the Bylaws or the Board of Directors. At any time in which the Chief Executive Officer is unable to discharge the powers and duties of the office, then until such time as the Board shall appoint a new Chief Executive Officer or determines that the Chief Executive Officer is able to resume office, temporary authority to perform such duties and exercise such powers shall be granted in the following manner:
(a)
First, to the President; or if he or she is unable to discharge such powers and duties,
(b)
To the Chief Financial Officer; or if he or she is unable to discharge such powers and duties,
(c)
To the executive officer serving as chief scientific officer; or if he or she is unable to discharge such powers and duties,
(d)
To the executive officer in charge of the Corporation’s largest business unit, measured by total revenue on a consolidated basis for the most recently completed fiscal year.
Item 9.01.
Financial Statements and Exhibits.
(d)
Exhibits
Exhibit No.
Description
3.1
Eli Lilly and Company Bylaws, as amended effective February 9, 2021.
3.2
Eli Lilly and Company Bylaws, marked to show amendments effective February 9, 2021.
99.1
Press Release of Eli Lilly and Company, dated February 9, 2021.
104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ELI LILLY AND COMPANY
(Registrant)
By:
/s/ Anat Hakim
Name:
Anat Hakim
Title:
Senior Vice President, General Counsel and Secretary
Date: February 9, 2021
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8-K_1730168_0001193125-20-102580.htm
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8-K
false 0001730168 0001730168 2020-04-09 2020-04-09 0001730168 us-gaap:CommonStockMember 2020-04-09 2020-04-09 0001730168 us-gaap:SeriesAPreferredStockMember 2020-04-09 2020-04-09 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): April 9, 2020 BROADCOM INC. (Exact Name of Registrant as Specified in Charter)
Delaware
001-38449
35-2617337
(State or other jurisdiction of incorporation)
(Commission File Number)
(IRS Employer Identification No.)
1320 Ridder Park Drive, San Jose, California
95131
(Address of principal executive offices)
(Zip Code) (408) 433-8000 (Registrant’s telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
AVGO
The NASDAQ Global Select Market
8.00% Mandatory Convertible Preferred Stock, Series A, $0.001 par value
AVGOP
The NASDAQ Global Select Market Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). 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. ☐
Item 1.01
Entry into a Material Definitive Agreement On April 9, 2020, Broadcom Inc. (the “Company”), completed its issuance and sale of $4.5 billion in aggregate principal amount of senior unsecured notes comprised of $2,250 million aggregate principal amount of 4.700% senior notes due 2025 (the “2025 Notes”) and $2,250 million aggregate principal amount of 5.000% senior notes due 2030 (the “2030 Notes” and, together with the 2025 Notes, the “Notes”). Each series of Notes will initially be fully and unconditionally guaranteed, jointly and severally, on an unsecured, unsubordinated basis by Broadcom Technologies Inc., a Delaware corporation and Broadcom Corporation, a California corporation (together, the “Guarantors”). Concurrently with the offering of the Notes, the Company is conducting cash tender offers (each, a “Tender Offer”) to purchase the outstanding notes described below, in each case subject to market conditions and other factors. The notes offered to be purchased in the Tender Offers, listed in the order of priority, are the (i) 3.000% senior notes due January 15, 2022, issued by Broadcom Corporation, (ii) 3.125% senior notes due April 15, 2021, issued by Broadcom Inc. and (iii) 2.200% senior notes due January 15, 2021, issued by Broadcom Corporation (the “Tender Offer Notes”) up to an aggregate purchase price, excluding accrued and unpaid interest, of $3.75 billion, of which up to $250 million may be used to purchase the 2.200% senior notes due January 15, 2021. The Company intends to use the net proceeds from the sale of the Notes to repay certain of its existing indebtedness, including funding the purchase of the Tender Offer Notes in the Tender Offers and the payment of accrued and unpaid interest, premiums, if any, fees and expenses in connection therewith and repaying certain amounts outstanding under either or both of its existing credit agreements with Bank of America, N.A., as administrative agent, with any remaining net proceeds from the sale of the Notes. Indenture The Notes were issued pursuant to an Indenture, dated April 9, 2020, among the Company, the Guarantors and Wilmington Trust, National Association, as trustee (the “Indenture”). Each series of Notes pays interest semi-annually in arrears on April 15 and October 15 of each year. The Notes were offered in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside of the United States in reliance on Regulation S under the Securities Act.
Optional Redemption Provisions and Change of Control Purchase Right The Company may, at its option, redeem or purchase, in whole or in part, the 2025 Notes and 2030 Notes at any time prior to March 15, 2025 (one month prior to maturity) and January 15, 2030 (three months prior to maturity), respectively, at a price equal to 100% of the principal amount of the applicable Notes redeemed, plus a corresponding “make-whole” premium as set forth in the Indenture, plus accrued and unpaid interest thereon to, but excluding, the redemption date. In addition, the Company may, at its option, redeem or purchase, in whole or in part, the 2025 Notes and 2030 Notes on or after March 15, 2025 and January 15, 2030, respectively, at a redemption price equal to 100% of the principal amount of the applicable Notes redeemed, plus accrued and unpaid interest thereon, if any, to, but excluding, the redemption date. In the event that certain changes in the tax law of any relevant jurisdiction would impose withholding taxes on payments on the Notes, the Company may redeem a series of Notes in whole, but not in part, at any time, at a redemption price of 100% of the principal amount, plus accrued and unpaid interest thereon, if any, and Additional Amounts (as defined in the Indenture), if any, to the redemption date. The holders of the Notes will also have the right to require the Company to purchase their Notes upon the occurrence of a Change of Control Triggering Event, as defined in the Indenture, at an offer price equal to 101% of the aggregate principal amount of the Notes purchased plus accrued and unpaid interest thereon to, but excluding, the date of purchase. Ranking Under the terms of the Indenture, the Notes and the guarantees are the Company’s and the Guarantors’ respective senior unsecured obligations and (i) rank equal in right of payment with all of the Company’s and the Guarantors’ respective existing and future senior unsecured indebtedness, (ii) rank senior in right of payment to the Company’s and the Guarantors’ respective existing and future subordinated indebtedness, (iii) are effectively subordinated in right of payment to the Company’s and the Guarantors’ respective existing and future secured obligations, to the extent of the assets securing such obligations and (iv) are structurally subordinated in right of payment to any existing and future indebtedness or other liabilities, including trade payables, of the Company’s subsidiaries (excluding the Guarantors) and the Guarantors’ respective subsidiaries. Restrictive Covenants The Indenture contains covenants that, subject to certain qualifications and exceptions, limit the ability of the Company, the Guarantors and their subsidiaries to, among other things, (i) incur certain secured debt; (ii) enter into certain sale and lease-back transactions and (iii) consolidate, merge, sell or otherwise dispose of all or substantially all of their assets. Events of Default Upon the occurrence of an event of default under the Indenture with respect to the Notes, which includes payment defaults, defaults in the performance of certain covenants and bankruptcy and insolvency related defaults, the Company’s obligations under the Notes may be accelerated, in which case the entire principal amount of the Notes would be immediately due and payable. The foregoing description of the Indenture does not purport to be complete and is qualified in its entirety by reference to the full text of the Indenture. A copy of the Indenture is attached as Exhibit 4.1 to this Current Report on Form 8-K, and is incorporated by reference herein. Registration Rights Agreement On April 9, 2020, the Company, the Guarantors and J.P. Morgan Securities LLC, as representative of the several initial purchasers of the Notes, entered into a registration rights agreement with respect to the Notes (the “Registration Rights Agreement”). The Company and the Guarantors agreed under the Registration Rights Agreement to use commercially reasonable efforts to (i) file a registration statement on an appropriate registration form with respect to a registered offer to exchange each series of the Notes for new notes, with terms substantially identical in all material respects to such series of Notes and (ii) cause the registration statement to be declared effective under the Securities Act.
If the exchange offer is not completed on or before April 9, 2025, the Company and the Guarantors will use commercially reasonable efforts to file and to have declared effective a shelf registration statement relating to resales of the Notes and keep such shelf registration statement effective until the date that the Notes cease to be Transfer Restricted Securities (as defined in the Registration Rights Agreement). If the Company and the Guarantors fail to satisfy this obligation with respect to a series of the Notes (a “registration default”) under the Registration Rights Agreement, then additional interest will accrue on the principal amount of the Notes of such series at an annual rate of 0.250%. The annual interest rate on such series of the Notes will increase by an additional 0.250% for each subsequent 90-day period during which the registration default continues, up to a maximum of 1.000%. The additional interest will accrue to and including the date such registration default ends, at which time the interest rate on the applicable series of Notes will revert to the original level. A registration default ends with respect to any Notes when such Notes cease to be Transfer Restricted Securities. If the Company is required to pay additional interest due to a registration default, the Company will pay such additional interest to the holders of the Notes in cash on the same dates that the Company makes other interest payments on the Notes, until the applicable registration default is cured. The foregoing description of the Registration Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Registration Rights Agreement. A copy of the Registration Rights Agreement is attached as Exhibit 4.4 to this Current Report on Form 8-K, and is incorporated by reference herein.
Item 2.03
Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement The information disclosed above under Item 1.01 is incorporated herein by reference. Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements (including within the meaning of Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended) concerning the Company. These statements include, but are not limited to, statements that address our expected future business and financial performance and other statements identified by words such as “will”, “expect”, “believe”, “anticipate”, “estimate”, “should”, “intend”, “plan”, “potential”, “predict” “project”, “aim”, and similar words, phrases or expressions. These forward-looking statements are based on current expectations and beliefs of the management of the Company, as well as assumptions made by, and information currently available to, such management, current market trends and market conditions and involve risks and uncertainties, many of which are outside the Company’s and management’s control, and which may cause actual results to differ materially from those contained in forward-looking statements. Accordingly, you should not place undue reliance on such statements. Particular uncertainties that could materially affect future results include risks associated with: our acquisition of Symantec Corporation’s Enterprise Security business (“Symantec Business”), including (1) potential difficulties in employee retention, (2) unexpected costs, charges or expenses, and (3) our ability to successfully integrate the Symantec Business and achieve the anticipated benefits of the transaction; any loss of our significant customers and fluctuations in the timing and volume of significant customer demand; our dependence on contract manufacturing and outsourced supply chain; our dependency on a limited number of suppliers; global economic conditions and concerns; international political and economic conditions; any acquisitions we may make, such as delays, challenges and expenses associated with receiving governmental and regulatory approvals and satisfying other closing conditions, and with integrating acquired businesses with our existing businesses and our ability to achieve the benefits, growth prospects and synergies expected by such acquisitions, including our recent acquisition of the Symantec Business; government regulations and trade restrictions; our significant indebtedness and the need to generate sufficient cash flows to service and repay such debt; dependence on and risks associated with distributors
and resellers of our products; dependence on senior management and our ability to attract and retain qualified personnel; involvement in legal or administrative proceedings; quarterly and annual fluctuations in operating results; our ability to accurately estimate customers’ demand and adjust our manufacturing and supply chain accordingly; cyclicality in the semiconductor industry or in our target markets; our competitive performance and ability to continue achieving design wins with our customers, as well as the timing of any design wins; prolonged disruptions of our or our contract manufacturers’ manufacturing facilities, warehouses or other significant operations; our ability to improve our manufacturing efficiency and quality; our dependence on outsourced service providers for certain key business services and their ability to execute to our requirements; our ability to maintain or improve gross margin; our ability to protect our intellectual property and the unpredictability of any associated litigation expenses; compatibility of our software products with operating environments, platforms or third-party products; our ability to enter into satisfactory software license agreements; sales to our government clients; availability of third party software used in our products; use of open source code sources in our products; any expenses or reputational damage associated with resolving customer product warranty and indemnification claims; market acceptance of the end products into which our products are designed; our ability to sell to new types of customers and to keep pace with technological advances; our compliance with privacy and data security laws; our ability to protect against a breach of security systems; changes in accounting standards; fluctuations in foreign exchange rates; our provision for income taxes and overall cash tax costs, legislation that may impact our overall cash tax costs and our ability to maintain tax concessions in certain jurisdictions; and other events and trends on a national, regional and global scale, including those of a political, economic, business, competitive and regulatory nature. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result.
Item 9.01
Financial Statements and Exhibits. (d) Exhibits
Exhibit No.
Description
4.1
Indenture, dated as of April 9, 2020, by and among the Company, the Guarantors and Wilmington Trust, National Association, as trustee.
4.2
Form of 4.700% Senior Notes due 2025 (included in Exhibit 4.1)
4.3
Form of 5.000% Senior Notes due 2030 (included in Exhibit 4.1)
4.4
Registration Rights Agreement, dated as of April 9, 2020, by and among the Company, the Guarantors and J.P. Morgan Securities LLC, as representative of the several initial purchasers of the Notes.
104
Cover Page Interactive Data File (formatted as Inline XBRL).
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
BROADCOM INC.
Date: April 9, 2020
By:
/s/ Thomas H. Krause, Jr.
Name:
Thomas H. Krause, Jr.
Title:
Chief Financial Officer
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8-K_1018724_0001018724-20-000019.htm
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amzn-202007300001018724false00010187242020-07-302020-07-30Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 _________________________ FORM 8-K _________________________ CURRENT REPORTPursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934July 30, 2020 Date of Report(Date of earliest event reported) _________________________AMAZON.COM, INC. (Exact name of registrant as specified in its charter)_________________________ Delaware000-2251391-1646860(State or other jurisdiction ofincorporation)(Commission File Number)(IRS Employer Identification No.)410 Terry Avenue North, Seattle, Washington 98109-5210 (Address of principal executive offices, including Zip Code)(206) 266-1000 (Registrant’s telephone number, including area code)_________________________ Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which RegisteredCommon Stock, par value $.01 per shareAMZNNasdaq Global Select MarketIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).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.¨Table of ContentsTABLE OF CONTENTS ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.3ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.3SIGNATURES4EXHIBIT 99.1EXHIBIT 99.2Table of ContentsITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.On July 30, 2020, Amazon.com, Inc. announced its second quarter 2020 financial results. A copy of the press release containing the announcement is included as Exhibit 99.1 and additional information regarding the inclusion of non-GAAP financial measures in certain of Amazon.com, Inc.’s public disclosures, including its second quarter 2020 financial results announcement, is included as Exhibit 99.2. Both of these exhibits are incorporated herein by reference.ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.(d) Exhibits. ExhibitNumberDescription99.1Press Release dated July 30, 2020 announcing Amazon.com, Inc.’s Second Quarter 2020 Financial Results.99.2Information Regarding Non-GAAP Financial Measures.104The cover page from this Current Report on Form 8-K, formatted in Inline XBRL (included as Exhibit 101).3Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AMAZON.COM, INC. (REGISTRANT)By:/s/ Brian T. OlsavskyBrian T. OlsavskySenior Vice President andChief Financial OfficerDated: July 30, 2020 4
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10-K_1018724_0001018724-24-000008.htm
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of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 ____________________________________FORM 10-K ____________________________________ (Mark One)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2023 or☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 ofincorporation or organization) (I.R.S. EmployerIdentification No.)410 Terry Avenue North Seattle, Washington 98109-5210(206) 266-1000 (Address and telephone number, including area code, of registrant’s principal executive offices)Securities registered pursuant to Section 12(b) of the Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which RegisteredCommon Stock, par value $.01 per shareAMZNNasdaq Global Select MarketSecurities registered pursuant to Section 12(g) of the Act:None ____________________________________Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Large accelerated filer☒Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒If securities are registered pursuant to Section 12(b) of the Exchange Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒Aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2023$1,183,684,965,587 Number of shares of common stock outstanding as of January 24, 202410,387,381,291 ____________________________________ DOCUMENTS INCORPORATED BY REFERENCEThe information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held in 2024, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.Table of ContentsAMAZON.COM, INC.FORM 10-KFor the Fiscal Year Ended December 31, 2023 INDEX PagePART IItem 1.Business3Item 1A.Risk Factors6Item 1B.Unresolved Staff Comments16Item 1C.Cybersecurity16Item 2.Properties18Item 3.Legal Proceedings18Item 4.Mine Safety Disclosures18PART IIItem 5.Market for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of Equity Securities19Item 6.Reserved19Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations20Item 7A.Quantitative and Qualitative Disclosures About Market Risk32Item 8.Financial Statements and Supplementary Data34Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure71Item 9A.Controls and Procedures71Item 9B.Other Information73Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections73PART IIIItem 10.Directors, Executive Officers, and Corporate Governance73Item 11.Executive Compensation73Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters73Item 13.Certain Relationships and Related Transactions, and Director Independence74Item 14.Principal Accountant Fees and Services74PART IVItem 15.Exhibits, Financial Statement Schedules75Item 16.Form 10-K Summary77Signatures782Table of ContentsAMAZON.COM, INC.PART IItem 1.BusinessThis Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on expectations, estimates, and projections as of the date of this filing. Actual results and outcomes may differ materially from those expressed in forward-looking statements. See Item 1A of Part I — “Risk Factors.” As used herein, “Amazon.com,” “we,” “our,” and similar terms include Amazon.com, Inc. and its subsidiaries, unless the context indicates otherwise.GeneralWe seek to be Earth’s most customer-centric company. We are guided by four principles: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking. In each of our segments, we serve our primary customer sets, consisting of consumers, sellers, developers, enterprises, content creators, advertisers, and employees.We have organized our operations into three segments: North America, International, and Amazon Web Services (“AWS”). These segments reflect the way the Company evaluates its business performance and manages its operations. Information on our net sales is contained in Item 8 of Part II, “Financial Statements and Supplementary Data — Note 10 — Segment Information.”ConsumersWe serve consumers through our online and physical stores and focus on selection, price, and convenience. We design our stores to enable hundreds of millions of unique products to be sold by us and by third parties across dozens of product categories. Customers access our offerings through our websites, mobile apps, Alexa, devices, streaming, and physically visiting our stores. We also manufacture and sell electronic devices, including Kindle, Fire tablet, Fire TV, Echo, Ring, Blink, and eero, and we develop and produce media content. We seek to offer our customers low prices, fast and free delivery, easy-to-use functionality, and timely customer service. In addition, we offer subscription services such as Amazon Prime, a membership program that includes fast, free shipping on tens of millions of items, access to award-winning movies and series, and other benefits.We fulfill customer orders in a number of ways, including through: North America and International fulfillment networks that we operate; co-sourced and outsourced arrangements in certain countries; digital delivery; and through our physical stores. We operate customer service centers globally, which are supplemented by co-sourced arrangements. See Item 2 of Part I, “Properties.”SellersWe offer programs that enable sellers to grow their businesses, sell their products in our stores, and fulfill orders using our services. We are not the seller of record in these transactions. We earn fixed fees, a percentage of sales, per-unit activity fees, interest, or some combination thereof, for our seller programs.Developers and EnterprisesWe serve developers and enterprises of all sizes, including start-ups, government agencies, and academic institutions, through AWS, which offers a broad set of on-demand technology services, including compute, storage, database, analytics, and machine learning, and other services. Content CreatorsWe offer programs that allow authors, independent publishers, musicians, filmmakers, Twitch streamers, skill and app developers, and others to publish and sell content.AdvertisersWe provide advertising services to sellers, vendors, publishers, authors, and others, through programs such as sponsored ads, display, and video advertising.3Table of ContentsCompetitionOur businesses encompass a large variety of product types, service offerings, and delivery channels. The worldwide marketplace in which we compete is evolving rapidly and intensely competitive, and we face a broad array of competitors from many different industry sectors around the world. Our current and potential competitors include: (1) physical, e-commerce, and omnichannel retailers, publishers, vendors, distributors, manufacturers, and producers of the products we offer and sell to consumers and businesses; (2) publishers, producers, and distributors of physical, digital, and interactive media of all types and all distribution channels; (3) web search engines, comparison shopping websites, social networks, web portals, and other online and app-based means of discovering, using, or acquiring goods and services, either directly or in collaboration with other retailers; (4) companies that provide e-commerce services, including website development and hosting, omnichannel sales, inventory and supply chain management, advertising, fulfillment, customer service, and payment processing; (5) companies that provide fulfillment and logistics services for themselves or for third parties, whether online or offline; (6) companies that provide information technology services or products, including on-premises or cloud-based infrastructure and other services; (7) companies that design, manufacture, market, or sell consumer electronics, telecommunication, and electronic devices; (8) companies that sell grocery products online and in physical stores; and (9) companies that provide advertising services, whether in digital or other formats. We believe that the principal competitive factors in our retail businesses include selection, price, and convenience, including fast and reliable fulfillment. Additional competitive factors for our seller and enterprise services include the quality, speed, and reliability of our services and tools, as well as customers’ ability and willingness to change business practices. Some of our current and potential competitors have greater resources, longer histories, more customers, greater brand recognition, and greater control over inputs critical to our various businesses. They may secure better terms from suppliers, adopt more aggressive pricing, pursue restrictive distribution agreements that restrict our access to supply, direct consumers to their own offerings instead of ours, lock-in potential customers with restrictive terms, and devote more resources to technology, infrastructure, fulfillment, and marketing. The internet facilitates competitive entry and comparison shopping, which enhances the ability of new, smaller, or lesser-known businesses to compete against us. Each of our businesses is also subject to rapid change and the development of new business models and the entry of new and well-funded competitors. Other companies also may enter into business combinations or alliances that strengthen their competitive positions.Intellectual PropertyWe regard our trademarks, service marks, copyrights, patents, domain names, trade dress, trade secrets, proprietary technologies, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and patent law, trade-secret protection, and confidentiality and/or license agreements with our employees, customers, partners, and others to protect our proprietary rights. We have registered, or applied for the registration of, a number of U.S. and international domain names, trademarks, service marks, and copyrights. Additionally, we have filed U.S. and international patent applications covering certain of our proprietary technology. SeasonalityOur business is affected by seasonality, which historically has resulted in higher sales volume during our fourth quarter, which ends December 31. Human CapitalOur employees are critical to our mission of being Earth’s most customer-centric company. As of December 31, 2023, we employed approximately 1,525,000 full-time and part-time employees. Additionally, we use independent contractors and temporary personnel to supplement our workforce. Competition for qualified personnel is intense, particularly for software engineers, computer scientists, and other technical staff, and constrained labor markets have increased competition for personnel across other parts of our business.As we strive to be Earth’s best employer, we focus on investment and innovation, inclusion and diversity, safety, and engagement to hire and develop the best talent. We rely on numerous and evolving initiatives to implement these objectives and invent mechanisms for talent development, including competitive pay and benefits, flexible work arrangements, and skills training and educational programs such as Amazon Career Choice (education funding for eligible employees) and the Amazon Technical Academy (software development engineer training). Over 175,000 Amazon employees around the world have participated in Career Choice. We also continue to inspect and refine the mechanisms we use to hire, develop, evaluate, and retain our employees to promote equity for all candidates and employees. In addition, safety is integral to everything we do at Amazon and we continue to invest in safety improvements such as capital improvements, new safety technology, vehicle safety controls, and engineering ergonomic solutions. Our safety team is dedicated to using the science of safety to solve complex problems and establish new industry best practices. We also provide mentorship and support resources to our employees, and have deployed numerous programs that advance employee engagement, communication, and feedback.4Table of ContentsAvailable InformationOur investor relations website is amazon.com/ir and we encourage investors to use it as a way of easily finding information about us. We promptly make available on this website, free of charge, the reports that we file or furnish with the Securities and Exchange Commission (“SEC”), corporate governance information (including our Code of Business Conduct and Ethics), and select press releases.Executive Officers and DirectorsThe following tables set forth certain information regarding our Executive Officers and Directors as of January 24, 2024:Information About Our Executive OfficersNameAgePositionJeffrey P. Bezos60Executive Chair Andrew R. Jassy56President and Chief Executive OfficerDouglas J. Herrington57CEO Worldwide Amazon StoresBrian T. Olsavsky60Senior Vice President and Chief Financial OfficerShelley L. Reynolds59Vice President, Worldwide Controller, and Principal Accounting OfficerAdam N. Selipsky57CEO Amazon Web ServicesDavid A. Zapolsky60Senior Vice President, Global Public Policy and General CounselJeffrey P. Bezos. Mr. Bezos founded Amazon.com in 1994 and has served as Executive Chair since July 2021. He has served as Chair of the Board since 1994 and served as Chief Executive Officer from May 1996 until July 2021, and as President from 1994 until June 1999 and again from October 2000 to July 2021.Andrew R. Jassy. Mr. Jassy has served as President and Chief Executive Officer since July 2021, CEO Amazon Web Services from April 2016 until July 2021, and Senior Vice President, Amazon Web Services, from April 2006 until April 2016.Douglas J. Herrington. Mr. Herrington has served as CEO Worldwide Amazon Stores since July 2022, Senior Vice President, North America Consumer from January 2015 to July 2022, Senior Vice President, Consumables from May 2014 to December 2014, and Vice President, Consumables from May 2005 to April 2014.Brian T. Olsavsky. Mr. Olsavsky has served as Senior Vice President and Chief Financial Officer since June 2015, Vice President, Finance for the Global Consumer Business from December 2011 to June 2015, and numerous financial leadership roles across Amazon with global responsibility since April 2002. Shelley L. Reynolds. Ms. Reynolds has served as Vice President, Worldwide Controller, and Principal Accounting Officer since April 2007.Adam N. Selipsky. Mr. Selipsky has served as CEO Amazon Web Services since July 2021, Senior Vice President, Amazon Web Services from May 2021 until July 2021, President and CEO of Tableau Software from September 2016 until May 2021, and Vice President, Marketing, Sales and Support of Amazon Web Services from May 2005 to September 2016.David A. Zapolsky. Mr. Zapolsky has served as Senior Vice President, Global Public Policy and General Counsel since May 2023 and has served as our Secretary since September 2012. He served as Senior Vice President and General Counsel from May 2014 to May 2023, Vice President and General Counsel from September 2012 to May 2014, and as Vice President and Associate General Counsel for Litigation and Regulatory matters from April 2002 until September 2012.5Table of ContentsBoard of DirectorsNameAgePositionJeffrey P. Bezos60Executive Chair Andrew R. Jassy56President and Chief Executive OfficerKeith B. Alexander72Chair of IronNet, Inc.Edith W. Cooper62Former Executive Vice President, Goldman Sachs Group, Inc.Jamie S. Gorelick73Partner, Wilmer Cutler Pickering Hale and Dorr LLPDaniel P. Huttenlocher65Dean, MIT Schwarzman College of ComputingJudith A. McGrath71Former Chair and CEO, MTV NetworksIndra K. Nooyi68Former Chair and CEO, PepsiCo, Inc.Jonathan J. Rubinstein67Former co-CEO, Bridgewater Associates, LPBrad D. Smith59President, Marshall UniversityPatricia Q. Stonesifer67Former President and Chief Executive Officer, Martha’s TableWendell P. Weeks64Chairman and CEO, Corning IncorporatedItem 1A.Risk FactorsPlease carefully consider the following discussion of significant factors, events, and uncertainties that make an investment in our securities risky. The events and consequences discussed in these risk factors could, in circumstances we may or may not be able to accurately predict, recognize, or control, have a material adverse effect on our business, growth, reputation, prospects, financial condition, operating results (including components of our financial results), cash flows, liquidity, and stock price. These risk factors do not identify all risks that we face; our operations could also be affected by factors, events, or uncertainties that are not presently known to us or that we currently do not consider to present significant risks to our operations. In addition to the factors discussed in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in the risk factors below, global economic and geopolitical conditions and additional or unforeseen circumstances, developments, or events may give rise to or amplify many of the risks discussed below. Many of the risks discussed below also impact our customers, including third-party sellers, which could indirectly have a material adverse effect on us.Business and Industry RisksWe Face Intense CompetitionOur businesses are rapidly evolving and intensely competitive, and we have many competitors across geographies, including cross-border competition, and in different industries, including physical, e-commerce, and omnichannel retail, e-commerce services, web and infrastructure computing services, electronic devices, digital content, advertising, grocery, and transportation and logistics services. Some of our current and potential competitors have greater resources, longer histories, more customers, and/or greater brand recognition, particularly with our newly-launched products and services and in our newer geographic regions. They may secure better terms from vendors, adopt more aggressive pricing, and devote more resources to technology, infrastructure, fulfillment, and marketing.Competition continues to intensify, including with the development of new business models and the entry of new and well-funded competitors, and as our competitors enter into business combinations or alliances and established companies in other market segments expand to become competitive with our business. In addition, new and enhanced technologies, including search, web and infrastructure computing services, practical applications of artificial intelligence and machine learning, digital content, and electronic devices continue to increase our competition. The internet facilitates competitive entry and comparison shopping, which enhances the ability of new, smaller, or lesser known businesses to compete against us. As a result of competition, our product and service offerings may not be successful, we may fail to gain or may lose business, and we may be required to increase our spending or lower prices, any of which could materially reduce our sales and profits.Our Expansion into New Products, Services, Technologies, and Geographic Regions Subjects Us to Additional RisksWe may have limited or no experience in our newer market segments, and our customers may not adopt our product or service offerings. These offerings, which can present new and difficult technology challenges, may subject us to claims if customers of these offerings experience, or are otherwise impacted by, service disruptions, delays, setbacks, or failures or quality issues. In addition, profitability or other intended benefits, if any, in our newer activities may not meet our expectations, and we may not be successful enough in these newer activities to recoup our investments in them, which investments are often significant. Failure to realize the benefits of amounts we invest in new technologies, products, or services could result in the 6Table of Contentsvalue of those investments being written down or written off. In addition, our sustainability initiatives may be unsuccessful for a variety of reasons, including if we are unable to realize the expected benefits of new technologies or if we do not successfully plan or execute new strategies, which could harm our business or damage our reputation.Our International Operations Expose Us to a Number of RisksOur international activities are significant to our revenues and profits, and we plan to further expand internationally. In certain international market segments, we have relatively little operating experience and may not benefit from any first-to-market advantages or otherwise succeed. It is costly to establish, develop, and maintain international operations and stores, and promote our brand internationally. Our international operations may not become profitable on a sustained basis.In addition to risks described elsewhere in this section, our international sales and operations are subject to a number of risks, including:•local economic and political conditions;•government regulation (such as regulation of our product and service offerings and of competition); restrictive governmental actions (such as trade protection measures, including export duties and quotas and custom duties and tariffs, and restrictions around the import and export of certain products, technologies, and components); nationalization; and restrictions on foreign ownership;•restrictions on sales or distribution of certain products or services and uncertainty regarding liability for products, services, and content, including uncertainty as a result of less internet-friendly legal systems, local laws, lack of legal precedent, and varying rules, regulations, and practices regarding the physical and digital distribution of media products and enforcement of intellectual property rights;•business licensing or certification requirements, such as for imports, exports, web services, and electronic devices;•limitations on the repatriation and investment of funds and foreign currency exchange restrictions;•limited fulfillment and technology infrastructure;•shorter payable and longer receivable cycles and the resultant negative impact on cash flow;•laws and regulations regarding privacy, data use, data protection, data security, data localization, network security, consumer protection, payments, advertising, and restrictions on pricing or discounts;•lower levels of use of the internet;•lower levels of consumer spending and fewer opportunities for growth compared to the U.S.;•lower levels of credit card usage and increased payment risk;•difficulty in staffing, developing, and managing foreign operations as a result of distance, language, and cultural differences;•different employee/employer relationships and the existence of works councils and labor unions;•compliance with the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties;•laws and policies of the U.S. and other jurisdictions affecting trade, foreign investment, loans, and taxes; and•geopolitical events, including war and terrorism.As international physical, e-commerce, and omnichannel retail, cloud services, and other services grow, competition will intensify, including through adoption of evolving business models. Local companies may have a substantial competitive advantage because of their greater understanding of, and focus on, the local customer, as well as their more established local brand names. The inability to hire, train, retain, and manage sufficient required personnel may limit our international growth.The People’s Republic of China (“PRC”) and India regulate Amazon’s and its affiliates’ businesses and operations in country through regulations and license requirements that may restrict (i) foreign investment in and operation of the internet, IT infrastructure, data centers, retail, delivery, and other sectors, (ii) internet content, and (iii) the sale of media and other products and services. For example, in order to meet local ownership, regulatory licensing, and cybersecurity requirements, we provide certain technology services in China through contractual relationships with third parties that hold PRC licenses to provide services. In India, the government restricts the ownership or control of Indian companies by foreign entities involved in online multi-brand retail trading activities. For www.amazon.in, we provide certain marketing tools and logistics services to third-party sellers to enable them to sell online and deliver to customers, and we hold an indirect minority interest in an entity that is a third-party seller on the www.amazon.in marketplace. Although we believe these structures and activities comply with existing laws, they involve unique risks, and the PRC and India may from time to time consider and implement additional changes in 7Table of Contentstheir regulatory, licensing, or other requirements that could impact these structures and activities. There are substantial uncertainties regarding the interpretation of PRC and Indian laws and regulations, and it is possible that these governments will ultimately take a view contrary to ours. In addition, our Chinese and Indian businesses and operations may be unable to continue to operate if we or our affiliates are unable to access sufficient funding or, in China, enforce contractual relationships we or our affiliates have in place. Violation of any existing or future PRC, Indian, or other laws or regulations or changes in the interpretations of those laws and regulations could result in our businesses in those countries being subject to fines and other financial penalties, having licenses revoked, or being forced to restructure our operations or shut down entirely. In addition, because China-based sellers account for significant portions of our third-party seller services and advertising revenues, and China-based suppliers provide significant portions of our components and finished goods, regulatory and trade restrictions, data protection and cybersecurity laws, economic factors, geopolitical events, security issues, or other factors negatively impacting China-based sellers and suppliers could adversely affect our operating results.The Variability in Our Retail Business Places Increased Strain on Our OperationsDemand for our products and services can fluctuate significantly for many reasons, including as a result of seasonality, promotions, product launches, or unforeseeable events, such as in response to global economic conditions such as recessionary fears or rising inflation, natural or human-caused disasters (including public health crises) or extreme weather (including as a result of climate change), or geopolitical events. For example, we expect a disproportionate amount of our retail sales to occur during our fourth quarter. Our failure to stock or restock popular products in sufficient amounts such that we fail to meet customer demand could significantly affect our revenue and our future growth. When we overstock products, we may be required to take significant inventory markdowns or write-offs and incur commitment costs, which could materially reduce profitability. We regularly experience increases in our net shipping cost due to complimentary upgrades, split-shipments, and additional long-zone shipments necessary to ensure timely delivery for the holiday season. If too many customers access our websites within a short period of time due to increased demand, we may experience system interruptions that make our websites unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we offer or sell and the attractiveness of our products and services. In addition, we may be unable to adequately staff our fulfillment network and customer service centers during these peak periods and delivery and other fulfillment companies and customer service co-sourcers may be unable to meet the seasonal demand. Risks described elsewhere in this Item 1A relating to fulfillment network optimization and inventory are magnified during periods of high demand.As a result of holiday sales, as of December 31 of each year, our cash, cash equivalents, and marketable securities balances typically reach their highest level (other than as a result of cash flows provided by or used in investing and financing activities) because consumers primarily use credit cards in our stores and the related receivables settle quickly. Typically, there is also a corresponding increase in accounts payable as of December 31 due to inventory purchases and third-party seller sales. Our accounts payable balance generally declines during the first three months of the year as vendors and sellers are paid, resulting in a corresponding decline in our cash, cash equivalents, and marketable securities balances.We Are Impacted by Fraudulent or Unlawful Activities of SellersThe law relating to the liability of online service providers is currently unsettled. In addition, governmental agencies have in the past and could in the future require changes in the way this business is conducted. Under our seller programs, we maintain policies and processes designed to prevent sellers from collecting payments, fraudulently or otherwise, when buyers never receive the products they ordered or when the products received are materially different from the sellers’ descriptions, and to prevent sellers in our stores or through other stores from selling unlawful, counterfeit, pirated, or stolen goods, selling goods in an unlawful or unethical manner, violating the proprietary rights of others, or otherwise violating our policies. When these policies and processes are circumvented or fail to operate sufficiently, it can harm our business or damage our reputation and we could face civil or criminal liability for unlawful activities by our sellers. Under our A-to-z Guarantee, we may reimburse customers for payments up to certain limits in these situations, and as our third-party seller sales grow, the cost of this program will increase and could negatively affect our operating results. We Face Risks Related to Adequately Protecting Our Intellectual Property Rights and Being Accused of Infringing Intellectual Property Rights of Third PartiesWe regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and patent law, trade secret protection, and confidentiality and/or license agreements with our employees, customers, and others to protect our proprietary rights. Effective intellectual property protection is not available in every country in which our products and services are made available. We also may not be able to acquire or maintain appropriate domain names in all countries in which we do business. Furthermore, regulations governing domain names may not protect our trademarks and similar proprietary rights. We may be 8Table of Contentsunable to prevent third parties from acquiring domain names that are similar to, infringe upon, or diminish the value of our trademarks and other proprietary rights.We are not always able to discover or determine the extent of any unauthorized use of our proprietary rights. Actions taken by third parties that license our proprietary rights may materially diminish the value of our proprietary rights or reputation. The protection of our intellectual property requires the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property do not always adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or other intellectual property rights.We have been subject to, and expect to continue to be subject to, claims and legal proceedings regarding alleged infringement by us of the intellectual property rights of third parties. Such claims, whether or not meritorious, have in the past, and may in the future, result in the expenditure of significant financial and managerial resources, injunctions against us, or significant payments for damages, including to satisfy indemnification obligations or to obtain licenses from third parties who allege that we have infringed their rights. Such licenses may not be available on terms acceptable to us or at all. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims. In addition, our and our customers’ use of artificial intelligence may result in increased claims of infringement or other claims, including those based on unauthorized use of third-party technology or content.Our digital content offerings depend in part on effective digital rights management technology to control access to digital content. Breach or malfunctioning of the digital rights management technology that we use could subject us to claims, and content providers may be unwilling to include their content in our service.We Have Foreign Exchange RiskThe results of operations of, and certain of our intercompany balances associated with, our international stores and product and service offerings are exposed to foreign exchange rate fluctuations. Due to these fluctuations, operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances. As we have expanded our international operations, our exposure to exchange rate fluctuations has increased. We also hold cash equivalents and/or marketable securities in foreign currencies such as British Pounds, Canadian Dollars, Euros, and Japanese Yen. When the U.S. Dollar strengthens compared to these currencies, cash equivalents, and marketable securities balances, when translated, may be materially less than expected and vice versa.Operating RisksOur Expansion Places a Significant Strain on our Management, Operational, Financial, and Other ResourcesWe are continuing to rapidly and significantly expand our global operations, including increasing our product and service offerings and scaling our infrastructure to support our retail and services businesses. The complexity of the current scale of our business can place significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions, and our expansion increases these factors. Failure to manage growth effectively could damage our reputation, limit our growth, and negatively affect our operating results.We Experience Significant Fluctuations in Our Operating Results and Growth RateWe are not always able to accurately forecast our growth rate. We base our expense levels and investment plans on sales estimates. A significant portion of our expenses and investments is fixed, and we are not always able to adjust our spending quickly enough if our sales are less than expected.Our revenue growth may not be sustainable, and our percentage growth rates may decrease. Our revenue and operating profit growth depends on the continued growth of demand for the products and services offered by us or our sellers, and our business is affected by, among other things, general economic, business, and geopolitical conditions worldwide. A softening of demand, whether caused by changes in customer preferences or a weakening of the U.S. or global economies, may result in decreased revenue or growth.Our sales and operating results will also fluctuate for many other reasons, including due to factors described elsewhere in this section and the following:•our ability to retain and increase sales to existing customers, attract new customers, and satisfy our customers’ demands;•our ability to retain and expand our network of sellers;•our ability to offer products on favorable terms, manage inventory, and fulfill orders;•the introduction of competitive stores, websites, products, services, price decreases, or improvements;9Table of Contents•changes in usage or adoption rates of the internet, e-commerce, electronic devices, and web services, including outside the U.S.;•timing, effectiveness, and costs of expansion and upgrades of our systems and infrastructure;•the success of our geographic, service, and product line expansions;•the extent to which we finance, and the terms of any such financing for, our current operations and future growth;•the outcomes of legal proceedings and claims, which may include significant monetary damages or injunctive relief and could have a material adverse impact on our operating results;•variations in the mix of products and services we sell;•variations in our level of merchandise and vendor returns;•the extent to which we offer fast and free delivery, continue to reduce prices worldwide, and provide additional benefits to our customers;•factors affecting our reputation or brand image (including any actual or perceived inability to achieve our goals or commitments, whether related to sustainability, customers, employees, or other topics), and public perceptions regarding social or ethical issues related to our development and use of artificial intelligence and machine learning technologies, products, and services;•the extent to which we invest in technology and infrastructure, fulfillment, and other expense categories;•availability of and increases in the prices of transportation (including fuel), resources such as land, water, and energy, commodities like paper and packing supplies and hardware products, and technology infrastructure products, including as a result of inflationary pressures;•constrained labor markets, which increase our payroll costs;•the extent to which operators of the networks between our customers and our stores successfully charge fees to grant our customers unimpaired and unconstrained access to our online services;•our ability to collect amounts owed to us when they become due;•the extent to which new and existing technologies, or industry trends, restrict online advertising or affect our ability to customize advertising or otherwise tailor our product and service offerings;•the extent to which use of our services is affected by spyware, viruses, phishing and other spam emails, denial of service attacks, data theft, computer intrusions, outages, and similar events;•the extent to which we fail to maintain our unique culture of innovation, customer obsession, and long-term thinking, which has been critical to our growth and success;•disruptions from natural or human-caused disasters (including public health crises) or extreme weather (including as a result of climate change), geopolitical events and security issues (including terrorist attacks, armed hostilities, and political conflicts, including those involving China), labor or trade disputes (including restrictive governmental actions impacting us, our customers, and our third-party sellers and suppliers in China or other foreign countries), and similar events; and•potential negative impacts of climate change, including: increased operating costs due to more frequent extreme weather events or climate-related changes, such as rising temperatures and water scarcity; increased investment requirements associated with the transition to a low-carbon economy; decreased demand for our products and services as a result of changes in customer behavior; increased compliance costs due to more extensive and global regulations and third-party requirements; and reputational damage resulting from perceptions of our environmental impact.We Face Risks Related to Successfully Optimizing and Operating Our Fulfillment Network and Data CentersFailures to adequately predict customer demand and consumer spending patterns or otherwise optimize and operate our fulfillment network and data centers successfully from time to time result in excess or insufficient fulfillment or data center capacity, service interruptions, increased costs, and impairment charges, any of which could materially harm our business. As we continue to add fulfillment and data center capability or add new businesses with different requirements, our fulfillment and data center networks become increasingly complex and operating them becomes more challenging. There can be no assurance that we will be able to operate our networks effectively.10Table of ContentsIn addition, failure to optimize inventory management or staffing in our fulfillment network increases our net shipping cost by increasing the distance products are shipped and reducing the number of units per shipment or delivery. We and our co-sourcers may be unable to adequately staff our fulfillment network and customer service centers. For example, productivity across our fulfillment network is affected by regional labor market constraints, which increase payroll costs and make it difficult to hire, train, and deploy a sufficient number of people to operate our fulfillment network as efficiently as we would like. Under some of our commercial agreements, we maintain the inventory of other companies, thereby increasing the complexity of tracking inventory and operating our fulfillment network. Our failure to adequately predict seller demand for storage or to properly handle such inventory or the inability of the other businesses on whose behalf we perform inventory fulfillment services to accurately forecast product demand may result in us being unable to secure sufficient storage space or to optimize our fulfillment network or cause other unexpected costs and other harm to our business and reputation.We rely on a limited number of shipping companies to deliver inventory to us and completed orders to our customers. An inability to negotiate acceptable terms with these companies or performance problems, staffing limitations, or other difficulties experienced by these companies or by our own transportation systems, including as a result of labor market constraints and related costs, could negatively impact our operating results and customer experience. In addition, our ability to receive inbound inventory efficiently and ship completed orders to customers also may be negatively affected by natural or human-caused disasters (including public health crises) or extreme weather (including as a result of climate change), geopolitical events and security issues, labor or trade disputes, and similar events.We Could Be Harmed by Data Loss or Other Security BreachesBecause we collect, process, store, and transmit large amounts of data, including confidential, classified, sensitive, proprietary, and business and personal information, failure to prevent or mitigate data loss, theft, misuse, unauthorized access, or other security breaches or vulnerabilities affecting our or our vendors’ or customers’ technology, products, and systems, could: expose us or our customers to a risk of loss, disclosure, or misuse of such information; adversely affect our operating results; result in litigation, liability, or regulatory action (including under laws related to privacy, data use, data protection, data security, network security, and consumer protection); deter customers or sellers from using our stores, products, and services; and otherwise harm our business and reputation. We use third-party technology and systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery to customers, back-office support, and other functions. Some of our systems have experienced past security breaches, and, although they did not have a material adverse effect on our operating results, there can be no assurance that future incidents will not have material adverse effects on our operations or financial results. Although we have developed systems and processes that are designed to protect customer data and prevent such incidents, including systems and processes designed to reduce the impact of a security breach at a third-party vendor or customer, such measures cannot provide absolute security and may fail to operate as intended or be circumvented.We Face Risks Related to System Interruption and Lack of RedundancyWe experience occasional system interruptions and delays that make our websites and services unavailable or slow to respond and prevent us from efficiently accepting or fulfilling orders or providing services to customers and third parties, which may reduce our net sales and the attractiveness of our products and services. Steps we take to add software and hardware, upgrade our systems and network infrastructure, and improve the stability and efficiency of our systems may not be sufficient to avoid system interruptions or delays that could adversely affect our operating results.Our computer and communications systems and operations in the past have been, or in the future could be, damaged or interrupted due to events such as natural or human-caused disasters (including public health crises) or extreme weather (including as a result of climate change), geopolitical events and security issues (including terrorist attacks and armed hostilities), computer viruses, physical or electronic break-ins, operational failures (including from energy shortages), and similar events or disruptions. Any of these events could cause system interruption, delays, and loss of critical data, and could prevent us from accepting and fulfilling customer orders and providing services, which could make our product and service offerings less attractive and subject us to liability. Our systems are not fully redundant and our disaster recovery planning may not be sufficient. In addition, our insurance may not provide sufficient coverage to compensate for related losses. Any of these events could damage our reputation and be expensive to remedy.The Loss of Key Senior Management Personnel or the Failure to Hire and Retain Highly Skilled and Other Personnel Could Negatively Affect Our BusinessWe depend on our senior management and other key personnel, including our President and CEO. We do not have “key person” life insurance policies. We also rely on other highly skilled personnel. Competition for qualified personnel in the industries in which we operate, as well as senior management, has historically been intense. For example, we experience 11Table of Contentssignificant competition in the technology industry, particularly for software engineers, computer scientists, and other technical staff. In addition, changes we make to our current and future work environments may not meet the needs or expectations of our employees or may be perceived as less favorable compared to other companies’ policies, which could negatively impact our ability to hire and retain qualified personnel. The loss of any of our executive officers or other key employees, the failure to successfully transition key roles, or the inability to hire, train, retain, and manage qualified personnel, could harm our business.We also rely on a significant number of personnel to operate our stores, fulfillment network, and data centers and carry out our other operations. Failure to successfully hire, train, manage, and retain sufficient personnel to meet our needs can strain our operations, increase payroll and other costs, and harm our business and reputation. In addition, changes in laws and regulations applicable to employees, independent contractors, and temporary personnel could increase our payroll costs, decrease our operational flexibility, and negatively impact how we are able to staff our operations and supplement our workforce.We are also subject to labor union efforts to organize groups of our employees from time to time. These organizational efforts, if successful, decrease our operational flexibility, which could adversely affect our operating efficiency. In addition, our response to any organizational efforts could be perceived negatively and harm our business and reputation.Our Supplier Relationships Subject Us to a Number of RisksWe have significant suppliers, including content and technology licensors, and in some cases, limited or single-sources of supply, that are important to our sourcing, services, manufacturing, and any related ongoing servicing of merchandise and content. We do not have long-term arrangements with most of our suppliers to guarantee availability of merchandise, content, components, or services, particular payment terms, or the extension of credit limits. Decisions by our current suppliers to limit or stop selling or licensing merchandise, content, components, or services to us on acceptable terms, or delay delivery, including as a result of one or more supplier bankruptcies due to poor economic conditions, as a result of natural or human-caused disasters (including public health crises) or geopolitical events, or for other reasons, may result in our being unable to procure alternatives from other suppliers in a timely and efficient manner and on acceptable terms, or at all. For example, we rely on a limited group of suppliers for semiconductor products, including products related to artificial intelligence infrastructure such as graphics processing units. Constraints on the availability of these products could adversely affect our ability to develop and operate artificial intelligence technologies, products, or services. In addition, violations by our suppliers or other vendors of applicable laws, regulations, contractual terms, intellectual property rights of others, or our Supply Chain Standards, as well as products or practices regarded as unethical, unsafe, or hazardous, could expose us to claims, damage our reputation, limit our growth, and negatively affect our operating results.Our Commercial Agreements, Strategic Alliances, and Other Business Relationships Expose Us to RisksWe provide physical, e-commerce, and omnichannel retail, cloud services, and other services to businesses through commercial agreements, strategic alliances, and business relationships. Under these agreements, we provide web services, technology, fulfillment, computing, digital storage, and other services, as well as enable sellers to offer products or services through our stores. These arrangements are complex and require substantial infrastructure capacity, personnel, and other resource commitments, which may limit the amount of business we can service. We may not be able to implement, maintain, and develop the components of these commercial relationships, which may include web services, fulfillment, customer service, inventory management, tax collection, payment processing, hardware, content, and third-party software, and engaging third parties to perform services. The amount of compensation we receive under certain of our commercial agreements is partially dependent on the volume of the other company’s sales. Therefore, when the other company’s offerings are not successful, the compensation we receive may be lower than expected or the agreement may be terminated. Moreover, we may not be able to enter into additional or alternative commercial relationships and strategic alliances on favorable terms. We also may be subject to claims from businesses to which we provide these services if we are unsuccessful in implementing, maintaining, or developing these services.As our agreements terminate, we may be unable to renew or replace these agreements on comparable terms, or at all. We may in the future enter into amendments on less favorable terms or encounter parties that have difficulty meeting their contractual obligations to us, which could adversely affect our operating results.Our present and future commercial agreements, strategic alliances, and business relationships create additional risks such as:•disruption of our ongoing business, including loss of management focus on existing businesses;•impairment of other relationships;•variability in revenue and income from entering into, amending, or terminating such agreements or relationships; and•difficulty integrating under the commercial agreements.12Table of ContentsOur Business Suffers When We Are Unsuccessful in Making, Integrating, and Maintaining Acquisitions and InvestmentsWe have acquired and invested in a number of companies, and we may in the future acquire or invest in or enter into joint ventures with additional companies. These transactions involve risks such as:•disruption of our ongoing business, including loss of management focus on existing businesses;•problems retaining key personnel;•additional operating losses and expenses of the businesses we acquired or in which we invested;•the potential impairment of tangible and intangible assets and goodwill, including as a result of acquisitions;•the potential impairment of customer and other relationships of the company we acquired or in which we invested or our own customers as a result of any integration of operations;•the difficulty of completing such transactions, including obtaining regulatory approvals or satisfying other closing conditions, and achieving anticipated benefits within expected timeframes, or at all; •the difficulty of incorporating acquired operations, technology, and rights into our offerings, and unanticipated expenses related to such integration;•the difficulty of integrating a new company’s accounting, financial reporting, management, information and data security, human resource, and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not successfully implemented;•losses we may incur as a result of declines in the value of an investment or as a result of incorporating an investee’s financial performance into our financial results;•for investments in which an investee’s financial performance is incorporated into our financial results, either in full or in part, or investments for which we are required to file financial statements or provide financial information, the dependence on the investee’s accounting, financial reporting, and similar systems, controls, and processes;•the difficulty of implementing at companies we acquire the controls, procedures, and policies appropriate for a larger public company;•the risks associated with businesses we acquire or invest in, which may differ from or be more significant than the risks our other businesses face;•potential unknown liabilities associated with a company we acquire or in which we invest; and•for foreign transactions, additional risks related to the integration of operations across different cultures and languages, and the economic, political, and regulatory risks associated with specific countries.As a result of future acquisitions or mergers, we might need to issue additional equity securities, spend our cash, or incur debt, contingent liabilities, or amortization expenses related to intangible assets, any of which could reduce our profitability and harm our business or only be available on unfavorable terms, if at all. In addition, valuations supporting our acquisitions and strategic investments could change rapidly. We could determine that such valuations have experienced impairments or other-than-temporary declines in fair value which could adversely impact our financial results.We Face Significant Inventory RiskIn addition to risks described elsewhere in this Item 1A relating to fulfillment network and inventory optimization by us and third parties, we are exposed to significant inventory risks that may adversely affect our operating results as a result of seasonality, new product launches, rapid changes in product cycles and pricing, defective merchandise, changes in customer demand and consumer spending patterns, changes in consumer tastes with respect to our products, spoilage, and other factors. We endeavor to accurately predict these trends and avoid overstocking or understocking products we manufacture and/or sell. Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale. In addition, when we begin selling or manufacturing a new product or offering a new service, it may be difficult to establish vendor relationships, determine appropriate product or component selection, and accurately forecast demand. The acquisition of certain types of inventory or components requires significant lead-time and prepayment and they may not be returnable. We carry a broad selection and significant inventory levels of certain products, such as consumer electronics, and at times we are unable to sell products in sufficient quantities or to meet demand during the relevant selling seasons. Any one of the inventory risk factors set forth above may adversely affect our operating results.We Are Subject to Payments-Related RisksWe accept payments using a variety of methods, including credit card, debit card, credit accounts (including promotional financing), gift cards, direct debit from a customer’s bank account, consumer invoicing, physical bank check, and payment 13Table of Contentsupon delivery. For existing and future payment options we offer to our customers, we currently are subject to, and may become subject to additional, regulations and compliance requirements (including obligations to implement enhanced authentication processes that could result in significant costs and reduce the ease of use of our payments products), as well as fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide certain Amazon-branded payment methods and payment processing services, including the processing of credit cards, debit cards, electronic checks, and promotional financing. In each case, it could disrupt our business if these companies become unwilling or unable to provide these services to us. We also offer co-branded credit card programs, which could adversely affect our operating results if renewed on less favorable terms or terminated. We are also subject to payment card association operating rules, including data security rules, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. Failure to comply with these rules or requirements, as well as any breach, compromise, or failure to otherwise detect or prevent fraudulent activity involving our data security systems, could result in our being liable for card issuing banks’ costs, subject to fines and higher transaction fees, and loss of our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected.In addition, we provide regulated services in certain jurisdictions because we enable customers to keep account balances with us and transfer money to third parties, and because we provide services to third parties to facilitate payments on their behalf. Jurisdictions subject us to requirements for licensing, regulatory inspection, bonding and capital maintenance, the use, handling, and segregation of transferred funds, consumer disclosures, maintaining or processing data, and authentication. We are also subject to or voluntarily comply with a number of other laws and regulations relating to payments, money laundering, international money transfers, privacy, data use, data protection, data security, data localization, network security, consumer protection, and electronic fund transfers. If we were found to be in violation of applicable laws or regulations, we could be subject to additional requirements and civil and criminal penalties, or forced to cease providing certain services.We Have a Rapidly Evolving Business Model and Our Stock Price Is Highly VolatileWe have a rapidly evolving business model. The trading price of our common stock fluctuates significantly in response to, among other risks, the risks described elsewhere in this Item 1A, as well as:•changes in interest rates;•conditions or trends in the internet and the industry segments we operate in;•quarterly variations in operating results;•fluctuations in the stock market in general and market prices for internet-related companies in particular;•changes in financial estimates by us or decisions to increase or decrease future spending or investment levels; •changes in financial estimates and recommendations by securities analysts;•changes in our capital structure, including issuance of additional debt or equity to the public;•changes in the valuation methodology of, or performance by, other e-commerce or technology companies; and•transactions in our common stock by major investors and certain analyst reports, news, and speculation.Volatility in our stock price could adversely affect our business and financing opportunities and force us to increase our cash compensation to employees or grant larger stock awards than we have historically, which could hurt our operating results or reduce the percentage ownership of our existing stockholders, or both.Legal and Regulatory RisksGovernment Regulation Is Evolving and Unfavorable Changes Could Harm Our BusinessWe are subject to general business regulations and laws, as well as regulations and laws specifically governing the internet, physical, e-commerce, and omnichannel retail, digital content, web services, electronic devices, advertising, artificial intelligence technologies and services, and other products and services that we offer or sell. These regulations and laws cover taxation, privacy, data use, data protection, data security, data localization, network security, consumer protection, pricing, content, copyrights, distribution, transportation, mobile communications, electronic device certification, electronic waste, energy consumption, environmental and climate-related regulation, electronic contracts and other communications, competition, employment, trade and protectionist measures, web services, the provision of online payment services, registration, licensing, and information reporting requirements, unencumbered internet access to our services or access to our facilities, the design and operation of websites, health, safety, and sanitation standards, the characteristics, legality, and quality of products and services, product labeling, the commercial operation of unmanned aircraft systems, healthcare, and other matters. It is not clear how 14Table of Contentsexisting laws governing issues such as property ownership, libel, privacy, data use, data protection, data security, data localization, network security, and consumer protection apply to aspects of our operations such as the internet, e-commerce, digital content, web services, electronic devices, advertising, and artificial intelligence technologies and services. A large number of jurisdictions regulate our operations, and the extent, nature, and scope of such regulations is evolving and expanding as the scope of our businesses expand. We are regularly subject to formal and informal reviews, investigations, and other proceedings by governments and regulatory authorities under existing laws, regulations, or interpretations or pursuing new and novel approaches to regulate our operations. For example, we face a number of open investigations based on claims that aspects of our operations infringe competition rules, including aspects of Amazon’s operation of its stores including its fulfillment network, Amazon’s acquisitions, and certain aspects of AWS’s offering of cloud services. We strongly dispute these claims and intend to defend ourselves vigorously in these investigations. Similarly, we face investigations under a growing patchwork of laws and regulations governing the collection, use, and disclosure of data, the interpretation of which continues to evolve, leading to uncertainty about how regulators will view our privacy practices. In addition, regulators and lawmakers are increasingly focused on controlling additional aspects of the operations of technology companies and companies they have characterized to be online “gatekeepers” through the application of existing regulations and laws and the adoption of new regulations and laws, which increases our compliance costs and limits the operation of our business. Unfavorable regulations, laws, decisions, or interpretations by government or regulatory authorities applying those laws and regulations, or inquiries, investigations, or enforcement actions threatened or initiated by them, could cause us to incur substantial costs, expose us to unanticipated civil and criminal liability or penalties (including substantial monetary fines), diminish the demand for, or availability of, our products and services, increase our cost of doing business, require us to change our business practices in a manner materially adverse to our business, damage our reputation, impede our growth, or otherwise have a material effect on our operations. The media, political, and regulatory scrutiny we face, which may continue to increase, amplifies these risks. Claims, Litigation, Government Investigations, and Other Proceedings May Adversely Affect Our Business and Results of OperationsAs an innovative company offering a wide range of consumer and business products and services around the world, we are regularly subject to actual and threatened claims, litigation, reviews, investigations, and other proceedings, including proceedings by governments and regulatory authorities, involving a wide range of issues, including patent and other intellectual property matters, taxes, labor and employment (including the characterization of delivery drivers), competition and antitrust, privacy, data use, data protection, data security, data localization, network security, consumer protection, commercial disputes, goods and services offered by us and by third parties (including artificial intelligence technologies and services), and other matters. The number and scale of these proceedings have increased over time as our businesses have expanded in scope and geographic reach, as our products, services, and operations have become more complex and available to, and used by, more people, and as governments and regulatory authorities seek to regulate us on a pre-emptive basis. For example, we are litigating a number of matters alleging price fixing, monopolization, and consumer protection claims, including those brought by state attorneys general and the Federal Trade Commission. Any of these types of proceedings can have an adverse effect on us because of legal costs, disruption of our operations, diversion of management resources, negative publicity, and other factors. The outcomes of these matters are inherently unpredictable and subject to significant uncertainties. Determining legal reserves or possible losses from such matters involves judgment and may not reflect the full range of uncertainties and unpredictable outcomes. Until the final resolution of such matters, we may be exposed to losses in excess of the amount recorded, and such amounts could be material. Should any of our estimates and assumptions change or prove to have been incorrect, it could have a material effect on our business, consolidated financial position, results of operations, or cash flows. In addition, it is possible that a resolution of one or more such proceedings, including as a result of a settlement, could involve licenses, sanctions, consent decrees, or orders requiring us to make substantial future payments, preventing us from offering certain products or services, requiring us to change our business practices in a manner materially adverse to our business, requiring development of non-infringing or otherwise altered products or technologies, damaging our reputation, or otherwise having a material effect on our operations. We Are Subject to Product Liability Claims When People or Property Are Harmed by the Products We Sell or ManufactureSome of the products we sell or manufacture expose us to product liability or food safety claims relating to personal injury or illness, death, or environmental or property damage, and can require product recalls or other actions. Third parties who sell products using our services and stores also expose us to product liability claims. Additionally, under our A-to-z Guarantee, we may reimburse customers for certain product liability claims up to certain limits in these situations, and as our third-party seller sales grow, the cost of this program will increase and could negatively affect our operating results. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. Although we impose contractual terms on sellers that are intended to prohibit sales of certain type of products, we may not be able to detect, enforce, or collect sufficient damages for 15Table of Contentsbreaches of such agreements. In addition, some of our agreements with our vendors and sellers do not indemnify us from product liability.We Face Additional Tax Liabilities and Collection ObligationsWe are subject to a variety of taxes and tax collection obligations in the U.S. (federal and state) and numerous foreign jurisdictions. We may recognize additional tax expense and be subject to additional tax liabilities, including other liabilities for tax collection obligations due to changes in laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions. Such changes could come about as a result of economic, political, and other conditions. An increasing number of jurisdictions are considering or have adopted laws or administrative practices that impose new tax measures, including revenue-based taxes, targeting online commerce and the remote selling of goods and services. These include new obligations to withhold or collect sales, consumption, value added, or other taxes on online marketplaces and remote sellers, or other requirements that may result in liability for third party obligations. For example, non-U.S. jurisdictions have proposed or enacted taxes on online advertising and marketplace service revenues. Proliferation of these or similar unilateral tax measures may continue unless broader international tax reform is implemented. In addition, the European Union and other countries (including those in which we operate) have enacted or have committed to enact global minimum taxes, which may increase our tax expense in future years.Our results of operations and cash flows could be adversely affected by additional taxes imposed on us prospectively or retroactively or additional taxes or penalties resulting from the failure to comply with any collection obligations or failure to provide information about our customers, suppliers, and other third parties for tax reporting purposes to various government agencies. In some cases we also may not have sufficient notice to enable us to build systems and adopt processes to properly comply with new reporting or collection obligations by the effective date.Our tax expense and liabilities are also affected by other factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, losses incurred in jurisdictions for which we are not able to realize related tax benefits, the applicability of special or extraterritorial tax regimes, changes in foreign exchange rates, changes in our stock price, changes to our forecasts of income and loss and the mix of jurisdictions to which they relate, and changes in our tax assets and liabilities and their valuation. In the ordinary course of our business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Significant judgment is required in evaluating and estimating our tax expense, assets, and liabilities.We are also subject to tax controversies in various jurisdictions that can result in tax assessments against us. Developments in an audit, investigation, or other tax controversy can 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. Due to the inherent complexity and uncertainty of these matters, interpretations of certain tax laws by authorities, and judicial, administrative, and regulatory processes in certain jurisdictions, the final outcome of any such controversy may be materially different from our expectations. For example, the Indian tax authority has asserted that tax applies to cloud services fees paid to Amazon in the U.S. We are contesting this position; however, if this matter is adversely resolved, we may be required to pay additional amounts with respect to current and prior periods and our taxes in the future could increase. We regularly assess the likelihood of an adverse outcome resulting from these proceedings to determine the adequacy of our tax accruals. Although we believe our tax estimates are reasonable, the final outcome of audits, investigations, and any other tax controversies could be materially different from our historical tax accruals.We Are Subject to Risks Related to Government Contracts and Related Procurement RegulationsOur contracts with U.S., as well as state, local, and foreign, government entities are subject to various procurement regulations and other requirements relating to their formation, administration, and performance. We are subject to audits and investigations relating to our government contracts, and any violations could result in various civil and criminal penalties and administrative sanctions, including termination of contract, refunding or suspending of payments, forfeiture of profits, payment of fines, and suspension or debarment from future government business. In addition, some of these contracts are subject to periodic funding approval and/or provide for termination by the government at any time, without cause.Item 1B.Unresolved Staff CommentsNone. Item 1C.CybersecurityWe have processes in place for assessing, identifying, and managing material risks from potential unauthorized occurrences on or through our electronic information systems that could adversely affect the confidentiality, integrity, or availability of our information systems or the information residing on those systems. These include a wide variety of 16Table of Contentsmechanisms, controls, technologies, methods, systems, and other processes that are designed to prevent, detect, or mitigate data loss, theft, misuse, unauthorized access, or other security incidents or vulnerabilities affecting the data. The data include confidential, proprietary, and business and personal information that we collect, process, store, and transmit as part of our business, including on behalf of third parties. We also use systems and processes designed to reduce the impact of a security incident at a third-party vendor or customer. Additionally, we use processes to oversee and identify material risks from cybersecurity threats associated with our use of third-party technology and systems, including: technology and systems we use for encryption and authentication; employee email; content delivery to customers; back-office support; and other functions. As part of our risk management process, we conduct application security assessments, vulnerability management, penetration testing, security audits, and ongoing risk assessments. We also maintain a variety of incident response plans that are utilized when incidents are detected. We require employees with access to information systems, including all corporate employees, to undertake data protection and cybersecurity training and compliance programs annually.We have a unified and centrally-coordinated team, led by our chief security officer, that is responsible for implementing and maintaining centralized cybersecurity and data protection practices at Amazon in close coordination with senior leadership and other teams across Amazon. Reporting to our chief security officer are a number of experienced chief information security officers responsible for various parts of our business, including AWS, each of whom is supported by a team of trained cybersecurity professionals. In addition to our extensive in-house cybersecurity capabilities, at times we also engage assessors, consultants, auditors, or other third parties to assist with assessing, identifying, and managing cybersecurity risks. Our cybersecurity risks and associated mitigations are evaluated by senior leadership, including as part of our enterprise risk assessments that are reviewed by the Audit Committee and our Board of Directors. Such risks and mitigations are also subject to oversight by the Security Committee of our Board of Directors. Additional information about cybersecurity risks we face is discussed in Item 1A of Part I, “Risk Factors,” under the heading “We Could Be Harmed by Data Loss or Other Security Breaches,” which should be read in conjunction with the information above.The Security Committee, which is comprised of independent directors, oversees our policies and procedures for protecting our cybersecurity infrastructure and for compliance with applicable data protection and security regulations, and related risks. The Security Committee receives reports regarding such risks from management, including our chief security officer, and reports to the Board at least annually. The Security Committee also oversees the Board’s response to any significant cybersecurity incidents. Our chief security officer, who has extensive cybersecurity knowledge and skills gained from over 15 years of work experience on the security team at Amazon and an extensive career in the technology and cybersecurity industries as a senior executive in the federal government, heads the team responsible for implementing and maintaining cybersecurity and data protection practices at Amazon and reports directly to the Chief Executive Officer.17Table of ContentsItem 2.PropertiesAs of December 31, 2023, we operated the following facilities (in thousands):Description of UseLeased Square Footage (1)Owned Square FootageLocationOffice space29,6559,222North AmericaOffice space24,5281,802InternationalPhysical stores (2)22,871707North AmericaPhysical stores (2)255—InternationalFulfillment, data centers, and other413,01725,630North AmericaFulfillment, data centers, and other173,76514,802InternationalTotal664,09152,163 ___________________(1)For leased properties, represents the total leased space excluding sub-leased space.(2)This includes 600 North America and 28 International stores as of December 31, 2023. SegmentLeased Square Footage (1)Owned Square Footage (1)North America424,14515,438International165,3297,931AWS20,43417,770Total609,90841,139 ___________________(1)Segment amounts exclude corporate facilities. Shared facilities are allocated among the segments based on usage and primarily relate to facilities that hold our technology infrastructure. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 10 — Segment Information.”We own and lease our corporate headquarters in Washington’s Puget Sound region and Arlington, Virginia.Item 3.Legal ProceedingsSee Item 8 of Part II, “Financial Statements and Supplementary Data — Note 7 — Commitments and Contingencies — Legal Proceedings.”Item 4.Mine Safety DisclosuresNot applicable.18Table of ContentsPART IIItem 5.Market for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of Equity SecuritiesMarket InformationOur common stock is traded on the Nasdaq Global Select Market under the symbol “AMZN.” HoldersAs of January 24, 2024, there were 11,656 shareholders of record of our common stock, although there is a much larger number of beneficial owners.Recent Sales of Unregistered SecuritiesNone.Issuer Purchases of Equity SecuritiesNone.Item 6.Reserved19Table of ContentsItem 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsForward-Looking StatementsThis Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects, or future results of operations or financial position, made in this Annual Report on Form 10-K are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results and outcomes could differ materially for a variety of reasons, including, among others, fluctuations in foreign exchange rates, changes in global economic conditions and customer demand and spending, inflation, interest rates, regional labor market constraints, world events, the rate of growth of the internet, online commerce, cloud services, and new and emerging technologies, the amount that Amazon.com invests in new business opportunities and the timing of those investments, the mix of products and services sold to customers, the mix of net sales derived from products as compared with services, the extent to which we owe income or other taxes, competition, management of growth, potential fluctuations in operating results, international growth and expansion, the outcomes of claims, litigation, government investigations, and other proceedings, fulfillment, sortation, delivery, and data center optimization, risks of inventory management, variability in demand, the degree to which we enter into, maintain, and develop commercial agreements, proposed and completed acquisitions and strategic transactions, payments risks, and risks of fulfillment throughput and productivity. In addition, global economic and geopolitical conditions and additional or unforeseen circumstances, developments, or events may give rise to or amplify many of these risks. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results or outcomes to differ significantly from management’s expectations, are described in greater detail in Item 1A of Part I, “Risk Factors.”OverviewOur primary source of revenue is the sale of a wide range of products and services to customers. The products offered through our stores include merchandise and content we have purchased for resale and products offered by third-party sellers, and we also manufacture and sell electronic devices and produce media content. Generally, we recognize gross revenue from items we sell from our inventory as product sales and recognize our net share of revenue of items sold by third-party sellers as service sales. We seek to increase unit sales across our stores, through increased product selection, across numerous product categories. We also offer other services such as compute, storage, and database offerings, fulfillment, advertising, publishing, and digital content subscriptions.Our financial focus is on long-term, sustainable growth in free cash flows. Free cash flows are driven primarily by increasing operating income and efficiently managing accounts receivable, inventory, accounts payable, and cash capital expenditures, including our decision to purchase or lease property and equipment. Increases in operating income primarily result from increases in sales of products and services and efficiently managing our operating costs, partially offset by investments we make in longer-term strategic initiatives, including capital expenditures focused on improving the customer experience. To increase sales of products and services, we focus on improving all aspects of the customer experience, including lowering prices, improving availability, offering faster delivery and performance times, increasing selection, producing original content, increasing product categories and service offerings, expanding product information, improving ease of use, improving reliability, and earning customer trust. See “Results of Operations — Non-GAAP Financial Measures” below for additional information on our non-GAAP free cash flows financial measures.We seek to reduce our variable costs per unit and work to leverage our fixed costs. Our variable costs include product and content costs, payment processing and related transaction costs, picking, packaging, and preparing orders for shipment, transportation, customer service support, costs necessary to run AWS, and a portion of our marketing costs. Our fixed costs include the costs necessary to build and run our technology infrastructure; to build, enhance, and add features to our online stores, web services, electronic devices, and digital offerings; and to build and optimize our fulfillment network. Variable costs generally change directly with sales volume, while fixed costs generally are dependent on the timing of capacity needs, geographic expansion, category expansion, and other factors. To decrease our variable costs on a per unit basis and enable us to lower prices for customers, we seek to increase our direct sourcing, increase discounts from suppliers, and reduce defects in our processes. To minimize unnecessary growth in fixed costs, we seek to improve process efficiencies and maintain a lean culture.We seek to turn inventory quickly and collect from consumers before our payments to vendors and sellers become due. Because consumers primarily use credit cards in our stores, our receivables from consumers settle quickly. We expect variability in inventory turnover over time since it is affected by numerous factors, including our product mix, the mix of sales by us and by third-party sellers, our continuing focus on in-stock inventory availability and selection of product offerings, supply chain disruptions and resulting vendor lead times, our investment in new geographies and product lines, and the extent to which we choose to utilize third-party fulfillment providers. We also expect some variability in accounts payable days over time since they are affected by several factors, including the mix of product sales, the mix of sales by third-party sellers, the mix 20Table of Contentsof suppliers, seasonality, and changes in payment and other terms over time, including the effect of balancing pricing and timing of payment terms with suppliers.We expect spending in technology and infrastructure will increase over time as we add computer scientists, designers, software and hardware engineers, and merchandising employees. Our technology and infrastructure investment and capital spending projects often support a variety of product and service offerings due to geographic expansion and the cross-functionality of our systems and operations. We seek to invest efficiently in several areas of technology and infrastructure, including AWS, and expansion of new and existing product categories and service offerings, as well as in infrastructure to enhance the customer experience and improve our process efficiencies. We believe that advances in technology, specifically the speed and reduced cost of processing power, data storage and analytics, improved wireless connectivity, and the practical applications of artificial intelligence and machine learning, will continue to improve users’ experience on the internet and increase its ubiquity in people’s lives. To best take advantage of these continued advances in technology, we are investing in AWS, which offers a broad set of on-demand technology services, including compute, storage, database, analytics, and machine learning, and other services to developers and enterprises of all sizes. We are also investing in initiatives to build and deploy innovative and efficient software and electronic devices as well as other initiatives including the development of a satellite network for global broadband service and autonomous vehicles for ride-hailing services. We seek to efficiently manage shareholder dilution while maintaining the flexibility to issue shares for strategic purposes, such as financings, acquisitions, and aligning employee compensation with shareholders’ interests. We utilize restricted stock units as our primary vehicle for equity compensation because we believe this compensation model aligns the long-term interests of our shareholders and employees. In measuring shareholder dilution, we include all vested and unvested stock awards outstanding, without regard to estimated forfeitures. Total shares outstanding plus outstanding stock awards were 10.6 billion and 10.8 billion as of December 31, 2022 and 2023.Our financial reporting currency is the U.S. Dollar and changes in foreign exchange rates significantly affect our reported results and consolidated trends. For example, if the U.S. Dollar weakens year-over-year relative to currencies in our international locations, our consolidated net sales and operating expenses will be higher than if currencies had remained constant. Likewise, if the U.S. Dollar strengthens year-over-year relative to currencies in our international locations, our consolidated net sales and operating expenses will be lower than if currencies had remained constant. We believe that our increasing diversification beyond the U.S. economy through our growing international businesses benefits our shareholders over the long-term. We also believe it is useful to evaluate our operating results and growth rates before and after the effect of currency changes.In addition, the remeasurement of our intercompany balances can result in significant gains and losses associated with the effect of movements in foreign exchange rates. Currency volatilities may continue, which may significantly impact (either positively or negatively) our reported results and consolidated trends and comparisons.For additional information about each line item addressed above, refer to Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business, Accounting Policies, and Supplemental Disclosures.”Our Annual Report on Form 10-K for the year ended December 31, 2022 includes a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2021 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”Critical Accounting EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles of the United States (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. Critical accounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the Company. Based on this definition, we have identified the critical accounting estimates addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business, Accounting Policies, and Supplemental Disclosures.” Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.InventoriesInventories, 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 21Table of Contentsvendors, or liquidations, and expected recoverable values of each disposition category. These assumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future. As a measure of sensitivity, for every 1% of additional inventory valuation allowance as of December 31, 2023, we would have recorded an additional cost of sales of approximately $355 million.In addition, we enter into supplier commitments for certain electronic device components and certain products. These commitments are based on forecasted customer demand. If we reduce these commitments, we may incur additional costs.Income TaxesWe are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, administrative practices, principles, and interpretations in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. In addition, our actual and forecasted earnings are subject to change due to economic, political, and other conditions and significant judgment is required in determining our ability to use our deferred tax assets. Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize related tax benefits, the applicability of special tax regimes, changes in foreign exchange rates, changes in our stock price, changes to our forecasts of income and loss and the mix of jurisdictions to which they relate, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions. In addition, a number of countries have enacted or are actively pursuing changes to their tax laws applicable to corporate multinationals. We are also currently subject to tax controversies in various jurisdictions, and these jurisdictions may assess additional income tax liabilities against us. Developments in an audit, investigation, or other tax controversy could have a material effect on our operating results or cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods. We regularly assess the likelihood of an adverse outcome resulting from these proceedings to determine the adequacy of our tax accruals. Although we believe our tax estimates are reasonable, the final outcome of audits, investigations, and any other tax controversies could be materially different from our historical income tax provisions and accruals.Liquidity and Capital ResourcesCash flow information is as follows (in millions): Year Ended December 31, 20222023Cash provided by (used in):Operating activities$46,752 $84,946 Investing activities(37,601)(49,833)Financing activities9,718 (15,879)Our principal sources of liquidity are cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, which, at fair value, were $70.0 billion and $86.8 billion as of December 31, 2022 and 2023. Amounts held in foreign currencies were $18.3 billion and $23.5 billion as of December 31, 2022 and 2023. Our foreign currency balances include British Pounds, Canadian Dollars, Euros, Indian Rupees, and Japanese Yen. Cash provided by (used in) operating activities was $46.8 billion and $84.9 billion in 2022 and 2023. Our operating cash flows result primarily from cash received from our consumer, seller, developer, enterprise, and content creator customers, and advertisers, offset by cash payments we make for products and services, employee compensation, payment processing and related transaction costs, operating leases, and interest payments. Cash received from our customers and other activities generally corresponds to our net sales. The increase in operating cash flow in 2023, compared to the prior year, was due to an increase in net income (loss), excluding non-cash expenses, and changes in working capital. Working capital at any specific point in time is subject to many variables, including variability in demand, inventory management and category expansion, the timing of cash receipts and payments, customer and vendor payment terms, and fluctuations in foreign exchange rates.Cash provided by (used in) investing activities corresponds with cash capital expenditures, including leasehold improvements, incentives received from property and equipment vendors, proceeds from asset sales, cash outlays for 22Table of Contentsacquisitions, investments in other companies and intellectual property rights, and purchases, sales, and maturities of marketable securities. Cash provided by (used in) investing activities was $(37.6) billion and $(49.8) billion in 2022 and 2023, with the variability caused primarily by purchases, sales, and maturities of marketable securities and cash capital expenditures. Cash capital expenditures were $58.3 billion, and $48.1 billion in 2022 and 2023, which primarily reflect investments in technology infrastructure (the majority of which is to support AWS business growth) and in additional capacity to support our fulfillment network, which investments we expect to increase in 2024. We made cash payments, net of acquired cash, related to acquisition and other investment activity of $8.3 billion and $5.8 billion in 2022 and 2023. We funded the acquisitions of MGM Holdings Inc. in 2022 and 1Life Healthcare, Inc. (One Medical) in 2023 with cash on hand. In 2023, we invested $1.25 billion in a note from Anthropic, PBC, which is convertible into equity. We have an agreement that expires in Q1 2024 to invest up to an additional $2.75 billion in a second convertible note.Cash provided by (used in) financing activities was $9.7 billion and $(15.9) billion in 2022 and 2023. Cash inflows from financing activities resulted from proceeds from short-term debt, and other and long-term-debt of $62.7 billion and $18.1 billion in 2022 and 2023. Cash outflows from financing activities resulted from repurchases of common stock in 2022, payments of short-term debt, and other, long-term debt, finance leases, and financing obligations of $53.0 billion and $34.0 billion in 2022 and 2023. Property and equipment acquired under finance leases was $675 million and $642 million in 2022 and 2023.We had no borrowings outstanding under the two unsecured revolving credit facilities or the commercial paper programs, we had $682 million of borrowings outstanding under the secured revolving credit facility, and the entire amount of the term loan has been repaid as of December 31, 2023. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 6 — Debt” for additional information. As of December 31, 2023, cash, cash equivalents, and marketable securities held by foreign subsidiaries were $4.7 billion. We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts.Our U.S. taxable income is reduced by accelerated depreciation deductions and increased by the impact of capitalized research and development expenses. U.S. tax rules provide for enhanced accelerated depreciation deductions by allowing us to expense a portion of qualified property, primarily equipment. These enhanced deductions are scheduled to phase out annually from 2023 through 2026. Our federal tax provision included a partial accelerated depreciation deduction election for 2021, and a full election for 2022 and 2023. Additionally, effective January 1, 2022, research and development expenses are required to be capitalized and amortized for U.S. tax purposes, which delays the deductibility of these expenses. Cash paid for U.S. (federal and state) and foreign income taxes (net of refunds) totaled $6.0 billion and $11.2 billion for 2022 and 2023. As of December 31, 2022 and 2023, restricted cash, cash equivalents, and marketable securities were $365 million and $503 million. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 6 — Debt” and “Financial Statements and Supplementary Data — Note 7 — Commitments and Contingencies” for additional discussion of our principal contractual commitments, as well as our pledged assets. Additionally, we have purchase obligations and open purchase orders, including for inventory and capital expenditures, that support normal operations and are primarily due in the next twelve months. These purchase obligations and open purchase orders are generally cancellable in full or in part through the contractual provisions.We believe that cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, as well as our borrowing arrangements, will be sufficient to meet our anticipated operating cash needs for at least the next twelve months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. See Item 1A of Part I, “Risk Factors.” We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities, obtain finance and operating lease arrangements, enter into financing obligations, repurchase common stock, pay dividends, or repurchase, refinance, or otherwise restructure our debt for strategic reasons or to further strengthen our financial position. The sale of additional equity or convertible debt securities would be dilutive to our shareholders. In addition, we will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, capital infrastructure, and technologies, which might affect our liquidity requirements or cause us to secure additional financing, or issue additional equity or debt securities. There can be no assurance that additional credit lines or financing instruments will be available in amounts or on terms acceptable to us, if at all. In addition, economic conditions and actions by policymaking bodies are contributing to changing interest rates and significant capital market volatility, which, along with any increases in our borrowing levels, could increase our future borrowing costs. 23Table of ContentsResults of OperationsWe have organized our operations into three segments: North America, International, and AWS. These segments reflect the way the Company evaluates its business performance and manages its operations. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 10 — Segment Information.” OverviewMacroeconomic factors, including inflation, increased interest rates, significant capital market and supply chain volatility, and global economic and geopolitical developments, have direct and indirect impacts on our results of operations that are difficult to isolate and quantify. In addition, changes in fuel, utility, and food costs, interest rates, and economic outlook may impact customer demand and our ability to forecast consumer spending patterns. We also expect the current macroeconomic environment and enterprise customer cost optimization efforts to impact our AWS revenue growth rates. We expect some or all of these factors to continue to impact our operations into Q1 2024.Net SalesNet sales include product and service sales. Product sales represent revenue from the sale of products and related shipping fees and digital media content where we record revenue gross. Service sales primarily represent third-party seller fees, which includes commissions and any related fulfillment and shipping fees, AWS sales, advertising services, Amazon Prime membership fees, and certain digital media content subscriptions. Net sales information is as follows (in millions): Year Ended December 31, 20222023Net Sales:North America$315,880 $352,828 International118,007 131,200 AWS80,096 90,757 Consolidated$513,983 $574,785 Year-over-year Percentage Growth (Decline):North America13 %12 %International(8)11 AWS29 13 Consolidated9 12 Year-over-year Percentage Growth, excluding the effect of foreign exchange rates:North America13 %12 %International4 11 AWS29 13 Consolidated13 12 Net Sales Mix:North America61 %61 %International23 23 AWS16 16 Consolidated100 %100 %Sales increased 12% in 2023, compared to the prior year. Changes in foreign exchange rates reduced net sales by $71 million in 2023. For a discussion of the effect of foreign exchange rates on sales growth, see “Effect of Foreign Exchange Rates” below.North America sales increased 12% in 2023, compared to the prior year. The sales growth primarily reflects increased unit sales, primarily by third-party sellers, advertising sales, and subscription services. Increased unit sales were driven largely by our continued focus on price, selection, and convenience for our customers, including from our shipping offers.International sales increased 11% in 2023, compared to the prior year. The sales growth primarily reflects increased unit sales, primarily by third-party sellers, advertising sales, and subscription services. Increased unit sales were driven largely by our continued focus on price, selection, and convenience for our customers, including from our shipping offers. Changes in foreign exchange rates increased International net sales by $88 million in 2023.24Table of ContentsAWS sales increased 13% in 2023, compared to the prior year. The sales growth primarily reflects increased customer usage, partially offset by pricing changes, primarily driven by long-term customer contracts.Operating Income (Loss) Operating income (loss) by segment is as follows (in millions):Year Ended December 31,20222023Operating Income (Loss)North America$(2,847)$14,877 International(7,746)(2,656)AWS22,841 24,631 Consolidated$12,248 $36,852 Operating income was $12.2 billion and $36.9 billion for 2022 and 2023. 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 North America operating income in 2023, as compared to the operating loss in the prior year, is primarily due to increased unit sales and increased advertising sales, partially offset by increased shipping and fulfillment costs and increased technology and infrastructure costs. The decrease in International operating loss in absolute dollars in 2023, compared to the prior year, is primarily due to increased unit sales and increased advertising sales, partially offset by increased fulfillment and shipping costs and increased technology and infrastructure costs. Changes in foreign exchange rates positively impacted operating loss by $246 million in 2023. The increase in AWS operating income in absolute dollars in 2023, compared to the prior year, is primarily due to increased sales, partially offset by increased payroll and related expenses and spending on technology infrastructure, both of which were primarily driven by additional investments to support AWS business growth. Changes in foreign exchange rates positively impacted operating income by $220 million in 2023.25Table of ContentsOperating ExpensesInformation about operating expenses is as follows (in millions): Year Ended December 31, 20222023Operating Expenses:Cost of sales$288,831 $304,739 Fulfillment84,299 90,619 Technology and infrastructure73,213 85,622 Sales and marketing42,238 44,370 General and administrative11,891 11,816 Other operating expense (income), net1,263 767 Total operating expenses$501,735 $537,933 Year-over-year Percentage Growth (Decline):Cost of sales6 %6 %Fulfillment12 7 Technology and infrastructure31 17 Sales and marketing30 5 General and administrative35 (1)Other operating expense (income), net1,936 (39)Percent of Net Sales:Cost of sales56.2 %53.0 %Fulfillment16.4 15.8 Technology and infrastructure14.2 14.9 Sales and marketing8.2 7.7 General and administrative2.3 2.1 Other operating expense (income), net0.2 0.1 Cost of SalesCost of sales primarily consists of the purchase price of consumer products, inbound and outbound shipping costs, including costs related to sortation and delivery centers and where we are the transportation service provider, and digital media content costs where we record revenue gross, including video and music.The increase in cost of sales in absolute dollars in 2023, compared to the prior year, is primarily due to increased product and shipping costs resulting from increased sales, partially offset by fulfillment network efficiencies and lower transportation rates. Changes in foreign exchange rates reduced cost of sales by $254 million in 2023.Shipping costs were $83.5 billion and $89.5 billion in 2022 and 2023. Shipping costs to receive products from our suppliers are included in our inventory and recognized as cost of sales upon sale of products to our customers. We expect our cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate, we use more expensive shipping methods, and we offer additional services. We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing our fulfillment network, negotiating better terms with our suppliers, and achieving better operating efficiencies. We believe that offering low prices to our customers is fundamental to our future success, and one way we offer lower prices is through shipping offers.Costs to operate our AWS segment are primarily classified as “Technology and infrastructure” as we leverage a shared infrastructure that supports both our internal technology requirements and external sales to AWS customers.FulfillmentFulfillment costs primarily consist of those costs incurred in operating and staffing our North America and International fulfillment centers, physical stores, and customer service centers and payment processing costs. While AWS payment processing and related transaction costs are included in “Fulfillment,” AWS costs are primarily classified as “Technology and infrastructure.” Fulfillment costs as a percentage of net sales may vary due to several factors, such as payment processing and related transaction costs, our level of productivity and accuracy, changes in volume, size, and weight of units received and 26Table of Contentsfulfilled, the extent to which third-party sellers utilize Fulfillment by Amazon services, timing of fulfillment network and physical store expansion, the extent we utilize fulfillment services provided by third parties, mix of products and services sold, and our ability to affect customer service contacts per unit by implementing improvements in our operations and enhancements to our customer self-service features. Additionally, sales by our sellers have higher payment processing and related transaction costs as a percentage of net sales compared to our retail sales because payment processing costs are based on the gross purchase price of underlying transactions.The increase in fulfillment costs in absolute dollars in 2023, compared to the prior year, is primarily due to increased sales and investments in our fulfillment network, partially offset by fulfillment network efficiencies. Changes in foreign exchange rates increased fulfillment costs by $52 million in 2023.We seek to expand our fulfillment network to accommodate a greater selection and in-stock inventory levels and to meet anticipated shipment volumes from sales of our own products as well as sales by third parties for which we provide the fulfillment services. We regularly evaluate our facility requirements.Technology and InfrastructureTechnology and infrastructure costs include payroll and related expenses for employees involved in the research and development of new and existing products and services, development, design, and maintenance of our stores, curation and display of products and services made available in our online stores, and infrastructure costs. Infrastructure costs include servers, networking equipment, and data center related depreciation and amortization, rent, utilities, and other expenses necessary to support AWS and other Amazon businesses. Collectively, these costs reflect the investments we make in order to offer a wide variety of products and services to our customers, including expenditures related to initiatives to build and deploy innovative and efficient software and electronic devices and the development of a satellite network for global broadband service and autonomous vehicles for ride-hailing services. We seek to invest efficiently in numerous areas of technology and infrastructure so we may continue to enhance the customer experience and improve our process efficiency through rapid technology developments, while operating at an ever increasing scale. Our technology and infrastructure investment and capital spending projects often support a variety of product and service offerings due to geographic expansion and the cross-functionality of our systems and operations. We expect spending in technology and infrastructure to increase over time as we continue to add employees and infrastructure. These costs are allocated to segments based on usage. The increase in technology and infrastructure costs in absolute dollars in 2023, compared to the prior year, is primarily due to an increase in spending on infrastructure and increased payroll and related costs associated with technical teams responsible for expanding our existing products and services and initiatives to introduce new products and service offerings.Sales and MarketingSales and marketing costs include advertising and payroll and related expenses for personnel engaged in marketing and selling activities, including sales commissions related to AWS. We direct customers to our stores primarily through a number of marketing channels, such as our sponsored search, social and online advertising, third-party customer referrals, television advertising, and other initiatives. Our marketing costs are largely variable, based on growth in sales and changes in rates. To the extent there is increased or decreased competition for these traffic sources, or to the extent our mix of these channels shifts, we would expect to see a corresponding change in our marketing costs.The increase in sales and marketing costs in absolute dollars in 2023, compared to the prior year, is primarily due to increased payroll and related expenses for personnel engaged in marketing and selling activities.While costs associated with Amazon Prime membership benefits and other shipping offers are not included in sales and marketing expense, we view these offers as effective worldwide marketing tools, and intend to continue offering them indefinitely.General and AdministrativeGeneral and administrative costs were $11.9 billion and $11.8 billion during 2022 and 2023, and were primarily related to payroll and related expenses and professional fees.Other Operating Expense (Income), NetOther operating expense (income), net was $1.3 billion and $767 million during 2022 and 2023, and was primarily related to asset impairments for physical store closures in 2022 and for fulfillment network facilities and physical store closures in 2023, and the amortization of intangible assets.27Table of ContentsInterest Income and ExpenseOur interest income was $989 million and $2.9 billion during 2022 and 2023, primarily due to an increase in prevailing rates. We generally invest our excess cash in AAA-rated money market funds and investment grade short- to intermediate-term marketable debt securities. Our interest income corresponds with the average balance of invested funds based on the prevailing rates, which vary depending on the geographies and currencies in which they are invested.Interest expense was $2.4 billion and $3.2 billion in 2022 and 2023 and was primarily related to debt and finance leases. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 4 — Leases and Note 6 — Debt” for additional information.Our long-term lease liabilities were $73.0 billion and $77.3 billion as of December 31, 2022 and 2023. Our long-term debt was $67.1 billion and $58.3 billion as of December 31, 2022 and 2023. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 4 — Leases and Note 6 — Debt” for additional information.Other Income (Expense), NetOther income (expense), net was $(16.8) billion and $938 million during 2022 and 2023. The primary components of other income (expense), net are related to equity securities valuations and adjustments, equity warrant valuations, and foreign currency. Included in other income (expense), net in 2022 and 2023 is a marketable equity securities valuation gain (loss) of $(12.7) billion and $797 million from our equity investment in Rivian.Income TaxesOur effective tax rate is subject to significant variation due to several factors, including variability in our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, intercompany transactions, the applicability of special tax regimes, changes in how we do business, acquisitions, investments, developments in tax controversies, changes in our stock price, changes in our deferred tax assets and liabilities and their valuation, foreign currency gains (losses), changes in statutes, regulations, case law, and administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions, and relative changes of expenses or losses for which tax benefits are not recognized. Our effective tax rate can be more or less volatile based on the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower. In addition, we record valuation allowances against deferred tax assets when there is uncertainty about our ability to generate future income in relevant jurisdictions. We recorded a provision (benefit) for income taxes of $(3.2) billion and $7.1 billion in 2022 and 2023. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 9 — Income Taxes” for additional information.Non-GAAP Financial MeasuresRegulation G, Conditions for Use of Non-GAAP Financial Measures, and other SEC regulations define and prescribe the conditions for use of certain non-GAAP financial information. Our measures of free cash flows and the effect of foreign exchange rates on our consolidated statements of operations meet the definition of non-GAAP financial measures. We provide multiple measures of free cash flows because we believe these measures provide additional perspective on the impact of acquiring property and equipment with cash and through finance leases and financing obligations.Free Cash FlowFree cash flow is cash flow from operations reduced by “Purchases of property and equipment, net of proceeds from sales and incentives.” The following is a reconciliation of free cash flow to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for 2022 and 2023 (in millions): Year Ended December 31, 20222023Net cash provided by (used in) operating activities$46,752 $84,946 Purchases of property and equipment, net of proceeds from sales and incentives(58,321)(48,133)Free cash flow$(11,569)$36,813 Net cash provided by (used in) investing activities$(37,601)$(49,833)Net cash provided by (used in) financing activities$9,718 $(15,879)28Table of ContentsFree Cash Flow Less Principal Repayments of Finance Leases and Financing ObligationsFree cash flow less principal repayments of finance leases and financing obligations is free cash flow reduced by “Principal repayments of finance leases” and “Principal repayments of financing obligations.” Principal repayments of finance leases and financing obligations approximates the actual payments of cash for our finance leases and financing obligations. The following is a reconciliation of free cash flow less principal repayments of finance leases and financing obligations to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for 2022 and 2023 (in millions): Year Ended December 31, 20222023Net cash provided by (used in) operating activities$46,752 $84,946 Purchases of property and equipment, net of proceeds from sales and incentives(58,321)(48,133)Free cash flow(11,569)36,813 Principal repayments of finance leases(7,941)(4,384)Principal repayments of financing obligations(248)(271)Free cash flow less principal repayments of finance leases and financing obligations$(19,758)$32,158 Net cash provided by (used in) investing activities$(37,601)$(49,833)Net cash provided by (used in) financing activities$9,718 $(15,879)Free Cash Flow Less Equipment Finance Leases and Principal Repayments of All Other Finance Leases and Financing Obligations Free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations is free cash flow reduced by equipment acquired under finance leases, which is included in “Property and equipment acquired under finance leases, net of remeasurements and modifications,” principal repayments of all other finance lease liabilities, which is included in “Principal repayments of finance leases,” and “Principal repayments of financing obligations.” All other finance lease liabilities and financing obligations consists of property. In this measure, equipment acquired under finance leases is reflected as if these assets had been purchased with cash, which is not the case as these assets have been leased. The following is a reconciliation of free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for 2022 and 2023 (in millions): Year Ended December 31, 20222023Net cash provided by (used in) operating activities$46,752 $84,946 Purchases of property and equipment, net of proceeds from sales and incentives(58,321)(48,133)Free cash flow(11,569)36,813 Equipment acquired under finance leases (1)(299)(310)Principal repayments of all other finance leases (2)(670)(683)Principal repayments of financing obligations(248)(271)Free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations$(12,786)$35,549 Net cash provided by (used in) investing activities$(37,601)$(49,833)Net cash provided by (used in) financing activities$9,718 $(15,879)___________________(1)For the year ended December 31, 2022 and 2023, this amount relates to equipment included in “Property and equipment acquired under finance leases, net of remeasurements and modifications” of $675 million and $642 million. (2)For the year ended December 31, 2022 and 2023, this amount relates to property included in “Principal repayments of finance leases” of $7,941 million and $4,384 million. 29Table of ContentsAll of these free cash flows measures have limitations as they omit certain components of the overall cash flow statement and do not represent the residual cash flow available for discretionary expenditures. For example, these measures of free cash flows do not incorporate the portion of payments representing principal reductions of debt or cash payments for business acquisitions. Additionally, our mix of property and equipment acquisitions with cash or other financing options may change over time. Therefore, we believe it is important to view free cash flows measures only as a complement to our entire consolidated statements of cash flows.Effect of Foreign Exchange RatesInformation regarding the effect of foreign exchange rates, versus the U.S. Dollar, on our net sales, operating expenses, and operating income is provided to show reported period operating results had the foreign exchange rates remained the same as those in effect in the comparable prior year period. The effect on our net sales, operating expenses, and operating income from changes in our foreign exchange rates versus the U.S. Dollar is as follows (in millions): Year Ended December 31, 2022Year Ended December 31, 2023 AsReportedExchangeRateEffect (1)At PriorYearRates (2)AsReportedExchangeRateEffect (1)At PriorYearRates (2)Net sales$513,983 $15,495 $529,478 $574,785 $71 $574,856 Operating expenses501,735 16,356 518,091 537,933 531 538,464 Operating income12,248 (861)11,387 36,852 (460)36,392 ___________________(1)Represents the change in reported amounts resulting from changes in foreign exchange rates from those in effect in the comparable prior year period for operating results.(2)Represents the outcome that would have resulted had foreign exchange rates in the reported period been the same as those in effect in the comparable prior year period for operating results.30Table of ContentsGuidanceWe provided guidance on February 1, 2024, in our earnings release furnished on Form 8-K as set forth below. These forward-looking statements reflect Amazon.com’s expectations as of February 1, 2024, and are subject to substantial uncertainty. Our results are inherently unpredictable and may be materially affected by many factors, such as fluctuations in foreign exchange rates, changes in global economic and geopolitical conditions and customer demand and spending (including the impact of recessionary fears), inflation, interest rates, regional labor market constraints, world events, the rate of growth of the internet, online commerce, cloud services, and new and emerging technologies, as well as those outlined in Item 1A of Part I, “Risk Factors.” First Quarter 2024 Guidance•Net sales are expected to be between $138.0 billion and $143.5 billion, or to grow between 8% and 13% compared with first quarter 2023. This guidance anticipates a favorable impact of approximately 40 basis points from foreign exchange rates. •Operating income is expected to be between $8.0 billion and $12.0 billion, compared with $4.8 billion in first quarter 2023. This guidance includes approximately $0.9 billion lower depreciation expense due to an increase in the estimated useful life of our servers beginning on January 1, 2024. •This guidance assumes, among other things, that no additional business acquisitions, restructurings, or legal settlements are concluded.31Table of ContentsItem 7A.Quantitative and Qualitative Disclosures About Market RiskWe are exposed to market risk for the effect of interest rate changes, foreign currency fluctuations, and changes in the market values of our investments. Information relating to quantitative and qualitative disclosures about market risk is set forth below and in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”Interest Rate RiskOur exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our debt. Our long-term debt is carried at amortized cost and fluctuations in interest rates do not impact our consolidated financial statements. However, the fair value of our long-term debt, which pays interest at a fixed rate, will generally fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest. We generally invest our excess cash in AAA-rated money market funds and investment grade short- to intermediate-term marketable debt securities. Marketable debt securities with fixed interest rates may have their fair market value adversely affected due to a rise in interest rates, and we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. The following table provides information about our cash equivalents and marketable debt securities, including principal cash flows by expected maturity and the related weighted-average interest rates as of December 31, 2023 (in millions, except percentages):20242025202620272028ThereafterTotalEstimated Fair Value as of December 31, 2023Money market funds$39,160 $— $— $— $— $— $39,160 $39,160 Weighted average interest rate5.32 %— %— %— %— %— %5.32 %Corporate debt securities25,075 2,227 715 9 — — 28,026 27,805 Weighted average interest rate5.13 %1.30 %1.51 %2.33 %— %— %4.74 %U.S. government and agency securities552 501 398 50 43 230 1,774 1,699 Weighted average interest rate3.24 %1.49 %1.12 %0.97 %0.67 %1.31 %1.89 %Asset-backed securities789 349 115 143 13 291 1,700 1,646 Weighted average interest rate1.34 %2.09 %1.20 %1.67 %1.66 %1.33 %1.51 %Foreign government and agency securities506 — — — — — 506 505 Weighted average interest rate5.28 %— %— %— %— %— %5.28 %Other debt securities62 46 — — — — 108 104 Weighted average interest rate0.55 %1.07 %— %— %— %— %0.78 %$66,144 $3,123 $1,228 $202 $56 $521 $71,274 Cash equivalents and marketable debt securities$70,919 As of December 31, 2023, we had long-term debt with a face value of $67.2 billion, including the current portion, primarily consisting of fixed rate unsecured senior notes. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 6 — Debt” for additional information.32Table of ContentsForeign Exchange RiskDuring 2023, net sales from our International segment accounted for 23% of our consolidated revenues. Net sales and related expenses generated from our internationally-focused stores, including within Canada and Mexico (which are included in our North America segment), are primarily denominated in the functional currencies of the corresponding stores and primarily include Euros, British Pounds, and Japanese Yen. The results of operations of, and certain of our intercompany balances associated with, our internationally-focused stores and AWS are exposed to foreign exchange rate fluctuations. Upon consolidation, as foreign exchange rates vary, net sales and other operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances. For example, as a result of fluctuations in foreign exchange rates throughout the year compared to rates in effect the prior year, International segment net sales increased by $88 million in comparison with the prior year.We have foreign exchange risk related to foreign-denominated cash, cash equivalents, and marketable securities (“foreign funds”). Based on the balance of foreign funds as of December 31, 2023, of $23.5 billion, an assumed 5%, 10%, and 20% adverse change to foreign exchange would result in declines of $1.2 billion, $2.3 billion, and $4.7 billion. We also have foreign exchange risk related to our intercompany balances denominated in various currencies. Based on the intercompany balances as of December 31, 2023, an assumed 5%, 10%, and 20% adverse change to foreign exchange rates would result in losses of $320 million, $640 million, and $1.3 billion, recorded to “Other income (expense), net.”See Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Effect of Foreign Exchange Rates” for additional information on the effect on reported results of changes in foreign exchange rates.Equity Investment RiskAs of December 31, 2023, our recorded value in equity, equity warrant, and convertible debt investments in public and private companies was $9.6 billion. Our equity and equity warrant investments in publicly traded companies, which include our equity investment in Rivian, represent $5.7 billion of our investments as of December 31, 2023, and are recorded at fair value, which is subject to market price volatility. We record our equity warrant investments in private companies at fair value and adjust our equity investments in private companies for observable price changes or impairments. Valuations of private companies are inherently more complex due to the lack of readily available market data. The current global economic conditions provide additional uncertainty. As such, we believe that market sensitivities are not practicable. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business, Accounting Policies, and Supplemental Disclosures” for additional information.33Table of ContentsItem 8.Financial Statements and Supplementary DataINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Ernst & Young LLP, Independent Registered Public Accounting Firm (PCAOB ID: 42)35Consolidated Statements of Cash Flows37Consolidated Statements of Operations38Consolidated Statements of Comprehensive Income (Loss)39Consolidated Balance Sheets40Consolidated Statements of Stockholders’ Equity41Notes to Consolidated Financial Statements4234Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and ShareholdersAmazon.com, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Amazon.com, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 1, 2024 expressed an unqualified opinion thereon.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.Critical Audit MatterThe critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.35Table of ContentsUncertain Tax PositionsDescription ofthe MatterAs discussed in Notes 1 and 9 of the consolidated financial statements, the Company is subject to income taxes in the U.S. and numerous foreign jurisdictions and during the ordinary course of business, there are many tax positions for which the ultimate tax determination is uncertain. As a result, significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. The Company uses significant judgment in (1) determining whether a tax position’s technical merits are more likely than not to be sustained and (2) measuring the amount of tax benefit that qualifies for recognition. As of December 31, 2023, the Company reported accrued liabilities of $5.2 billion for various tax contingencies.Auditing the recognition and measurement of the Company’s tax contingencies was challenging because the evaluation of whether a tax position is more likely than not to be sustained and the measurement of the benefit of various tax positions can be complex and involves significant auditor judgment. Management’s evaluation of tax positions is based on interpretations of tax laws and legal rulings, and may be impacted by regulatory changes and judicial and examination activity.How We Addressed the Matter in Our AuditWe tested controls over the Company’s process to assess the technical merits of its tax contingencies, including controls over: the assessment as to whether a tax position is more likely than not to be sustained; the measurement of the benefit of its tax positions, both initially and on an ongoing basis; and the development of the related disclosures. We involved our international tax, transfer pricing, and research and development tax professionals in assessing the technical merits of certain of the Company’s tax positions. Depending on the nature of the specific tax position and, as applicable, developments with the relevant tax authorities relating thereto, our procedures included obtaining and examining the Company’s analysis including the Company’s correspondence with such tax authorities and evaluating the underlying facts upon which the tax positions are based. We used our knowledge of and experience with international, transfer pricing, and other income tax laws of the relevant taxing jurisdictions to evaluate the Company’s accounting for its tax contingencies. We evaluated developments in the applicable regulatory environments to assess potential effects on the Company’s positions, including recent decisions in relevant court cases. We analyzed the appropriateness of the Company’s assumptions and the accuracy of the Company’s calculations and data used to determine the amount of tax benefits to recognize. We evaluated the Company’s income tax disclosures in relation to these matters./s/ Ernst & Young LLPWe have served as the Company’s auditor since 1996. Seattle, WashingtonFebruary 1, 2024 36Table of ContentsAMAZON.COM, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in millions) Year Ended December 31, 202120222023CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD$42,377 $36,477 $54,253 OPERATING ACTIVITIES:Net income (loss)33,364 (2,722)30,425 Adjustments to reconcile net income (loss) to net cash from operating activities:Depreciation and amortization of property and equipment and capitalized content costs, operating lease assets, and other34,433 41,921 48,663 Stock-based compensation12,757 19,621 24,023 Non-operating expense (income), net(14,306)16,966 (748)Deferred income taxes(310)(8,148)(5,876)Changes in operating assets and liabilities:Inventories(9,487)(2,592)1,449 Accounts receivable, net and other(9,145)(8,622)(8,348)Other assets(9,018)(13,275)(12,265)Accounts payable3,602 2,945 5,473 Accrued expenses and other2,123 (1,558)(2,428)Unearned revenue2,314 2,216 4,578 Net cash provided by (used in) operating activities46,327 46,752 84,946 INVESTING ACTIVITIES:Purchases of property and equipment(61,053)(63,645)(52,729)Proceeds from property and equipment sales and incentives5,657 5,324 4,596 Acquisitions, net of cash acquired, non-marketable investments, and other(1,985)(8,316)(5,839)Sales and maturities of marketable securities59,384 31,601 5,627 Purchases of marketable securities(60,157)(2,565)(1,488)Net cash provided by (used in) investing activities(58,154)(37,601)(49,833)FINANCING ACTIVITIES:Common stock repurchased— (6,000)— Proceeds from short-term debt, and other7,956 41,553 18,129 Repayments of short-term debt, and other(7,753)(37,554)(25,677)Proceeds from long-term debt19,003 21,166 — Repayments of long-term debt(1,590)(1,258)(3,676)Principal repayments of finance leases(11,163)(7,941)(4,384)Principal repayments of financing obligations(162)(248)(271)Net cash provided by (used in) financing activities6,291 9,718 (15,879)Foreign currency effect on cash, cash equivalents, and restricted cash(364)(1,093)403 Net increase (decrease) in cash, cash equivalents, and restricted cash(5,900)17,776 19,637 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD$36,477 $54,253 $73,890 See accompanying notes to consolidated financial statements.37Table of ContentsAMAZON.COM, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in millions, except per share data) Year Ended December 31, 202120222023Net product sales$241,787 $242,901 $255,887 Net service sales228,035 271,082 318,898 Total net sales469,822 513,983 574,785 Operating expenses:Cost of sales272,344 288,831 304,739 Fulfillment75,111 84,299 90,619 Technology and infrastructure56,052 73,213 85,622 Sales and marketing32,551 42,238 44,370 General and administrative8,823 11,891 11,816 Other operating expense (income), net62 1,263 767 Total operating expenses444,943 501,735 537,933 Operating income24,879 12,248 36,852 Interest income448 989 2,949 Interest expense(1,809)(2,367)(3,182)Other income (expense), net14,633 (16,806)938 Total non-operating income (expense)13,272 (18,184)705 Income (loss) before income taxes38,151 (5,936)37,557 Benefit (provision) for income taxes(4,791)3,217 (7,120)Equity-method investment activity, net of tax4 (3)(12)Net income (loss)$33,364 $(2,722)$30,425 Basic earnings per share$3.30 $(0.27)$2.95 Diluted earnings per share$3.24 $(0.27)$2.90 Weighted-average shares used in computation of earnings per share:Basic10,117 10,189 10,304 Diluted10,296 10,189 10,492 See accompanying notes to consolidated financial statements.38Table of ContentsAMAZON.COM, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in millions) Year Ended December 31, 202120222023Net income (loss)$33,364 $(2,722)$30,425 Other comprehensive income (loss):Foreign currency translation adjustments, net of tax of $47, $100, and $(55)(819)(2,586)1,027 Available-for-sale debt securities:Change in net unrealized gains (losses), net of tax of $72, $159, and $(110)(343)(823)366 Less: reclassification adjustment for losses (gains) included in “Other income (expense), net,” net of tax of $13, $0, and $(15)(34)298 50 Net change(377)(525)416 Other, net of tax of $0, $0, and $(1)— — 4 Total other comprehensive income (loss)(1,196)(3,111)1,447 Comprehensive income (loss)$32,168 $(5,833)$31,872 See accompanying notes to consolidated financial statements.39Table of ContentsAMAZON.COM, INC.CONSOLIDATED BALANCE SHEETS(in millions, except per share data)December 31, 20222023ASSETSCurrent assets:Cash and cash equivalents$53,888 $73,387 Marketable securities16,138 13,393 Inventories34,405 33,318 Accounts receivable, net and other42,360 52,253 Total current assets146,791 172,351 Property and equipment, net186,715 204,177 Operating leases66,123 72,513 Goodwill20,288 22,789 Other assets42,758 56,024 Total assets$462,675 $527,854 LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:Accounts payable$79,600 $84,981 Accrued expenses and other62,566 64,709 Unearned revenue13,227 15,227 Total current liabilities155,393 164,917 Long-term lease liabilities72,968 77,297 Long-term debt67,150 58,314 Other long-term liabilities21,121 25,451 Commitments and contingencies (Note 7)Stockholders’ equity:Preferred stock ($0.01 par value; 500 shares authorized; no shares issued or outstanding)— — Common stock ($0.01 par value; 100,000 shares authorized; 10,757 and 10,898 shares issued; 10,242 and 10,383 shares outstanding)108 109 Treasury stock, at cost(7,837)(7,837)Additional paid-in capital75,066 99,025 Accumulated other comprehensive income (loss)(4,487)(3,040)Retained earnings83,193 113,618 Total stockholders’ equity146,043 201,875 Total liabilities and stockholders’ equity$462,675 $527,854 See accompanying notes to consolidated financial statements.40Table of ContentsAMAZON.COM, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in millions) Common Stock SharesAmountTreasuryStockAdditionalPaid-InCapitalAccumulated Other Comprehensive Income (Loss)RetainedEarningsTotalStockholders’EquityBalance as of January 1, 202110,066 $105 $(1,837)$42,765 $(180)$52,551 $93,404 Net income— — — — — 33,364 33,364 Other comprehensive income (loss)— — — — (1,196)— (1,196)Stock-based compensation and issuance of employee benefit plan stock109 1 — 12,672 — — 12,673 Balance as of December 31, 202110,175 106 (1,837)55,437 (1,376)85,915 138,245 Net loss— — — — — (2,722)(2,722)Other comprehensive income (loss)— — — — (3,111)— (3,111)Stock-based compensation and issuance of employee benefit plan stock113 2 — 19,629 — — 19,631 Common stock repurchased(46)— (6,000)— — — (6,000)Balance as of December 31, 202210,242 108 (7,837)75,066 (4,487)83,193 146,043 Net income— — — — — 30,425 30,425 Other comprehensive income (loss)— — — — 1,447 — 1,447 Stock-based compensation and issuance of employee benefit plan stock141 1 — 23,959 — — 23,960 Balance as of December 31, 202310,383 $109 $(7,837)$99,025 $(3,040)$113,618 $201,875 See accompanying notes to consolidated financial statements.41Table of ContentsAMAZON.COM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1 — DESCRIPTION OF BUSINESS, ACCOUNTING POLICIES, AND SUPPLEMENTAL DISCLOSURESDescription of BusinessWe seek to be Earth’s most customer-centric company. In each of our segments, we serve our primary customer sets, consisting of consumers, sellers, developers, enterprises, content creators, advertisers, and employees. We serve consumers through our online and physical stores and focus on selection, price, and convenience. We offer programs that enable sellers to grow their businesses, sell their products in our stores, and fulfill orders using our services, and programs that allow authors, independent publishers, musicians, filmmakers, Twitch streamers, skill and app developers, and others to publish and sell content. We serve developers and enterprises of all sizes through AWS, which offers a broad set of on-demand technology services, including compute, storage, database, analytics, and machine learning, and other services. We also manufacture and sell electronic devices. In addition, we provide advertising services to sellers, vendors, publishers, authors, and others, through programs such as sponsored ads, display, and video advertising.We have organized our operations into three segments: North America, International, and AWS. See “Note 10 — Segment Information.” Common Stock SplitOn May 27, 2022, we effected a 20-for-1 stock split of our common stock and proportionately increased the number of authorized shares of common stock. All share, restricted stock unit (“RSU”), and per share or per RSU information throughout this Annual Report on Form 10-K has been retroactively adjusted to reflect the stock split. The shares of common stock retain a par value of $0.01 per share. Accordingly, an amount equal to the par value of the increased shares resulting from the stock split was reclassified from “Additional paid-in capital” to “Common stock.”Prior Period ReclassificationsCertain prior period amounts have been reclassified to conform to the current period presentation. “Other assets” were reclassified out of “Accounts receivable, net and other” on our consolidated statements of cash flows.Principles of ConsolidationThe consolidated financial statements include the accounts of Amazon.com, Inc. and its consolidated entities (collectively, the “Company”), consisting of its wholly-owned subsidiaries and those entities in which we have a variable interest and of which we are the primary beneficiary, including certain entities in India and certain entities that support our health care services and seller lending financing activities. Intercompany balances and transactions between consolidated entities are eliminated. Use of EstimatesThe preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, income taxes, useful lives of equipment, commitments and contingencies, valuation of acquired intangibles and goodwill, stock-based compensation forfeiture rates, vendor funding, inventory valuation, collectability of receivables, impairment of property and equipment and operating leases, valuation and impairment of investments, self-insurance liabilities, and viewing patterns of capitalized video content. Actual results could differ materially from these estimates. For example, in Q4 2023 we completed a useful life study for our servers and are increasing the useful life from five years to six years in January 2024, which, based on servers that are included in “Property and equipment, net” as of December 31, 2023, will have an anticipated impact to our 2024 operating income of $3.1 billion. We had previously increased the useful life of our servers from four years to five years in January 2022.For the year ended December 31, 2022, we recorded approximately $1.1 billion, of which $720 million was recorded in the fourth quarter, of impairments of property and equipment and operating leases primarily related to physical stores. These charges were recorded in “Other operating expense (income), net” on our consolidated statements of operations and primarily impacted our North America segment. For the year ended December 31, 2022, we also recorded expenses of approximately $480 million, primarily in “Fulfillment”, on our consolidated statements of operations primarily relating to terminating contracts for certain leases not yet commenced as well as other purchase commitments, which primarily impacted our North America segment. 42Table of ContentsFor the year ended December 31, 2022, we recorded approximately $720 million, of which $640 million was recorded in the fourth quarter, of estimated severance costs primarily related to planned role eliminations. These charges were recorded primarily in “Technology and infrastructure,” “Fulfillment,” and “General and administrative” on our consolidated statements of operations and primarily impacted our North America segment. Charges for impairment, expenses for terminating contracts and other commitments, and severance costs were not material to our consolidated results of operations for the years ended December 31, 2021 and 2023.Supplemental Cash Flow InformationThe following table shows supplemental cash flow information (in millions):Year Ended December 31,202120222023SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest on debt, net of capitalized interest$1,098 $1,561 $2,608 Cash paid for operating leases$6,722 $8,633 $10,453 Cash paid for interest on finance leases$521 $374 $308 Cash paid for interest on financing obligations$153 $207 $196 Cash paid for income taxes, net of refunds$3,688 $6,035 $11,179 Assets acquired under operating leases$25,369 $18,800 $14,052 Property and equipment acquired under finance leases, net of remeasurements and modifications$7,061 $675 $642 Property and equipment recognized during the construction period of build-to-suit lease arrangements$5,846 $3,187 $357 Property and equipment derecognized after the construction period of build-to-suit lease arrangements, with the associated leases recognized as operating$230 $5,158 $1,374 Earnings Per ShareBasic 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): Year Ended December 31, 202120222023Shares used in computation of basic earnings per share10,117 10,189 10,304 Total dilutive effect of outstanding stock awards179 — 188 Shares used in computation of diluted earnings per share10,296 10,189 10,492 RevenueRevenue 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 in our stores, and fulfill orders using our services. 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. 43Table of ContentsAdvertising services - We provide advertising services to sellers, vendors, publishers, authors, and others, through programs such as sponsored ads, display, and video advertising. Revenue is recognized as ads are delivered based on the number of clicks or impressions.Subscription services - Our subscription sales include fees associated with Amazon Prime memberships and access to content including digital video, audiobooks, digital music, e-books, and other non-AWS subscription services. Prime memberships provide our customers with access to an evolving suite of benefits that represent a single stand-ready obligation. Subscriptions are paid for at the time of or in advance of delivering the services. Revenue from such arrangements is recognized over the subscription period.AWS - Our AWS arrangements include global sales of compute, storage, database, and other services. Revenue is allocated to services using stand-alone selling prices and is primarily recognized when the customer uses these services, based on the quantity of services rendered, such as compute or storage capacity delivered on-demand. Certain services, including compute and database, are also offered as a fixed quantity over a specified term, for which revenue is recognized ratably. Sales commissions we pay in connection with contracts that exceed one year are capitalized and amortized over the contract term.Other - Other revenue includes sales related to various other offerings, such as certain licensing and distribution of video content, health care services, and shipping services, and our co-branded credit card agreements. Revenue is recognized when content is licensed or distributed and as or when services are performed.Return Allowances Return allowances, which reduce revenue and cost of sales, are estimated using historical experience. Liabilities for return allowances are included in “Accrued expenses and other” and were $1.0 billion, $1.3 billion, and $1.4 billion as of December 31, 2021, 2022, and 2023. Additions to the allowance were $5.1 billion, $5.5 billion, and $5.2 billion and deductions from the allowance were $4.9 billion, $5.2 billion, and $5.1 billion in 2021, 2022, and 2023. Included in “Inventories” on our consolidated balance sheets are assets totaling $882 million, $948 million, and $992 million as of December 31, 2021, 2022, and 2023, for the rights to recover products from customers associated with our liabilities for return allowances. Cost of SalesCost of sales primarily consists of the purchase price of consumer products, inbound and outbound shipping costs, including costs related to sortation and delivery centers and where we are the transportation service provider, and digital media content costs where we record revenue gross, including video and music. Shipping costs to receive products from our suppliers are included in our inventory, and recognized as cost of sales upon sale of products to our customers. Payment processing and related transaction costs, including those associated with seller transactions, are classified in “Fulfillment” on our consolidated statements of operations.Vendor AgreementsWe have agreements with our vendors to receive consideration primarily for cooperative marketing efforts, promotions, incentives, and volume rebates. We generally consider these amounts received from vendors to be a reduction of the prices we pay for their goods, including property and equipment, or services, and are recorded as a reduction of the cost of inventory, cost of services, or cost of property and equipment. Volume rebates typically depend on reaching minimum purchase thresholds. We evaluate the likelihood of reaching purchase thresholds using past experience and current year forecasts. When volume rebates can be reasonably estimated, we record a portion of the rebate as we make progress towards the purchase threshold.FulfillmentFulfillment costs primarily consist of those costs incurred in operating and staffing our North America and International segments’ fulfillment centers, physical stores, and customer service centers, including facilities and equipment expenses, such as depreciation and amortization, and rent; costs attributable to buying, receiving, inspecting, and warehousing inventories; picking, packaging, and preparing customer orders for shipment; payment processing and related transaction costs, including costs associated with our guarantee for certain seller transactions; responding to inquiries from customers; and supply chain management for our manufactured electronic devices. Fulfillment costs also include amounts paid to third parties that assist us in fulfillment and customer service operations.44Table of ContentsTechnology and InfrastructureTechnology and infrastructure costs include payroll and related expenses for employees involved in the research and development of new and existing products and services, development, design, and maintenance of our stores, curation and display of products and services made available in our online stores, and infrastructure costs. Infrastructure costs include servers, networking equipment, and data center related depreciation and amortization, rent, utilities, and other expenses necessary to support AWS and other Amazon businesses. Collectively, these costs reflect the investments we make in order to offer a wide variety of products and services to our customers, including expenditures related to initiatives to build and deploy innovative and efficient software and electronic devices and the development of a satellite network for global broadband service and autonomous vehicles for ride-hailing services. Technology and infrastructure costs are generally expensed as incurred.Sales and MarketingSales and marketing costs include advertising and payroll and related expenses for personnel engaged in marketing and selling activities, including sales commissions related to AWS. We pay commissions to third parties when their customer referrals result in sales. We also participate in cooperative advertising arrangements with certain of our vendors, and other third parties.Advertising and other promotional costs to market our products and services are expensed as incurred and were $16.9 billion, $20.6 billion, and $20.3 billion in 2021, 2022, and 2023. General and AdministrativeGeneral and administrative expenses primarily consist of costs for corporate functions, including payroll and related expenses; facilities and equipment expenses, such as depreciation and amortization expense and rent; and professional fees.Stock-Based CompensationCompensation cost for all equity-classified stock awards expected to vest is measured at fair value on the date of grant and recognized over the service period. The fair value of restricted stock units is determined based on the number of shares granted and the quoted price of our common stock. Such value is recognized as expense over the service period, net of estimated forfeitures, using the accelerated method. Under this method, approximately 50% of the grant date fair value is recognized as expense in the first year of grant for the majority of our stock-based compensation awards. The accelerated method also adds a higher level of sensitivity and complexity in estimating forfeitures. If an award is forfeited early in its life, the adjustment to compensation expense is much greater under an accelerated method than under a straight-line method. The estimated number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including historical forfeiture experience by grant year and employee level. Additionally, stock-based compensation includes stock appreciation rights that are expected to settle in cash. These liability-classified awards are remeasured to fair value at the end of each reporting period until settlement or expiration. Other Operating Expense (Income), NetOther operating expense (income), net, consists primarily of the amortization of intangible assets, and asset impairments for physical store closures in 2022 and for fulfillment network facilities and physical store closures in 2023. Other Income (Expense), NetOther income (expense), net, is as follows (in millions):Year Ended December 31,202120222023Marketable equity securities valuation gains (losses)$11,526 $(13,870)$984 Equity warrant valuation gains (losses)1,315 (2,132)26 Upward adjustments relating to equity investments in private companies1,866 76 40 Foreign currency gains (losses)(55)(340)65 Other, net(19)(540)(177)Total other income (expense), net$14,633 $(16,806)$938 45Table of ContentsIncluded in other income (expense), net in 2022 and 2023 is a marketable equity securities valuation gain (loss) of $(12.7) billion and $797 million from our equity investment in Rivian Automotive, Inc. (“Rivian”). Our investment in Rivian’s preferred stock was accounted for at cost, with adjustments for observable changes in prices or impairments, prior to Rivian’s initial public offering in November 2021, which resulted in the conversion of our preferred stock to Class A common stock. As of December 31, 2023, we held 158 million shares of Rivian’s Class A common stock, representing an approximate 16% ownership interest, and an approximate 15% voting interest. We determined that we have the ability to exercise significant influence over Rivian through our equity investment, our commercial arrangement for the purchase of electric vehicles and jointly-owned intellectual property, and one of our employees serving on Rivian’s board of directors. We elected the fair value option to account for our equity investment in Rivian, which is included in “Marketable securities” on our consolidated balance sheets, and had a fair value of $2.9 billion and $3.7 billion as of December 31, 2022 and December 31, 2023. The investment was subject to regulatory sales restrictions resulting in a discount for lack of marketability of approximately $800 million as of December 31, 2021, which expired in Q1 2022.Required summarized financial information of Rivian as disclosed in its most recent SEC filings is as follows (in millions):Year Ended December 31, 2021Year Ended December 31, 2022Nine Months EndedSeptember 30, 2023Revenues$55 $1,658 $3,119 Gross profit(465)(3,123)(1,424)Loss from operations(4,220)(6,856)(4,158)Net loss(4,688)(6,752)(3,911)December 31, 2022September 30, 2023Total current assets$13,130 $12,086 Total assets17,876 16,456 Total current liabilities2,424 2,624 Total liabilities4,077 5,904 Income TaxesIncome tax expense includes U.S. (federal and state) and foreign income taxes. Certain foreign subsidiary earnings and losses are subject to current U.S. taxation and the subsequent repatriation of those earnings is not subject to tax in the U.S. We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as net operating loss and tax credit carryforwards, and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered.Deferred tax assets represent amounts available to reduce income taxes payable in future periods. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent we believe they will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including recent cumulative loss experience and expectations of future earnings, capital gains and investment in such jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. We utilize a two-step approach to recognizing and measuring uncertain income tax positions (income tax contingencies). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating our tax positions and estimating our tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. We include interest and penalties related to our income tax contingencies in income tax expense.46Table of ContentsFair Value of Financial InstrumentsFair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets.Level 2 — Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.Level 3 — Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.We measure the fair value of money market funds and certain marketable equity securities based on quoted prices in active markets for identical assets or liabilities. Other marketable securities were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. We did not hold significant amounts of marketable securities categorized as Level 3 assets as of December 31, 2022 and 2023.We hold equity warrants giving us the right to acquire stock of other companies. As of December 31, 2022 and 2023, these warrants had a fair value of $2.1 billion and $2.2 billion, and are recorded within “Other assets” on our consolidated balance sheets with gains and losses recognized in “Other income (expense), net” on our consolidated statements of operations. These warrants are classified as Level 2 and 3 assets. Cash and Cash EquivalentsWe classify all highly liquid instruments with an original maturity of three months or less as cash equivalents.InventoriesInventories, consisting of products available for sale, are primarily accounted for using the first-in, first-out method, and are valued at the lower of cost and net realizable value. This valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category. The inventory valuation allowance, representing a write-down of inventory, was $2.8 billion and $3.0 billion as of December 31, 2022 and 2023.We provide Fulfillment by Amazon services in connection with certain of our sellers’ programs. Third-party sellers maintain ownership of their inventory, regardless of whether fulfillment is provided by us or the third-party sellers, and therefore these products are not included in our inventories.We also purchase electronic device components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate supply, we enter into agreements with contract manufacturers and suppliers for certain electronic device components. We have certain non-cancellable purchase commitments arising from these agreements. These commitments are based on forecasted customer demand. If we reduce these commitments, we may incur additional costs. We also have firm, non-cancellable commitments for certain products offered in our Whole Foods Market stores. Accounts Receivable, Net and OtherIncluded in “Accounts receivable, net and other” on our consolidated balance sheets are receivables primarily related to customers, vendors, and sellers, as well as prepaid expenses and other current assets. As of December 31, 2022 and 2023, customer receivables, net, were $26.6 billion and $34.1 billion, vendor receivables, net, were $6.9 billion and $8.5 billion, seller receivables, net, were $1.3 billion and $1.0 billion, and other receivables, net, were $3.1 billion and $3.3 billion. Seller receivables are amounts due from sellers related to our seller lending program, which provides funding to sellers primarily to procure inventory. Prepaid expenses and other current assets were $4.5 billion and $5.4 billion as of December 31, 2022 and December 31, 2023.We estimate losses on receivables based on expected losses, including our historical experience of actual losses. Receivables are considered impaired and written-off when it is probable that all contractual payments due will not be collected in accordance with the terms of the agreement. The allowance for doubtful accounts was $1.1 billion, $1.4 billion, and $1.7 billion as of December 31, 2021, 2022, and 2023. Additions to the allowance were $1.0 billion, $1.6 billion, and $1.9 billion, and deductions to the allowance were $1.1 billion, $1.3 billion, and $1.6 billion in 2021, 2022, and 2023.47Table of ContentsSoftware Development CostsWe incur software development costs related to products to be sold, leased, or marketed to external users, internal-use software, and our websites. Software development costs capitalized were not significant for the years presented. All other costs, including those related to design or maintenance, are expensed as incurred. Property and Equipment, NetProperty and equipment are stated at cost less accumulated depreciation and amortization. Incentives that we receive from property and equipment vendors are recorded as a reduction to our costs. Property includes buildings and land that we own, along with property we have acquired under build-to-suit lease arrangements when we have control over the building during the construction period and finance lease arrangements. Equipment includes assets such as servers and networking equipment, heavy equipment, and other fulfillment equipment. Depreciation and amortization is recorded on a straight-line basis over the estimated useful lives of the assets (generally the lesser of 40 years or the remaining life of the underlying building, four years prior to January 1, 2022 and five years subsequent to January 1, 2022 for our servers, five years prior to January 1, 2022 and six years subsequent to January 1, 2022 for our networking equipment, ten years for heavy equipment, and three to ten years for other fulfillment equipment). Depreciation and amortization expense is classified within the corresponding operating expense categories on our consolidated statements of operations. LeasesWe categorize leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those leases that allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance leases are recorded in “Property and equipment, net.” All other leases are categorized as operating leases. Our leases generally have terms that range from one to ten years for equipment and one to twenty years for property.Certain lease contracts include obligations to pay for other services, such as operations and maintenance. For leases of property, we account for these other services as a component of the lease. For substantially all other leases, the services are accounted for separately and we allocate payments to the lease and other services components based on estimated stand-alone prices.Lease liabilities are recognized at the present value of the fixed lease payments, reduced by landlord incentives using a discount rate based on similarly secured borrowings available to us. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives, plus any direct costs from executing the leases or lease prepayments reclassified from “Other assets” upon lease commencement. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.When we have the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and it is reasonably certain that we will exercise the option, we consider the option in determining the classification and measurement of the lease. Our leases may include variable payments based on measures that include changes in price indices, market interest rates, or the level of sales at a physical store, which are expensed as incurred. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease. Finance lease assets are amortized within operating expenses on a straight-line basis over the shorter of the estimated useful lives of the assets or, in the instance where title does not transfer at the end of the lease term, the lease term. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term.We establish assets and liabilities for the present value of estimated future costs to retire long-lived assets at the termination or expiration of a lease. Such assets are amortized over the lease period into operating expense, and the recorded liabilities are accreted to the future value of the estimated retirement costs.Financing ObligationsWe record assets and liabilities for estimated construction costs under build-to-suit lease arrangements when we have control over the building during the construction period. If we continue to control the building after the construction period, the arrangement is classified as a financing obligation instead of a lease. The building is depreciated over the shorter of its useful life or the term of the obligation. If we do not control the building after the construction period ends, the assets and liabilities for construction costs are derecognized, and we classify the lease as operating. 48Table of ContentsGoodwill and Indefinite-Lived Intangible AssetsWe evaluate goodwill and indefinite-lived intangible assets for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. We may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying value and if so, we perform a quantitative test. We compare the carrying value of each reporting unit and indefinite-lived intangible asset to its estimated fair value and if the fair value is determined to be less than the carrying value, we recognize an impairment loss for the difference. We estimate the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on expected category expansion, pricing, market segment share, and general economic conditions.We completed the required annual impairment test of goodwill for all reporting units and indefinite-lived intangible assets as of April 1, 2023, resulting in no impairments. The fair value of our reporting units substantially exceeded their carrying value. There were no events that caused us to update our annual impairment test. See “Note 5 — Acquisitions, Goodwill, and Acquired Intangible Assets.”Other AssetsIncluded in “Other assets” on our consolidated balance sheets are amounts primarily related to video and music content, net of accumulated amortization; long-term deferred tax assets; acquired intangible assets, net of accumulated amortization; equity warrant assets and certain equity investments; satellite network launch services deposits; and affordable housing loans. We recognize certain transactions with governments when there is reasonable assurance that incentives included in the agreements, such as cash or certain tax credits, will be received and we are able to comply with any related conditions. These incentives are recorded as reductions to the cost of related assets or expenses.Digital Video and Music ContentWe obtain video content, inclusive of episodic television and movies, and music content for customers through licensing agreements that have a wide range of licensing provisions including both fixed and variable payment schedules. When the license fee for a specific video or music title is determinable or reasonably estimable and the content is available to us, we recognize an asset and a corresponding liability for the amounts owed. We reduce the liability as payments are made and we amortize the asset to “Cost of sales” on an accelerated basis, based on estimated usage or viewing patterns, or on a straight-line basis. If the licensing fee is not determinable or reasonably estimable, no asset or liability is recorded and licensing costs are expensed as incurred. We also develop original video content for which the production costs are capitalized and amortized to “Cost of sales” predominantly on an accelerated basis that follows the estimated viewing patterns associated with the content. The weighted average remaining life of our capitalized video content is 3.5 years. We review usage and viewing patterns impacting the amortization of capitalized video content on an ongoing basis and reflect any changes prospectively. Our produced and licensed video content is primarily monetized together as a unit, referred to as a film group, in each major geography where we offer Amazon Prime memberships. These film groups are evaluated for impairment whenever an event occurs or circumstances change indicating the fair value is less than the carrying value. The total capitalized costs of video, which is primarily released content, and music as of December 31, 2022 and 2023 were $16.7 billion and $17.4 billion. Total video and music expense was $16.6 billion and $18.9 billion for the year ended December 31, 2022 and 2023. Total video and music expense includes licensing and production costs associated with content offered within Amazon Prime memberships, and costs associated with digital subscriptions and sold or rented content.InvestmentsWe generally invest our excess cash in AAA-rated money market funds and investment grade short- to intermediate-term marketable debt securities. Such investments are included in “Cash and cash equivalents” or “Marketable securities” on the accompanying consolidated balance sheets. Marketable debt securities are classified as available-for-sale and reported at fair value with unrealized gains and losses included in “Accumulated other comprehensive income (loss).” Each reporting period, we evaluate whether declines in fair value below carrying value are due to expected credit losses, as well as our ability and intent to hold the investment until a forecasted recovery occurs. Expected credit losses are recorded as an allowance through “Other income (expense), net” on our consolidated statements of operations. Convertible notes classified as available for sale, equity investments in private companies for which we do not have the ability to exercise significant influence and accounted for at cost, and equity investments accounted for using the equity method of accounting are included within “Other assets” on our consolidated balance sheets.49Table of ContentsIn Q3 2023, we invested in a $1.25 billion note from Anthropic, PBC, which is convertible to equity. The note is classified as available for sale and reported at fair value with unrealized gains and losses included in “Accumulated other comprehensive income (loss).” The note is classified as a Level 3 asset. We have an agreement that expires in Q1 2024 to invest up to an additional $2.75 billion in a second convertible note. We also have a commercial arrangement primarily for the provision of AWS cloud services, which includes the use of AWS chips.Equity investments in private companies for which we do not have the ability to exercise significant influence are accounted for at cost, with adjustments for observable changes in prices or impairments, with adjustments recognized in “Other income (expense), net” on our consolidated statements of operations. Each reporting period, we perform a qualitative assessment to evaluate whether the investment is impaired. Our assessment includes a review of recent operating results and trends, recent sales/acquisitions of the investee securities, and other publicly available data. If the investment is impaired, we write it down to its estimated fair value. As of December 31, 2022 and 2023, these investments had a carrying value of $715 million and $754 million.Equity investments are accounted for using the equity method of accounting, or at fair value if we elect the fair value option, if the investment gives us the ability to exercise significant influence, but not control, over an investee. Our share of the earnings or losses as reported by equity-method investees, amortization of basis differences, related gains or losses, and impairments, if any, are recognized in “Equity-method investment activity, net of tax” on our consolidated statements of operations. Each reporting period, we evaluate whether declines in fair value below carrying value are other-than-temporary and if so, we write down the investment to its estimated fair value. Equity investments that have readily determinable fair values, including investments for which we have elected the fair value option, are included in “Marketable securities” on our consolidated balance sheets and measured at fair value with changes recognized in “Other income (expense), net” on our consolidated statements of operations. Long-Lived AssetsLong-lived assets, other than goodwill and indefinite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable.For long-lived assets used in operations, including lease assets, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value. Long-lived assets are considered held for sale when certain criteria are met, including when management has committed to a plan to sell the asset, the asset is available for sale in its immediate condition, and the sale is probable within one year of the reporting date. Assets held for sale are reported at the lower of cost or fair value less costs to sell. Assets held for sale were not significant as of December 31, 2022 and 2023.Accrued Expenses and OtherIncluded in “Accrued expenses and other” on our consolidated balance sheets are liabilities primarily related to leases and asset retirement obligations, tax-related liabilities, current debt, payroll and related expenses, unredeemed gift cards, self-insurance liabilities, customer liabilities, marketing liabilities, acquired digital media content, and other operating expenses.As of December 31, 2022 and 2023, our liabilities for payroll related expenses were $7.7 billion and our liabilities for unredeemed gift cards were $5.4 billion and $5.3 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.Self-Insurance LiabilitiesAlthough we maintain certain high-deductible, third-party insurance coverage for catastrophic losses, we effectively self-insure for exposure primarily related to workers’ compensation, employee health care benefits, general and product liability, and automobile liability, including liability resulting from third-party transportation service providers. We estimate self-insurance liabilities by considering historical claims experience, frequency and costs of claims, projected claims development, inflation, and other actuarial assumptions. Changes in the number or costs of claims, healthcare costs, judgment and settlement amounts, associated legal expenses, and other factors could cause actual results to differ materially from these estimates. In the fourth quarter of 2022, we increased our reserves for general, product, and automobile liabilities by $1.3 billion primarily driven by changes in our estimates about the costs of asserted and unasserted claims, which was primarily recorded in “Cost of sales” on our consolidated statements of operations and impacted our North America segment. Increases to our reserves driven by changes in estimates were not material to our consolidated results of operations for the years ended December 31, 2021 and 50Table of Contents2023. As of December 31, 2022 and 2023, our total self-insurance liabilities were $4.0 billion and $6.3 billion and are included in “Accrued expenses and other” on our consolidated balance sheets. Unearned RevenueUnearned revenue is recorded when payments are received or due in advance of performing our service obligations and is recognized over the service period. Unearned revenue primarily relates to prepayments of AWS services and Amazon Prime memberships. Our total unearned revenue as of December 31, 2022 was $16.1 billion, of which $12.4 billion was recognized as revenue during the year ended December 31, 2023 and our total unearned revenue as of December 31, 2023 was $20.6 billion. Included in “Other long-term liabilities” on our consolidated balance sheets was $2.9 billion and $5.7 billion of unearned revenue as of December 31, 2022 and 2023. Additionally, we have performance obligations, primarily related to AWS, associated with commitments in customer contracts for future services that have not yet been recognized in our financial statements. For contracts with original terms that exceed one year, those commitments not yet recognized were $155.7 billion as of December 31, 2023. The weighted average remaining life of our long-term contracts is 4.0 years. However, the amount and timing of revenue recognition is largely driven by customer usage, which can extend beyond the original contractual term.Other Long-Term LiabilitiesIncluded in “Other long-term liabilities” on our consolidated balance sheets are liabilities primarily related to financing obligations, unearned revenue, asset retirement obligations, tax contingencies, digital video and music content, and deferred tax liabilities.Foreign CurrencyWe have internationally-focused stores for which the net sales generated, as well as most of the related expenses directly incurred from those operations, are denominated in local functional currencies. The functional currency of our subsidiaries that either operate or support these stores is generally the same as the local currency. Assets and liabilities of these subsidiaries are translated into U.S. Dollars at period-end foreign exchange rates, and revenues and expenses are translated at average rates prevailing throughout the period. Translation adjustments are included in “Accumulated other comprehensive income (loss),” a separate component of stockholders’ equity. Transaction gains and losses including intercompany transactions denominated in a currency other than the functional currency of the entity involved are included in “Other income (expense), net” on our consolidated statements of operations. In connection with the settlement and remeasurement of intercompany balances, we recorded gains (losses) of $19 million, $386 million, and $(329) million in 2021, 2022, and 2023.Accounting Pronouncements Not Yet AdoptedIn December 2023, the Financial Accounting Standards Board issued an Accounting Standards Update (“ASU”) amending existing income tax disclosure guidance, primarily requiring more detailed disclosure for income taxes paid and the effective tax rate reconciliation. The ASU is effective for annual reporting periods beginning after December 15, 2024, with early adoption permitted and can be applied on either a prospective or retroactive basis. We are currently evaluating the ASU to determine its impact on our income tax disclosures. 51Table of ContentsNote 2 — FINANCIAL INSTRUMENTSCash, Cash Equivalents, Restricted Cash, and Marketable SecuritiesAs of December 31, 2022 and 2023, our cash, cash equivalents, restricted cash, and marketable securities primarily consisted of cash, AAA-rated money market funds, U.S. and foreign government and agency securities, other investment grade securities, and marketable equity securities. Cash equivalents and marketable securities are recorded at fair value. The following table summarizes, by major security type, our cash, cash equivalents, restricted cash, and marketable securities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in millions): December 31, 2022 Cost orAmortizedCostGrossUnrealizedGainsGrossUnrealizedLossesTotalEstimatedFair ValueCash$10,666 $— $— $10,666 Level 1 securities:Money market funds27,899 — — 27,899 Equity securities (1)3,709 Level 2 securities:Foreign government and agency securities537 — (2)535 U.S. government and agency securities2,301 — (155)2,146 Corporate debt securities23,111 — (484)22,627 Asset-backed securities2,721 — (149)2,572 Other debt securities249 — (12)237 $67,484 $— $(802)$70,391 Less: Restricted cash, cash equivalents, and marketable securities (2)(365)Total cash, cash equivalents, and marketable securities$70,026 52Table of Contents December 31, 2023 Cost orAmortizedCostGrossUnrealizedGainsGrossUnrealizedLossesTotalEstimatedFair ValueCash$11,706 $— $— $11,706 Level 1 securities:Money market funds39,160 — — 39,160 Equity securities (1)4,658 Level 2 securities:Foreign government and agency securities505 — — 505 U.S. government and agency securities1,789 1 (91)1,699 Corporate debt securities27,996 — (191)27,805 Asset-backed securities1,707 — (61)1,646 Other debt securities108 — (4)104 $82,971 $1 $(347)$87,283 Less: Restricted cash, cash equivalents, and marketable securities (2)(503)Total cash, cash equivalents, and marketable securities$86,780 ___________________(1)The related unrealized gain (loss) recorded in “Other income (expense), net” was $11.6 billion, $(13.6) billion, and $1.0 billion for the years ended December 31, 2021, 2022, and 2023. (2)We are required to pledge or otherwise restrict a portion of our cash, cash equivalents, and marketable debt securities primarily as collateral for real estate, amounts due to third-party sellers in certain jurisdictions, debt, and standby and trade letters of credit. We classify cash, cash equivalents, and marketable debt 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 7 — Commitments and Contingencies.”The following table summarizes gross gains and gross losses realized on sales of marketable debt securities (in millions):Year Ended December 31,202120222023Realized gains$85 $43 $2 Realized losses38 341 67 The following table summarizes the remaining contractual maturities of our cash equivalents and marketable debt securities as of December 31, 2023 (in millions):AmortizedCostEstimatedFair ValueDue within one year$65,224 $65,159 Due after one year through five years4,635 4,430 Due after five years through ten years411 394 Due after ten years995 936 Total$71,265 $70,919 Actual maturities may differ from the contractual maturities because borrowers may have certain prepayment conditions.53Table of ContentsConsolidated Statements of Cash Flows ReconciliationThe 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, 2022December 31, 2023Cash and cash equivalents$53,888 $73,387 Restricted cash included in accounts receivable, net and other358 497 Restricted cash included in other assets7 6 Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows$54,253 $73,890 Note 3 — PROPERTY AND EQUIPMENTProperty and equipment, at cost, consisted of the following (in millions): December 31, 20222023Gross property and equipment (1):Land and buildings$91,650 $105,293 Equipment157,458 185,039 Other assets4,602 5,116 Construction in progress30,020 28,840 Gross property and equipment283,730 324,288 Total accumulated depreciation and amortization (1)97,015 120,111 Total property and equipment, net$186,715 $204,177 __________________(1)Includes the original cost and accumulated depreciation of fully-depreciated assets.Depreciation and amortization expense on property and equipment was $22.9 billion, $24.9 billion, and $30.2 billion which includes amortization of property and equipment acquired under finance leases of $9.9 billion, $6.1 billion, and $5.9 billion for 2021, 2022, and 2023. 54Table of ContentsNote 4 — LEASESWe have entered into non-cancellable operating and finance leases for fulfillment network, data center, office, and physical store facilities as well as server and networking equipment, aircraft, and vehicles. Gross assets acquired under finance leases, including those where title transfers at the end of the lease, are recorded in “Property and equipment, net” and were $68.0 billion and $62.5 billion as of December 31, 2022 and 2023. Accumulated amortization associated with finance leases was $45.2 billion and $44.7 billion as of December 31, 2022 and 2023. Lease cost recognized in our consolidated statements of operations is summarized as follows (in millions): Year Ended December 31,202120222023Operating lease cost$7,199 $8,847 $10,550 Finance lease cost:Amortization of lease assets9,857 6,097 5,899 Interest on lease liabilities473 361 304 Finance lease cost10,330 6,458 6,203 Variable lease cost1,556 1,852 2,165 Total lease cost$19,085 $17,157 $18,918 Other information about lease amounts recognized in our consolidated financial statements is as follows: December 31, 2022December 31, 2023 Weighted-average remaining lease term – operating leases11.6 years11.3 yearsWeighted-average remaining lease term – finance leases10.3 years11.9 yearsWeighted-average discount rate – operating leases2.8 %3.3 %Weighted-average discount rate – finance leases2.3 %2.7 %Our lease liabilities were as follows (in millions):December 31, 2022 Operating LeasesFinance LeasesTotalGross lease liabilities$81,273 $18,019 $99,292 Less: imputed interest(12,233)(2,236)(14,469)Present value of lease liabilities69,040 15,783 84,823 Less: current portion of lease liabilities(7,458)(4,397)(11,855)Total long-term lease liabilities$61,582 $11,386 $72,968 December 31, 2023 Operating LeasesFinance LeasesTotalGross lease liabilities$90,777 $14,106 $104,883 Less: imputed interest(15,138)(1,997)(17,135)Present value of lease liabilities75,639 12,109 87,748 Less: current portion of lease liabilities(8,419)(2,032)(10,451)Total long-term lease liabilities$67,220 $10,077 $77,297 55Table of ContentsNote 5 — ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS2021 Acquisition Activity During 2021, we acquired certain companies for an aggregate purchase price of $496 million, net of cash acquired. 2022 Acquisition Activity On March 17, 2022, we acquired MGM Holdings Inc., for cash consideration of approximately $6.1 billion, net of cash acquired, to provide more digital media content options for customers. We also assumed $2.5 billion of debt, which we repaid immediately after closing. The acquired assets primarily consist of $3.4 billion of video content and $4.9 billion of goodwill. During 2022, we also acquired certain other companies for an aggregate purchase price of $141 million, net of cash acquired.2023 Acquisition Activity On February 22, 2023, we acquired 1Life Healthcare, Inc. (One Medical), for cash consideration of approximately $3.5 billion, net of cash acquired, to provide health care options for customers. The acquired assets primarily consist of $1.3 billion of intangible assets and $2.5 billion of goodwill, which is allocated to our North America segment.During 2023, we also acquired certain other companies for an immaterial aggregate purchase price, net of cash acquired. Pro forma results of operations have not been presented because the effects of the 2023 acquisitions, individually and in the aggregate, were not material to our consolidated results of operations. Acquisition-related costs were expensed as incurred and were not significant.In addition, in August 2022, we entered into an agreement to acquire iRobot Corporation, as amended in July 2023, for approximately $1.7 billion, including its debt, subject to customary closing conditions. In January 2024, we and iRobot agreed to terminate the transaction.GoodwillThe 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 the acquired companies is generally not deductible for tax purposes. The following summarizes our goodwill activity in 2022 and 2023 by segment (in millions):NorthAmericaInternationalAWSConsolidatedGoodwill - January 1, 2022$12,758 $1,327 $1,286 $15,371 New acquisitions 3,943 1,054 — 4,997 Other adjustments (1)(80)30 (30)(80)Goodwill - December 31, 202216,621 2,411 1,256 20,288 New acquisitions2,494 — — 2,494 Other adjustments (1)11 1 (5)7 Goodwill - December 31, 2023$19,126 $2,412 $1,251 $22,789 ___________________(1)Primarily includes changes in foreign exchange rates. 56Table of Contents Intangible AssetsAcquired identifiable intangible assets are valued primarily by using discounted cash flows. These assets are included within “Other assets” on our consolidated balance sheets and consist of the following (in millions): December 31, 20222023 AcquiredIntangibles,Gross (1)AccumulatedAmortization (1)AcquiredIntangibles,NetAcquiredIntangibles,Gross (1)AccumulatedAmortization (1)AcquiredIntangibles,NetWeightedAverage LifeRemainingFinite-lived intangible assets (2): Marketing-related$2,407 $(601)$1,806 $2,643 $(738)$1,905 17.5Contract-based3,661 (813)2,848 4,800 (1,129)3,671 11.7Technology- and content-based883 (643)240 743 (340)403 5.1Customer-related184 (128)56 749 (188)561 6.6Total finite-lived intangible assets$7,135 $(2,185)$4,950 $8,935 $(2,395)$6,540 12.5IPR&D and other (3)$1,147 $1,147 $1,147 $1,147 Total acquired intangibles $8,282 $(2,185)$6,097 $10,082 $(2,395)$7,687 ___________________(1)Excludes the original cost and accumulated amortization of fully-amortized intangibles.(2)Finite-lived intangible assets, excluding acquired video content, have estimated useful lives of between one and twenty-five years, and are being amortized to operating expenses on a straight-line basis.(3)Intangible assets acquired in a business combination that are in-process and used in research and development activities are considered indefinite-lived until the completion or abandonment of the research and development efforts. Once the research and development efforts are completed, we determine the useful life and begin amortizing the assets.Amortization expense for acquired finite-lived intangibles was $512 million, $604 million, and $706 million in 2021, 2022, and 2023. Expected future amortization expense of acquired finite-lived intangible assets as of December 31, 2023 is as follows (in millions): Year Ended December 31,2024$715 2025631 2026563 2027552 2028534 Thereafter3,545 $6,540 57Table of ContentsNote 6 — DEBTAs of December 31, 2023, we had $66.5 billion of unsecured senior notes outstanding (the “Notes”) and $682 million of borrowings under our secured revolving credit facility. Our total long-term debt obligations are as follows (in millions):Maturities (1)Stated Interest RatesEffective Interest RatesDecember 31, 2022December 31, 20232014 Notes issuance of $6.0 billion2024 - 20443.80% - 4.95%3.90% - 5.12%4,000 4,000 2017 Notes issuance of $17.0 billion2024 - 20572.80% - 5.20%2.95% - 4.33%16,000 15,000 2020 Notes issuance of $10.0 billion2025 - 20600.80% - 2.70%0.88% - 2.77%10,000 9,000 2021 Notes issuance of $18.5 billion2024 - 20610.45% - 3.25%0.57% - 3.31%18,500 17,500 April 2022 Notes issuance of $12.8 billion2024 - 20622.73% - 4.10%2.83% - 4.15%12,750 12,750 December 2022 Notes issuance of $8.3 billion2024 - 20324.55% - 4.70%4.61% - 4.83%8,250 8,250 Credit Facility1,042 682 Total face value of long-term debt70,542 67,182 Unamortized discount and issuance costs, net(393)(374)Less: current portion of long-term debt(2,999)(8,494)Long-term debt$67,150 $58,314 ___________________(1)The weighted-average remaining lives of the 2014, 2017, 2020, 2021, April 2022, and December 2022 Notes were 11.6, 14.1, 17.5, 13.1, 12.3, and 4.9 years as of December 31, 2023. The combined weighted-average remaining life of the Notes was 12.7 years as of December 31, 2023.Interest on the Notes is payable semi-annually in arrears. We may redeem the Notes at any time in whole, or from time to time, in part at specified redemption prices. We are not subject to any financial covenants under the Notes. The estimated fair value of the Notes was approximately $61.4 billion and $60.6 billion as of December 31, 2022 and 2023, which is based on quoted prices for our debt as of those dates. We have a $1.5 billion secured revolving credit facility with a lender that is secured by certain seller receivables, which we may from time to time increase in the future subject to lender approval (the “Credit Facility”). The Credit Facility is available until August 2025, bears interest based on the daily Secured Overnight Financing Rate plus 1.25%, and has a commitment fee of up to 0.45% on the undrawn portion. There were $1.0 billion and $682 million of borrowings outstanding under the Credit Facility as of December 31, 2022 and 2023, which had an interest rate of 5.6% and 6.6%, respectively. As of December 31, 2022 and 2023, we have pledged $1.2 billion and $806 million of our cash and seller receivables as collateral for debt related to our Credit Facility. The estimated fair value of the Credit Facility, which is based on Level 2 inputs, approximated its carrying value as of December 31, 2022 and 2023.As of December 31, 2023, future principal payments for our total long-term debt were as follows (in millions):Year Ended December 31,2024$8,500 20255,286 20263,146 20278,750 20282,250 Thereafter39,250 $67,182 In January 2023, we entered into an $8.0 billion unsecured 364-day term loan with a syndicate of lenders (the “Term Loan”), maturing in January 2024 and bearing interest at the Secured Overnight Financing Rate specified in the Term Loan plus 0.75%. The Term Loan was classified as short-term debt and included within “Accrued expenses and other” on our consolidated balance sheets. As of December 31, 2023, the entire amount of the Term Loan has been repaid.We have U.S. Dollar and Euro commercial paper programs (the “Commercial Paper Programs”) under which we may from time to time issue unsecured commercial paper up to a total of $20.0 billion (including up to €3.0 billion) at the date of issue, with individual maturities that may vary but will not exceed 397 days from the date of issue. There were $6.8 billion of 58Table of Contentsborrowings outstanding under the Commercial Paper Programs as of December 31, 2022, which were included in “Accrued expenses and other” on our consolidated balance sheets and had a weighted-average effective interest rate, including issuance costs, of 4.5%. There were no borrowings outstanding under the Commercial Paper Programs as of December 31, 2023. We use the net proceeds from the issuance of commercial paper for general corporate purposes.In November 2023, we entered into a $15.0 billion unsecured revolving credit facility with a syndicate of lenders (the “Credit Agreement”), which replaced the prior amended and restated credit agreement entered into in March 2022. The Credit Agreement has a term that extends to November 2028 and may be extended for one or more additional one-year terms if approved by the lenders. The interest rate applicable to outstanding balances under the Credit Agreement is the applicable benchmark rate specified in the Credit Agreement plus 0.45%, with a commitment fee of 0.03% on the undrawn portion of the credit facility. There were no borrowings outstanding under the Credit Agreement or the prior amended and restated credit agreement as of December 31, 2022 and 2023.In November 2023, we also entered into a $5.0 billion unsecured 364-day revolving credit facility with a syndicate of lenders (the “Short-Term Credit Agreement”), which replaced the prior 364-day revolving credit agreement entered into in November 2022. The Short-Term Credit Agreement matures in October 2024 and may be extended for one additional period of 364 days if approved by the lenders. The interest rate applicable to outstanding balances under the Short-Term Credit Agreement is the Secured Overnight Financing Rate specified in the Short-Term Credit Agreement plus 0.45%, with a commitment fee of 0.03% on the undrawn portion. There were no borrowings outstanding under the Short-Term Credit Agreement or the prior 364-day revolving credit agreement as of December 31, 2022 and 2023. We also utilize other short-term credit facilities for working capital purposes. There were $1.2 billion and $147 million of borrowings outstanding under these facilities as of December 31, 2022 and 2023, which were included in “Accrued expenses and other” on our consolidated balance sheets. In addition, we had $6.8 billion of unused letters of credit as of December 31, 2023. 59Table of ContentsNote 7 — COMMITMENTS AND CONTINGENCIESCommitmentsThe following summarizes our principal contractual commitments, excluding open orders for purchases that support normal operations and are generally cancellable, as of December 31, 2023 (in millions): Year Ended December 31, 20242025202620272028ThereafterTotalLong-term debt principal and interest$10,616 $7,175 $4,858 $10,404 $3,643 $60,176 $96,872 Operating lease liabilities11,229 9,922 9,156 8,321 7,546 44,603 90,777 Finance lease liabilities, including interest2,292 1,471 1,369 1,123 1,022 6,829 14,106 Financing obligations, including interest (1)469 462 468 476 484 6,282 8,641 Leases not yet commenced2,034 2,620 2,836 2,852 2,979 24,860 38,181 Unconditional purchase obligations (2)9,432 7,823 5,901 4,463 1,912 5,953 35,484 Other commitments (3)3,273 1,390 1,125 759 680 9,121 16,348 Total commitments$39,345 $30,863 $25,713 $28,398 $18,266 $157,824 $300,409 ___________________(1)Includes non-cancellable financing obligations for fulfillment network and data center facilities. Excluding interest, current financing obligations of $266 million and $271 million are recorded within “Accrued expenses and other” and $6.7 billion and $6.6 billion are recorded within “Other long-term liabilities” as of December 31, 2022 and 2023. The weighted-average remaining term of the financing obligations was 17.9 years and 17.0 years and the weighted-average imputed interest rate was 3.1% as of December 31, 2022 and 2023.(2)Includes unconditional purchase obligations related to long-term agreements to acquire and license digital media content that are not reflected on the consolidated balance sheets, and certain products offered in our Whole Foods Market stores. 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. Renewable energy agreements based on actual generation without a fixed or minimum volume commitment are not included. These agreements also provide the right to receive renewable energy certificates for no additional consideration.(3)Includes asset retirement obligations, liabilities associated with digital media content agreements with initial terms greater than one year, and the estimated timing and amounts of payments for rent and tenant improvements associated with build-to-suit lease arrangements that are under construction. Excludes approximately $5.2 billion of income tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period of payment, if any.SuppliersDuring 2023, no vendor accounted for 10% or more of our purchases. We generally do not have long-term contracts or arrangements with our vendors to guarantee the availability of merchandise, particular payment terms, or the extension of credit limits.Other ContingenciesWe are disputing claims and denials of refunds or credits, and monitoring or evaluating potential claims, related to various non-income taxes (such as sales, value added, consumption, service, and similar taxes), including in jurisdictions in which we already collect and remit these taxes. These non-income tax controversies typically include (i) the taxability of products and services, including cross-border intercompany transactions, (ii) collection and withholding on transactions with third parties, including as a result of evolving requirements imposed on marketplaces with respect to third-party sellers, and (iii) the adequacy of compliance with reporting obligations, including evolving documentation requirements. Due to the inherent complexity and uncertainty of these matters and the judicial and regulatory processes in certain jurisdictions, the final outcome of any such controversies may be materially different from our expectations.Legal ProceedingsThe Company is involved from time to time in claims, proceedings, and litigation, including the following:In November 2015, Eolas Technologies, Inc. filed a complaint against Amazon.com, Inc. in the United States District Court for the Eastern District of Texas. The complaint alleges, among other things, that the use of “interactive features” on www.amazon.com, including “search suggestions and search results,” infringes U.S. Patent No. 9,195,507, entitled “Distributed 60Table of ContentsHypermedia Method and System for Automatically Invoking External Application Providing Interaction and Display of Embedded Objects Within a Hypermedia Document.” The complaint sought a judgment of infringement together with costs and attorneys’ fees. In February 2016, Eolas filed an amended complaint seeking, among other things, an unspecified amount of damages. In February 2017, Eolas alleged in its damages report that in the event of a finding of liability Amazon could be subject to $130 million to $250 million in damages. In April 2017, the case was transferred to the United States District Court for the Northern District of California. In May 2022, the district court granted summary judgment, holding that the patent is invalid. In June 2022, Eolas filed a notice of appeal. In February 2024, the United States Court of Appeals for the Federal Circuit affirmed the district court’s judgment. We dispute the allegations of wrongdoing and will continue to defend ourselves vigorously in this matter.In May 2018, Rensselaer Polytechnic Institute and CF Dynamic Advances LLC filed a complaint against Amazon.com, Inc. in the United States District Court for the Northern District of New York. The complaint alleges, among other things, that “Alexa Voice Software and Alexa enabled devices” infringe U.S. Patent No. 7,177,798, entitled “Natural Language Interface Using Constrained Intermediate Dictionary of Results.” The complaint seeks an injunction, an unspecified amount of damages, enhanced damages, an ongoing royalty, interest, attorneys’ fees, and costs. In March 2023, the plaintiffs alleged in their damages report that in the event of a finding of liability Amazon could be subject to $140 million to $267 million in damages. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter.In December 2018, Kove IO, Inc. filed a complaint against Amazon Web Services, Inc. in the United States District Court for the Northern District of Illinois. The complaint alleges, among other things, that Amazon S3 and DynamoDB infringe U.S. Patent Nos. 7,814,170 and 7,103,640, each entitled “Network Distributed Tracking Wire Transfer Protocol”; and 7,233,978, entitled “Method and Apparatus for Managing Location Information in a Network Separate from the Data to Which the Location Information Pertains.” The complaint seeks an unspecified amount of damages, enhanced damages, attorneys’ fees, costs, interest, and injunctive relief. In March 2022, the case was stayed pending resolution of review petitions we filed with the United States Patent and Trademark Office. In November 2022, the stay was lifted. In July 2023, Kove alleged in its damages report that in the event of a finding of liability Amazon Web Services could be subject to $517 million to $1.03 billion in damages. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. Beginning in June 2019 with Wilcosky v. Amazon.com, Inc., now pending in the United States District Court for the Northern District of Illinois (“N.D. Ill.”), private litigants have filed a number of cases in U.S. federal and state courts, including Hogan v. Amazon.com, Inc. (N.D. Ill.), alleging, among other things, that Amazon’s collection, storage, use, retention, and protection of biometric identifiers violated the Illinois Biometric Information Privacy Act. The complaints allege purported classes of Illinois residents who had biometric identifiers collected through Amazon products or services, including Amazon Photos, Alexa, AWS cloud services, Ring, Amazon Connect, Amazon’s Flex driver app, and Amazon’s virtual try-on technology. The complaints seek certification as class actions, unspecified amounts of damages, injunctive relief, attorneys’ fees, costs, and interest. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in these matters.Beginning in March 2020 with Frame-Wilson v. Amazon.com, Inc. filed in the United States District Court for the Western District of Washington (“W.D. Wash.”), private litigants have filed a number of cases in the U.S. and Canada alleging, among other things, price fixing arrangements between Amazon.com, Inc. and vendors and third-party sellers in Amazon’s stores, monopolization and attempted monopolization, and consumer protection and unjust enrichment claims. Attorneys General for the District of Columbia and California brought similar suits in May 2021 and September 2022 in the Superior Court of the District of Columbia and the California Superior Court for the County of San Francisco, respectively. Some of the private cases include allegations of several distinct purported classes, including consumers who purchased a product through Amazon’s stores and consumers who purchased a product offered by Amazon through another e-commerce retailer. The complaints seek billions of dollars of alleged damages, treble damages, punitive damages, injunctive relief, civil penalties, attorneys’ fees, and costs. The Federal Trade Commission and a number of state Attorneys General filed a similar lawsuit in September 2023 in the W.D. Wash. alleging violations of federal antitrust and state antitrust and consumer protection laws. That complaint alleges, among other things, that Amazon has a monopoly in markets for online superstores and marketplace services, and unlawfully maintains those monopolies through anticompetitive practices relating to our pricing policies, advertising practices, the structure of Prime, and promotion of our own products on our website. The complaint seeks injunctive and structural relief, an unspecified amount of damages, and costs. Amazon’s motions to dismiss were granted in part and denied in part in Frame-Wilson in March 2022 and March 2023, De Coster v. Amazon.com, Inc. (W.D. Wash.) in January 2023, and the California Attorney General’s lawsuit in March 2023. All three courts dismissed claims alleging that Amazon’s pricing policies are inherently illegal and denied dismissal of claims alleging that Amazon’s pricing policies are an unlawful restraint of trade. In March 2022, the DC Superior Court dismissed the DC Attorney General’s lawsuit in its entirety; the dismissal is under appeal. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in these matters.In October 2020, Broadband iTV, Inc. filed a complaint against Amazon.com, Inc., Amazon.com Services LLC, and Amazon Web Services, Inc. in the United States District Court for the Western District of Texas. The complaint alleges, among other things, that certain Amazon Prime Video features and services infringe U.S. Patent Nos. 9,648,388, 10,546,750, and 10,536,751, each entitled “Video-On-Demand Content Delivery System for Providing Video-On-Demand Services to TV 61Table of ContentsServices Subscribers”; 10,028,026, entitled “System for Addressing On-Demand TV Program Content on TV Services Platform of a Digital TV Services Provider”; and 9,973,825, entitled “Dynamic Adjustment of Electronic Program Guide Displays Based on Viewer Preferences for Minimizing Navigation in VOD Program Selection.” The complaint seeks an unspecified amount of damages. In April 2022, Broadband iTV alleged in its damages report that in the event of a finding of liability Amazon could be subject to $166 million to $986 million in damages. In September 2022, the court granted summary judgment, holding that the patents are invalid. In October 2022, Broadband iTV filed a notice of appeal. We dispute the allegations of wrongdoing and will continue to defend ourselves vigorously in this matter.In July 2021, the Luxembourg National Commission for Data Protection (the “CNPD”) issued a decision against Amazon Europe Core S.à r.l. claiming that Amazon’s processing of personal data did not comply with the EU General Data Protection Regulation. The decision imposes a fine of €746 million and corresponding practice revisions. We believe the CNPD’s decision to be without merit and intend to defend ourselves vigorously in this matter.In December 2021, the Italian Competition Authority (the “ICA”) issued a decision against Amazon Services Europe S.à r.l., Amazon Europe Core S.à r.l., Amazon EU S.à r.l., Amazon Italia Services S.r.l., and Amazon Italia Logistica S.r.l. claiming that certain of our marketplace and logistics practices in Italy infringe EU competition rules. The decision imposes remedial actions and a fine of €1.13 billion, which we have paid and will seek to recover pending conclusion of all appeals. We believe the ICA’s decision to be without merit and intend to defend ourselves vigorously in this matter. In July 2022, Acceleration Bay, LLC filed a complaint against Amazon Web Services, Inc. in the United States District Court for the District of Delaware. The complaint alleges, among other things, that Amazon EC2, Amazon CloudFront, AWS Lambda, Amazon Lumberyard, Luna, Amazon Prime Video, Twitch, Amazon GameLift, GridMate, Amazon EKS, AWS App Mesh, and Amazon VPC infringe U.S. Patent Nos. 6,701,344, entitled “Distributed Game Environment”; 6,714,966, entitled “Information Delivery Service”; 6,732,147, entitled “Leaving a Broadcast Channel”; 6,829,634, entitled “Broadcasting Network”; and 6,910,069, entitled “Joining a Broadcast Channel.” The complaint seeks injunctive relief, an unspecified amount of damages, enhanced damages, interest, attorneys’ fees, and costs. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter.In November 2022, LightGuide, Inc. filed a complaint against Amazon.com, Inc. and Amazon.com Services LLC in the United States District Court for the Eastern District of Texas. The complaint alleges, among other things, that Amazon’s Nike Intent Detection System used in certain fulfillment centers infringes U.S. Patent Nos. 7,515,981, entitled “Light Guided Assembly System”; and 9,658,614 and 10,528,036, each entitled “Light Guided Assembly System and Method.” The complaint seeks an unspecified amount of damages, enhanced damages, attorneys’ fees, costs, interest, and injunctive relief. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. In May 2023, Dialect, LLC filed a complaint against Amazon.com, Inc. and Amazon Web Services, Inc. in the United States District Court for the Eastern District for Virginia. The complaint alleges, among other things, that Amazon’s Alexa-enabled products and services, such as Echo devices, Fire tablets, Fire TV sticks, Fire TVs, Alexa, and Alexa Voice Services, infringe U.S. Patent Nos. 7,693,720 and 9,031,845, each entitled “Mobile Systems and Methods for Responding to Natural Language Speech Utterance”; 8,015,006, entitled “Systems and Methods for Processing Natural Language Speech Utterances with Context-Specific Domain Agents”; 8,140,327, entitled “System and Method for Filtering and Eliminating Noise from Natural Language Utterances to Improve Speech Recognition and Parsing”; 8,195,468 and 9,495,957, each entitled “Mobile Systems and Methods of Supporting Natural Language Human-Machine Interactions”; and 9,263,039, entitled “Systems and Methods for Responding to Natural Language Speech Utterance.” The complaint seeks an unspecified amount of damages, enhanced damages, attorneys’ fees, costs, interest, and injunctive relief. In November 2023, the court granted in part Amazon’s motion to dismiss Dialect’s complaint and dismissed the ‘845 patent from the case. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter.Beginning in October 2023, Nokia Technologies Oy and related entities filed complaints alleging infringement of patents related to video-related technologies against Amazon.com, Inc. and related entities in multiple courts in the United States, India, the United Kingdom, Germany, and Brazil, the Unified Patent Court of the European Union, and the United States International Trade Commission. The complaints allege, among other things, that certain Amazon Prime Video services and features of Amazon devices carrying the Prime Video app infringe Nokia’s patents; some of the complaints additionally allege infringement by Freevee, Twitch, and Amazon voice assistants. The complaints seek, among other things, injunctive relief and, in some cases, unspecified money damages, enhanced damages, attorneys’ fees, costs, interest, and declaratory relief. These matters are at various procedural stages, with preliminary injunctions issued in certain instances. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in these matters.In addition, we are regularly subject to claims, litigation, and other proceedings, including potential regulatory proceedings, involving patent and other intellectual property matters, taxes, labor and employment, competition and antitrust, privacy and data protection, consumer protection, commercial disputes, goods and services offered by us and by third parties, and other matters.62Table of ContentsThe outcomes of our legal proceedings and other contingencies are inherently unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular period. We evaluate, on a regular basis, developments in our legal proceedings and other contingencies that could affect the amount of liability, including amounts in excess of any previous accruals and reasonably possible losses disclosed, and make adjustments and changes to our accruals and disclosures as appropriate. For the matters we disclose that do not include an estimate of the amount of loss or range of losses, such an estimate is not possible or is immaterial, and we may be unable to estimate the possible loss or range of losses that could potentially result from the application of non-monetary remedies. Until the final resolution of such matters, if any of our estimates and assumptions change or prove to have been incorrect, we may experience losses in excess of the amounts recorded, which could have a material effect on our business, consolidated financial position, results of operations, or cash flows.See also “Note 9 — Income Taxes.”Note 8 — STOCKHOLDERS’ EQUITYPreferred StockWe have authorized 500 million shares of $0.01 par value preferred stock. No preferred stock was outstanding for any year presented.Common StockCommon shares outstanding plus shares underlying outstanding stock awards totaled 10.5 billion, 10.6 billion, and 10.8 billion, as of December 31, 2021, 2022, and 2023. These totals include all vested and unvested stock awards outstanding, including those awards we estimate will be forfeited.Stock Repurchase ActivityIn March 2022, the Board of Directors authorized a program to repurchase up to $10.0 billion of our common stock, with no fixed expiration, which replaced the previous $5.0 billion stock repurchase authorization, approved by the Board of Directors in February 2016. We repurchased 46.2 million shares of our common stock for $6.0 billion in 2022 under these programs. There were no repurchases of common stock in 2021 or 2023. As of December 31, 2023, we have $6.1 billion remaining under the repurchase program.Stock Award PlansEmployees vest in restricted stock unit awards over the corresponding service term, generally between two and five years. The majority of restricted stock unit awards are granted at the date of hire or in Q2 as part of the annual compensation review and primarily vest semi-annually in Q2 and Q4 of the relevant compensation year.Stock Award ActivityStock-based compensation expense is as follows (in millions):Year Ended December 31,202120222023Cost of sales$540 $757 $836 Fulfillment1,946 2,745 3,090 Technology and infrastructure6,645 10,621 13,434 Sales and marketing2,530 3,875 4,623 General and administrative1,096 1,623 2,040 Total stock-based compensation expense (1)$12,757 $19,621 $24,023 ___________________(1)The related tax benefits were $2.7 billion, $4.3 billion, and $5.4 billion for 2021, 2022, and 2023. 63Table of ContentsThe following table summarizes our restricted stock unit activity (in millions):Number of UnitsWeighted AverageGrant-DateFair ValueOutstanding as of January 1, 2021303.3 $100 Units granted127.3 167 Units vested(108.4)85 Units forfeited(42.3)116 Outstanding as of December 31, 2021279.9 134 Units granted262.8 142 Units vested(113.3)114 Units forfeited(45.0)143 Outstanding as of December 31, 2022384.4 144 Units granted218.1 106 Units vested(139.9)143 Units forfeited(56.8)135 Outstanding as of December 31, 2023405.8 125 Scheduled vesting for outstanding restricted stock units as of December 31, 2023, is as follows (in millions): Year Ended 20242025202620272028ThereafterTotalScheduled vesting — restricted stock units218.3 124.6 48.7 11.2 1.3 1.7 405.8 As of December 31, 2023, there was $18.3 billion of net unrecognized compensation cost related to unvested stock-based compensation arrangements. This compensation is recognized on an accelerated basis with more than half of the compensation expected to be expensed in the next twelve months, and has a remaining weighted-average recognition period of 0.9 years. The estimated forfeiture rate as of December 31, 2021, 2022, and 2023 was 26.5%, 26.5%, and 26.1%. During 2021, 2022, and 2023, the fair value of restricted stock units that vested was $18.2 billion, $12.8 billion, and $17.6 billion.Common Stock Available for Future IssuanceAs of December 31, 2023, common stock available for future issuance to employees is 1.6 billion shares.Note 9 — INCOME TAXESIn 2021, 2022, and 2023, we recorded a net tax provision (benefit) of $4.8 billion, $(3.2) billion, and $7.1 billion. Our U.S. taxable income is reduced by accelerated depreciation deductions and increased by the impact of capitalized research and development expenses. Cash paid for income taxes, net of refunds, was $3.7 billion, $6.0 billion, and $11.2 billion for 2021, 2022, and 2023.Certain foreign subsidiary earnings and losses are subject to current U.S. taxation and the subsequent repatriation of those earnings is not subject to tax in the U.S. The U.S. tax rules also provide for enhanced accelerated depreciation deductions by allowing us to expense a portion of qualified property, primarily equipment. These enhanced deductions are scheduled to phase out annually from 2023 through 2026. Our federal tax provision included a partial accelerated depreciation deduction election for 2021, and a full election for 2022 and 2023. Effective January 1, 2022, research and development expenses are required to be capitalized and amortized for U.S. tax purposes.64Table of ContentsThe components of the provision (benefit) for income taxes, net are as follows (in millions): Year Ended December 31,202120222023U.S. Federal:Current$2,129 $2,175 $8,652 Deferred155 (6,686)(5,505)Total2,284 (4,511)3,147 U.S. State:Current763 1,074 2,158 Deferred(178)(1,302)(498)Total585 (228)1,660 International:Current2,209 1,682 2,186 Deferred(287)(160)127 Total1,922 1,522 2,313 Provision (benefit) for income taxes, net$4,791 $(3,217)$7,120 U.S. and international components of income (loss) before income taxes are as follows (in millions): Year Ended December 31, 202120222023U.S.$35,879 $(8,225)$32,328 International2,272 2,289 5,229 Income (loss) before income taxes$38,151 $(5,936)$37,557 The items accounting for differences between income taxes computed at the federal statutory rate and the provision (benefit) recorded for income taxes are as follows (in millions): Year Ended December 31, 202120222023Income taxes computed at the federal statutory rate$8,012 $(1,246)$7,887 Effect of:Tax impact of foreign earnings and losses(1,349)(370)594 State taxes, net of federal benefits465 (173)1,307 Tax credits(1,136)(1,006)(2,362)Stock-based compensation (1)(1,094)612 1,047 Foreign income deduction (2)(301)(1,258)(1,429)Other, net194 224 76 Total$4,791 $(3,217)$7,120 ___________________(1)Includes non-deductible stock-based compensation and excess tax benefits or shortfalls from stock-based compensation. Our tax provision includes $1.9 billion of excess tax benefits from stock-based compensation for 2021, and $33 million and $519 million of tax shortfalls from stock-based compensation for 2022 and 2023.(2)U.S. companies are eligible for a deduction that lowers the effective tax rate on certain foreign income. This regime is referred to as the Foreign-Derived Intangible Income deduction and is dependent on the amount of our U.S. taxable income.We generated an income tax benefit in 2022 as compared to a provision for income taxes in 2021 primarily due to a decrease in pretax income and an increase in the foreign income deduction. This was partially offset by a reduction in excess tax benefits from stock-based compensation and a decrease in the tax impact of foreign earnings and losses driven by a decline in the favorable effects of corporate restructuring transactions. The foreign income deduction benefit recognized in 2022 reflects a change in our application of tax regulations related to the computation of qualifying foreign income and includes a tax benefit of approximately $655 million related to years prior to 2022.65Table of ContentsWe recorded a provision for income taxes in 2023 as compared to an income tax benefit in 2022 primarily due to an increase in pretax income, a decrease in the tax impact of foreign earnings and losses driven by a decline in the favorable effects of corporate restructuring transactions, and an increase in tax shortfalls from stock-based compensation. This was partially offset by an increase in federal research and development credits, which included approximately $600 million of tax benefit recorded in 2023 related to a change in the estimated qualifying expenditures associated with our 2022 U.S. federal R&D credit.We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts.Deferred income tax assets and liabilities are as follows (in millions): December 31, 20222023Deferred tax assets (1):Loss carryforwards U.S. - Federal/States386 610 Loss carryforwards - Foreign2,831 2,796 Accrued liabilities, reserves, and other expenses3,280 3,751 Stock-based compensation4,295 5,279 Depreciation and amortization1,009 1,114 Operating lease liabilities18,285 19,922 Capitalized research and development6,824 14,800 Other items1,023 745 Tax credits950 1,582 Total gross deferred tax assets38,883 50,599 Less valuation allowances (2)(4,374)(4,811)Deferred tax assets, net of valuation allowances34,509 45,788 Deferred tax liabilities:Depreciation and amortization(9,039)(12,454)Operating lease assets(17,140)(18,648)Other items(817)(1,489)Net deferred tax assets (liabilities), net of valuation allowances$7,513 $13,197 ___________________(1)Deferred tax assets are presented after tax effects and net of tax contingencies.(2)Relates primarily to deferred tax assets that would only be realizable upon the generation of net income in certain foreign taxing jurisdictions or future capital gains, as well as tax credits.Our valuation allowances primarily relate to foreign deferred tax assets, including substantially all of our foreign net operating loss carryforwards as of December 31, 2023. Our foreign net operating loss carryforwards for income tax purposes as of December 31, 2023 were approximately $10.2 billion before tax effects and certain of these amounts are subject to annual limitations under applicable tax law. If not utilized, a portion of these losses will begin to expire in 2024. Income Tax ContingenciesWe are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.66Table of ContentsThe reconciliation of our income tax contingencies is as follows (in millions): December 31, 202120222023Gross tax contingencies – January 1$2,820 $3,242 $4,002 Gross increases to tax positions in prior periods403 274 440 Gross decreases to tax positions in prior periods(354)(172)(38)Gross increases to current period tax positions507 706 1,009 Settlements with tax authorities(60)(20)(106)Lapse of statute of limitations(74)(28)(79)Gross tax contingencies – December 31 (1)$3,242 $4,002 $5,228 ___________________(1)As of December 31, 2023, we had approximately $5.2 billion of income tax contingencies of which $3.3 billion, if fully recognized, would decrease our effective tax rate. As of December 31, 2022 and 2023, we had accrued interest and penalties, net of federal income tax benefit, related to tax contingencies of $103 million and $194 million. Interest and penalties, net of federal income tax benefit, recognized for the years ended December 31, 2021, 2022, and 2023 were $28 million, $(7) million, and $91 million.We are under examination, or may be subject to examination, by the Internal Revenue Service for the calendar year 2016 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. We are also subject to taxation in various states and other foreign jurisdictions including China, France, 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 2011 and thereafter. We are currently disputing tax assessments in multiple jurisdictions, including with respect to the allocation and characterization of income. In September 2022, the Luxembourg tax authority (“LTA”) denied the tax basis of certain intangible assets that we distributed from Luxembourg to the U.S. in 2021. When we are assessed by the LTA, we will need to remit taxes related to this matter. We believe the LTA’s position is without merit, we intend to defend ourselves vigorously in this matter, and we expect to recoup taxes paid. The Indian tax authority (“ITA”) has asserted that tax applies to cloud services fees paid to Amazon in the U.S. We will need to remit taxes related to this matter until it is resolved, which payments could be significant in the aggregate. We believe the ITA’s position is without merit, we are defending our position vigorously in the Indian courts, and we expect to recoup taxes paid. If this matter is adversely resolved, we could recognize significant additional tax expense, including for taxes previously paid.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, which 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. On May 12, 2021, the European Union General Court annulled the European Commission’s state aid decision. In July 2021, the European Commission appealed the decision to the European Court of Justice. In December 2023, the European Court of Justice affirmed the European Union General Court’s decision. Changes in tax laws, regulations, administrative practices, principles, and interpretations may impact our tax contingencies. Due to various factors, including the inherent complexities and uncertainties of the judicial, administrative, and regulatory processes in certain jurisdictions, the timing of the resolution of income tax controversies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next twelve months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax controversies in one or more jurisdictions. These assessments or settlements could result in changes to our contingencies related to positions on prior years’ tax filings. The actual amount of any change could vary significantly depending on the ultimate timing and nature of any settlements. We cannot currently provide an estimate of the range of possible outcomes.67Table of ContentsNote 10 — SEGMENT INFORMATIONWe have organized our operations into three segments: North America, International, and AWS. We allocate to segment results the operating expenses “Fulfillment,” “Technology and infrastructure,” “Sales and marketing,” and “General and administrative” based on usage, which is generally reflected in the segment in which the costs are incurred. The majority of technology costs recorded in “Technology and infrastructure” are incurred in the U.S. and are included in our North America and AWS segments. The majority of infrastructure costs recorded in “Technology and infrastructure” are allocated to the AWS segment based on usage. There are no internal revenue transactions between our reportable segments. Our chief operating decision maker (“CODM”) regularly reviews consolidated net sales, consolidated operating expenses, and consolidated operating income (loss) by segment. Amounts included in consolidated operating expenses include “Cost of sales,” “Fulfillment,” “Technology and infrastructure,” “Sales and marketing,” “General and administrative,” and “Other operating expense (income), net.” Our CODM manages our business by reviewing annual forecasts and consolidated results by segment on a quarterly basis.North AmericaThe North America segment primarily consists of amounts earned from retail sales of consumer products (including from sellers) and advertising and subscription services through North America-focused online and physical stores. This segment includes export sales from these online stores.InternationalThe International segment primarily consists of amounts earned from retail sales of consumer products (including from sellers) and advertising and subscription services through internationally-focused online stores. This segment includes export sales from these internationally-focused online stores (including export sales from these online stores to customers in the U.S., Mexico, and Canada), but excludes export sales from our North America-focused online stores.AWSThe AWS segment consists of amounts earned from global sales of compute, storage, database, and other services for start-ups, enterprises, government agencies, and academic institutions.Information on reportable segments and reconciliation to consolidated net income (loss) is as follows (in millions): Year Ended December 31, 202120222023North AmericaNet sales$279,833 $315,880 $352,828 Operating expenses272,562 318,727 337,951 Operating income (loss)$7,271 $(2,847)$14,877 InternationalNet sales$127,787 $118,007 $131,200 Operating expenses128,711 125,753 133,856 Operating loss$(924)$(7,746)$(2,656)AWSNet sales$62,202 $80,096 $90,757 Operating expenses43,670 57,255 66,126 Operating income$18,532 $22,841 $24,631 ConsolidatedNet sales$469,822 $513,983 $574,785 Operating expenses444,943 501,735 537,933 Operating income24,879 12,248 36,852 Total non-operating income (expense)13,272 (18,184)705 Benefit (provision) for income taxes(4,791)3,217 (7,120)Equity-method investment activity, net of tax4 (3)(12)Net income (loss)$33,364 $(2,722)$30,425 68Table of ContentsNet sales by groups of similar products and services, which also have similar economic characteristics, is as follows (in millions): Year Ended December 31, 202120222023Net Sales:Online stores (1)$222,075 $220,004 $231,872 Physical stores (2)17,075 18,963 20,030 Third-party seller services (3)103,366 117,716 140,053 Advertising services (4)31,160 37,739 46,906 Subscription services (5)31,768 35,218 40,209 AWS62,202 80,096 90,757 Other (6)2,176 4,247 4,958 Consolidated$469,822 $513,983 $574,785 ___________________(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, videos, games, music, and software. These product sales include digital products sold on a transactional basis. Digital media content subscriptions that provide unlimited viewing or usage rights are included in “Subscription services.” (2)Includes product sales where our customers physically select items in a store. Sales to customers who order goods online for delivery or pickup at our physical stores are included in “Online stores.” (3)Includes commissions and any related fulfillment and shipping fees, and other third-party seller services. (4)Includes sales of advertising services to sellers, vendors, publishers, authors, and others, through programs such as sponsored ads, display, and video advertising.(5)Includes annual and monthly fees associated with Amazon Prime memberships, as well as digital video, audiobook, digital music, e-book, and other non-AWS subscription services.(6)Includes sales related to various other offerings, such as certain licensing and distribution of video content, health care services, and shipping services, and our co-branded credit card agreements. Net sales are attributed to countries primarily based on country-focused online and physical stores or, for AWS purposes, the selling entity. Net sales attributed to countries that represent a significant portion of consolidated net sales are as follows (in millions): Year Ended December 31, 202120222023United States$314,006 $356,113 $395,637 Germany37,326 33,598 37,588 United Kingdom31,914 30,074 33,591 Japan23,071 24,396 26,002 Rest of world63,505 69,802 81,967 Consolidated$469,822 $513,983 $574,785 69Table of ContentsTotal segment assets exclude corporate assets, such as cash and cash equivalents, marketable securities, other long-term investments, corporate facilities, goodwill and other acquired intangible assets, and tax assets. Technology infrastructure assets are allocated among the segments based on usage, with the majority allocated to the AWS segment. Total segment assets reconciled to consolidated amounts are as follows (in millions): December 31, 202120222023North America (1)$161,255 $185,268 $196,029 International (1)57,983 64,666 69,718 AWS (2)63,835 88,491 108,533 Corporate137,476 124,250 153,574 Consolidated$420,549 $462,675 $527,854 ___________________(1)North America and International segment assets primarily consist of property and equipment, operating leases, inventory, accounts receivable, and digital video and music content.(2)AWS segment assets primarily consist of property and equipment, accounts receivable, and operating leases.Property and equipment, net by segment is as follows (in millions): December 31, 202120222023North America$83,640 $90,076 $93,632 International21,718 23,347 24,357 AWS43,245 60,324 72,701 Corporate11,678 12,968 13,487 Consolidated$160,281 $186,715 $204,177 Total net additions to property and equipment by segment are as follows (in millions): Year Ended December 31, 202120222023North America (1)$37,397 $23,682 $17,529 International (1)10,259 6,711 4,144 AWS (2)22,047 27,755 24,843 Corporate2,622 2,688 1,828 Consolidated$72,325 $60,836 $48,344 ___________________(1)Includes property and equipment added under finance leases of $3.6 billion, $422 million, and $525 million in 2021, 2022, and 2023, and under build-to-suit lease arrangements of $5.6 billion, $3.2 billion, and $356 million in 2021, 2022, and 2023.(2)Includes property and equipment added under finance leases of $3.5 billion, $253 million, and $117 million in 2021, 2022, and 2023, and under build-to-suit lease arrangements of $51 million, $20 million, and $1 million in 2021, 2022, and 2023.U.S. property and equipment, net and operating leases were $155.0 billion, $180.0 billion, and $196.0 billion, as of December 31, 2021, 2022, and 2023, and non-U.S. property and equipment, net and operating leases were $61.3 billion, $72.9 billion, and $80.7 billion as of December 31, 2021, 2022, and 2023. Except for the U.S., property and equipment, net and operating leases in any single country were less than 10% of consolidated property and equipment, net and operating leases.Depreciation and amortization expense on property and equipment, including corporate property and equipment, are allocated to all segments based on usage. Total depreciation and amortization expense, by segment, is as follows (in millions): Year Ended December 31, 202120222023North America$9,234 $11,565 $13,678 International3,022 3,483 4,016 AWS10,653 9,876 12,531 Consolidated$22,909 $24,924 $30,225 70Table of ContentsItem 9.Changes in and Disagreements with Accountants On Accounting and Financial DisclosureNone.Item 9A.Controls and ProceduresEvaluation of Disclosure Controls and Procedures We carried out an evaluation required by the Securities Exchange Act of 1934 (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the 1934 Act, as of December 31, 2023. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2023, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.Management’s Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the 1934 Act. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2023 based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this assessment, management concluded that, as of December 31, 2023, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Ernst & Young has independently assessed the effectiveness of our internal control over financial reporting and its report is included below. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting during the quarter ended December 31, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Limitations on Controls Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. 71Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and Shareholders Amazon.com, Inc. Opinion on Internal Control Over Financial ReportingWe have audited Amazon.com, Inc.’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Amazon.com, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023 and the related notes and our report dated February 1, 2024 expressed an unqualified opinion thereon. Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLPSeattle, Washington February 1, 202472Table of ContentsItem 9B.Other InformationOn November 3, 2023, Jonathan Rubinstein, Director, adopted a trading plan intended to satisfy Rule 10b5-1(c) to sell up to 22,953 shares of Amazon.com, Inc. common stock over a period ending on February 9, 2026, subject to certain conditions.On November 6, 2023, Douglas Herrington, CEO Worldwide Amazon Stores, adopted a trading plan intended to satisfy Rule 10b5-1(c) to sell up to 130,162 shares of Amazon.com, Inc. common stock over a period ending on December 31, 2024, subject to certain conditions. On November 8, 2023, Jeffrey Bezos, our founder and Executive Chair, adopted a trading plan intended to satisfy Rule 10b5-1(c) to sell up to 50,000,000 shares of Amazon.com, Inc. common stock over a period ending on January 31, 2025, subject to certain conditions.On November 13, 2023, Shelley Reynolds, Vice President, Worldwide Controller, adopted a trading plan intended to satisfy Rule 10b5-1(c) to sell up to 11,200 shares of Amazon.com, Inc. common stock over a period ending on November 29, 2024, subject to certain conditions.On November 13, 2023, David Zapolsky, Senior Vice President, Global Public Policy and General Counsel, adopted a trading plan intended to satisfy Rule 10b5-1(c) to sell up to 48,480 shares of Amazon.com, Inc. common stock over a period ending on December 31, 2024, subject to certain conditions.On November 16, 2023, Andrew Jassy, President and Chief Executive Officer, adopted a trading plan intended to satisfy Rule 10b5-1(c) to sell up to 190,900 shares of Amazon.com, Inc. common stock over a period ending on December 31, 2024, subject to certain conditions.On November 21, 2023, Brian Olsavsky, Senior Vice President and Chief Financial Officer, adopted a trading plan intended to satisfy Rule 10b5-1(c) to sell up to 31,400 shares of Amazon.com, Inc. common stock over a period ending on May 28, 2024, subject to certain conditions.On November 27, 2023, Judith McGrath, Director, adopted a trading plan intended to satisfy Rule 10b5-1(c) to sell up to 5,760 shares of Amazon.com, Inc. common stock over a period ending on March 8, 2024, subject to certain conditions.Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent InspectionsNot applicable.PART IIIItem 10.Directors, Executive Officers, and Corporate GovernanceInformation regarding our Executive Officers required by Item 10 of Part III is set forth in Item 1 of Part I “Business — Information About Our Executive Officers.” Information required by Item 10 of Part III regarding our Directors and any material changes to the process by which security holders may recommend nominees to the Board of Directors is included in our Proxy Statement relating to our 2024 Annual Meeting of Shareholders, and is incorporated herein by reference. Information relating to our Code of Business Conduct and Ethics and, to the extent applicable, compliance with Section 16(a) of the 1934 Act is set forth in our Proxy Statement relating to our 2024 Annual Meeting of Shareholders and is incorporated herein by reference. To the extent permissible under Nasdaq rules, we intend to disclose amendments to our Code of Business Conduct and Ethics, as well as waivers of the provisions thereof, on our investor relations website under the heading “Corporate Governance” at amazon.com/ir. Item 11.Executive CompensationInformation required by Item 11 of Part III is included in our Proxy Statement relating to our 2024 Annual Meeting of Shareholders and is incorporated herein by reference. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Shareholder MattersInformation required by Item 12 of Part III is included in our Proxy Statement relating to our 2024 Annual Meeting of Shareholders and is incorporated herein by reference. 73Table of ContentsItem 13.Certain Relationships and Related Transactions, and Director IndependenceInformation required by Item 13 of Part III is included in our Proxy Statement relating to our 2024 Annual Meeting of Shareholders and is incorporated herein by reference. Item 14.Principal Accountant Fees and ServicesInformation required by Item 14 of Part III is included in our Proxy Statement relating to our 2024 Annual Meeting of Shareholders and is incorporated herein by reference. 74Table of ContentsPART IV Item 15.Exhibits, Financial Statement Schedules(a) List of Documents Filed as a Part of This Report: (1) Index to Consolidated Financial Statements: Report of Ernst & Young LLP, Independent Registered Public Accounting Firm Consolidated Statements of Cash Flows for each of the three years ended December 31, 2023 Consolidated Statements of Operations for each of the three years ended December 31, 2023 Consolidated Statements of Comprehensive Income (Loss) for each of the three years ended December 31, 2023 Consolidated Balance Sheets as of December 31, 2022 and 2023 Consolidated Statements of Stockholders’ Equity for each of the three years ended December 31, 2023 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Registered Public Accounting Firm (2) Index to Financial Statement Schedules: All schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or because it is not required. (3) Index to Exhibits See exhibits listed under Part (b) below. (b) Exhibits:Exhibit NumberDescription 3.1Amended and Restated Certificate of Incorporation of Amazon.com, Inc. (incorporated by reference to the Company’s Current Report on Form 8-K, filed May 27, 2022).3.2Amended and Restated Bylaws of Amazon.com, Inc. (incorporated by reference to the Company’s Current Report on Form 8-K, filed January 6, 2023).4.1Indenture, dated as of November 29, 2012, between Amazon.com, Inc. and Wells Fargo Bank, National Association, as trustee (incorporated by reference to the Company’s Current Report on Form 8-K, filed November 29, 2012).4.2Supplemental Indenture, dated as of April 13, 2022, among Amazon.com, Inc., Wells Fargo Bank, National Association, as prior trustee, and Computershare Trust Company, National Association, as successor trustee, containing Form of 2.730% Note due 2024, Form of 3.000% Note due 2025, Form of 3.300% Note due 2027, Form of 3.450% Note due 2029, Form of 3.600% Note due 2032, Form of 3.950% Note due 2052, and Form of 4.100% Note due 2062 (incorporated by reference to the Company’s Current Report on Form 8-K, filed April 13, 2022).4.3Officers’ Certificate of Amazon.com, Inc., dated as of December 5, 2014, containing Form of 2.600% Note due 2019, Form of 3.300% Note due 2021, Form of 3.800% Note due 2024, Form of 4.800% Note due 2034, and Form of 4.950% Note due 2044 (incorporated by reference to the Company’s Current Report on Form 8-K, filed December 5, 2014).4.4Officers’ Certificate of Amazon.com, Inc., dated as of August 22, 2017, containing Form of 1.900% Note due 2020, Form of 2.400% Note due 2023, Form of 2.800% Note due 2024, Form of 3.150% Note due 2027, Form of 3.875% Note due 2037, Form of 4.050% Note due 2047, and Form of 4.250% Note due 2057 (incorporated by reference to the Company’s Current Report on Form 8-K, filed August 22, 2017).4.5Officers’ Certificate of Amazon.com, Inc., dated as of December 20, 2017, containing Form of 5.200% Note due 2025 (incorporated by reference to the Company’s Current Report on Form 8-K, filed December 20, 2017).75Table of Contents4.6Officers’ Certificate of Amazon.com, Inc., dated as of June 3, 2020, containing Form of 0.400% Note due 2023, Form of 0.800% Note due 2025, Form of 1.200% Note due 2027, Form of 1.500% Note due 2030, Form of 2.500% Note due 2050, and Form of 2.700% Note due 2060 (incorporated by reference to the Company’s Current Report on Form 8-K, filed June 3, 2020).4.7Officers’ Certificate of Amazon.com, Inc., dated as of May 12, 2021, containing Form of 0.250% Note due 2023, Form of 0.450% Note due 2024, Form of 1.000% Note due 2026, Form of 1.650% Note due 2028, Form of 2.100% Note due 2031, Form of 2.875% Note due 2041, Form of 3.100% Note due 2051, and Form of 3.250% Note due 2061 (incorporated by reference to the Company’s Current Report on Form 8-K, filed May 12, 2021).4.8Officers’ Certificate of Amazon.com, Inc., dated as of December 1, 2022, containing Form of 4.700% Note due 2024, Form of 4.600% Note due 2025, Form of 4.550% Note due 2027, Form of 4.650% Note due 2029, and Form of 4.700% Note due 2032 (incorporated by reference to the Company’s Current Report on Form 8-K, filed December 1, 2022).4.9Description of Securities (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2019).10.1†1997 Stock Incentive Plan (amended and restated) (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2022).10.2†1999 Nonofficer Employee Stock Option Plan (amended and restated) (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2022).10.3†Form of Indemnification Agreement between Amazon.com, Inc. and each of its Directors (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (Registration No. 333-23795) filed March 24, 1997, as amended on April 21, 1997).10.4†Form of Restricted Stock Unit Agreement for Officers and Employees (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2002).10.5†Form of Restricted Stock Unit Agreement for Directors (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2002).10.6†Form of Restricted Stock Agreement (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2001).10.7†Form of Global Restricted Stock Unit Award Agreement for Executive Officers.10.8Term Loan Agreement, dated as of January 3, 2023, among Amazon.com, Inc., Toronto Dominion (Texas) LLC, as administrative agent, and the other lenders party thereto (incorporated by reference to the Company’s Current Report on Form 8-K, filed January 3, 2023).10.9Five-Year Revolving Credit Agreement, dated as of November 1, 2023, among Amazon.com, Inc., Citibank N.A., as administrative agent, and the lenders party thereto (incorporated by reference to the Company’s Current Report on Form 8-K, filed November 1, 2023).10.10364-Day Revolving Credit Agreement, dated as of November 1, 2023, among Amazon.com, Inc., Citibank N.A., as administrative agent, and the lenders party thereto (incorporated by reference to the Company’s Current Report on Form 8-K, filed November 1, 2023).21.1List of Significant Subsidiaries.23.1Consent of Independent Registered Public Accounting Firm.31.1Certification of Andrew R. Jassy, President and Chief Executive Officer of Amazon.com, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.31.2Certification of Brian T. Olsavsky, Senior Vice President and Chief Financial Officer of Amazon.com, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.32.1Certification of Andrew R. Jassy, President and Chief Executive Officer of Amazon.com, Inc., pursuant to 18 U.S.C. Section 1350.76Table of Contents32.2Certification of Brian T. Olsavsky, Senior Vice President and Chief Financial Officer of Amazon.com, Inc., pursuant to 18 U.S.C. Section 1350.97.1Amazon.com, Inc. Clawback Policy.101The following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, formatted in Inline XBRL: (i) Consolidated Statements of Cash Flows, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Balance Sheets, (v) Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Company has not filed with this Annual Report on Form 10-K certain instruments defining the rights of holders of long-term debt of the Company and its subsidiaries because the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of such agreements to the Commission upon request.104The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, formatted in Inline XBRL (included as Exhibit 101).__________________† Executive Compensation Plan or Agreement.Item 16.Form 10-K SummaryNone.77Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, as of February 1, 2024. AMAZON.COM, INC.By:/s/ Andrew R. JassyAndrew R. JassyPresident and Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of February 1, 2024. SignatureTitle/s/ Andrew R. JassyAndrew R. JassyPresident and Chief Executive Officer (Principal Executive Officer) and Director/s/ Brian T. OlsavskyBrian T. OlsavskySenior Vice President and Chief Financial Officer (Principal Financial Officer)/s/ Shelley L. ReynoldsShelley L. ReynoldsVice President, Worldwide Controller (Principal Accounting Officer)/s/ Jeffrey P. BezosJeffrey P. BezosExecutive Chair /s/ Keith B. AlexanderKeith B. AlexanderDirector/s/ Edith W. CooperEdith W. CooperDirector/s/ Jamie S. GorelickJamie S. GorelickDirector/s/ Daniel P. HuttenlocherDaniel P. HuttenlocherDirector/s/ Judith A. McGrathJudith A. McGrathDirector/s/ Indra K. NooyiIndra K. NooyiDirector/s/ Jonathan J. RubinsteinJonathan J. RubinsteinDirector/s/ Brad D. SmithBrad D. SmithDirector/s/ Patricia Q. StonesiferPatricia Q. StonesiferDirector/s/ Wendell P. WeeksWendell P. WeeksDirector78
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nvda-202303020001045810false01/2800010458102023-03-022023-03-02UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549______________FORM 8-K CURRENT REPORTPURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934Date of Report (Date of earliest event reported): March 2, 2023 NVIDIA CORPORATION(Exact name of registrant as specified in its charter)Delaware0-2398594-3177549(State or other jurisdiction(Commission(IRS Employerof incorporation)File Number)Identification No.)2788 San Tomas Expressway, Santa Clara, CA 95051 (Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (408) 486-2000 Not Applicable(Former name or former address, if changed since last report)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock, $0.001 par value per shareNVDAThe Nasdaq Global Select MarketIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.Adoption of Fiscal Year 2024 Variable Compensation PlanOn March 2, 2023, the Compensation Committee of the Board of Directors, or the Board, of NVIDIA Corporation, or the Company, adopted the Variable Compensation Plan for Fiscal Year 2024, or the 2024 Plan, which provides eligible executive officers the opportunity to earn a variable cash payment based on the level of achievement by the Company of certain corporate performance goals, or the Performance Goals, during fiscal year 2024. The Company operates on a fiscal year ending on the last Sunday in January and designates its fiscal year by the year in which that fiscal year ends. Fiscal year 2024 refers to the Company’s fiscal year ending January 28, 2024.The Compensation Committee has set the Performance Goals for fiscal year 2024 based upon the achievement of specified fiscal year 2024 revenue and has established threshold, base compensation plan, and stretch compensation plan levels. An eligible participant’s variable cash compensation under the 2024 Plan will be based on the achievement by the Company of the Performance Goals in fiscal year 2024.Unless otherwise determined by the Compensation Committee, a participant must remain an employee through the payment date under the 2024 Plan to be eligible to earn an award.The following table sets forth the respective target award opportunities for base compensation plan achievement for the Company’s named executive officers under the 2024 Plan:Named Executive OfficerTarget Award Opportunity for Base Compensation Plan AchievementTarget Award Opportunity for Base Compensation Plan Achievement as a % of Fiscal Year 2024 Base SalaryJen-Hsun HuangPresident and Chief Executive Officer$2,000,000200%Colette M. KressExecutive Vice President and Chief Financial Officer$300,00033%Ajay K. PuriExecutive Vice President, Worldwide Field Operations$650,00068%Debora ShoquistExecutive Vice President, Operations $250,00029%Timothy S. TeterExecutive Vice President, General Counsel and Secretary$250,00029%The foregoing description is subject to, and qualified in its entirety by, the 2024 Plan, which is filed with this report as Exhibit 10.1 and is incorporated herein by reference.Item 5.03. Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.(a) Amendment to BylawsOn March 2, 2023, the Board of the Company amended and restated the Company’s Bylaws, or the Restated Bylaws, which became effective immediately upon adoption by the Board.Among other things, the Restated Bylaws update procedural mechanics and disclosure requirements in connection with stockholder nominations of directors and submissions of stockholder proposals regarding other business at stockholder meetings (other than nominations pursuant to the Company’s proxy access bylaws and proposals to be included in the Company’s proxy materials pursuant to Rule 14a-8 under the Securities and Exchange Act of 1934, as amended, or the Exchange Act), including by requiring: •additional background information and disclosures regarding proposing stockholders, proposed nominees and business, and other persons related to a stockholder’s solicitation of proxies;•any stockholder submitting a nomination notice to make a representation as to whether such stockholder intends to solicit proxies in support of director nominees other than the Company’s nominees in accordance with Rule 14a-19 under the Exchange Act and to timely provide reasonable evidence that certain requirements of such rule have been satisfied;•that disclosures included in a stockholder’s notice of nominations or proposals regarding other business be updated, if necessary, to be accurate both as of the stockholder meeting record date and as of five business days prior to the stockholder meeting;•that if any stockholder provides a nomination notice and subsequently either (i) notifies the Company that such stockholder no longer intends to solicit proxies in support of director nominees other than the Company’s nominees or (ii) fails either to comply with the requirements of Rule 14a-19 or fails to timely provide reasonable evidence to the Company that such stockholder has met the requirements of Rule 14a-19, then such stockholder’s nominees will be disregarded and no vote on such nominees proposed by such stockholder will occur, notwithstanding any proxies or votes the Company has received in respect of such nominees; and•a stockholder directly or indirectly soliciting proxies from other stockholders to use a proxy card color other than white, which shall be reserved for the exclusive use by the Board.The foregoing summary of the amendments effected by the Restated Bylaws does not purport to be complete and is qualified in its entirety by reference to the complete text of the Restated Bylaws, a copy of which is filed as Exhibit 3.1 hereto and incorporated herein by reference.Item 9.01. Financial Statements and Exhibits.(d) ExhibitsExhibit Number Description3.1Bylaws of NVIDIA Corporation, Amended and Restated as of March 2, 202310.1Variable Compensation Plan - Fiscal Year 2024104The cover page of this Current Report on Form 8-K, formatted in inline XBRL (included as Exhibit 101)SIGNATUREPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NVIDIA CorporationDate: March 8, 2023By: /s/ Rebecca Peters Rebecca PetersVice President, Deputy General Counsel and Assistant Secretary
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8-K_789019_0001193125-20-188481.htm
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8-K
MICROSOFT CORP false 0000789019 0000789019 2020-07-01 2020-07-01 0000789019 us-gaap:CommonStockMember 2020-07-01 2020-07-01 0000789019 msft:NotesTwoPointOneTwoFivePercentDueDecemberSixTwentyTwentyOneMember 2020-07-01 2020-07-01 0000789019 msft:NotesThreePointOneTwoFivePercentDueDecemberSixTwentyTwentyEightMember 2020-07-01 2020-07-01 0000789019 msft:NotesTwoPointSixTwoFivePercentDueMayTwoTwentyThirtyThreeMember 2020-07-01 2020-07-01 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) July 1, 2020 Microsoft Corporation (Exact name of registrant as specified in its charter)
Washington
001-37845
91-1144442
(State of Incorporation)
(Commission File Number)
(I.R.S. ID) (IRS Employer Identification No.)
One Microsoft Way, Redmond, Washington
98052-6399 (address) (425) 882-8080 www.microsoft.com/investor Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common stock, $0.00000625 par value per share
MSFT
NASDAQ
2.125% Notes due 2021
MSFT
NASDAQ
3.125% Notes due 2028
MSFT
NASDAQ
2.625% Notes due 2033
MSFT
NASDAQ
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. On July 1, 2020 Margaret L. Johnson, Executive Vice President, Business Development, informed the Company that she was resigning from her position at the Company, effective July 1, 2020. Her last day with the Company will be July 7, 2020.
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
MICROSOFT CORPORATION
(Registrant)
Date: July 7, 2020
/s/ Keith Dolliver
Keith R. Dolliver
VP and Deputy General Counsel
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8-K_320193_0000320193-19-000007.htm
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8-K
1
a8-kq1201912292018.htm
8-K
Document
UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 8-KCURRENT REPORTPursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934January 29, 2019Date of Report (Date of earliest event reported) Apple Inc.(Exact name of Registrant as specified in its charter)California 001-36743 94-2404110(State or other jurisdictionof incorporation) (CommissionFile Number) (I.R.S. EmployerIdentification No.)One Apple Park WayCupertino, California 95014(Address of principal executive offices) (Zip Code)(408) 996-1010(Registrant’s telephone number, including area code)Not applicable(Former name or former address, if changed since last report.)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Indicate by check mark whether the Registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).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. ☐ Item 2.02 Results of Operations and Financial Condition.On January 29, 2019, Apple Inc. (“Apple”) issued a press release regarding Apple’s financial results for its first fiscal quarter ended December 29, 2018. A copy of Apple’s press release is attached hereto as Exhibit 99.1.The information contained in this Current Report shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. Item 9.01 Financial Statements and Exhibits.(d)Exhibits.ExhibitNumber Exhibit Description 99.1 Press release issued by Apple Inc. on January 29, 2019.SIGNATUREPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.Date:January 29, 2019 Apple Inc. By: /s/ Luca Maestri Luca Maestri Senior Vice President,Chief Financial Officer
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10-K_59478_0000059478-22-000068.htm
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StatesSecurities and Exchange CommissionWashington, D.C. 20549Form 10-K Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the fiscal year ended December 31, 2021Commission file number 001-06351ELI LILLY AND COMPANY (Exact name of Registrant as specified in its charter)Indiana 35-0470950(State or other jurisdiction of(I.R.S. Employerincorporation or organization)Identification No.)Lilly Corporate Center, Indianapolis, Indiana 46285(Address and zip code of principal executive offices)Registrant's telephone number, including area code (317) 276-2000 Securities registered pursuant to Section 12(b) of the Exchange Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange On Which RegisteredCommon Stock (no par value)LLYNew York Stock Exchange1.000% Notes due 2022LLY22New York Stock Exchange7 1/8% Notes due 2025LLY25New York Stock Exchange1.625% Notes due 2026LLY26New York Stock Exchange2.125% Notes due 2030LLY30New York Stock Exchange0.625% Notes due 2031LLY31New York Stock Exchange0.500% Notes due 2033LLY33New York Stock Exchange6.77% Notes due 2036LLY36New York Stock Exchange1.625% Notes due 2043LLY43New York Stock Exchange1.700% Notes due 2049LLY49ANew York Stock Exchange1.125% Notes due 2051LLY51New York Stock Exchange1.375% Notes due 2061LLY61New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Exchange Act: NoneIndicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.Large accelerated filer☒Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐ Emerging growth company☐If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the Registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒Aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant's most recently completed second fiscal quarter: approximately $193,649,000,000.Number of shares of common stock outstanding as of February 18, 2022: 952,347,126Portions of the Registrant's Proxy Statement for the 2022 Annual Meeting of Shareholders have been incorporated by reference into Part III of this report.1Eli Lilly and CompanyForm 10-KFor the Year Ended December 31, 2021 Table of ContentsPagePart IItem 1.Business5Item 1A.Risk Factors23Item 1B.Unresolved Staff Comments31Item 2.Properties31Item 3.Legal Proceedings31Item 4.Mine Safety Disclosures31Part IIItem 5.Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities32Item 6.[Reserved]34Item 7.Management's Discussion and Analysis of Results of Operations and Financial Condition34Item 7A.Quantitative and Qualitative Disclosures About Market Risk54Item 8.Financial Statements and Supplementary Data55Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure118Item 9A.Controls and Procedures118Item 9B.Other Information118Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections118Part IIIItem 10.Directors, Executive Officers, and Corporate Governance119Item 11.Executive Compensation119Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters120Item 13.Certain Relationships and Related Transactions, and Director Independence120Item 14.Principal Accountant Fees and Services120Item 15.Exhibits and Financial Statement Schedules121Item 16.Form 10-K Summary1232Forward-Looking StatementsThis Annual Report on Form 10-K and our other publicly available documents include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act), and are subject to the safe harbor created thereby under the Private Securities Litigation Reform Act of 1995. In particular, information appearing under "Business," "Risk Factors," and "Management's Discussion and Analysis of Results of Operations and Financial Condition" includes forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts, and generally can be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "intend," "anticipate," "plan," "continue," or similar expressions or future or conditional verbs. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those expressed in forward-looking statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, it is based on management's current plans and expectations, expressed in good faith and believed to have a reasonable basis. However, we can give no assurance that any such expectation or belief will result or will be achieved or accomplished. Investors therefore should not place undue reliance on forward-looking statements. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:•the impact of the evolving COVID-19 pandemic or any future pandemic, epidemic, or similar public health threat and the global response thereto;•uncertainties related to our efforts to develop, manufacture, and distribute potential treatments for COVID-19;•the significant costs and uncertainties in the pharmaceutical research and development process, including with respect to the timing and process of obtaining regulatory approvals;•the impact and outcome of acquisitions and business development transactions and related integration costs;•the expiration of intellectual property protection for certain of our products and competition from generic and/or biosimilar products;•our ability to protect and enforce patents and other intellectual property;•changes in patent law or regulations related to data package exclusivity;•competitive developments affecting current products and our pipeline;•market uptake of recently launched products;•information technology system inadequacies, breaches, or operating failures;•unauthorized access, disclosure, misappropriation, or compromise of confidential information or other data stored in our information technology systems, networks, and facilities, or those of third parties with whom we share our data;•unexpected safety or efficacy concerns associated with our products;•litigation, investigations, or other similar proceedings involving past, current, or future products or commercial activities as we are largely self-insured;•issues with product supply and regulatory approvals stemming from manufacturing difficulties, disruptions, or shortages, including as a result of demand, labor shortages, third-party performance, or regulatory actions relating to our facilities;•reliance on third-party relationships and outsourcing arrangements;•regulatory changes or other developments;•regulatory actions regarding currently marketed products; •continued pricing pressures and the impact of actions of governmental and private payers affecting pricing of, reimbursement for, and access to pharmaceuticals;•devaluations in foreign currency exchange rates, changes in interest rates, and inflation;•changes in tax law, tax rates, or events that differ from our assumptions related to tax positions; •asset impairments and restructuring charges;3•the impact of global macroeconomic conditions, trade disruptions, global disputes, unrest, war, or other costs, uncertainties and risks related to engaging in business in foreign jurisdictions; •changes in accounting and reporting standards promulgated by the Financial Accounting Standards Board and the Securities and Exchange Commission (SEC); and•regulatory compliance problems or government investigations.Investors should also carefully read the factors described under Item 1A, "Risk Factors" in this Annual Report on Form 10-K for a description of certain risks that could, among other things, cause our actual results to differ from those expressed in forward-looking statements. Investors should understand that it is not possible to predict or identify all such factors and should not consider the risks described above and under Item 1A, "Risk Factors" to be a complete statement of all potential risks and uncertainties.All forward-looking statements speak only as of the date of this Annual Report and are expressly qualified in their entirety by the risk factors and cautionary statements included in this Annual Report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this Annual Report.4Part IItem 1.BusinessEli Lilly and Company (referred to as the company, Lilly, we, or us) was incorporated in 1901 in Indiana to succeed to the drug manufacturing business founded in Indianapolis, Indiana, in 1876 by Colonel Eli Lilly. We discover, develop, manufacture, and market products in a single business segment—human pharmaceutical products.Our purpose is to unite caring with discovery to create medicines that make life better for people around the world. Most of the products we sell today were discovered or developed by our own scientists, and our long-term success depends on our ability to continually discover or acquire, develop, and commercialize innovative new medicines.We manufacture and distribute our products through facilities in the United States (U.S.), including Puerto Rico, and 7 other countries. Our products are sold in approximately 120 countries.ProductsOur products include:Diabetes products, including:•Basaglar®, in collaboration with Boehringer Ingelheim, a long-acting human insulin analog for the treatment of diabetes.•Humalog®, Humalog Mix 75/25, Humalog U-100, Humalog U-200, Humalog Mix 50/50, insulin lispro, insulin lispro protamine, and insulin lispro mix 75/25, human insulin analogs for the treatment of diabetes. •Humulin®, Humulin 70/30, Humulin N, Humulin R, and Humulin U-500, human insulins of recombinant DNA origin for the treatment of diabetes.•Jardiance®, in collaboration with Boehringer Ingelheim, for the treatment of type 2 diabetes; to reduce the risk of cardiovascular death in adult patients with type 2 diabetes and established cardiovascular disease; and to reduce the risk of cardiovascular death and hospitalizations for heart failure in adults with heart failure and reduced ejection fraction.•Trajenta®, in collaboration with Boehringer Ingelheim, for the treatment of type 2 diabetes.•Trulicity®, for the treatment of type 2 diabetes and to reduce the risk of major adverse cardiovascular events in adult patients with type 2 diabetes and established cardiovascular disease or multiple cardiovascular risk factors.Oncology products, including:•Alimta®, for the first-line treatment, in combination with two other agents, of advanced non-small cell lung cancer (NSCLC) for patients with non-squamous cell histology and no epidermal growth factor receptor or anaplastic lymphoma kinase genomic tumor aberrations; for the first-line treatment, in combination with another agent, of advanced non-squamous NSCLC; for the second-line treatment of advanced non-squamous NSCLC; as monotherapy for the maintenance treatment of advanced non-squamous NSCLC in patients whose disease has not progressed immediately following chemotherapy treatment; and in combination with another agent for the treatment of malignant pleural mesothelioma.•Cyramza®, for use as monotherapy or in combination with another agent as a second-line treatment of advanced or metastatic gastric cancer or gastro-esophageal junction adenocarcinoma; in combination with another agent as a second-line treatment of metastatic NSCLC; in combination with another agent as a second-line treatment of metastatic colorectal cancer; as a monotherapy as a second-line treatment of hepatocellular carcinoma; and in combination with another agent as a first-line treatment of adult patients with metastatic NSCLC with activating epidermal growth factor receptor mutations. •Erbitux®, indicated both as monotherapy and in combination with another agent for the treatment of certain types of colorectal cancers; and as monotherapy, in combination with chemotherapy, or in combination with radiation therapy for the treatment of certain types of head and neck cancers.5•Retevmo®, for the treatment of metastatic NSCLC in adult patients; for the treatment of advanced metastatic medullary thyroid cancer who require systemic therapy in adult and pediatric patients; and for the treatment of advanced metastatic thyroid cancer in adult and pediatric patients who require systemic therapy and are radioactive iodin-refractory.•Tyvyt®, in collaboration with Innovent Biologics, Inc., for the treatment of relapsed or refractory classic Hodgkin's lymphoma and for the first-line treatment of non-squamous NSCLC in combination with Alimta and another agent in China.•Verzenio®, for use as monotherapy or in combination with endocrine therapy for the treatment of HR+, HER2- metastatic breast cancer and in combination with endocrine therapy for treatment of HR+, HER2-, node positive, early breast cancer at high risk of recurrence and a Ki-67 score at least 20%, as determined by a U.S. Food and Drug Administration (FDA) approved test.Immunology products, including:•Olumiant®, in collaboration with Incyte Corporation, for the treatment of adults with moderately-to-severely active rheumatoid arthritis and for moderate to severe atopic dermatitis. •Baricitinib was granted Emergency Use Authorization (EUA) in 2021 for the treatment of COVID-19 in hospitalized adults and pediatric patients 2 years of age or older requiring supplemental oxygen, non-invasive or invasive mechanical ventilation, or extracorporeal membrane oxygenation.•Taltz®, for the treatment of adults and pediatric patients aged 6 years or older with moderate-to-severe plaque psoriasis, adults with active psoriatic arthritis, adults with ankylosing spondylitis, and adults with active non-radiographic axial spondyloarthritis.Neuroscience products, including:•Cymbalta®, for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, fibromyalgia, and chronic musculoskeletal pain due to chronic low back pain or chronic pain due to osteoarthritis.•Emgality®, for migraine prevention and the treatment of episodic cluster headache in adults.•Zyprexa®, for the treatment of schizophrenia, acute mixed or manic episodes associated with bipolar I disorder, and bipolar maintenance.Other therapies, including:•Bamlanivimab and etesevimab, administered together, for the treatment of mild-to-moderate COVID-19 in adults and pediatric patients from birth to 12 years old with positive results of direct SARS-CoV-2 viral testing and who are at high risk for progression to severe COVID-19, including hospitalization or death (EUA granted in 2021). In January 2022, the FDA revised the EUA for bamlanivimab and etesevimab administered together to limit their use to only when the patient is likely to have been infected with or exposed to a variant that is susceptible to this combination treatment.•Bebtelovimab, for the treatment of mild-to-moderate COVID-19 in adults and pediatric patients (12 years of age and older and weighing at least 40 kilograms) with positive results of direct SARS-CoV-2 viral testing, and who are at high risk for progression to severe COVID-19, including hospitalization or death, and for whom alternative COVID-19 treatment options approved or authorized by the FDA are not accessible or clinically appropriate (EUA granted in 2022).•Cialis®, for the treatment of erectile dysfunction and benign prostatic hyperplasia.•Forteo®, for the treatment of osteoporosis in postmenopausal women and men at high risk for fracture and for glucocorticoid-induced osteoporosis in men and postmenopausal women.Marketing and DistributionWe sell most of our products worldwide. We adapt our marketing methods and product emphasis in various countries to meet local customer needs and comply with local regulations.6U.S.We promote our major products in the U.S. through sales representatives who engage with physicians and other health care professionals. We also educate healthcare providers about our products in various other ways, including promoting in online health care channels, distributing literature and samples of certain products to physicians, and exhibiting at medical meetings. In addition, we advertise certain products directly to consumers in the U.S., and we maintain websites and other media channels with information about our major products. We supplement our employee sales force with contract sales organizations to leverage our resources and reach additional patients in need.We maintain special business groups to service wholesalers, pharmacy benefit managers, managed care organizations, group purchasing organizations, government and long-term care institutions, hospitals, and certain retail pharmacies. We enter into arrangements with these organizations providing for discounts or rebates on our products.In the U.S., most of our products are distributed through wholesalers that serve pharmacies, physicians and other health care professionals, and hospitals. In 2021, 2020, and 2019, three wholesale distributors in the U.S.—McKesson Corporation, AmerisourceBergen Corporation, and Cardinal Health, Inc.—each accounted for between 15 percent and 20 percent of our consolidated revenue. No other customer accounted for more than 10 percent of our consolidated revenue in any of these years.Outside the U.S.Outside the U.S., we promote our products to healthcare providers primarily through sales representatives and other health care channels. While the products we market vary from country to country, diabetes products constitute the largest single group of our consolidated revenue. Distribution patterns for our products also vary from country to country. In most countries in which we operate, we maintain our own sales organizations, but in some smaller countries we market our products through third-party distributors, some of which we have engaged through distribution and promotion arrangements.Marketing CollaborationsCertain of our products are marketed in arrangements with other pharmaceutical companies. For example, we and Boehringer Ingelheim have a global agreement to develop and commercialize a portfolio of diabetes products, including Trajenta, Jentadueto®, Jardiance, Glyxambi®, Synjardy®, Trijardy® XR, and Basaglar. For additional information, see Item 8, "Financial Statements and Supplementary Data - Note 4, Collaborations and Other Arrangements."CompetitionOur products compete globally with many other pharmaceutical products in highly competitive markets. Important competitive factors include effectiveness, safety, and ease of use; formulary placement, price, and demonstrated cost-effectiveness; marketing effectiveness; and research and development of new products, processes, modalities, and uses. Most new products that we introduce must compete with other branded, biosimilar, or generic products already on the market or that are later developed by competitors. When competitors introduce new products or delivery systems with therapeutic or cost advantages, including by developing new modalities, our products become subject to decreased sales, progressive price reductions, or both. We believe our long-term competitive success depends on discovering and developing (either alone or in collaboration with others) or acquiring innovative, cost-effective products that provide improved outcomes for patients and deliver value to payers, and continuously improving the productivity of our operations in a highly competitive environment. There can be no assurance that our efforts will result in commercially successful products, and it is possible that our products will be, or will become, uncompetitive from time to time as a result of products developed by our competitors.7Generic PharmaceuticalsOne of the biggest competitive challenges we face is from generic pharmaceuticals. In the U.S. and Europe, the regulatory approval process for pharmaceuticals (other than biological products (biologics)) exempts generics from costly and time-consuming clinical trials to demonstrate their safety and efficacy, allowing generic manufacturers to rely on the safety and efficacy of the innovator product. As a result, generic manufacturers generally invest far fewer resources than we do in research and development and can price their products significantly lower than our branded products. Accordingly, when a branded non-biologic pharmaceutical loses its market exclusivity, it normally faces intense price competition from generic forms of the product, which can cause us to lose a significant portion of the product's revenue in a very short period of time.Further, public and private payers typically encourage the use of generics as alternatives to brand-name drugs in their healthcare programs. Laws in the U.S. generally allow, and in many cases require, pharmacists to substitute generic drugs that have been rated under government procedures to be essentially equivalent to a brand-name drug. Where substitution is mandatory, it must be made unless the prescribing physician expressly forbids it. In many countries outside the U.S., intellectual property protection is weak, and we must compete with generic or counterfeit versions of our products relatively shortly after launch. BiosimilarsA number of our products and potential new medicines in our clinical-stage pipeline are biologics. In the U.S., the FDA regulates biologics under the Federal Food, Drug and Cosmetic Act, the Public Health Service Act, and implementing regulations. Competition for Lilly's biologics may be affected by the approval of follow-on biologics, also known as biosimilars. A biosimilar is a subsequent version of an approved innovator biologic that, due to its analytical and clinical similarity to the innovator biologic, may be approved based on an abbreviated data package that relies in part on the full testing required of the innovator biologic. Approval by the FDA ultimately depends on many factors, including a showing that the biosimilar is "highly similar" to the original product and has no clinically meaningful differences from the original product in terms of safety, purity, and potency.Globally, most governments have developed abbreviated regulatory pathways to approve biosimilars as follow-ons to innovator-developed biologics, including the Biologics Price Competition and Innovation Act of 2009 (the BPCIA) in the U.S. A number of biosimilars have been licensed under the BPCIA and in Europe. The patent and regulatory exclusivity for the existing innovator biologic generally must expire in a given market before biosimilars may enter that market. However, in the U.S., the product exclusivity period under the BPCIA could be affected by recent government proposals and litigation. See "- Patents, Trademarks, and Other Intellectual Property Rights." In addition, the extent to which a biosimilar, once approved, will be substituted for the innovator biologic in a way that is similar to traditional generic substitution for non-biologic products is not yet entirely clear, and will depend on a number of regulatory and marketplace factors that are still developing. In the U.S., currently only a biosimilar product that is determined to be "interchangeable" by the FDA will be considered substitutable for the original biologic product without the intervention of the health care provider who prescribed the original biologic product. To prove that a biosimilar product is interchangeable, the applicant must demonstrate that the product can be expected to produce the same clinical results as the original biologic product in any given patient, and if the product is administered more than once in a patient, that safety risks and potential for diminished efficacy of alternating or switching between the use of the interchangeable biosimilar biologic product and the original biologic product is no greater than the risk of using the original biologic product without switching. The FDA has begun to issue "interchangeable" designations for biosimilar products.Biosimilars may present both competitive challenges and opportunities. For example, a competitor company has developed a version of insulin lispro that competes with our product Humalog. On the other hand, in collaboration with Boehringer Ingelheim, we developed Basaglar, an insulin glargine product, which has the same amino acid sequence as a product currently marketed by a competitor and has launched as a follow-on biologic in the U.S., and as a biosimilar in Europe and Japan. However, in March 2020, the FDA began regulating all of our insulin products as "biologics" rather than "drugs." Based on FDA draft guidance, this change may lessen the amount of data required for competitor biosimilar products to enter the market, some of which could be designated as interchangeable and therefore substituted for our insulin products at U.S. pharmacies. For example, in June 2020, the FDA approved a New Drug Application (NDA) for Semglee, a follow-on insulin glargine product that competes with Basaglar in the U.S., and, in July 2021, Semglee received additional FDA approval as a biosimilar that is interchangeable to its reference insulin glargine product. The FDA's interpretation of important aspects of the laws regulating biosimilars continues to evolve and, therefore, the impact of these laws on our business remains subject to substantial uncertainty.8U.S. Private Sector DynamicsIn the U.S. private sector, consolidation and integration among healthcare providers significantly affects the competitive marketplace for pharmaceuticals. Health plans, managed care organizations, pharmacy benefit managers, wholesalers, and other supply chain stakeholders have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance. Private third-party insurers, as well as governments, typically maintain formularies that specify coverage (the conditions under which drugs are included on a plan's formulary) and reimbursement (the associated out-of-pocket cost to the consumer) to control costs by negotiating discounted prices in exchange for formulary inclusion.Formulary placement can lead to reduced usage of a drug for the relevant patient population due to coverage restrictions, such as prior authorizations and formulary exclusions, or due to reimbursement limitations that result in higher consumer out-of-pocket cost, such as non-preferred co-pay tiers, increased co-insurance levels, and higher deductibles. Consequently, pharmaceutical companies face increased pressure in pricing and usage negotiation, and compete fiercely for formulary placement, not only on the basis of product attributes such as efficacy, safety profile, or patient ease of use, but also by providing rebates. As payers and pharmaceutical companies continue to negotiate formulary placement and pricing, value-based agreements, where pricing is based on achievement (or not) of specified outcomes, are another tool that may become increasingly prevalent. Price is an increasingly important factor in formulary decisions, particularly in treatment areas in which the payer has taken the position that multiple branded products are therapeutically comparable. We expect these downward pricing pressures will continue to negatively affect our consolidated results of operations. In addition to formulary placement, changes in insurance designs continue to drive greater consumer cost-sharing through high deductible plans and higher co-insurance or co-pays. For additional information on pricing and reimbursement for our pharmaceutical products, see "- Regulations and Private Payer Actions Affecting Pharmaceutical Pricing, Reimbursement, and Access - U.S."Patents, Trademarks, and Other Intellectual Property RightsOverviewIntellectual property protection is critical to our ability to successfully commercialize our life sciences innovations and invest in the search for new medicines. We own, have applied for, or are licensed under, a large number of patents in the U.S. and many other countries relating to products, product uses, formulations, and manufacturing processes. In addition, as discussed below, for some products we have effective intellectual property protection in the form of data protection under pharmaceutical regulatory laws.The patent protection anticipated to be of most relevance to pharmaceuticals is provided by national patents claiming the active ingredient (the compound patent), particularly those in major markets such as the U.S., major European countries, and Japan. These patents may be issued based upon the filing of international patent applications, usually filed under the Patent Cooperation Treaty (PCT). Patent applications covering compounds are generally filed during the Discovery Phase of the drug discovery process, which is described in the "Research and Development" section below. In general, national patents in each relevant country are available for a period of 20 years from the filing date of the PCT application, which is often years prior to the launch of a commercial product. Further patent term adjustments and restorations may extend the original patent term:•Patent term adjustment is a statutory right available to all U.S. patent applicants to provide relief in the event that a patent grant is delayed during examination by the United States Patent and Trademark Office (USPTO).•Patent term restoration is a statutory right provided to U.S. patent holders that claim inventions subject to review by the FDA. To make up for a portion of the time invested in clinical trials and the FDA review process, a single patent for a pharmaceutical product may be eligible for patent term restoration. Patent term restoration is limited by a formula and cannot be calculated until product approval due to uncertainty about the duration of clinical trials and the time it takes the FDA to review an application. There is a five-year cap on any restoration, and no patent's expiration date may be extended beyond 14 years from FDA approval. Some countries outside the U.S. similarly offer forms of patent term restoration for patents claiming inventions subject to a local review by a regulatory agency. For example, Supplementary Protection Certificates are available to extend the life of a European patent up to an additional five years (subject to a 15-year cap from European Medicines Agency (EMA) approval). Also, in Japan, South Korea, and Australia, patent terms can be extended up to five years, depending on the length of regulatory review and other factors.9Loss of effective patent protection for pharmaceuticals, especially for non-biologic products, typically results in the loss of effective market exclusivity for the product, which often results in severe and rapid decline in revenues for the product. However, in some cases the innovator company may retain exclusivity despite approval of the generic, biosimilar, or other follow-on versions of a new medicine beyond the expiration of the compound patent through manufacturing trade secrets, later-expiring patents on manufacturing processes, methods of use or formulations, or data protection that may be available under pharmaceutical regulatory laws. Changes to the laws and regulations governing these protections could result in earlier loss of effective market exclusivity. The primary forms of data protection are as follows:•Regulatory authorities in major markets generally grant data package protection for a period of years following new drug approvals in recognition of the substantial investment required to complete clinical trials. Data package protection prohibits other manufacturers from submitting regulatory applications for marketing approval in reliance on the innovator company's regulatory submission data for the drug. The base period of data package protection depends on the country. For example, the period is generally five years in the U.S. (12 years for new biologics as described below), effectively 10 years in Europe, and eight years in Japan. The period begins on the date of product approval and runs concurrently with the patent term for any relevant patent.•Under the BPCIA, the FDA has the authority to approve biosimilars. A competitor seeking approval of a biosimilar must file an application to show its molecule is highly similar to an approved innovator biologic and include a certain amount of safety and efficacy data that the FDA will consider on a case-by-case basis. Under the data protection provisions of this law, the FDA cannot approve a biosimilar application until 12 years after initial marketing approval of the innovator biologic, subject to certain conditions. •In the U.S., the FDA has the authority to grant additional data protection for approved drugs where the sponsor conducts specified testing in pediatric or adolescent populations within a specified time period. If granted, this "pediatric exclusivity" provides an additional six months of exclusivity, which is added to the term of data protection and, for products other than biologics, to the term of any relevant patents, to the extent these protections have not already expired. While the term of the pediatric exclusivity attaches to the term of any relevant patent, pediatric exclusivity is a regulatory exclusivity—i.e., a bar to generic or biosimilar approval, not a patent right.•Under the U.S. orphan drug law, a specific use of a drug or biologic can receive "orphan" designation if it is intended to treat a disease or condition affecting fewer than 200,000 people in the U.S., or affecting more than 200,000 people but not reasonably expected to recover its development and marketing costs through U.S. sales. Among other benefits, orphan designation entitles the particular use of the drug to seven years of market exclusivity, meaning that the FDA cannot (with limited exceptions) approve another marketing application for the same drug for the same indication until expiration of the seven-year period. Unlike pediatric exclusivity, the orphan exclusivity period is independent of and runs in parallel with any applicable patents.Outside the major markets, the adequacy and effectiveness of intellectual property protection for pharmaceuticals varies widely, and in a number of these markets we are unable to patent our products or to enforce the patents we receive for our products. Under the Trade-Related Aspects of Intellectual Property Agreement (TRIPs) administered by the World Trade Organization, more than 140 countries have agreed to provide non-discriminatory protection for most pharmaceutical inventions and to assure that adequate and effective rights are available to patent owners. Certain developing countries limit protection for biopharmaceutical products under their interpretation of "flexibilities" allowed under the agreement. Thus, some types of patents, such as those on new uses of compounds or new forms of molecules, are not available in certain developing countries. Further, many developing countries, and some developed countries, do not provide effective data package protection even though it is specified in TRIPs. Our Intellectual Property PortfolioWe consider intellectual property protection for certain products, processes, uses, and formulations—particularly with respect to those products discussed below—to be important to our operations. In addition to the patents and data protection identified below, we may hold patents on manufacturing processes, formulations, devices, or uses that extend exclusivity beyond the dates shown below. For approved products, dates include, where applicable, pending or granted patent term extensions.10The most relevant U.S. patent protection or data protection and associated expiry dates for our major or recently launched patent-protected marketed products are as follows:•Alimta is protected by pediatric exclusivity (2022). See Item 8, "Financial Statements and Supplementary Data - Note 16, Contingencies," for information regarding our settlement agreement with Eagle Pharmaceuticals, Inc. and its impact on our exclusivity for Alimta.•Baqsimi® is protected by data protection (2022).•Cyramza is protected by a compound patent and biologics data protection (2026).•Emgality is protected by a compound patent (2033) and biologics data protection (2030).•Jardiance, and the related combination product Glyxambi, is protected by a compound patent (2028). •Olumiant is protected by a compound patent (2032). •Retevmo is protected by a compound patent (2037) and by data protection (2025).•Reyvow® is protected by a compound patent (2030).•Taltz is protected by a compound patent (2030) and by biologics data protection (2028).•Trulicity is protected by a compound patent (2027) and by biologics data protection (2026).•Verzenio is protected by a compound patent (2031) and by data protection (2022).Outside the U.S., important patent protection or data protection includes: •Baqsimi is protected by data protection in Japan (2026).•Cyramza is protected by a compound patent (2028) and by data protection (2024) in major European countries, and by a compound patent (2026) and by data protection (2023) in Japan.•Emgality is protected by a compound patent (2033) and by data protection (2028) in major European countries, and by a compound patent (2035) and by data protection (2029) in Japan.•Jardiance is protected by a compound patent in major European countries (2029) and Japan (2030).•Olumiant is protected by a compound patent (2032) and by data protection (2027) in major European countries, and by a compound patent (2033) and by data protection (2025) in Japan.•Retevmo is protected by a compound patent (2037) and by data protection (2031) in major European countries, and by a compound patent (2038) and by data protection (2029) in Japan.•Reyvow is protected by a compound patent (2026) and by data protection (2032) in Japan.•Taltz is protected by a compound patent (2031) and data protection (2027) in major European countries and a compound patent (2030) and data protection (2024) in Japan.•Trulicity is protected by a compound patent (2029) and by data protection (2024) in major European countries and by a compound patent (2029) and by data protection (2023) in Japan.•Verzenio is protected by a compound patent (2033) and data protection (2028) in major European countries and by a compound patent (2034) and data protection (2026) in Japan.The following product candidates are currently under regulatory review. Upon approval, we expect relevant compound patent and data protections to apply:•We have commenced a rolling submission in the U.S. for donanemab for the treatment of Alzheimer's disease.•We have commenced a rolling submission in the U.S. for pirtobrutinib (LOXO-305) for the treatment of mantle cell lymphoma.•Reyvow has been submitted for regulatory review in certain major European countries for the acute treatment of migraine.•Tirzepatide has been submitted for regulatory review in the U.S., in Japan, and in certain major European countries as an adjunct to diet and exercise to improve glycemic control in adults with type 2 diabetes.11Worldwide, we sell all of our major products under trademarks consisting of our product names, logos, and unique product appearances (e.g., the appearance of our Trulicity autoinjector) which we consider in the aggregate to be important to our operations. Trademark protection varies throughout the world, with protection continuing in some countries as long as the mark is used, and in other countries as long as it is registered. Registrations are normally for fixed but renewable terms. Trademark protection typically extends beyond the patent and data protection for a product. Patent Licenses and CollaborationsMost of our major products are not subject to significant license and collaboration agreements. For information on our license and collaboration agreements, see Item 8, "Financial Statements and Supplementary Data - Note 4, Collaborations and Other Arrangements." Patent Challenges In the U.S., the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, authorizes the FDA to approve generic versions of innovative pharmaceuticals (other than biologics, which are discussed below in more detail) when the generic manufacturer has not conducted safety and efficacy studies but files an Abbreviated New Drug Application (ANDA). In an ANDA, the generic manufacturer must demonstrate only "pharmaceutical equivalence" and "bioequivalence" between the generic version and the NDA-approved drug—not safety and efficacy. Establishing pharmaceutical equivalence and bioequivalence is generally straightforward and inexpensive for the generic company.Absent a patent challenge, the FDA cannot approve an ANDA until after certain of the innovator's patents expire. However, after the innovator has marketed its product for four years, a generic manufacturer may file an ANDA alleging that one or more or all of the patents listed in the innovator's NDA are invalid or not infringed. This allegation is commonly known as a "Paragraph IV certification." If the innovator responds by filing suit against the generic manufacturer, the FDA is then prohibited from approving the generic company's application for a 30-month period (which can be shortened or extended by the trial court judge hearing the patent challenge). If one or more of the NDA-listed patents are challenged, the first filer(s) of a Paragraph IV certification may be entitled to a 180-day period of market exclusivity over all other generic manufacturers.Generic manufacturers use Paragraph IV certifications extensively to challenge patents on innovative pharmaceuticals. In addition, generic companies have shown willingness to launch "at risk," i.e., after receiving ANDA approval but before final resolution of their patent challenge.Under the BPCIA, the FDA cannot approve an application for a biosimilar product until data protection expires, 12 years after initial marketing approval of the innovator biologic, and an application may not be submitted until four years following the date the innovator biologic was first approved. However, the BPCIA does provide a mechanism for a competitor to challenge the validity of an innovator's patents as early as four years after initial marketing approval of the innovator biologic. The patent litigation scheme under the BPCIA, and the BPCIA itself, is complex and continues to be interpreted and implemented by the FDA as well as courts. Courts have held that biosimilar applicants are not required to engage in the BPCIA patent litigation scheme and patent holders retain the right to bring suit under normal patent law procedures if a biosimilar applicant attempts to commercialize a product prior to patent expiration. Further, in the U.S., the increased likelihood of generic and biosimilar challenges to innovators' intellectual property has increased the risk of loss of innovators' market exclusivity. See also "- Competition - Biosimilars." In addition, there is a procedure in U.S. patent law, known as inter partes review (IPR), which allows any member of the public to file a petition with the USPTO seeking the review of any issued U.S. patent for validity. IPRs are conducted before Administrative Patent Judges in the USPTO using a lower standard of proof than used in federal district court. In addition, the challenged patents are not accorded the presumption of validity as they are in federal district court. Generic drug companies and even some investment firms have engaged in the IPR process in attempts to invalidate our patents. The use of IPR proceedings after the institution of litigation pursuant to the BPCIA or Hatch-Waxman Act is currently a topic of debate among legislators. We expect additional changes to the Patent Trial and Appeal Board (PTAB), including potentially to the policy to discretionarily deny an otherwise meritorious petition for IPR in light of a concurrent district court proceeding. See "Risk Factors—Risks Related to Our Business—Our long-term success depends on intellectual property protection; if our intellectual property rights are invalidated, circumvented, or weakened, our business will be adversely affected."12Outside the U.S., the legal doctrines and processes by which pharmaceutical patents can be challenged vary widely. In recent years, we have experienced an increase in patent challenges from generic manufacturers in many countries outside the U.S.For more information on administrative challenges and litigation involving our intellectual property rights, see Item 8, "Financial Statements and Supplementary Data - Note 16, Contingencies." Government Regulation of Our OperationsOur operations are regulated extensively by numerous national, state, and local agencies. Regulation of Products The lengthy process of laboratory and clinical testing, data analysis, manufacturing development, and regulatory review necessary for governmental approvals of our products is extremely costly and can significantly delay product introductions and revenue generation. In addition, our operations are subject to complex federal, state, local, and foreign laws and regulations concerning relationships with healthcare providers and suppliers, the environment, occupational health and safety, data privacy, and other matters. Evolving regulatory priorities have intensified governmental scrutiny of our operations, including with respect to current Good Manufacturing Practices (cGMP), quality assurance, and similar regulations. Compliance with the laws and regulations affecting the manufacture and sale of current products and the discovery, development, and introduction of new products will continue to require substantial effort, expense, and capital investment.Of particular importance to our business is regulation by the FDA in the U.S. Pursuant to laws and regulations that include the Federal Food, Drug, and Cosmetic Act, the FDA has jurisdiction over all of our products and devices in the U.S. and administers requirements covering the testing, safety, effectiveness, manufacturing, quality control, distribution, labeling, marketing, promotion, advertising, dissemination of information, and post-marketing surveillance of those products.Following approval, our products remain subject to regulation by various agencies in connection with labeling, import, export, storage, recordkeeping, advertising, promotion, and safety reporting. We conduct extensive post-marketing surveillance of the safety of the products we sell. The FDA may withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after a product reaches the market. The FDA strictly regulates marketing, labeling, advertising, and promotion of products that are placed on the market. Pharmaceutical products may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. The FDA extensively regulates all aspects of manufacturing quality for pharmaceuticals under its cGMP regulations. Outside the U.S., our products and operations are subject to similar regulatory requirements, notably by the EMA in Europe, the Ministry of Health, Labor and Welfare in Japan, and the National Medical Products Administration in China. Specific regulatory requirements vary from country to country. Regulatory requirements and approval processes outside the U.S. may differ from those in the U.S. and may involve additional costs, uncertainties, and risks.We make substantial investments of capital and operating expenses to implement comprehensive, company-wide quality systems and controls in our manufacturing, product development, and process development operations in an effort to maintain sustained compliance with cGMP and similar regulations. However, in the event we fail to adhere to these requirements, we become subject to potential government investigations, regulatory and legal actions, product recalls and seizures, fines and penalties, interruption of production leading to product shortages, import bans or denials of import certifications, delays or denials in new product approvals, and reputational harm, any of which would adversely affect our business. Certain of our products are manufactured by third parties, and their failure to comply with these regulations could adversely affect us, including through failure to supply product to us or delays in new product approvals. Any determination by the FDA or other regulatory authorities of manufacturing or other deficiencies could adversely affect our business. We are also subject to a variety of federal, state, local, and foreign environmental, health and safety, and other laws and regulations that may affect our research, development or production efforts. 13Emergency Use AuthorizationsThe Secretary of Health and Human Services may authorize unapproved medical products to be manufactured, marketed, and sold in the context of an actual or potential emergency that has been designated by the government. After an emergency has been announced, the Secretary of Health and Human Services may authorize EUAs for the use of specific products based on criteria established by statute, including that the product at issue may be effective in diagnosing, treating, or preventing serious or life-threatening diseases when there are no adequate, approved, and available alternatives. An EUA is subject to additional conditions and restrictions, such as the obligation to provide fact sheets for healthcare providers administering the product and those to whom it is administered, adverse event monitoring and reporting, and recordkeeping and reporting requirements by product manufacturers. The FDA may also establish additional discretionary conditions of authorization that the FDA deems necessary or appropriate to protect the public health, including conditions related to product distribution, product administration and data collection and analysis concerning the safety and effectiveness of the product. In issuing an EUA, the FDA considers the totality of available scientific evidence regarding quality, safety and efficacy, including the known and potential risks of such products and the adequacy and availability of approved alternatives, among other factors. An EUA is not a substitute for obtaining FDA approval, licensure, or clearance for use of a product. An EUA terminates when the emergency determination underlying the EUA terminates, and EUAs can be revoked under other circumstances, the timing of which may occur unexpectedly or be difficult to predict.Outside the U.S., the emergency use of medical products is subject to regulatory processes and requirements that differ from those in the U.S.The COVID-19 pandemic has been designated as a national emergency in the U.S. On the basis of such determination, the Secretary of Health and Human Services declared that circumstances exist justifying the authorization of emergency use of drugs and biologics during the COVID-19 pandemic. The FDA has granted EUAs for bamlanivimab and etesevimab administered together, baricitinib, and bebtelovimab, and similar actions have been taken by other regulators in certain jurisdictions outside the U.S. However, the FDA has revised, and may in the future revise, any EUA for our COVID-19 antibodies in response to the prevalence of variants against which our antibodies have varying degrees of efficacy. For example, in January 2022, the FDA revised the EUA for bamlanivimab and etesevimab administered together to limit their use to only when the patient is likely to have been infected with or exposed to a variant that is susceptible to this combination treatment.Other Laws and RegulationsThe marketing, promotional, and pricing practices of pharmaceutical manufacturers, as well as the manner in which manufacturers interact with purchasers, prescribers, and patients, are subject to various other U.S. federal and state laws, as well as analogous foreign laws and regulations, including the federal anti-kickback statute, the False Claims Act, and state laws governing kickbacks, false claims, unfair trade practices, and consumer protection. These laws are administered by, among others, the Department of Justice, the Office of Inspector General of the Department of Health and Human Services, the Federal Trade Commission, the Office of Personnel Management, and state attorneys general. Over the past several years, state, federal, and foreign governments, agencies, and other regulatory bodies have increased their oversight, enforcement activities, and coordination with respect to pharmaceutical companies, which has resulted in intensified scrutiny, corporate criminal sanctions, and substantial civil settlements in the pharmaceutical industry. In December 2020, the Office of Inspector General of the U.S. Department of Health and Human Services and the Centers for Medicare & Medicaid Services (CMS) issued final rules expanding and modifying existing, and adding new, regulatory "safe harbors" and exceptions, respectively, under the anti-kickback statute and the Ethics in Patient Referrals Act. We are currently evaluating the impact, if any, these regulatory amendments will have upon becoming effective on our consolidated results of operations, liquidity, and financial position, which is uncertain at this time. The U.S. Foreign Corrupt Practices Act of 1977 (FCPA) prohibits certain individuals and entities, including U.S. publicly traded companies, from promising, offering, or giving anything of value to foreign officials with the corrupt intent of influencing the foreign official for the purpose of helping the company obtain or retain business or gain any improper advantage. The FCPA also imposes specific recordkeeping and internal controls requirements on U.S. publicly traded companies. As noted above, outside the U.S., our business is heavily regulated and therefore involves significant interaction with foreign officials. Additionally, in many countries outside the U.S., healthcare providers who prescribe pharmaceuticals are employed by the government and purchasers of pharmaceuticals are government entities; therefore, our interactions with these prescribers and purchasers are subject to regulation under the FCPA. 14In addition to the U.S. application and enforcement of the FCPA, the various jurisdictions in which we operate and supply our products have laws and regulations aimed at preventing and penalizing corrupt and anticompetitive behavior. In recent years, several jurisdictions have enhanced their laws and regulations in this area, increased their enforcement activities, and/or increased the level of cross-border coordination and information sharing.We are and could in the future become subject to administrative and legal proceedings and actions, which could include claims for civil penalties (including treble damages under the False Claims Act), criminal sanctions, and administrative remedies, including exclusion from U.S. federal and other health care programs. It is possible that an adverse outcome in future actions could have a material adverse impact on our consolidated results of operations, liquidity, and financial position.We are also subject to a variety of federal, state, local, and foreign environmental, health and safety, and other laws and regulations that may affect our research, development or production efforts. Regulations and Private Payer Actions Affecting Pharmaceutical Pricing, Reimbursement, and Access U.S.There continues to be considerable public and government scrutiny of pharmaceutical pricing, and measures to address the perceived high cost of pharmaceuticals are being considered at various levels of state and federal government. In addition, U.S. government action to reduce federal spending on entitlement programs, including Medicare and Medicaid, may affect payment for our products or services associated with the provision of our products. Additionally, there has been heightened governmental scrutiny recently over the manner in which drug manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs and reform government program reimbursement methodologies for drug products. Restrictive or unfavorable pricing, coverage, or reimbursement determinations for our medicines or product candidates by governments, regulatory agencies, or private payers could also adversely impact our business and financial results. For example, in January 2022, the CMS proposed a national coverage determination (NCD) decision memorandum stating that the proposed NCD would cover FDA approved monoclonal antibodies that target amyloid for the treatment of Alzheimer's disease for people with Medicare only if they are enrolled in qualifying clinical trials (the Alzheimer’s Monoclonal Antibody NCD). If finalized in its current form, the proposed Alzheimer’s Monoclonal Antibody NCD would result in reduced coverage for, and negatively impact, our product candidate donanemab, and may negatively impact our business and financial results. The regulatory priorities of the current U.S. presidential administration could further intensify these efforts, which could have a material adverse impact on our business.In the U.S., we are required to provide rebates to the federal government and respective state governments on their purchases of our pharmaceuticals under various federal and state healthcare programs, including state Medicaid and Medicaid Managed Care programs (minimum of 23.1 percent plus adjustments for price increases over time) and discounts to private entities who treat patients in certain types of health care facilities intended to serve low-income and uninsured patients (known as 340B facilities). No rebates are required at this time in the Medicare Part B (physician and hospital outpatient) program where reimbursement is set on an "average sales price plus 4.3 percent" formula. Additionally, an annual fee is imposed on pharmaceutical manufacturers and importers that sell branded prescription drugs to specified government programs. Since 2019, the Bipartisan Budget Act has required manufacturers of brand-name drugs, biologics, and biosimilars to provide a discount of 70 percent of the cost of branded prescription drugs for Medicare Part D participants who are in the "doughnut hole" (the coverage gap in Medicare prescription drug coverage).Rebates are also negotiated in the private sector. We pay rebates to private payers that provide prescription drug benefits to seniors covered by Medicare and to private payers that provide prescription drug benefits to their customers. These rebates are affected by the introduction of competitive products and generics in the same class. Our approach to the rebates we offer to private payers that provide prescription drug benefits to seniors covered by Medicare may be impacted by the 2020 regulatory amendments to the anti-kickback statute's discount safe harbor, which have currently been stayed until at least January 1, 2026. Pending legislation could repeal the amendments to the discount safe harbor. Accordingly, their impact on our business is uncertain at this time.15Outside the U.S.Globally, public and private payers are increasingly restricting access to pharmaceuticals based on assessments of comparative effectiveness and value, including through the establishment of formal health technology assessment processes. In addition, third-party organizations, including professional associations, academic institutions, and non-profit entities associated with payers, are conducting and publishing comparative effectiveness and cost/benefit analyses on medicines, the impact of which are uncertain at this time. In most international markets, we operate in an environment of government-mandated cost-containment programs, which may include price controls, international reference pricing (to other countries' prices), discounts and rebates, therapeutic reference pricing (to other, often generic, pharmaceutical choices), restrictions on physician prescription levels, and mandatory generic substitution. We may experience additional pricing pressures resulting from the financial strain of the COVID-19 pandemic on government-funded healthcare systems around the world.We cannot predict the extent to which our business may be affected by these or other potential future legislative, regulatory, or payer developments. However, in general we expect to see continued focus on regulating pricing resulting in additional state, federal, and international legislative and regulatory developments that could have further negative effects on pricing and reimbursement for our products.See Item 7, "Management's Discussion and Analysis - Results of Operations - Executive Overview - Other Matters - Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access" for additional information regarding recent legislative, administrative, and other pricing initiatives and their impact on our results.Research and DevelopmentOur commitment to research and development dates back more than 140 years. We invest heavily in research and development because we believe it is critical to our long-term competitiveness. At the end of 2021, we employed approximately 8,100 people in pharmaceutical research and development activities, including a substantial number of physicians, scientists holding graduate or postgraduate degrees, and highly skilled technical personnel. Our internal pharmaceutical research focuses primarily on the areas of diabetes, immunology, neuroscience, and oncology. During the past two years, we have also focused on researching and developing potential treatments for COVID-19. In addition to discovering and developing new medicines, we seek to expand the value of existing products through new uses, formulations, and therapeutic approaches that provide additional value to patients.To supplement our internal efforts, we collaborate with others, including academic institutions and research-based pharmaceutical and biotechnology companies. We use the services of physicians, hospitals, medical schools, and other research organizations worldwide to conduct clinical trials to establish the safety and effectiveness of our medicines. We also invest in external research and technologies that we believe complement and strengthen our own efforts. These investments can take many forms, including, among others, licensing arrangements, co-development agreements, co-promotion arrangements, joint ventures, acquisitions, and equity investments.Pharmaceutical development is time-consuming, expensive, and risky. Very few of the candidates discovered by researchers ultimately become approved medicines. The process from discovery to regulatory approval can take over a decade. Candidates can fail at any stage of the process, and even late-stage candidates sometimes fail to receive regulatory approval or achieve commercial success. The following describes in more detail the research and development process for pharmaceutical products:Phases of New Drug Development•Discovery PhaseIn the discovery phase, scientists identify, design, and synthesize promising candidates by analyzing their effect on biological targets thought to play a role in disease. Targets are often unproven and only candidates that have the desired effect on the target and meet other design criteria move to the next phase of development, which includes the initiation of studies in animals to support regulatory and safety requirements for clinical research in humans. The discovery phase can take years and the probability of any one candidate becoming a medicine is extremely low.16•Early Development PhaseEarly development includes initial testing for safety and efficacy and early analyses of manufacturing requirements. Safety testing is initially performed in laboratory tests and animals, as necessary. In general, the first human tests (often referred to as Phase I) are conducted in small groups of subjects to assess safety and evaluate the potential dosing range. Subsequently, larger populations of patients are studied (Phase II) to identify initial signs of efficacy while continuing to assess safety. In parallel, scientists work to identify safe, effective, and economical manufacturing processes. Long-term animal studies continue to test for potential safety issues. Of the candidates that enter the early development phase, approximately 10 percent move to the late development phase. The early development phase varies but can take several years to complete.•Late Development PhaseLate phase development projects (typically Phase III) have met initial safety requirements and shown initial evidence of efficacy in earlier studies. As a result, these candidates generally have a higher likelihood of success and trials include larger patient populations to demonstrate safety and efficacy in the disease. These studies are designed to demonstrate the benefit and risk of the potential new medicine and may be compared to competitive therapies, placebo, or both. Phase III studies are generally conducted globally and are designed to support regulatory filings for marketing approval. The duration of Phase III testing varies by disease and may take two to four years.•Submission PhaseOnce a potential new medicine is submitted to regulatory agencies, the time to final marketing approval can vary from several months to several years, depending on the disease state, the strength and complexity of available data, the degree of unmet need, and the time required for the regulatory agency(ies) to evaluate the submission, which can depend on prioritization by regulators and other factors. There is no guarantee that a potential medicine will receive marketing approval, or that decisions on marketing approvals or indications will be consistent across geographic areas.We believe our investments in research, both internally and in collaboration with others, have resulted in a robust pipeline of potential new medicines and new treatment indications in all stages of development. We currently have approximately 45 new medicine candidates in clinical development or under regulatory review, and a larger number of projects in the discovery phase. See Item 7, "Management's Discussion and Analysis - Results of Operations - Executive Overview - Late-Stage Pipeline," for more information on certain of our product candidates.Raw Materials and Product SupplyMost of the principal materials we use in our manufacturing operations are available from more than one source. However, we obtain certain raw or intermediate materials primarily from only one source. We generally seek to maintain sufficient inventory to supply the market until an alternative source of supply could be implemented, in the event one of these suppliers was unable to provide the materials or product. However, various developments from time to time lead to interruption or shortages in supply until we establish new sources or, in some cases, implement alternative processes.The majority of our revenue comes from products produced in our own facilities. Our principal active ingredient manufacturing occurs at sites we own in the U.S., including Puerto Rico, and Ireland. Finishing operations, including formulation, filling, assembling, delivery device manufacturing, and packaging, take place at a number of sites throughout the world. We utilize third parties for certain active ingredient manufacturing and finishing operations.We manage our supply chain (including our own facilities, contracted arrangements, and inventory) in a way that is intended to allow us to meet substantially all expected product demand while maintaining flexibility to reallocate manufacturing capacity to improve efficiency and respond to changes in supply and demand. To maintain a stable supply of our products, we use a variety of techniques including comprehensive quality systems, inventory management, and back-up sites.17However, pharmaceutical production processes are complex, highly regulated, and vary widely from product to product. Shifting or adding manufacturing capacity can be a very lengthy process requiring significant capital expenditures, process modifications, and regulatory approvals. Accordingly, developments such as unplanned plant shutdowns, manufacturing or quality assurance difficulties at one of our facilities or contracted facilities, failure or refusal of a supplier or contract manufacturer to supply contracted quantities, increases in demand on a supplier, or difficulties in predicting or variability in demand for our products, from time to time lead to interruption or higher costs in the supply of certain products or product shortages. Further, global transportation and logistics challenges, as well as tight labor markets, have caused, and in the future may cause, delays in, and/or increase costs related to, distribution of our medicines, the construction or acquisition of manufacturing capacity, procurement activity, and supplier or contract manufacturer arrangements. For more information on the additional risks we face in connection with any difficulties, disruptions, and shortages in the manufacturing, distribution, and sale of our products, see "Risk Factors - Risks Related to Our Business - Manufacturing and supply chain difficulties, disruptions, or shortages could lead to product supply problems."In addition, the strain on global transportation, logistics, and labor markets caused by the COVID-19 pandemic and an increase in overall demand in our industry for certain materials have had, and may continue to have, a number of impacts on our business, including increased costs to provide a consistent supply of our medicines where they are needed and disruptions in the supply of our medicines. For more information, see Item 1A, "Risk Factors - Risks Related to Our Business - The COVID-19 pandemic has adversely impacted and may continue to adversely impact our business and operations. We are currently unable to predict the full extent to which the COVID-19 pandemic or any future pandemic, epidemic, or similar public health threat will adversely impact our business and operations in the future." and Item 7, "Management's Discussion and Analysis - Results of Operations - Executive Overview - COVID-19 Pandemic."Quality AssuranceOur success depends in great measure on customer confidence in the quality of our products and in the integrity of the data that support their safety and effectiveness. Product quality arises from a total commitment to quality in all parts of our operations, including research and development, purchasing, facilities planning, manufacturing, distribution, and dissemination of information about our medicines. Quality of production processes involves strict control of ingredients, equipment, facilities, manufacturing methods, packaging materials, and labeling. We perform tests at various stages of production processes and on the final product in an effort to ensure that the product meets all applicable regulatory requirements and our internal standards. These tests may involve chemical and physical chemical analyses, microbiological testing, testing in animals, or a combination thereof. Additional assurance of quality is provided by quality assurance groups that audit and monitor all aspects of quality related to pharmaceutical manufacturing procedures and systems in company operations and at third-party suppliers.Executive Officers of the CompanyThe following table sets forth certain information regarding our current executive officers.The term of office for each executive officer expires on the date of the annual meeting of the board of directors, to be held on May 2, 2022 in connection with the company's annual meeting of shareholders, or on the date his or her successor is chosen and qualified. No director or executive officer has a "family relationship" with any other director or executive officer of the company, as that term is defined for purposes of this disclosure requirement. There is no understanding between any executive officer or director and any other person pursuant to which the executive officer was selected.18NameAgeTitles and Business ExperienceDavid A. Ricks54Chair, President, and Chief Executive Officer (CEO) (since 2017). Previously, Mr. Ricks held various leadership roles with Lilly, including senior vice president and president, Lilly Bio-Medicines. Mr. Ricks has 25 years of service with Lilly.Anat Ashkenazi 49Senior Vice President and Chief Financial Officer (since 2021). Previously, Ms. Ashkenazi held various leadership roles with Lilly, including senior vice president, controller and chief financial officer, Lilly Research Laboratories, and vice president, finance and chief financial officer, Lilly Diabetes and Lilly global manufacturing and quality. Ms. Ashkenazi has 20 years of service with Lilly. Stephen F. Fry56Senior Vice President, Human Resources and Diversity (since 2011). Previously, Mr. Fry held various leadership roles with Lilly, including vice president, human resources. Mr. Fry has 34 years of service with Lilly.Anat Hakim52Senior Vice President, General Counsel and Secretary (since 2020). Prior to joining Lilly, Ms. Hakim was senior vice president, general counsel and secretary of WellCare Health Plans, Inc. (WellCare) from 2016 to 2018, and executive vice president, general counsel and secretary of WellCare from 2018 to 2020. Prior to joining WellCare, she served as divisional vice president and associate general counsel of intellectual property litigation at Abbott Laboratories from 2010 to 2013 and divisional vice president and associate general counsel of litigation from 2013 to 2016. Ms. Hakim has two years of service with Lilly.Edgardo Hernandez47Senior Vice President and President, Manufacturing Operations (since 2021). Previously, Mr. Hernandez held various leadership roles with Lilly, including senior vice president, global parenteral drug product, delivery devices and regional manufacturing, and vice president, Fegersheim operations. Mr. Hernandez has 17 years of service with Lilly.Patrik Jonsson55Senior Vice President and President, Lilly Immunology, Lilly USA, and Chief Customer Officer (since 2021). Previously, Mr. Jonsson held various leadership roles with Lilly, including senior vice president and president, Lilly USA, and chief customer officer, senior vice president and president, Lilly Bio-Medicines and president and general manager, Lilly Japan. Mr. Jonsson has 31 years of service with Lilly.Michael B. Mason 55Senior Vice President and President, Lilly Diabetes (since 2020). Previously, Mr. Mason held various leadership roles with Lilly, including senior vice president, connected care and insulins and vice president of U.S. Diabetes. Mr. Mason has 32 years of service with Lilly.Johna L. Norton55Senior Vice President, Global Quality (since 2017). Previously, Ms. Norton held various leadership roles with Lilly, including vice president, global quality assurance API manufacturing and product research and development. Ms. Norton has 31 years of service with Lilly.Leigh Ann Pusey59Senior Vice President, Corporate Affairs and Communications (since 2017). Prior to joining Lilly, Ms. Pusey was president and chief executive officer of the American Insurance Association from 2009 to 2017. Ms. Pusey has four years of service with Lilly.Diogo Rau47Senior Vice President and Chief Information and Digital Officer (since 2021). Prior to joining Lilly, Mr. Rau was senior director of information systems and technology for retail and online stores of Apple Inc. from 2011 to 2021. Prior to his tenure at Apple, he served as a partner at McKinsey & Company.Daniel M. Skovronsky, M.D., Ph.D.48Senior Vice President, Chief Scientific and Medical Officer, and President, Lilly Research Laboratories (since 2021). Previously, Dr. Skovronsky held various leadership roles with Lilly, including senior vice president, chief scientific officer, and president, Lilly Research Laboratories, and senior vice president, clinical and product development. Dr. Skovronsky has 11 years of service with Lilly.Jacob Van Naarden37Senior Vice President, CEO Loxo Oncology at Lilly, and President, Lilly Oncology (since 2021). Previously, Mr. Van Naarden served as Chief Executive Officer-Loxo Oncology at Lilly, and Chief Operating Officer-Loxo Oncology at Lilly. Mr. Van Naarden joined Lilly in 2019 when the company acquired Loxo Oncology, Inc., where he was the chief operating officer. In previous roles, Mr. Van Naarden worked in various biotechnology investing, operating, and advisory capacities, including positions with HealthCor Management, Aisling Capital, and Goldman Sachs. Mr. Van Naarden has three years of service with Lilly.Alonzo Weems51Senior Vice President, Enterprise Risk Management, and Chief Ethics and Compliance Officer (since 2021). Previously, Mr. Weems held various leadership roles with Lilly, including vice president and deputy general counsel for corporate legal functions, general counsel for Lilly USA, and general counsel for biomedicines and diabetes. Mr. Weems has 24 years of service with Lilly.Anne E. White53Senior Vice President and President, Lilly Neuroscience (since 2021). Previously, Ms. White held various leadership roles with Lilly, including senior vice president and president, Lilly Oncology, vice president of Portfolio Management, Chorus, and Next Generation Research and Development. Ms. White has 26 years of service with Lilly.Ilya Yuffa47Senior Vice President and President, Lilly International (since 2021). Previously, Mr. Yuffa held various leadership roles with Lilly, including senior vice president and president, Lilly Bio-Medicines, vice president of U.S. Diabetes, general manager of Italy Hub, and vice president, global ethics and compliance officer since 2014. Mr. Yuffa has 25 years of service with Lilly.19Human Capital ManagementOur core values—integrity, excellence, and respect for people—shape our approach to attracting, retaining, engaging, and developing a highly skilled and ethical workforce, which is critical to executing our strategy. We believe the strength of our workforce significantly contributes to our financial performance and enables us to make life better for people around the world. For instance, most of the products we sell today were discovered or developed by our own scientists, and our long-term success depends on our ability to continually discover or acquire, develop, and commercialize innovative new medicines. We believe that fostering a positive culture that values the contributions of our talented colleagues helps drive our success.We are committed to creating a safe, supportive, ethical, and rewarding work environment through strategic focus on our human capital management process, fairness and nondiscrimination in our employment practices, robust training and development opportunities, and competitive pay and benefits. We believe our dedication to promoting diversity, equity, and inclusion (DEI) within our company reflects our values and is a key driver of business success and growth. We regularly conduct anonymous employee surveys to seek feedback from our workforce on a variety of topics. These results are reviewed and analyzed by our leaders in order to implement changes to our policies and benefits designed to improve our employees' well-being. As a result of our efforts, we believe that we have a highly performing, cohesive workforce and that our employee relations are good.At the end of 2021, we employed approximately 35,000 people, including approximately 19,600 employees outside the U.S. Our employees include approximately 8,100 people engaged in research and development activities.Strategy and OversightIn order to build diverse and inclusive teams, our CEO and executive committee set expectations for inclusive leadership and hold leaders accountable for achieving results. Because dedication to human capital management is also a core component of our corporate governance, our board of directors regularly engages with management and facilitates a system of reporting designed to monitor human capital management initiatives and progress as part of the overarching framework that guides how we attract, retain, engage, and develop a workforce that aligns with our values and mission. Diversity, Equity, and InclusionWe are committed to fairness and nondiscrimination in our employment practices, and we deeply value diverse backgrounds, skills, and global perspectives. To fulfill our purpose, we believe we must look at challenges from multiple viewpoints and understand the diverse experiences of the patients who depend on us. We believe that fostering DEI begins with understanding. For example, our Employee Journeys research has yielded important insights about the experiences of women, Black/African American, Latinx, Asian, and LGBTQ+ employees at Lilly. The results of this research are reviewed by our senior leadership, and we deploy actions and activities in response to these insights to improve our workplace and corporate culture.In 2020, as part of our DEI and community initiatives, Lilly and the Lilly Foundation launched the Racial Justice Commitment and pledged $25 million and 25,000 volunteer hours over five years to help decrease the burden of racial injustice and its effects on communities of color. The Racial Justice Commitment aims to drive change across five areas: internal people development, health equity, social impact, diversity partners, and family sustaining jobs, through the use of financial and people resources. In 2021, we made progress in these efforts, including through the development of two apprenticeship programs at Lilly for individuals without college degrees.Since 2017, we have committed to increasing the number of women, Black/African American, Latinx, and Asian populations in leadership roles, and we actively monitor our progress. From the end of 2017 through the end of 2021, we increased the percentage of women in management globally from 41 percent to 48 percent. For minority group members (MGM) in the U.S. over the same period, we increased management representation from 16 percent to 24 percent. Across all levels of our workforce, from the end of 2017 through the end of 2021, we have seen increased representation for MGMs in the U.S. and women globally. Our focus on DEI is also evident at our executive committee and board of directors. Five of 15 current members (approximately 33 percent) of our executive committee (which includes our CEO) are women and two are MGM. In addition, as of the filing of this report, the company's 13-member board of directors includes four women and six members who are MGMs.20Our efforts in DEI and workplace benefits have garnered numerous recognitions, including, in 2021, Top 50 Companies for Diversity by DiversityInc., America's Best Employers for Diversity by Forbes, America's Most JUST Companies and Forbes JUST 100 by Forbes and JUST Capital, Perfect Score on the Human Rights Campaign Foundation Corporate Equality Index, World's Most Ethical Companies by Ethisphere, Leading Disability Employer by the National Organization on Disability, Top Employers by Science Magazine, and 100 Best Companies, Top Companies for Executive Women, Best Companies for Dads, and Best Companies for Multicultural Women by Working Mother Magazine.Employee DevelopmentWe believe talent begins with the hiring process. We therefore require hiring managers to consider a diverse pool of candidates and we strive to provide a diverse panel of interviewers for open positions. We believe that hiring in this way helps ensure that people from all backgrounds have equal opportunity to advance their careers.We offer training to enable our employees to perform their duties in our highly regulated industry. We also strive to cultivate a culture that promotes ongoing learning by encouraging employees to seek further education and growth experiences, helping them build rewarding careers. We have introduced online programming to facilitate access to our learning and development offerings. Many training courses are designed to improve accessibility for people with disabilities and other unique needs. Across Lilly, we are working to design learning experiences to be more inclusive and effective. In addition, we have implemented tools and resources and improved our talent programs and processes to provide broad access to information and transparency regarding career development and advancement at Lilly.In early 2022, we launched Discover, a 12-month new employee onboarding program with multiple touchpoints designed to foster integration into the Lilly culture, to accelerate learning in their new roles and to create connections to further a sense of belonging at Lilly. Discover was shaped in part by external benchmarking, feedback from employees, and learnings from onboarding remotely during the COVID-19 pandemic.Employee resource groups (ERGs) are another important component of developing talent at Lilly. We currently have 11 ERGs representing groups including women, MGMs, LGBTQ+ individuals, veterans, and people with disabilities. ERGs offer our diverse workforce opportunities to build relationships, engage with senior leaders, advance our caring community, and offer unique insights and perspectives to improve our business. We have continued our efforts to create an inclusive workplace with the goal of ensuring that all employees feel safe to speak up and share their ideas at work. Our Make it Safe to Thrive education and awareness program is designed to help employees and leaders understand how individual psychological safety can be created and enhanced and includes live and online training and a monthly video series.Lilly is committed to fostering a culture of diversity and respect in the workplace—an environment free of discrimination, harassment, or retaliation of any kind. In 2022, as part of our annual review of The Red Book (Lilly's comprehensive code of business conduct applicable to our board and all employees worldwide) and related policies and procedures, we revised the Global Conduct in the Workplace procedure to continue to help ensure that we maintain a respectful, safe, inclusive, and professional workplace.Employee Health and SafetyWe strive to foster a healthy, vibrant work environment, which includes keeping our employees safe. We seek to create a companywide culture where best-in-class safety practices are consistently followed. To do this, we assess and continuously attempt to improve our companywide safety performance to promote the well-being of employees and to help safeguard communities where we operate. As the COVID-19 pandemic has evolved, we have taken various measures to protect and support the health and safety of our employees globally, including instituting travel restrictions and work-from-home arrangements, offering onsite testing and vaccination options where possible, and instituting safety precautions such as masking, social distancing, and enhanced cleaning practices. To support employee well-being in the U.S., we also enhanced local benefits related to health care, childcare, and time off. We believe this holistic approach and dedication to safety helps us be our best as we deliver on our company purpose to improve lives around the world.21Information Available on Our WebsiteOur company website is www.lilly.com. None of the information accessible on or through our website is incorporated into this Annual Report on Form 10-K. We make available through the website, free of charge, our company filings with the SEC as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. These include our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, registration statements, and any amendments to those documents. The link to our SEC filings is investor.lilly.com/financial-information/sec-filings.Paper copies of the company's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q that are filed with the SEC are available without charge upon written request to:ELI LILLY AND COMPANYc/o General Counsel and SecretaryLilly Corporate CenterIndianapolis, Indiana 46285In addition, the Governance portion of our website includes our corporate governance guidelines, board of directors and committee information (including committee charters), and our articles of incorporation and bylaws. The link to our corporate governance information is lilly.com/leadership/governance.22Item 1A.Risk FactorsIn addition to the other information contained in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating our company. It is possible that our business, financial condition, liquidity, cash flows, or results of operations could be materially adversely affected by any of these risks. Certain of these risks could also adversely affect the company's reputation. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could also adversely affect our business and reputation.Risks Related to Our Business•The COVID-19 pandemic has adversely impacted and may continue to adversely impact our business and operations. We are currently unable to predict the full extent to which the COVID-19 pandemic or any future pandemic, epidemic, or similar public health threat will adversely impact our business and operations in the future.The COVID-19 pandemic continues to burden healthcare systems worldwide. The focus of resources on COVID-19, widespread protective measures implemented to control the spread of COVID-19, and the resulting strain on global transportation, manufacturing, and labor markets have negatively impacted development, manufacturing, supply, distribution, and sales of our medicines.Although in-person interactions with healthcare professionals have largely resumed, we continue to see a lack of "normal" access and fewer in-person interactions by patients and our employees with healthcare professionals. As the COVID-19 pandemic continues to develop, we may decide to halt such in-person interactions in the future and, in those cases, expect to resume such interactions as it is safe to do so and in compliance with applicable guidance and requirements.The strain on global transportation, logistics, and labor markets caused by the COVID-19 pandemic and an increase in overall demand in our industry for certain materials resulting in changed buying patterns and constrained supply have had, and may continue to have, a number of impacts on our business, including increased costs to provide a consistent supply of our medicines where they are needed and disruptions and shortages in the supply of our medicines. These factors may negatively affect our results of operations.We also face risks and uncertainties related to our COVID-19 therapies, including heightened regulatory scrutiny of our manufacturing practices, quality assurance, and similar regulations, restrictions on administration that limit widespread and timely access to our therapies, and risks related to handling, return, and/or refund of product after delivery by us. In addition, expedited authorization processes have allowed restricted distribution of products with less than typical safety and efficacy data, and additional data that become available may call into question the safety or effectiveness of our COVID-19 therapies. The availability of superior or competitive therapies, including therapies that can be administered more easily, or preventative measures such as vaccines, coupled with the unpredictable nature of pandemics, have and could further negatively impact or eliminate demand for our COVID-19 therapies. We also expect that additional revenue from the sale of bamlanivimab and etesevimab after the first quarter of 2022 will be limited. Mutations or the spread of other variants of the coronavirus have in some cases impacted the effectiveness of our COVID-19 therapies, and may further render our therapies more or less effective or ineffective. Furthermore, the FDA has revised, and may in the future revise, any EUA for our COVID-19 therapies in response to the prevalence of variants against which our therapies have varying degrees of efficacy. These and other risks related to COVID-19 could affect other aspects of our business or intensify other risks inherent in our business, including potentially resulting in delays or denials in the approval or launch of other products or indications.It remains difficult to reasonably assess or predict the full extent of the ongoing impact of the COVID-19 pandemic on us. The degree to which the COVID-19 pandemic continues to affect us will depend on developments that are highly uncertain and beyond our knowledge or control, including, but not limited to, the duration and severity of the pandemic, the actions taken to reduce its transmission, including widespread availability and efficacy of vaccines, the introduction and spread of new variants of the coronavirus that may be resistant to currently approved vaccines, the continuation of existing or implementation of new government restrictions and the speed with which, and extent to which, more stable economic and operating conditions resume. Should the COVID-19 pandemic, or any future pandemic, epidemic, or similar public health threat, and any associated supply chain disruption, labor 23market impact, recession, or depression continue for a prolonged period, these risks could be exacerbated, causing further impact on our business and operations in the future.•Pharmaceutical research and development is very costly and highly uncertain; we may not succeed in developing, licensing, or acquiring commercially successful products sufficient in number or value to replace revenues of products that have lost or will soon lose intellectual property protection or are displaced by competing products or therapies. There are many difficulties and uncertainties inherent in pharmaceutical research and development, the introduction of new products, and business development activities to enhance our product pipeline. There is a high rate of failure inherent in new drug discovery and development. To bring a drug from the discovery phase to market can take over a decade and often costs in excess of $2 billion. Failure can occur at any point in the process, including in later stages after substantial investment. As a result, most funds invested in research programs will not generate financial returns. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain or maintain necessary regulatory approvals or payer reimbursement or coverage, limited scope of approved uses, label changes, changes in the relevant treatment standards or the availability of new or better competitive products, difficulty or excessive costs to manufacture, or infringement of the patents or intellectual property rights of others. Regulatory agencies establish high hurdles for the efficacy and safety of new products and indications. Delays and uncertainties in drug approval processes can result in delays in product launches and lost market opportunity. In addition, it can be very difficult to predict revenue growth rates of new products and indications.We cannot state with certainty when or whether our products now under development will be approved or launched; whether, if initially granted, such approval will be maintained; whether we will be able to develop, license, or otherwise acquire additional product candidates or products; or whether our products, once launched, will be commercially successful. We must maintain a continuous flow of successful new products and successful new indications or brand extensions for existing products, both through our internal efforts and our business development activities, sufficient both to cover our substantial research and development costs and to replace revenues that are lost as profitable products lose intellectual property exclusivity or are displaced by competing products or therapies. Failure to do so in the short-term or long-term would have a material adverse effect on our business, results of operations, cash flows, and financial position.We engage in various forms of business development activities to enhance our product pipeline, including licensing arrangements, co-development agreements, co-promotion arrangements, joint ventures, acquisitions, and equity investments. There are substantial risks associated with identifying successful business development targets and consummating related transactions. Increased focus on business combinations in our industry, including by the Federal Trade Commission, and heightened competition for attractive targets has and could continue to delay, jeopardize or increase the costs of our business development activities. In addition, failures or difficulties in integrating or retaining new personnel or the operations of the businesses, products, or assets we acquire (including related technology, commercial operations, compliance programs, manufacturing, distribution, and general business operations and procedures) may affect our ability to realize the expected benefits of business development transactions and may result in our incurrence of substantial asset impairment or restructuring charges. We also may fail to generate the expected revenue and pipeline enhancement from business development activities due to developments outside our control, including unsuccessful clinical trials, issues related to the quality, integrity, or broad applicability of data, regulatory impediments, and commercialization challenges. Accordingly, business development transactions may not be completed in a timely manner (if at all), may not result in successful commercialization of any product, and may give rise to legal proceedings or regulatory scrutiny.See Item 1, "Business - Research and Development - Phases of New Drug Development" and Item 7, "Management's Discussion and Analysis - Results of Operations - Executive Overview - Late-Stage Pipeline," for more details about our current product pipeline. 24•We depend on products with intellectual property protection for most of our revenues, cash flows, and earnings; we have lost or soon will lose effective intellectual property protection for a number of our products, which has resulted and is likely to continue to result in rapid and severe declines in revenues.A number of our products, including Alimta and Forteo, have recently lost, or soon will lose, significant patent protection and/or data protection in the U.S. as well as in key jurisdictions outside the U.S. We have faced, and remain exposed to, generic competition following the loss of such intellectual property protection. In particular, we expect that the entry of generic competition for Alimta in the U.S. following the loss of patent exclusivity will cause a rapid and severe decline in revenue for the product and have a material adverse effect on our consolidated results of operations and cash flows.Certain other significant products no longer have effective exclusivity through patent protection or data protection. For non-biologic products, loss of exclusivity (whether by expiration of legal rights or by termination thereof as a consequence of litigation) typically results in the entry of one or more generic competitors, leading to a rapid and severe decline in revenues, especially in the U.S. For biologics (such as Humalog, Humulin, Erbitux, Cyramza, Trulicity, Taltz, and Emgality), loss of exclusivity may or may not result in the near-term entry of competitor versions (i.e., biosimilars) due to many factors, including development timelines, manufacturing challenges, and/or uncertainties regarding the regulatory pathways for approval of the competitor versions. Generic pharmaceutical companies could also introduce a generic product before resolution of any related patent litigation.There is no assurance that the patents we are seeking will be granted or that the patents we hold will be found valid and enforceable if challenged. Moreover, patents relating to particular products, uses, formulations, or processes do not preclude other manufacturers from employing alternative processes or marketing alternative products or formulations that compete with our patented products. In addition, competitors or other third parties may assert claims that our activities infringe patents or other intellectual property rights held by them, or allege a third-party right of ownership in our existing intellectual property. See Item 7, "Management's Discussion and Analysis - Results of Operations - Executive Overview - Other Matters - Patent Matters," and Item 1, "Business - Patents, Trademarks, and Other Intellectual Property Rights," for more details. •Our long-term success depends on intellectual property protection; if our intellectual property rights are invalidated, circumvented, or weakened, our business will be adversely affected. Our long-term success depends on our ability to continually discover or acquire, develop, and commercialize innovative new medicines. Without strong intellectual property protection, we would be unable to generate the returns necessary to support our significant investments in research and development, as well as the other expenditures required to bring new drugs to the market. Intellectual property protection varies throughout the world and is subject to change over time, depending on local laws and regulations. Changes to such laws and regulations could reduce protections for our innovative products. In the U.S., in addition to the process for challenging patents set forth in the BPCIA, which applies to biologic products, the Hatch-Waxman Act provides generic companies substantial incentives to seek to invalidate our patents covering pharmaceutical products. As a result, we expect that our U.S. patents on major pharmaceutical products, including biologics, will continue to be routinely challenged in litigation and may not be upheld. In addition, a separate IPR process currently allows competitors to seek invalidation of patents at the USPTO without the protections of the BPCIA or Hatch-Waxman Act. The use of IPR proceedings after the institution of litigation pursuant to the BPCIA or Hatch-Waxman Act is currently a topic of debate among legislators and the future ability of our competitors to use IPR proceedings as an alternative to Hatch-Waxman Act or BPCIA litigation procedures to challenge our patents remains uncertain. However, if our patents are challenged through this expedited review process, even if we prevail in demonstrating the validity of our patent, our win provides limited precedential value at the PTAB and no precedential value in federal district court, meaning the same patent can be challenged by other competitors. We face many generic manufacturer challenges to our patents outside the U.S. as well. The entry of generic competitors typically results in rapid and severe declines in revenues. In addition, competitors or other third parties may claim that our activities infringe patents or other intellectual property rights held by them. If successful, such claims could result in our being unable to market a product in a particular territory or being required to pay significant damages for past infringement or royalties on future sales. In addition, intellectual property protection in certain jurisdictions outside the U.S. is weak and we face additional risks to our intellectual property rights, including competition with generic or counterfeit versions of our products relatively shortly after launch. See Item 1, "Business - 25Patents, Trademarks, and Other Intellectual Property Rights," and Item 8, "Financial Statements and Supplementary Data - Note 16: Contingencies," for more details.•We and our products face intense competition from multinational pharmaceutical companies, biotechnology companies, and lower-cost generic and biosimilar manufacturers, and such competition could have a material adverse effect on our business.We compete with a large number of multinational pharmaceutical companies, biotechnology companies, and generic pharmaceutical companies and, in many cases, our products compete against the leading products of one or more of our competitors. To compete successfully, we must continue to deliver to the market innovative, cost-effective products that meet important medical needs. Our product revenues can be adversely affected by the introduction by competitors of branded products that are perceived as superior by the marketplace, by generic or biosimilar versions of our branded products, and by generic or biosimilar versions of other products in the same therapeutic class as our branded products. Our revenues can also be adversely affected by treatment innovations that eliminate or minimize the need for treatment with our drugs.Regulation of generic and biosimilar products varies around the world and such regulation is complex and subject to ongoing interpretation and implementation by regulatory agencies and courts. Particularly for biosimilars, recent health authority guidelines and legislative proposals could make it less burdensome for competitor products to enter the market and further incentivize uptake of biosimilars. In the U.S., the FDA has begun issuing "interchangeability" designations for biosimilar products, which could – subject to state law requirements – enable pharmacies to substitute biosimilars for innovator biological products. Given the importance of biologic products to our clinical-stage pipeline, such regulation could have a material adverse effect on our business. See Item 1, "Business - Competition" and "Business - Research and Development," for more details.In addition, we rely on our ability to attract, engage, and retain highly qualified and skilled personnel in order to compete effectively. To continue to commercialize our products, and advance the research, development, and commercialization of additional modalities and product candidates, we may need to expand our workforce, including in the areas of manufacturing, clinical trials management, regulatory affairs, and sales and marketing, both in and outside the U.S. We continue to face intense competition for qualified individuals from numerous multinational pharmaceutical companies, biotechnology companies, academic and other research institutions, as well as employers near our manufacturing and other facilities, which has and may continue to increase our labor costs. Our ability to attract and retain talent in our increasingly competitive environment may be further complicated by evolving employment trends arising from the COVID-19 pandemic, including vaccination mandates, increased preferences for remote, alternative, or flexible work arrangements, and other factors. Our failure to compete effectively for talent could negatively affect sales of our current and any future approved products, and could result in material financial, legal, commercial, or reputational harm to our business.•Failure, inadequacy, breach of, or unauthorized access to, our IT systems or those of our third-party service providers, unauthorized access to our confidential information, or violations of data protection laws, could each result in material harm to our business and reputation.A great deal of confidential information owned by us or our business partners or other third parties is stored in our information systems, networks, and facilities or those of third parties. This includes valuable trade secrets and intellectual property, clinical trial information, corporate strategic plans, marketing plans, customer information, and personally identifiable information, such as employee and patient information (collectively, confidential information). We also rely, to a large extent, on the efficient and uninterrupted operation of complex information technology systems, infrastructure, and hardware (together, IT systems), some of which are within our control and some of which are within the control of third parties, to accumulate, process, store, and transmit large amounts of confidential information and other data. We are subject to a variety of continuously evolving and developing laws and regulations around the world related to privacy, data protection, and data security. Maintaining the security, confidentiality, integrity and availability of our IT systems and confidential information is vital to our business. Our failure, or the failure of our third party service providers, to protect and maintain the security, confidentiality, integrity, and availability of our (or their) IT systems and our confidential information and other data could significantly harm our reputation as well as result in significant costs, including those related to fines, litigation, and obligations to comply with applicable data breach laws.26IT systems are vulnerable to system inadequacies, operating failures, service interruptions or failures, security breaches, malicious intrusions, or cyber-attacks from a variety of sources. Cyber-attacks are growing in their frequency, sophistication, and intensity, and are becoming increasingly difficult to detect, mitigate, or prevent. Cyber-attacks come in many forms, including the deployment of harmful malware, exploitation of vulnerabilities (including those of third-party software or systems), denial-of-service attacks, the use of social engineering, and other means to compromise the confidentiality, integrity and availability of our IT systems, confidential information, and other data. Breaches resulting in the compromise, disruption, degradation, manipulation, loss, theft, destruction, or unauthorized disclosure or use of confidential information, or the unauthorized access to, disruption of, or interference with our IT systems, products and services, can occur in a variety of ways, including but not limited to, negligent or wrongful conduct by employees or others with permitted access to our systems and information, or wrongful conduct by hackers, competitors, certain governments or nation-states, or other current or former company personnel. Our third-party partners, including third-party providers of data hosting or cloud services, as well as suppliers, distributors, alliances, and other third parties with whom we may share data, face similar risks, which could affect us directly or indirectly. The healthcare industry has been and continues to be a target for cyber-attacks, and the number of threats has only increased over time. Numerous federal agencies that monitor and regulate internet and cyber-crime have issued guidance, alerts and directives warning of software vulnerabilities that require immediate patching, malicious actors targeting healthcare related systems and nation-state sponsored hacking designed to steal valuable information.The failure, inadequacy, or breach of our IT systems or business processes, the compromise, disruption, degradation, manipulation, loss, theft, destruction, or unauthorized access to, disclosure or use of, confidential information, or the unauthorized access to, disruption of, or interference with our products and services that rely on IT systems or business processes, could impair our ability to secure and maintain intellectual property rights; result in a product manufacturing interruption or failure, or in the interruption or failure of products or services that rely on IT systems or business processes; damage our operations, customer relationships, or reputation; result in unfavorable clinical trial results by virtue of incorrect or unreliable data; and/or cause us to lose trade secrets or other competitive advantages. Unauthorized disclosure of personally identifiable information could expose us to significant sanctions for violations of data privacy laws and regulations around the world and could damage public trust in our company. In addition, IT system security in jurisdictions outside the U.S. is weaker and may result in additional costs, uncertainties, and risks. To date, system inadequacies, operating failures, unauthorized access, service interruptions or failures, security breaches, malicious intrusions, cyber-attacks, and the compromise, disruption, degradation, manipulation, loss, theft, destruction, or unauthorized disclosure or use of confidential information have not had a material impact on our consolidated results of operations. We maintain cyber liability insurance; however, this insurance may not be sufficient to cover the financial, legal, business, or reputational losses that may result from an interruption or breach of our IT systems. We continue to implement measures in an effort to protect, detect, respond to, and minimize or prevent these risks and to enhance the resiliency of our IT systems; however, these measures may not be successful and we may fail to detect or remediate security breaches, malicious intrusions, cyber-attacks, or other compromises of our systems. Any of these events could result in material financial, legal, commercial, or reputational harm to our business.•Significant economic downturns or international trade and other global disruptions or disputes could adversely affect our business and operating results. While pharmaceuticals have generally been less sensitive to overall economic cycles, prolonged economic slowdowns could lead to decreased utilization of our products, affecting our sales volume. Declining tax revenues attributable to economic downturns increase the pressure on governments to reduce health care spending, leading to increasing government efforts to control drug prices and utilization. Additionally, some customers, including governments or other entities reliant upon government funding, may be unable to pay for our products in a timely manner. Also, if our customers, suppliers, or collaboration partners experience financial difficulties, we could experience slower customer collections, greater bad debt expense, and performance defaults by suppliers or collaboration partners. Similarly, in the event of a significant economic downturn, we could have difficulty accessing credit markets.27Significant portions of our business are conducted in Europe, including the United Kingdom, in Asia, including China, and in other international geographies. Trade and other global disputes and interruptions in international relationships, including related to tariffs, trade protection measures, import or export licensing requirements, the imposition of trade sanctions or similar restrictions by the U.S. or other governments, unrest or war, as well as pandemic diseases, such as COVID-19, affect our ability to do business. For example, tensions between the U.S. and China have led to a series of tariffs and sanctions being imposed by the U.S. on imports from China mainland, as well as other business restrictions. These and similar events could adversely affect us, or our business partners or customers. •Pharmaceutical products can develop unexpected safety or efficacy concerns, which could have a material adverse effect on our revenues, income, and reputation. Pharmaceutical products receive regulatory approval based on data obtained in controlled clinical trials of limited duration. After approval, the products are used for longer periods of time by much larger numbers of patients. Accordingly, we and others (including regulatory agencies and private payers) collect extensive information on the efficacy and safety of our marketed products by continuously monitoring the use of our products in the marketplace. In addition, we or others may conduct post-marketing clinical studies on efficacy and safety of our marketed products. New safety or efficacy data from both market surveillance and post-marketing clinical studies may result in product label changes or other measures that could reduce the product's market acceptance and result in declining sales. Serious safety or efficacy issues that arise after product approval have, and could in the future, result in voluntary or mandatory product recalls or withdrawals from the market. Safety issues have, and could in the future, result in costly product liability claims. See also " - The COVID-19 pandemic has adversely impacted and may continue to adversely impact our business and operations. We are currently unable to predict the full extent to which the COVID-19 pandemic or any future pandemic, epidemic, or similar public health threat will adversely impact our business and operations in the future."•We face litigation and investigations related to our products, how we price our products, and how we commercialize our products; we could face large numbers of claims in the future, which could adversely affect our business, and we are self-insured for such matters. We are subject to a substantial number of product liability claims involving various current and historical products, litigation and investigations related to how we commercialize and/or how we price our products, including relating to our 340B drug pricing program, as well as contractual disputes. See Item 8, "Financial Statements and Supplementary Data - Note 16, Contingencies" for more information on our current product liability litigation, as well as pricing litigation, investigations, and inquiries. Because of the nature of pharmaceutical products, we are and could in the future become subject to large numbers of product liability claims for our previous, current, or future products, or to further litigation or investigations, including related to pricing or other commercial practices. Such matters could affect our results of operations or require us to recognize substantial charges to resolve and, if involving marketed products, could adversely affect sales of the product. Due to a very restrictive market for liability insurance, we are self-insured for litigation liability losses for all our currently marketed products, as well as for litigation or investigations related to our pricing practices or other similar matters. •Manufacturing and supply chain difficulties, disruptions, or shortages could lead to product supply problems. Pharmaceutical manufacturing is complex and highly regulated. Manufacturing or quality assurance difficulties at our facilities or contracted facilities, the failure or refusal of a supplier or contract manufacturer to supply contracted quantities, or increases in demand on a supplier could result in delays and disruptions in the manufacturing, distribution, and sale of our products and/or product shortages, leading to lost revenue. Further, global transportation and logistics challenges, as well as tight labor markets, have caused, and in the future may cause, delays in, and/or increase costs related to, distribution of our medicines, the construction or other acquisition of manufacturing capacity, procurement activity, and supplier or contract manufacturer arrangements. Such difficulties, disruptions, or challenges could result from quality, oversight, or regulatory compliance problems; natural disasters or pandemic disease; equipment, mechanical, data, or information technology system vulnerabilities, such as system inadequacies, inadequate controls or procedures, operating failures, service interruptions or failures, security breaches, malicious intrusions, or cyber-attacks from a variety of sources; labor shortages; contractual disputes with our suppliers and contract manufacturers; or inability to obtain single-source or other raw or intermediate materials. In addition, difficulties in predicting or variability in demand for our 28products and indications and the very long lead times necessary for the expansion and regulatory qualification of pharmaceutical manufacturing capacity from time to time result in difficulty meeting demand for, or disruptions, shortages, and higher costs in the supply of, our products. See Item 1, "Business - Raw Materials and Product Supply," for more details.•Reliance on third-party relationships and outsourcing arrangements could adversely affect our business. We rely on third parties, including suppliers, distributors, alliances, and collaborations with other pharmaceutical and biotechnology companies, and third-party service providers, for selected aspects of product and clinical development, manufacturing, commercialization, hosting of, and support for, information technology systems, product distribution, and certain financial transactional processes. As examples, we outsource the day-to-day management and oversight of some of our clinical trials to contract research organizations and the distribution of our products through logistics providers. Outsourcing these functions involves the risk that the third parties may not perform to our standards or legal requirements; may not produce reliable results; may not perform in a timely manner; may not maintain the confidentiality, integrity, and availability of confidential and proprietary information relating to us, our clinical trial subjects, or patients; may experience disruption or fail to perform due to information technology system vulnerabilities, breaches, cyber-attacks, or inadequate controls or procedures; may be unable to satisfy their commitments to us in which case we may not be able to achieve acceptable alternative sourcing; or may fail to perform at all. The foregoing risks may be heightened in jurisdictions outside the U.S., where we may face additional costs, uncertainties, and risks. Failure of these third parties to meet their contractual, regulatory, confidentiality, privacy, security, or other obligations to us, our clinical trial subjects, and our patients could have a material adverse effect on our business. Risks Related to Government Regulation•Our business is subject to increasing government price controls and other public and private restrictions on pricing, reimbursement, and access for our drugs, which could have a material adverse effect on our reputation or business. Public and private payers continue to take aggressive steps to control their expenditures for pharmaceuticals by placing restrictions on pricing and reimbursement for, and patient access to, our medicines. These pressures could continue to negatively affect our future revenues and net income. Governments and private payers worldwide have intensified their scrutiny of, and actions intended to address, pricing, reimbursement, and access to pharmaceutical products. Additional policies, regulations, legislation, or enforcement, including as a result of the regulatory priorities of the current U.S. presidential administration and other regulatory authorities worldwide, could adversely impact our business and revenue. For example, pending legislation in the U.S. could result in government negotiation of the price of some of our medicines, including insulin. Furthermore, restrictive or unfavorable pricing, coverage, or reimbursement determinations for our medicines or product candidates by governments, regulatory agencies, or private payers, such as the recently proposed Alzheimer’s Monoclonal Antibody NCD, may adversely impact our business and financial results. However, we cannot predict the likelihood, nature, or extent of current and future health care reform efforts. We also may continue to experience potential additional pricing pressures resulting from the financial strain of the COVID-19 pandemic on government-funded healthcare systems around the world.For more details, see Item 1, "Business - Regulations and Private Payer Actions Affecting Pharmaceutical Pricing, Reimbursement, and Access," Item 7, "Management's Discussion and Analysis - Results of Operations - Executive Overview - Other Matters - Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access," and Item 8, "Financial Statements and Supplementary Data - Note 16: Contingencies."•Changes in foreign currency rates, interest rate risks, or inflation could materially affect our results of operations.As a global company, we face foreign currency risk exposure from fluctuating currency exchange rates, interest rate risk from our exposure to floating and variable interest rates, and inflation risk from existing and expected rates of inflation in the U.S. and other jurisdictions. While we seek to manage a portion of these exposures through hedging and other risk management techniques, significant fluctuations in currency rates, interest rates, and inflation can have a material impact, either positive or negative, on our 29results of operations. Further, in the event of an extreme devaluation of local currency, the price of our products could become unsustainable in the relevant market. In addition, the discontinuation, modification, or other reform of the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with a different reference rate, could increase our interest expense, decrease our cash flows, and/or require us to amend certain of our existing agreements. See Item 7, "Management's Discussion and Analysis - Financial Condition and Liquidity" and Item 8, "Financial Statements and Supplementary Data - Note 1: Summary of Significant Accounting Policies and Implementation of New Financial Accounting Standard" for more details.•Changes in tax laws or exposure to additional tax liabilities could increase our income taxes and decrease our net income. We are subject to income taxes in the U.S. and numerous foreign jurisdictions, and in the course of our business, we make judgments about the expected tax treatment of various transactions and events. Changes in tax laws, regulations, administrative practices, principles, and interpretations, as well as events that differ from our expectations, have affected and may adversely affect our effective tax rates, cash flows, and/or and results of operations. For example, in December 2017, the U.S. enacted tax reform legislation significantly revising U.S. tax laws, and a number of other countries are also actively considering or enacting tax changes. Significant uncertainty currently exists regarding proposed tax policies of the current U.S. presidential administration and Congress, including modifications to certain aspects of the 2017 tax law. In addition, tax authorities in the U.S. and other jurisdictions in which we do business routinely examine our tax returns and are intensifying their scrutiny and examinations of profit allocations among jurisdictions, which could unfavorably impact our results of operations. Further, actions taken with respect to tax-related matters by associations such as the Organisation for Economic Cooperation and Development and the European Commission could influence tax laws in countries in which we operate. Modifications to key elements of the current U.S. or international tax framework could have a significant impact on our effective tax rate, results of operations, and cash flows. See Item 7, "Management's Discussion and Analysis - Results of Operations - Executive Overview - Other Matters - Tax Matters" and Item 8, "Financial Statements and Supplementary Data - Note 14: Income Taxes," for more details.•Regulatory compliance problems could be damaging to the company. The marketing, promotional, and pricing practices of pharmaceutical manufacturers, as well as the manner in which manufacturers interact with purchasers, prescribers, and patients, are subject to extensive regulation. Many companies, including us, have been subject to claims related to these practices asserted by federal, state, and foreign governmental authorities, private payers, and consumers. These claims have resulted in substantial expense and other significant consequences to us. We are and could in the future become subject to such investigations, the outcomes of which could include criminal charges and fines, penalties, or other monetary or non-monetary remedies, including exclusion from U.S. federal and other health care programs. Such investigations have intensified and may continue to intensify as a result of the regulatory priorities of the current U.S. presidential administration and other regulatory authorities worldwide. In addition, regulatory issues concerning compliance with cGMP, quality assurance, and similar regulations (and comparable foreign regulations) for our products can lead to regulatory and legal actions, product recalls and seizures, fines and penalties, interruption of production leading to product shortages, import bans or denials of import certifications, delays or denials in the approvals of new products or supplemental approvals of current products pending resolution of the issues, and reputational harm, any of which would adversely affect our business. Regulatory compliance and processes in jurisdictions outside the U.S. may also be less predictable and result in additional costs, uncertainties, and risks. See Item 1, "Business - Government Regulation of Our Operations," for more details. 30Item 1B.Unresolved Staff CommentsNone.Item 2.PropertiesOur principal domestic and international executive offices are located in Indianapolis. At December 31, 2021, we owned 9 production and distribution sites in the United States (U.S.), including Puerto Rico. Together with the corporate administrative offices, these facilities contain an aggregate of approximately 8.1 million square feet of floor area dedicated to production, distribution, and administration. Major production sites include Indianapolis, Indiana; Carolina, Puerto Rico; and Branchburg, New Jersey.We own production and distribution sites in 7 countries outside the U.S., containing an aggregate of approximately 4.7 million square feet of floor area. Major production sites include facilities in Ireland, France, Spain, Italy, and China.In the U.S., our research and development facilities contain an aggregate of approximately 4.4 million square feet of floor area, primarily consisting of owned facilities located in Indianapolis and smaller leased sites primarily in San Diego, California; San Francisco, California; and New York, New York. Outside the U.S., we own a small research and development facility in Spain and lease a small site in Singapore.We believe that none of our properties is subject to any encumbrance, easement, or other restriction that would detract materially from its value or impair its use in the operation of the business. The buildings we own are of varying ages and in good condition.Item 3.Legal ProceedingsWe are a party to various currently pending legal actions, government investigations, and environmental proceedings. Information pertaining to legal proceedings is described in Item 8, "Financial Statements and Supplementary Data - Note 16: Contingencies," and incorporated by reference herein. Item 4.Mine Safety DisclosuresNot applicable.31Part IIItem 5.Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity SecuritiesInformation relating to the principal market for our common stock and related stockholder matters is described in Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition" and Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters." This information is incorporated herein by reference.As of February 18, 2022, there were approximately 20,641 holders of record of our common stock based on information provided by EQ Shareowner Services, our transfer agent. Our common stock is listed under the ticker symbol LLY on the New York Stock Exchange (NYSE). The following table summarizes the activity related to repurchases of our equity securities during the fourth quarter ended December 31, 2021:PeriodTotal Number ofShares Purchased(in thousands)Average Price Paidper ShareTotal Number of SharesPurchased as Part ofPublicly AnnouncedPlans or Programs(in thousands)Approximate Dollar Valueof Shares that May Yet BePurchased Under thePlans or Programs(dollars in millions)October 20212,398 $254.70 2,398 $4,889.1November 2021— —— 4,889.1December 2021546 254.70 546 4,750.0Total2,944 254.70 2,944 During the three months ended December 31, 2021, we repurchased the remaining $500.0 million of shares available under the $8.00 billion share repurchase program authorized in June 2018 and $250.0 million of shares available under the $5.00 billion share repurchase program authorized in May 2021. 32PERFORMANCE GRAPHThe following graph compares the return on Lilly stock with that of the Standard & Poor's (S&P) 500 Stock Index and our peer group for the years 2017 through 2021. The graph assumes that, on the last business day of 2016, a person invested $100 each in Lilly stock, the S&P 500 Stock Index, and the peer group's collective common stock. The graph measures total shareholder return, which takes into account both stock price and dividends. It assumes that dividends paid by a company are immediately reinvested in that company's stock. Value of $100 Invested on Last Business Day of 2016 Comparison of Five-Year Cumulative Total Shareholder Return Among Lilly, S&P 500 Stock Index, and Peer Group(1)LillyPeer GroupS&P 500Dec-16$100.00 $100.00 $100.00 Dec-17117.83 117.86 121.83 Dec-18165.50 123.85 116.49 Dec-19192.23 146.23 153.17 Dec-20251.93 149.47 181.35 Dec-21418.40 179.16 233.41 (1) We constructed the peer group as the industry index for this graph. It is comprised of the following companies in the pharmaceutical and biotechnology industries: AbbVie Inc.; Amgen Inc.; AstraZeneca PLC; Biogen Inc.; Bristol-Myers Squibb Company; Gilead Sciences Inc.; GlaxoSmithKline plc; Johnson & Johnson; Merck & Co., Inc.; Novartis AG.; Novo Nordisk A/S; Pfizer Inc.; Roche Holding AG; Sanofi S.A.; and Takeda Pharmaceutical Company Limited. The peer group used for performance benchmarking aligns with the peer group used for executive compensation purposes for 2021 other than our peer group for performance benchmarking excludes Allergan plc, Celgene Corporation, and Shire plc as they were acquired in 2020, 2019 and 2019, respectively.33Item 6. [Reserved]Item 7.Management's Discussion and Analysis of Results of Operations and Financial ConditionRESULTS OF OPERATIONS(Tables present dollars in millions, except per-share data)GeneralManagement's discussion and analysis of results of operations and financial condition is intended to assist the reader in understanding and assessing significant changes and trends related to the results of operations and financial position of our consolidated company. This discussion and analysis should be read in conjunction with Item 8, "Financial Statements and Supplementary Data." Certain statements in this Item 7 constitute forward-looking statements. Various risks and uncertainties, including those discussed in "Forward-Looking Statements" and Item 1A, "Risk Factors," may cause our actual results, financial position, and cash generated from operations to differ materially from these forward-looking statements.Executive OverviewThis section provides an overview of our financial results, recent product and late-stage pipeline developments, and other matters affecting our company and the pharmaceutical industry. Earnings per share (EPS) data are presented on a diluted basis.COVID-19 PandemicIn response to the COVID-19 pandemic, we have focused on maintaining a supply of our medicines; reducing the strain on the medical system; developing treatments for COVID-19; protecting the health, safety, and well-being of our employees; supporting our communities; and ensuring affordability of and access to our medicines, particularly insulin. As part of our response to the COVID-19 pandemic, and at the request of the United States (U.S.) and international governments, we invested in large-scale manufacturing of COVID-19 antibodies at risk, in order to ensure rapid access to patients around the world. The U.S. Food and Drug Administration (FDA) granted Emergency Use Authorizations (EUA) for bamlanivimab and etesevimab administered together for higher-risk patients who have been recently diagnosed with mild-to-moderate COVID-19 and for baricitinib for treatment with or without remdesivir in hospitalized COVID-19 patients. In the third quarter of 2021, the FDA expanded the EUA for bamlanivimab and etesevimab administered together to include post-exposure prophylaxis in certain individuals for the prevention of SARS-CoV-2 infection. We expect that additional revenue from the sale of bamlanivimab and etesevimab after the first quarter of 2022 will be limited. In February 2022, the FDA granted an EUA for bebtelovimab for certain high-risk patients who have been recently diagnosed with mild-to-moderate COVID-19. We have agreed with the U.S. government to supply up to 600,000 doses of bebtelovimab no later than March 31, 2022 for at least $720 million with an option of 500,000 additional doses no later than July 31, 2022. The FDA has revised, and may in the future revise, any EUA for our COVID-19 therapies in response to the prevalence of variants against which our therapies have varying degrees of efficacy. The COVID-19 pandemic has, and may continue to, adversely impact our business and operations. The focus of resources on COVID-19, widespread protective measures implemented to control the spread of COVID-19, and the resulting strain on global transportation, manufacturing, and labor markets have negatively impacted development, manufacturing, supply, distribution, and sales of our medicines. In addition to decreases in new prescriptions, changes in payer segment mix, and the increased use of patient affordability programs in the U.S., we have experienced, and may continue to experience if the COVID-19 pandemic undergoes resurgent or more severe waves, decreased demand as a result of lack of "normal" access and fewer in-person interactions by patients and our employees with healthcare professionals. 34We also face risks and uncertainties related to our COVID-19 therapies, including heightened regulatory scrutiny of our manufacturing practices, quality assurance, and similar regulations, restrictions on administration that limit widespread and timely access to our therapies, and risks related to handling, return, and/or refund of product after delivery by us. The availability of superior or competitive therapies, including therapies that can be administered more easily, or preventative measures such as vaccines, coupled with the unpredictable nature of pandemics, have and could further negatively impact or eliminate demand for our COVID-19 therapies. Mutations or the spread of other variants of the coronavirus have in some cases impacted the effectiveness of our COVID-19 therapies, and may further render our therapies more or less effective or ineffective. The strain on global transportation, logistics, and labor markets caused by the COVID-19 pandemic and an increase in overall demand in our industry for certain materials resulting in changed buying patterns and constrained supply have had, and may continue to have, a number of impacts on our business, including increased costs to provide a consistent supply of our medicines where they are needed and potential disruptions in the supply of our medications. These factors may negatively affect our results of operations.It remains difficult to reasonably assess or predict the full extent of the ongoing impact of the COVID-19 pandemic on us. The degree to which the COVID-19 pandemic continues to affect us will depend on developments that are highly uncertain and beyond our knowledge or control. We are currently unable to predict the full extent to which the COVID-19 pandemic or any future pandemic, epidemic or similar public health threat will adversely impact our business and operations in the future.See Item 1A, "Risk Factors" for additional information on risk factors that could impact our business and operations.Financial ResultsThe following table summarizes our key operating results:Year Ended December 31Percent Change20212020Revenue$28,318.4 $24,539.8 15Gross margin21,005.6 19,056.5 10Gross margin as a percent of revenue74.2 %77.7 %Operating expenses$13,457.5 $12,206.9 10Acquired in-process research and development 874.9 660.4 32Asset impairment, restructuring, and other special charges316.1 131.2 NMOther—net, (income) expense 201.6 (1,171.9)NMIncome before income taxes6,155.5 7,229.9 (15)Income taxes573.8 1,036.2 (45)Net income5,581.7 6,193.7 (10)EPS6.12 6.79 (10)NM - not meaningfulRevenue increased in 2021 driven by increased volume and, to a lesser extent, the favorable impact of foreign exchange rates, partially offset by lower realized prices. Operating expenses, defined as the sum of research and development and marketing, selling, and administrative expenses, increased in 2021, driven primarily by higher development expenses for late-stage assets. The decreases in net income and EPS in 2021 were driven primarily by reduction in other-net, (income) expense and higher operating expenses, partially offset by higher gross margin. 35The following highlighted items affect comparisons of our 2021 and 2020 financial results:2021Cost of Sales (See Note 6 to the consolidated financial statements)•We recognized a net inventory impairment charge related to our COVID-19 antibodies of $339.7 million. As part of our response to the COVID-19 pandemic, and at the request of the U.S. and international governments, we invested in large-scale manufacturing of COVID-19 antibodies at risk, in order to ensure rapid access to patients around the world. As the COVID-19 pandemic evolved during 2021, we incurred a net inventory impairment charge primarily due to the combination of changes to current and forecasted demand from U.S. and international governments, including changes to our agreement with the U.S. government, and near-term expiry dates of COVID-19 antibodies.Acquired In-Process Research and Development (IPR&D) (Note 3 to the consolidated financial statements)•We recognized acquired IPR&D charges of $874.9 million related to business development transactions. Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)•We recognized charges of $316.1 million primarily related to an impairment of a contract-based intangible asset from our acquisition of Loxo Oncology, Inc. (Loxo), an intangible asset impairment resulting from the sale of the rights to Qbrexza®, as well as acquisition and integration costs associated with the acquisition of Prevail Therapeutics Inc. (Prevail). Other-Net, (Income) Expense (Note 18 to the consolidated financial statements)•We recognized a debt extinguishment loss of $405.2 million related to the repurchase of debt. •We recognized $176.9 million of net investment gains on equity securities. 2020 Acquired IPR&D (Note 3 to the consolidated financial statements)•We recognized acquired IPR&D charges of $660.4 million related to business development transactions. Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)•We recognized charges of $131.2 million primarily related to severance costs incurred as a result of actions taken worldwide to reduce our cost structure.Other-Net, (Income) Expense (Note 18 to the consolidated financial statements)•We recognized $1.44 billion of net investment gains on equity securities. 36Late-Stage PipelineOur long-term success depends on our ability to continually discover or acquire, develop, and commercialize innovative new medicines. We currently have approximately 45 new medicine candidates in clinical development or under regulatory review, and a larger number of projects in the discovery phase.The following certain new molecular entities (NMEs) are currently in Phase II or Phase III clinical trials or have been submitted for regulatory review in the U.S., Europe, or Japan. The following table reflects the status of certain NMEs, including certain other developments since our Quarterly Report on Form 10-Q for the quarter ended September 30, 2021.CompoundIndicationStatus DevelopmentsCOVID-19 AntibodiesBebtelovimab (LY-CoV1404)COVID-19Emergency Use Authorization The FDA granted EUA for certain high-risk patients recently diagnosed with mild-to-moderate COVID-19 in February 2022.DiabetesTirzepatide Type 2 diabetesSubmittedSubmitted in the U.S. using a priority review voucher and in Europe and Japan in 2021. Heart failure with preserved ejection fractionPhase IIIPhase III trials are ongoing.ObesityNonalcoholic steatohepatitis Phase IIPhase II trial is ongoing. Basal Insulin-FcType 1 and 2 diabetesPhase IIPhase II trials are ongoing.GGG Tri-AgonistObesityPhase IIPhase II trials are ongoing. Type 2 diabetesGLP-1R NPAObesityPhase IIPhase II trials are ongoing.Type 2 diabetesImmunologyLebrikizumab(1)Atopic dermatitisPhase IIIGranted FDA Fast Track designation(2). Announced in 2021 that Phase III trials met primary and all key secondary endpoints. Phase III trials are ongoing.MirikizumabCrohn's DiseasePhase IIIPhase III trials are ongoing. Ulcerative colitisAnnounced in 2021 that Phase III trials met primary and all key secondary endpoints. CXCR1/2 Ligands Monoclonal AntibodyHidradenitis suppurativaPhase IIPhase II trial is ongoing.IL-2 ConjugateSystemic lupus erythematosusPhase IIPhase II trials are ongoing.Ulcerative colitisPD-1 MAB AgonistRheumatoid arthritisPhase IIPhase II trial is ongoing.37CompoundIndicationStatus DevelopmentsNeuroscienceDonanemabEarly Alzheimer's diseaseSubmission initiated Granted FDA Breakthrough Therapy designation(3). Initiated a rolling submission in the U.S. for accelerated approval in 2021. Phase III trials are ongoing.Preclinical Alzheimer's diseasePhase IIIPhase III trial is ongoing.SolanezumabPreclinical Alzheimer's diseasePhase IIIPhase III trial is ongoing. Epiregulin/TGFα MABChronic painPhase IIPhase II trials are ongoing. GBA1 Gene Therapy (PR001)Parkinson's disease Phase IIAcquired in the Prevail acquisition in 2021. Granted FDA Fast Track designation(2). Phase II trials are ongoing. GRN Gene Therapy (PR006)Frontotemporal dementiaPhase IIO-glc-NAcaseAlzheimer's diseasePhase IIPhase II trial initiated in the fourth quarter of 2021.PACAP38 AntibodyChronic painPhase IIPhase II trial is ongoing.SSTR4 AgonistChronic painPhase IIPhase II trials are ongoing.TRPA1 AntagonistPainPhase IIPhase II trials are ongoing.OncologySelpercatinib (Retevmo®)Lung cancerApproved(4)Phase III trials are ongoing. Thyroid cancerSintilimab injection(5)Lung cancer Submitted In February 2022, the Oncologic Drugs Advisory Committee recommended that the FDA require additional clinical trials prior to a final regulatory decision.Pirtobrutinib (LOXO-305)Mantle cell lymphomaSubmission initiatedInitiated a rolling submission in the U.S. for accelerated approval in the fourth quarter of 2021. Phase II and Phase III trials are ongoing.Chronic lymphocytic leukemiaPhase IIIPhase III trials are ongoing.B-cell malignanciesPhase IIPhase II trial is ongoing.ImlunestrantER+HER2- metastatic breast cancerPhase IIIPhase III trial is ongoing.(1) In collaboration with Almirall, S.A. in Europe. (2) Fast Track designation is designed to expedite the development and review of new therapies to treat serious conditions and address unmet medical needs.(3) Breakthrough Therapy designation is designed to expedite the development and review of potential medicines that are intended to treat a serious condition where preliminary clinical evidence indicates that the treatment may demonstrate substantial improvement over available therapy on a clinically significant endpoint. (4) Continued approval may be contingent on verification and description of clinical benefit in confirmatory Phase III trials.(5) In collaboration with Innovent Biologics, Inc.38Our pipeline also contains several new indication line extension (NILEX) products. The following certain NILEX products for use in the indication described are currently in Phase II or Phase III clinical trials or have been submitted for regulatory review in the U.S., Europe, or Japan. The following table reflects the status of certain NILEX products, including certain other developments since our Quarterly Report on Form 10-Q for the quarter ended September 30, 2021:CompoundIndicationStatusDevelopmentsDiabetesEmpagliflozin (Jardiance®)(1)Heart failure with preserved ejection fractionSubmitted Granted FDA Breakthrough Therapy designation(2) and FDA Fast Track designation(3). Submitted in the U.S. and Europe in 2021 and in Japan in January 2022. The FDA granted priority review for adults with heart failure independent of left ventricular ejection fraction.Chronic kidney diseasePhase IIIGranted FDA Fast Track designation(3). Phase III trials are ongoing. ImmunologyBaricitinib (Olumiant®)COVID-19Emergency Use Authorization(4) Submitted in the U.S. and the FDA granted priority review in January 2022.Alopecia areataSubmittedGranted FDA Breakthrough Therapy designation(2). Submitted in U.S., Europe and Japan in 2021.Systemic lupus erythematosusDiscontinuedAnnounced in January 2022 that, based on top-line efficacy results from Phase III trials, we discontinued development.OncologyAbemaciclib (Verzenio®)HR+, HER2- Adjuvant breast cancer Approved Approved in the U.S. and Japan in the fourth quarter of 2021. Prostate cancerPhase IIIPhase III trial is ongoing.HR+, HER2+ Adjuvant breast cancerDiscontinuedAnnounced in January 2022 that we will discontinue the Phase III trial in response to the changing treatment landscape and global enrollment challenges.(1) In collaboration with Boehringer Ingelheim. (2) Breakthrough Therapy designation is designed to expedite the development and review of potential medicines that are intended to treat a serious condition where preliminary clinical evidence indicates that the treatment may demonstrate substantial improvement over available therapy on a clinically significant endpoint. (3) Fast Track designation is designed to expedite the development and review of new therapies to treat serious conditions and address unmet medical needs.(4) The FDA granted EUA for treatment with or without remdesivir in hospitalized COVID-19 patients.There are many difficulties and uncertainties inherent in pharmaceutical research and development and the introduction of new products, as well as a high rate of failure inherent in new drug discovery and development. To bring a drug from the discovery phase to market can take over a decade and often costs in excess of $2 billion. Failure can occur at any point in the process, including in later stages after substantial investment. As a result, most funds invested in research programs will not generate financial returns. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain or maintain necessary regulatory approvals or payer reimbursement or coverage, limited scope of approved uses, label changes, changes in the relevant treatment standards or the availability of new or better competitive products, difficulty or excessive costs to manufacture, or infringement of the patents or intellectual property rights of others. Regulatory agencies establish high hurdles for the efficacy and safety of new products and indications. Delays and uncertainties in drug approval processes can result in delays in product launches and lost market opportunity. In addition, it can be very difficult to predict revenue growth rates of new products and indications. 39We manage research and development spending across our portfolio of potential new medicines. A delay in, or termination of, any one project will not necessarily cause a significant change in our total research and development spending. Due to the risks and uncertainties involved in the research and development process, we cannot reliably estimate the nature, timing, and costs of the efforts necessary to complete the development of our research and development projects, nor can we reliably estimate the future potential revenue that will be generated from any successful research and development project. Each project represents only a portion of the overall pipeline, and none is individually material to our consolidated research and development expense. While we do accumulate certain research and development costs on a project level for internal reporting purposes, we must make significant cost estimations and allocations, some of which rely on data that are neither reproducible nor validated through accepted control mechanisms. Therefore, we do not have sufficiently reliable data to report on total research and development costs by project, by preclinical versus clinical spend, or by therapeutic category. Other MattersPatent MattersWe depend on patents or other forms of intellectual property protection for most of our revenue, cash flows, and earnings. In 2021, our vitamin regimen patents for Alimta® expired worldwide. Following the loss of patent exclusivity in major European countries and Japan, we faced, and remain exposed to, generic competition which has eroded revenue and is likely to continue to rapidly and severely erode revenue from current levels. In the U.S., we expect pediatric data exclusivity to provide us with protection through May 2022. However, we and Eagle Pharmaceuticals, Inc. (Eagle) reached an agreement in December 2019 to settle all pending U.S. patent litigation, allowing Eagle a limited initial entry into the market with its product starting February 2022 (up to an approximate three-week supply) and subsequent unlimited entry starting April 2022. We expect that the entry of generic competition in the U.S. following the loss of exclusivity will cause a rapid and severe decline in revenue and will have a material adverse effect on our consolidated results of operations and cash flows. See Note 16 to the consolidated financial statements for a more detailed account of the legal proceedings currently pending regarding, among others, our Alimta patents.Our compound patent for Humalog® (insulin lispro) has expired in major markets. Global regulators have different legal pathways to approve similar versions of insulin lispro. A competitor has similar version of insulin lispro in the U.S. and in certain European markets. While it is difficult to estimate the severity of the impact of insulin lispro products entering the market, we do not expect and have not experienced a rapid and severe decline in revenue; however, we expect additional pricing pressure and some loss of market share that may continue over time.Our formulation and use patents for Forteo® have expired in major markets. We expect further decline in revenue as a result of the entry of generic and biosimilar competition due to the loss of patent exclusivity in major markets. Our regulatory data and patent exclusivity for Cymbalta® expired in Japan. Beginning in mid-2021, we have faced, and remain exposed to, generic competition which has eroded revenue and is likely to continue to rapidly and severely erode revenue from current levels.Foreign Currency Exchange RatesAs a global company, we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Japanese yen, and Chinese yuan. While we seek to manage a portion of these exposures through hedging and other risk management techniques, significant fluctuations in currency rates can have a material impact, either positive or negative, on operating expenses. While there is uncertainty in the future movements in foreign exchange rates, fluctuations in these rates could adversely impact our future consolidated results of operations and cash flows.40Trends Affecting Pharmaceutical Pricing, Reimbursement, and AccessGlobal concern over access to and affordability of pharmaceutical products continues to drive regulatory and legislative debate, as well as worldwide cost containment efforts by governmental authorities. Such measures may include the use of mandated discounts, price reporting requirements, mandated reference prices, restrictive formularies, changes to available intellectual property protections, as well as other efforts. In addition, consolidation of private payors in the U.S. has significantly impacted the market for pharmaceuticals by increasing payor leverage in negotiating manufacturer price concessions and pharmacy reimbursement rates. Furthermore, restrictive or unfavorable pricing, coverage, or reimbursement determinations for our medicines or product candidates by governments, regulatory agencies, or private payers, such as the recently proposed Alzheimer’s Monoclonal Antibody national coverage determination, may adversely impact our business and financial results. We expect that these actions may intensify and could particularly affect certain products, such as insulin, as governments manage and emerge from the COVID-19 pandemic, which could adversely affect our business. In addition, we are engaged in litigation and investigations related to our 340B program that, if resolved adversely to us, could negatively impact our business and consolidated results of operations. It is not currently possible to predict the overall potential adverse impact to us or the general pharmaceutical industry of continued cost containment efforts worldwide. In addition, evolving regulatory priorities have intensified governmental scrutiny of our operations and our industry, including with respect to current Good Manufacturing Practices, quality assurance, and similar regulations, and increased focus on business combinations in our industry. Any regulatory issues concerning these matters could lead to regulatory and legal actions, product recalls and seizures, fines and penalties, interruption of production leading to product shortages, import bans or denials of import certifications, delays or denials in the approvals of new products or supplemental approvals of current products pending resolution of the issues, impediments to the completion of business combinations, and reputational harm, any of which would adversely affect our business.See Item 1, "Business - Regulations and Private Payer Actions Affecting Pharmaceutical Pricing, Reimbursement, and Access" and Note 16 to the consolidated financial statements for additional information.Tax MattersWe are subject to income taxes and various other taxes in the U.S. and in many foreign jurisdictions; therefore, changes in both domestic and international tax laws or regulations have affected and may affect our effective tax rate, results of operations, and cash flows. In 2017, the U.S. enacted the Tax Cuts and Jobs Act (the 2017 Tax Act), which contains a provision that requires capitalization and amortization of research and development expenses for tax purposes starting in 2022. Previously, these expenses could be deducted in the year incurred. While this provision of the 2017 Tax Act is expected to have an immaterial impact on our consolidated results of operations, if it is not deferred or repealed by Congress, we expect that the implementation of this provision will increase our cash payments of income taxes by up to $1.50 billion in 2022 and subsequently decrease our cash payments of income taxes moderately over the five-year amortization period.The U.S. and countries around the world are actively considering and enacting tax law changes. Tax proposals introduced by Congress and the U.S. presidential administration contain significant changes, including increases to the tax rates at which both domestic and foreign income of U.S. companies would be taxed. In addition, tax authorities in the U.S. and other jurisdictions in which we do business routinely examine our tax returns and are intensifying their scrutiny and examinations of profit allocations among jurisdictions, which could adversely impact our future consolidated results of operations and cash flows. Further, actions taken with respect to tax-related matters by associations such as the Organisation for Economic Co-operation and Development and the European Commission could influence tax laws in countries in which we operate.41AcquisitionsWe opportunistically invest in external research and technologies that we believe complement and strengthen our own efforts. These investments can take many forms, including acquisitions, collaborations, investments, and licensing arrangements. We view our business development activity as a way to enhance our pipeline and strengthen our business. In January 2021, we acquired all shares of Prevail for a purchase price that included $22.50 per share in cash (or an aggregate of $747.4 million, net of cash acquired) plus one non-tradable contingent value right (CVR) per share. The CVR entitles Prevail stockholders up to an additional $4.00 per share in cash (or an aggregate of approximately $160 million) payable, subject to certain terms and conditions, upon the first regulatory approval of a Prevail product in one of the following countries: U.S., Japan, United Kingdom, Germany, France, Italy, or Spain. Under the terms of the agreement, we acquired potentially disease-modifying AAV9-based gene therapies for patients with neurodegenerative diseases. The acquisition establishes a new modality for drug discovery and development, extending our research efforts through the creation of a gene therapy program that is being anchored by Prevail's portfolio of assets. In February 2020, we acquired all shares of Dermira, Inc. for a purchase price of $849.3 million, net of cash acquired. Under the terms of the agreement, we acquired lebrikizumab, a novel, investigational, monoclonal antibody being evaluated for the treatment of moderate-to-severe atopic dermatitis. Lebrikizumab was granted Fast Track designation from the FDA. We also acquired Qbrexza cloth, a medicated cloth for the topical treatment of primary axillary hyperhidrosis (uncontrolled excessive underarm sweating). In 2021, we sold the rights to Qbrexza. See Note 5 to the consolidated financial statements for additional information regarding the sale of the rights to Qbrexza. In February 2019, we acquired all shares of Loxo for a purchase price of $6.92 billion, net of cash acquired. Under the terms of the agreement, we acquired a pipeline of investigational medicines, including selpercatinib, an oral RET inhibitor, and LOXO-305 (pirtobrutinib), an oral BTK inhibitor. In the second quarter of 2020, the FDA approved selpercatinib (Retevmo) under its Accelerated Approval regulations and continued approval may be contingent upon verification and description of clinical benefit in confirmatory trials.See Note 3 to the consolidated financial statements for additional information regarding our recent acquisitions.42Operating Results—2021 RevenueThe following table summarizes our revenue activity by region:Year EndedDecember 31,20212020Percent ChangeU.S.$16,811.0 $14,229.3 18Outside U.S.11,507.4 10,310.5 12Revenue$28,318.4 $24,539.8 15The following are components of the change in revenue compared with the prior year:2021 vs. 2020U.S.Outside U.S.ConsolidatedVolume19 %13 %16 %Price(1)%(4)%(2)%Foreign exchange rates— %3 %1 %Percent change18 %12 %15 %Numbers may not add due to rounding.In the U.S the increase in volume in 2021 was primarily driven by COVID-19 antibodies, Trulicity®, and Taltz®.Outside the U.S. the increase in volume in 2021 was primarily driven by Trulicity, Olumiant, COVID-19 antibodies, Verzenio, and Taltz. The decrease in realized prices outside the U.S. was primarily driven by the price impact of the updated National Reimbursement Drug List formulary for certain products, largely Tyvyt®, in China.43The following table summarizes our revenue activity in 2021 compared with 2020:Year EndedDecember 31, 20212020ProductU.S.Outside U.S.TotalTotalPercent ChangeTrulicity$4,914.4 $1,557.6 $6,471.9 $5,068.1 28Humalog(1)1,320.7 1,132.3 2,453.0 2,625.9 (7)COVID-19 antibodies(2)1,978.0 261.4 2,239.3 871.2 NMTaltz1,542.4 670.4 2,212.8 1,788.5 24Alimta1,233.9 827.5 2,061.4 2,329.9 (12)Jardiance(3)807.3 683.5 1,490.8 1,153.8 29Verzenio834.9 515.0 1,349.9 912.7 48Humulin®832.9 389.6 1,222.6 1,259.6 (3)Olumiant(4)324.1 791.0 1,115.1 638.9 75Cyramza®358.1 674.8 1,033.0 1,032.6 —Basaglar®588.3 304.2 892.5 1,124.4 (21)Forteo441.6 360.3 801.9 1,046.3 (23)Cialis®10.6 707.9 718.4 607.1 18Cymbalta38.7 542.8 581.5 767.7 (24)Emgality®434.5 142.7 577.2 362.9 59Erbitux®481.8 66.4 548.3 536.4 2Zyprexa®39.6 390.7 430.3 406.5 6Tyvyt— 418.1 418.1 308.7 35Trajenta®(5)82.1 290.4 372.5 358.5 4Other products547.1 780.8 1,327.9 1,340.1 (1)Revenue$16,811.0 $11,507.4 $28,318.4 $24,539.8 15Numbers may not add due to rounding.NM - Not meaningful(1) Humalog revenue includes insulin lispro.(2) COVID-19 antibodies include sales for bamlanivimab administered alone as well as sales for bamlanivimab and etesevimab administered together and were made pursuant to EUAs or similar regulatory authorizations.(3) Jardiance revenue includes Glyxambi®, Synjardy®, and Trijardy® XR.(4) Olumiant revenue includes sales for baricitinib, for treatment in hospitalized COVID-19 patients, that were made pursuant to EUA or similar regulatory authorizations.(5) Trajenta revenue includes Jentadueto®.Revenue of Trulicity, a treatment for type 2 diabetes and to reduce the risk of major adverse cardiovascular events in adult patients with type 2 diabetes and established cardiovascular disease or multiple cardiovascular risk factors, increased 28 percent in the U.S., driven by increased demand. Revenue outside the U.S. increased 26 percent, driven by increased volume and, to a lesser extent, the favorable impact of foreign exchange rates, partially offset by lower realized prices.Revenue of Humalog, an injectable human insulin analog for the treatment of diabetes, decreased 11 percent in the U.S., primarily driven by lower realized prices. Humalog's lower realized prices in the U.S. in 2021 were driven by higher contracted rebates and discounts and increased utilization in more highly-rebated government segments, partially offset by lower utilization in the 340B segment. Revenue outside the U.S. decreased 1 percent, driven by decreased volume and, to a lesser extent, lower realized prices, largely offset by the favorable impact of foreign exchange rates. Included in the revenue of Humalog in the U.S. are our own insulin lispro authorized generics. While it is difficult to estimate the severity of the impact of similar insulin lispro products entering the market, we do not expect and have not experienced a rapid and severe decline in revenue. However, due to the impact of competition and due to pricing pressure in the U.S. and some international markets, we expect some price decline and loss of market share to continue over time.44Revenue of COVID-19 antibodies, treatments for mild to moderate COVID-19 for higher-risk patients and for post-exposure prophylaxis in certain individuals for the prevention of SARS-CoV-2 infection, was $1.98 billion in the U.S. during the year ended December 31, 2021. Revenue outside the U.S. was $261.4 million during the year ended December 31, 2021. The availability of superior or competitive therapies, including therapies that can be administered more easily, or preventative measures, such as vaccines, coupled with the unpredictable nature of pandemics, have and could further negatively impact or eliminate demand for these COVID-19 antibodies. The FDA has revised, and may in the future revise, any EUA for our COVID-19 antibodies in response to the prevalence of variants against which our antibodies have varying degrees of efficacy. We expect that additional revenue from the sale of bamlanivimab and etesevimab after the first quarter of 2022 will be limited.Revenue of Taltz, a treatment for moderate-to-severe plaque psoriasis, active psoriatic arthritis, ankylosing spondylitis, and active non-radiographic axial spondyloarthritis, increased 20 percent in the U.S., driven by increased demand, partially offset by lower realized prices due to increased rebates to gain commercial access. Revenue outside the U.S. increased 34 percent, primarily driven by increased volume. Revenue of Alimta, a treatment for various cancers, decreased 2 percent in the U.S., driven by decreased volume, partially offset by higher realized prices. Revenue outside the U.S. decreased 22 percent, primarily driven by decreased volume due to the entry of generic competition in certain markets and, to a lesser extent, lower realized prices, partially offset by the favorable impact of foreign exchange rates. Following the loss of exclusivity in major European countries and Japan in June 2021, we faced, and remain exposed to, generic competition which has eroded revenue and is likely to continue to rapidly and severely erode revenue from current levels. In the U.S., we expect the limited entry of generic competition starting February 2022 and subsequent unlimited entry starting April 2022. We expect that the entry of generic competition following the loss of exclusivity in the U.S. will cause a rapid and severe decline in revenue. See "Executive Overview - Other Matters- Patent Matters" for additional information. Revenue of Jardiance, a treatment for type 2 diabetes, to reduce the risk of cardiovascular death in adult patients with type 2 diabetes and established cardiovascular disease, and to reduce the risk of cardiovascular death and hospitalization for heart failure in adults with heart failure and reduced ejection fraction, increased 30 percent in the U.S., primarily driven by increased demand. Revenue outside the U.S. increased 28 percent, primarily driven by increased volume. See Note 4 to the consolidated financial statements for information regarding our collaboration with Boehringer Ingelheim involving Jardiance.Revenue of Verzenio, a treatment for HR+, HER2- metastatic breast cancer and high risk early breast cancer, increased 35 percent in the U.S., driven by increased demand. Revenue outside the U.S. increased 75 percent, driven by increased volume.Revenue of Humulin, an injectable human insulin for the treatment of diabetes, decreased 4 percent in the U.S., driven by decreased demand and, to a lesser extent, lower realized prices. Revenue outside the U.S. decreased 1 percent, driven by decreased volume, largely offset by higher realized prices and the favorable impact of foreign exchange rates.Revenue of Olumiant, a treatment for adults with moderately-to-severely active rheumatoid arthritis, moderate to severe atopic dermatitis, and of baricitinib, a treatment, with or without remdesivir, of hospitalized patients with COVID-19, increased $260.3 million in the U.S., driven by increased volume and, to a lesser extent, higher realized prices. Revenue outside the U.S. increased 38 percent, driven by increased volume and, to a lesser extent, the favorable impact of foreign exchange rates, partially offset by lower realized prices. Increased volume worldwide was partially driven by utilization of Olumiant for the treatment of hospitalized patients with COVID-19.Revenue of Cyramza, a treatment for various cancers, decreased 6 percent in the U.S., driven by decreased demand, partially offset by higher realized prices. Revenue outside the U.S. increased 4 percent, driven by increased volume, partially offset by lower realized prices. 45Gross Margin, Costs, and ExpensesGross margin as a percent of revenue was 74.2 percent in 2021, a decrease of 3.5 percentage points compared with 2020, driven by higher sales of COVID-19 antibodies. Research and development expenses increased 15 percent to $7.03 billion in 2021, primarily driven by higher development expenses for late-stage assets.Marketing, selling, and administrative expenses increased 5 percent to $6.43 billion in 2021, primarily due to increased marketing costs to continue to drive growth for certain products, investment in preparation for new launches, and lower marketing activities in 2020 as a result of pandemic-related spending reductions.We recognized acquired IPR&D charges of $874.9 million and $660.4 million in 2021 and 2020, respectively, related to business development transactions. See Note 3 to the consolidated financial statements for additional information.We recognized asset impairment, restructuring, and other special charges of $316.1 million in 2021. The charges were primarily related to an impairment of a contract-based intangible asset from our acquisition of Loxo, an intangible asset impairment resulting from the sale of the rights to Qbrexza, as well as acquisition and integration costs associated with the acquisition of Prevail. In 2020, we recognized $131.2 million of asset impairment, restructuring, and other special charges primarily related to severance costs incurred as a result of actions taken worldwide to reduce our cost structure. Other—net, (income) expense was expense of $201.6 million in 2021 compared to income of $1.17 billion in 2020, primarily driven by lower net investment gains on equity securities and a debt extinguishment loss of $405.2 million related to the repurchase of debt.Our effective tax rate was 9.3 percent in 2021, compared with an effective tax rate of 14.3 percent in 2020, primarily driven by the tax impacts of acquired IPR&D charges, lower net investment gains on equity securities, as well as a net discrete tax benefit. Operating Results—2020 For a discussion of our results of operations pertaining to 2020 and 2019 see Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition" in our Annual Report on Form 10-K for the year ended December 31, 2020.46FINANCIAL CONDITION AND LIQUIDITYWe believe our available cash and cash equivalents, together with our ability to generate operating cash flow and our access to short-term and long-term borrowings, are sufficient to fund our existing and planned capital requirements, which include: •working capital requirements, including related to employee payroll, clinical trials, manufacturing materials, and taxes;•capital expenditures;•share repurchases and dividends;•repayment of outstanding short-term and long-term borrowings; •contributions to our defined benefit pension and retiree health benefit plans;•milestone and royalty payments; and•potential business development activities, including acquisitions, collaborations, investments, and licensing arrangements.Our management continuously evaluates our liquidity and capital resources, including our access to external capital, to ensure we can adequately and efficiently finance our capital requirements. As of December 31, 2021, our material cash requirements primarily related to purchases of goods and services to produce our products and conduct our operations, capital equipment expenditures, dividends, repayment of outstanding borrowings, milestone and royalty payments, the remaining obligations for the one-time repatriation transition tax (also known as the 'Toll Tax') from the 2017 Tax Act, leases, unfunded commitments to invest in venture capital funds, and retirement benefits (see Notes 11, 4, 14, 10, 7, and 15 to the consolidated financial statements). We anticipate our cash requirements related to ordinary course purchases of goods and services and capital equipment expenditures will be consistent with our past levels relative to revenues. Beginning in 2022, the 2017 Tax Act contains a provision that requires us to capitalize and amortize research and development expenses for tax purposes, whereas previously we could fully deduct these expenses in the year incurred. While this provision of the 2017 Tax Act is expected to have an immaterial impact on our consolidated results of operations, if it is not deferred or repealed by Congress, we expect that the implementation of this provision will increase our cash payments of income taxes by up to $1.50 billion in 2022 and subsequently decrease our cash payments of income taxes moderately over the five-year amortization period. See "Results of Operations - Executive Overview - Other Matters -Tax Matters" for additional information. We plan to invest more than $1 billion over several years in a new facility in Concord, North Carolina to manufacture parenteral (injectable) products and devices. We plan to invest more than 400 million euros over several years in a new facility in Limerick, Ireland to expand our manufacturing network for biologic active ingredients.Cash and cash equivalents increased to $3.82 billion as of December 31, 2021, compared with $3.66 billion at December 31, 2020. Net cash provided by operating activities was $7.26 billion in 2021, compared with $6.50 billion in 2020. Refer to the consolidated statements of cash flows for additional information on the significant sources and uses of cash for the years ended December 31, 2021 and 2020. In addition to our cash and cash equivalents, we held total investments of $3.30 billion and $2.99 billion as of December 31, 2021 and 2020, respectively. See Note 7 to the consolidated financial statements for additional information.In January 2021, we acquired all shares of Prevail for a purchase price that included $22.50 per share in cash (or an aggregate of $747.4 million, net of cash acquired) plus one non-tradable CVR per share. The CVR entitles Prevail stockholders up to an additional $4.00 per share in cash (or an aggregate of approximately $160 million) payable, subject to certain terms and conditions. This acquisition was funded primarily through cash on hand. See Note 3 to the consolidated financial statements for additional information. 47As of December 31, 2021, total debt was $16.88 billion, an increase of $289.4 million compared with $16.60 billion at December 31, 2020. In September 2021, we issued euro-denominated notes consisting of €500.0 million of 1.125 percent fixed-rate notes due in September 2051 and €700.0 million of 1.375 percent fixed-rate notes due in September 2061, with interest to be paid annually, and British pound-denominated notes consisting of £250.0 million of 1.625 percent fixed-rate notes due in September 2043, with interest to be paid annually. We paid $1.91 billion of the net cash proceeds from the offering to purchase and redeem certain higher interest rate U.S. dollar-denominated notes with an aggregate principal amount of $1.50 billion. We used the remaining net proceeds from the offering to prefund certain 2022 debt maturities and for general corporate purposes. In addition, in September 2021, we issued euro-denominated notes consisting of €600.0 million of 0.50 percent fixed-rate notes due in September 2033, with interest to be paid annually. The net proceeds from the offering will be used to fund, in whole or in part, eligible projects designed to advance one or more of our environmental, social, and governance objectives. See Note 11 to the consolidated financial statements for additional information. As of December 31, 2021, we had a total of $5.26 billion of unused committed bank credit facilities, $5.00 billion of which is available to support our commercial paper program. See Note 11 to the consolidated financial statements for additional information. We believe that amounts accessible through existing commercial paper markets should be adequate to fund any short-term borrowing needs.For the 136th consecutive year, we distributed dividends to our shareholders. Dividends of $3.40 per share and $2.96 per share were paid in 2021 and 2020, respectively. In the fourth quarter of 2021, effective for the dividend to be paid in the first quarter of 2022, the quarterly dividend was increased to $0.98 per share, resulting in an indicated annual rate for 2022 of $3.92 per share.Capital expenditures of $1.31 billion during 2021, compared to $1.39 billion in 2020.In 2021, we repurchased $1.00 billion of shares, which completed our $8.00 billion share repurchase program authorized in June 2018. Additionally, our board authorized a $5.00 billion share repurchase program in May 2021. In 2021, we repurchased $250.0 million of shares under the $5.00 billion share repurchase program. As of December 31, 2021, we had $4.75 billion remaining under the $5.00 billion share repurchase program. See Note 13 to the consolidated financial statements for additional information.See "Results of Operations - Executive Overview - Other Matters - Patent Matters" for information regarding recent and upcoming losses of patent protection.Both domestically and abroad, we continue to monitor the potential impacts of the economic environment; the creditworthiness of our wholesalers and other customers, including foreign government-backed agencies and suppliers; the uncertain impact of health care legislation; and various international government funding levels.In the normal course of business, our operations are exposed to fluctuations in interest rates, currency values, and fair values of equity securities. These fluctuations can vary the costs of financing, investing, and operating. We seek to address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of this risk management program is to limit the impact on earnings of fluctuations in interest and currency exchange rates. All derivative activities are for purposes other than trading.Our primary interest rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and floating rate debt positions and may enter into interest rate derivatives to help maintain that balance. As of December 31, 2021, substantially all of our total long-term debt carries interest at a fixed rate. We have converted approximately 13 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps. Based on our overall interest rate exposure at December 31, 2021 and 2020, including derivatives and other interest rate risk-sensitive instruments, a hypothetical 10 percent change in interest rates applied to the fair value of the instruments as of December 31, 2021 and 2020, respectively, would not have a material impact on earnings, cash flows, or fair values of interest rate risk-sensitive instruments over a one-year period.48Our foreign currency risk exposure results from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Japanese yen, and Chinese yuan. We face foreign currency exchange exposures when we enter into transactions arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. We also face currency exposure that arises from translating the results of our global operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of the period. We may enter into foreign currency forward or option derivative contracts to reduce the effect of fluctuating currency exchange rates (primarily the euro, the Japanese yen, and Chinese yuan). Our corporate risk-management policy outlines the minimum and maximum hedge coverage of such exposures. Gains and losses on these derivative contracts offset, in part, the impact of currency fluctuations on the existing assets and liabilities. We periodically analyze the fair values of the outstanding foreign currency derivative contracts to determine their sensitivity to changes in foreign exchange rates. A hypothetical 10 percent change in exchange rates (primarily against the U.S. dollar) applied to the fair values of our outstanding foreign currency derivative contracts as of December 31, 2021 and 2020, would not have a material impact on earnings, cash flows, or financial position over a one-year period. This sensitivity analysis does not consider the impact that hypothetical changes in exchange rates would have on the underlying foreign currency denominated transactions.Our fair value risk exposure relates primarily to our public equity investments and to equity investments that do not have readily determinable fair values. As of December 31, 2021 and 2020, our carrying values of these investments were $1.83 billion and $2.04 billion, respectively. A hypothetical 20 percent change in fair value of the equity instruments would have impacted other-net, (income) expense by $365.6 million and $407.6 million as of December 31, 2021 and 2020, respectively. We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. We acquire and collaborate on potential products still in development and enter into research and development arrangements with third parties that often require milestone and royalty payments to the third party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required contingent upon the successful achievement of an important point in the development life cycle of the pharmaceutical product (e.g., approval for marketing by the appropriate regulatory agency or upon the achievement of certain sales levels). If required by the arrangement, we may make royalty payments based upon a percentage of the sales of the product in the event that regulatory approval for marketing is obtained. Individually, these arrangements are generally not material in any one annual reporting period. However, if milestones for multiple products covered by these arrangements were reached in the same reporting period, the aggregate expense or aggregate milestone payments made could be material to our results of operations or cash flows, respectively, in that period. See Note 4 to the consolidated financial statements for additional information. These arrangements often give us the discretion to unilaterally terminate development of the product, which would allow us to avoid making the contingent payments; however, we are unlikely to cease development if the compound successfully achieves milestone objectives. We also note that, from a business perspective, we view these payments as positive because they signify that the product is successfully moving through development and is now generating or is more likely to generate cash flows from sales of products.49APPLICATION OF CRITICAL ACCOUNTING ESTIMATESIn preparing our financial statements in accordance with accounting principles generally accepted in the U.S., we must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Some of those judgments can be subjective and complex, and consequently actual results could differ from those estimates. For any given individual estimate or assumption we make, it is possible that other people applying reasonable judgment to the same facts and circumstances could develop different estimates. We believe that, given current facts and circumstances, it is unlikely that applying any such other reasonable judgment would cause a material adverse effect on our consolidated results of operations, financial position, or liquidity for the periods presented in this report. Our most critical accounting estimates have been discussed with our audit committee and are described below.Revenue Recognition and Sales Return, Rebate, and Discount AccrualsWe recognize revenue primarily from two different types of contracts, product sales to customers (net product revenue) and collaborations and other arrangements. For product sales to customers, provisions for returns, rebates and discounts are established in the same period the related product sales are recognized. To determine the appropriate transaction price for our product sales at the time we recognize a sale to a direct customer, we estimate any rebates or discounts that ultimately will be due to the direct customer and other customers in the distribution chain under the terms of our contracts. Significant judgments are required in making these estimates. The largest of our sales rebate and discount amounts are rebates associated with sales covered by managed care, Medicare, Medicaid, chargeback, and patient assistance programs in the U.S. In determining the appropriate accrual amount, we consider our historical rebate payments for these programs by product as a percentage of our historical sales as well as any significant changes in sales trends (e.g., patent expiries and product launches), an evaluation of the current contracts for these programs, the percentage of our products that are sold via these programs, and our product pricing.Refer to Note 2 to the consolidated financial statements for further information on revenue recognition and sales return, rebate, and discount accruals.Revenue recognized from collaborations and other arrangements will include our share of profits from the collaboration, as well as royalties, upfront and milestone payments we receive under these types of contracts.Financial Statement ImpactWe believe that our accruals for sales returns, rebates, and discounts are reasonable and appropriate based on current facts and circumstances. Our rebate and discount liabilities are included in sales rebates and discounts on our consolidated balance sheet. Our sales return liability is included in other current liabilities and other noncurrent liabilities on our consolidated balance sheet. As of December 31, 2021, a 5 percent change in our consolidated sales return, rebate, and discount liability would have led to an approximate $366 million effect on our income before income taxes. The portion of our consolidated sales return, rebate, and discount liability resulting from sales of our products in the U.S. was approximately 90 percent as of December 31, 2021 and 2020.The following represents a roll-forward of our most significant U.S. sales return, rebate, and discount liability balances, including managed care, Medicare, Medicaid, chargeback, and patient assistance programs:(Dollars in millions)20212020Sales return, rebate, and discount liabilities, beginning of year$5,400.0 $4,635.5 Reduction of net sales(1) 20,106.3 18,668.4 Cash payments(19,344.7)(17,903.9)Sales return, rebate, and discount liabilities, end of year$6,161.6 $5,400.0 (1) Adjustments of the estimates for these returns, rebates, and discounts to actual results were less than 1 percent of consolidated revenue for each of the years presented.50Litigation Liabilities and Other ContingenciesBackground and UncertaintiesLitigation liabilities and other contingencies are, by their nature, uncertain and based upon complex judgments and probabilities. The factors we consider in developing our litigation liability reserves and other contingent liability amounts include the merits and jurisdiction of the litigation, the nature and the number of other similar current and past matters, the nature of the product and the current assessment of the science subject to the litigation, as applicable, and the likelihood of settlement and current state of settlement discussions, if any. In addition, we accrue for certain liability claims incurred, but not filed, to the extent we can formulate a reasonable estimate of their costs based primarily on historical claims experience and data regarding product usage. We accrue legal defense costs expected to be incurred in connection with significant liability contingencies when both probable and reasonably estimable.We also consider the insurance coverage we have to diminish the exposure for periods covered by insurance. In assessing our insurance coverage, we consider the policy coverage limits and exclusions, the potential for denial of coverage by the insurance company, the financial condition of the insurers, and the possibility of and length of time for collection. Due to a very restrictive market for litigation liability insurance, we are self-insured for litigation liability losses for all our currently marketed products. In addition to insurance coverage, we consider any third-party indemnification to which we are entitled or under which we are obligated. With respect to our third-party indemnification rights, these considerations include the nature of the indemnification, the financial condition of the indemnifying party, and the possibility of and length of time for collection.The litigation accruals and environmental liabilities and the related estimated insurance recoverables have been reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets.AcquisitionsBackground and UncertaintiesTo determine whether acquisitions or licensing transactions should be accounted for as a business combination or as an asset acquisition, we make certain judgments, which include assessing whether the acquired set of activities and assets would meet the definition of a business under the relevant accounting rules. If the acquired set of activities and assets meets the definition of a business, assets acquired and liabilities assumed are required to be recorded at their respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets, where applicable, is recorded as goodwill. If the acquired set of activities and assets does not meet the definition of a business, the transaction is recorded as an acquisition of assets and, therefore, any acquired IPR&D that does not have an alternative future use is charged to expense at the acquisition date, and goodwill is not recorded. See Note 3 to the consolidated financial statements for additional information. The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed in a business combination, as well as estimated asset lives, can materially affect our consolidated results of operations. The fair values of intangible assets, including acquired IPR&D, are determined using information available near the acquisition date based on estimates and assumptions that are deemed reasonable by management. Significant estimates and assumptions include, but are not limited to, probability of technical success, revenue growth and discount rate. Depending on the facts and circumstances, we may deem it necessary to engage an independent valuation expert to assist in valuing significant assets and liabilities. The fair values of identifiable intangible assets are primarily determined using an "income method," as described in Note 8 to the consolidated financial statements.The fair value of any contingent consideration liability that results from a business combination is primarily determined using a discounted cash flow analysis, as described in Note 7 to the consolidated financial statements. Estimating the fair value of contingent consideration requires the use of significant estimates and judgments, including, but not limited to, probability of technical success and the discount rate.Financial Statement ImpactAs of December 31, 2021, a 5 percent change in the contingent consideration liability would result in a change in income before income taxes of $3.5 million.51Impairment of Indefinite-Lived and Long-Lived AssetsBackground and UncertaintiesWe review the carrying value of long-lived assets (both intangible and tangible) for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset (or asset group) may not be recoverable. We identify impairment by comparing the projected undiscounted cash flows to be generated by the asset (or asset group) to its carrying value. If an impairment is identified, a loss is recorded equal to the excess of the asset's net book value over its fair value, and the cost basis is adjusted.Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually, or more frequently if impairment indicators are present, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the intangible asset is less than its carrying amount. If we conclude it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the intangible asset to its carrying value is performed to determine the amount of any impairment.Several methods may be used to determine the estimated fair value of acquired IPR&D, all of which require multiple assumptions. We utilize the "income method," as described in Note 8 to the consolidated financial statements.For acquired IPR&D assets, the risk of failure has been factored into the fair value measure and there can be no certainty that these assets ultimately will yield a successful product, as discussed previously in "Results of Operations - Executive Overview - Late-Stage Pipeline." The nature of the pharmaceutical business is high-risk and requires that we invest in a large number of projects to maintain a successful portfolio of approved products. As such, it is likely that some acquired IPR&D assets will become impaired in the future.Estimates of future cash flows, based on what we believe to be reasonable and supportable assumptions and projections, require management's judgment. Actual results could vary materially from these estimates.Retirement Benefits AssumptionsBackground and UncertaintiesDefined benefit pension plan and retiree health benefit plan costs include assumptions for the discount rate, expected return on plan assets, and retirement age. These assumptions have a significant effect on the amounts reported. In addition to the analysis below, see Note 15 to the consolidated financial statements for additional information regarding our retirement benefits.Annually, we evaluate the discount rate and the expected return on plan assets in our defined benefit pension and retiree health benefit plans. We use an actuarially determined, plan-specific yield curve of high quality, fixed income debt instruments to determine the discount rates. In evaluating the expected return on plan assets, we consider many factors, with a primary analysis of current and projected market conditions, asset returns and asset allocations (approximately 75 percent of which are growth investments), and the views of leading financial advisers and economists. We may also review our historical assumptions compared with actual results, as well as the discount rates and expected return on plan assets of other companies, where applicable. In evaluating our expected retirement age assumption, we consider the retirement ages of our past employees eligible for pension and medical benefits together with our expectations of future retirement ages.Annually, we determine the fair value of the plan assets in our defined benefit pension and retiree health benefit plans. Approximately 38 percent of our plan assets are in hedge funds and private equity-like investment funds (collectively, alternative assets). We value these alternative investments using significant unobservable inputs or using the net asset value reported by the counterparty, adjusted as necessary. Inputs include underlying net asset values, discounted cash flows valuations, comparable market valuations, and adjustments for currency, credit, liquidity and other risks.52Financial Statement ImpactIf the 2021 discount rate for the U.S. defined benefit pension and retiree health benefit plans (U.S. plans) were to change by a quarter percentage point, income before income taxes would change by $21.6 million. If the 2021 expected return on plan assets for U.S. plans were to change by a quarter percentage point, income before income taxes would change by $31.5 million. If our assumption regarding the 2021 expected age of future retirees for U.S. plans were adjusted by one year, our income before income taxes would be affected by $51.1 million. The U.S. plans, including Puerto Rico, represent approximately 80 percent of each of the total projected benefit obligation and total plan assets at December 31, 2021.Adjustments to the fair value of plan assets are not recognized in pension and retiree health benefit expense in the year that the adjustments occur. Such changes are deferred, along with other actuarial gains and losses, and are amortized into expense over the expected remaining service life of employees.Income TaxesBackground and UncertaintiesWe prepare and file tax returns based upon our interpretation of tax laws and regulations, and we record estimates based upon these interpretations. Our tax returns are routinely subject to examination by taxing authorities, which could result in future tax, interest, and penalty assessments. Inherent uncertainties exist in estimates of many tax positions due to changes in tax law resulting from legislation and regulation as concluded through the various jurisdictions' tax court systems. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example, adjustments could result from changes to existing tax law, the issuance of regulations by taxing authorities, new information obtained during a tax examination, or resolution of a tax examination. We believe our estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from examinations of our tax returns. We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense.We have recorded valuation allowances against certain of our deferred tax assets, primarily those that have been generated from net operating losses, tax credits, and other tax carryforwards and carrybacks in certain taxing jurisdictions. In evaluating whether we would more likely than not recover these deferred tax assets, we have not assumed future taxable income in the jurisdictions associated with these carryforwards where history does not support such an assumption. Implementation of tax planning strategies to recover these deferred tax assets or to generate future taxable income in these jurisdictions could lead to the reversal of all or a portion of these valuation allowances and a reduction of income tax expense.Financial Statement ImpactAs of December 31, 2021, a 5 percent change in the amount of uncertain tax positions and the valuation allowance would result in a change in net income of $84.9 million and $43.8 million, respectively.LEGAL AND REGULATORY MATTERS Information relating to certain legal proceedings can be found in Note 16 to the consolidated financial statements and is incorporated here by reference.53Item 7A.Quantitative and Qualitative Disclosures About Market RiskYou can find quantitative and qualitative disclosures about market risk (e.g., interest rate risk) at Item 7, "Management's Discussion and Analysis - Financial Condition and Liquidity." That information is incorporated by reference herein.54Item 8.Financial Statements and Supplementary DataConsolidated Statements of OperationsELI LILLY AND COMPANY AND SUBSIDIARIES(Dollars in millions and shares in thousands, except per-share data)Year Ended December 31202120202019Revenue (Note 2)$28,318.4 $24,539.8 $22,319.5 Costs, expenses, and other:Cost of sales7,312.8 5,483.3 4,721.2 Research and development7,025.9 6,085.7 5,595.0 Marketing, selling, and administrative6,431.6 6,121.2 6,213.8 Acquired in-process research and development (Note 3)874.9 660.4 239.6 Asset impairment, restructuring, and other special charges (Note 5)316.1 131.2 575.6 Other—net, (income) expense (Note 18)201.6 (1,171.9)(291.6)22,162.9 17,309.9 17,053.6 Income before income taxes6,155.5 7,229.9 5,265.9 Income taxes (Note 14)573.8 1,036.2 628.0 Net income from continuing operations5,581.7 6,193.7 4,637.9 Net income from discontinued operations (Note 19)— — 3,680.5 Net income$5,581.7 $6,193.7 $8,318.4 Earnings per share:Earnings from continuing operations - basic$6.15 $6.82 $4.98 Earnings from discontinued operations - basic— — 3.95 Earnings per share - basic$6.15 $6.82 $8.93 Earnings from continuing operations - diluted$6.12 $6.79 $4.96 Earnings from discontinued operations - diluted— — 3.93 Earnings per share - diluted$6.12 $6.79 $8.89 Shares used in calculation of earnings per share:Basic906,963 907,634 931,059 Diluted911,681 912,505 935,684 See notes to consolidated financial statements.55Consolidated Statements of Comprehensive Income (Loss)ELI LILLY AND COMPANY AND SUBSIDIARIES(Dollars in millions)Year Ended December 31202120202019Net income$5,581.7 $6,193.7 $8,318.4 Other comprehensive income (loss) from continuing operations:Change in foreign currency translation gains (losses)13.5 122.1 (89.9)Change in net unrealized gains (losses) on securities(15.9)14.2 34.4 Change in defined benefit pension and retiree health benefit plans (Note 15)2,699.4 (157.1)(970.0)Change in effective portion of cash flow hedges151.6 (152.9)34.3 Other comprehensive income (loss) from continuing operations before income taxes2,848.6 (173.7)(991.2)Benefit (provision) for income taxes related to other comprehensive income (loss) from continuing operations(695.3)200.9 151.0 Other comprehensive income (loss) from continuing operations, net of tax (Note 17)2,153.3 27.2 (840.2)Other comprehensive income from discontinued operations, net of tax (Note 17)— — 56.8 Other comprehensive income (loss), net of tax (Note 17)2,153.3 27.2 (783.4)Comprehensive income$7,735.0 $6,220.9 $7,535.0 See notes to consolidated financial statements.56Consolidated Balance SheetsELI LILLY AND COMPANY AND SUBSIDIARIES(Dollars in millions, shares in thousands)December 3120212020AssetsCurrent AssetsCash and cash equivalents (Note 7)$3,818.5 $3,657.1 Short-term investments (Note 7)90.1 24.2 Accounts receivable, net of allowances of $22.5 (2021) and $25.9 (2020)6,672.8 5,875.3 Other receivables1,454.4 1,053.7 Inventories (Note 6)3,886.0 3,980.3 Prepaid expenses and other2,530.6 2,871.5 Total current assets18,452.4 17,462.1 Investments (Note 7)3,212.6 2,966.8 Goodwill (Note 8)3,892.0 3,766.5 Other intangibles, net (Note 8)7,691.9 7,450.0 Deferred tax assets (Note 14)2,489.3 2,830.4 Property and equipment, net (Note 9)8,985.1 8,681.9 Other noncurrent assets4,082.7 3,475.4 Total assets$48,806.0 $46,633.1 Liabilities and EquityCurrent LiabilitiesShort-term borrowings and current maturities of long-term debt (Note 11)$1,538.3 $8.7 Accounts payable1,670.6 1,606.7 Employee compensation958.1 997.2 Sales rebates and discounts6,845.8 5,853.0 Dividends payable885.5 770.6 Income taxes payable (Note 14)126.9 495.1 Other current liabilities3,027.5 2,750.3 Total current liabilities15,052.7 12,481.6 Other LiabilitiesLong-term debt (Note 11)15,346.4 16,586.6 Accrued retirement benefits (Note 15)1,954.1 4,094.5 Long-term income taxes payable (Note 14)3,920.0 3,837.8 Deferred tax liabilities (Note 14)1,733.7 2,099.9 Other noncurrent liabilities1,644.3 1,707.5 Total other liabilities24,598.5 28,326.3 Commitments and Contingencies (Note 16)Eli Lilly and Company Shareholders' Equity (Notes 12 and 13)Common stock—no par value Authorized shares: 3,200,000 Issued shares: 954,116 (2021) and 957,077 (2020)596.3 598.2 Additional paid-in capital6,833.4 6,778.5 Retained earnings8,958.5 7,830.2 Employee benefit trust(3,013.2)(3,013.2)Accumulated other comprehensive loss (Note 17)(4,343.1)(6,496.4)Cost of common stock in treasury(52.7)(55.7)Total Eli Lilly and Company shareholders' equity8,979.2 5,641.6 Noncontrolling interests175.6 183.6 Total equity9,154.8 5,825.2 Total liabilities and equity$48,806.0 $46,633.1 See notes to consolidated financial statements.57Consolidated Statements of Shareholders' Equity Equity of Eli Lilly and Company ShareholdersELI LILLY AND COMPANY AND SUBSIDIARIES(Dollars in millions, shares in thousands)Common StockAdditionalPaid-inCapitalRetainedEarningsEmployee Benefit TrustAccumulated Other Comprehensive LossCommon Stock in TreasuryNoncontrolling InterestSharesAmountSharesAmountBalance at January 1, 20191,057,639 $661.0 $6,583.6 $11,395.9 $(3,013.2)$(5,729.2)604 $(69.4)$1,080.4 Net income8,318.4 37.7 Other comprehensive income (loss), net of tax(794.4)11.0 Cash dividends declared per share: $2.68(2,430.5)Retirement of treasury shares(102,640)(64.1)(12,363.4)(102,640)12,427.5 Purchase of treasury shares37,639 (4,400.0)Issuance of stock under employee stock plans, net3,057 1.9 (210.7)(74)8.6 Stock-based compensation312.4 Acquisition of common stock in exchange offer65,001 (8,027.5)Deconsolidation of Elanco(1,028.9)Other(8.0)Balance at December 31, 2019958,056 598.8 6,685.3 4,920.4 (3,013.2)(6,523.6)530 (60.8)92.2 Net income 6,193.7 126.6 Other comprehensive income, net of tax27.2 Cash dividends declared per share: $3.07(2,786.2)Retirement of treasury shares(3,627)(2.3)(497.7)(3,627)500.0 Purchase of treasury shares3,627 (500.0)Issuance of stock under employee stock plans, net2,648 1.7 (212.7)(43)5.1 Stock-based compensation308.1 Other(2.2)(35.2)Balance at December 31, 2020957,077 598.2 6,778.5 7,830.2 (3,013.2)(6,496.4)487 (55.7)183.6 Net income5,581.7 3.4 Other comprehensive income, net of tax2,153.3 Cash dividends declared per share: $3.53(3,201.7)Retirement of treasury shares(5,412)(3.4)(1,246.6)(5,412)1,250.0 Purchase of treasury shares5,412 (1,250.0)Issuance of stock under employee stock plans, net2,451 1.5 (287.9)(24)3.0 Stock-based compensation342.8 Other(5.1)(11.4)Balance at December 31, 2021954,116 $596.3 $6,833.4 $8,958.5 $(3,013.2)$(4,343.1)463 $(52.7)$175.6 See notes to consolidated financial statements.58Consolidated Statements of Cash FlowsELI LILLY AND COMPANY AND SUBSIDIARIES(Dollars in millions)Year Ended December 31202120202019Cash Flows from Operating ActivitiesNet income$5,581.7 $6,193.7 $8,318.4 Adjustments to Reconcile Net Income to Cash Flows from Operating Activities:Gain related to disposition of Elanco (Note 19)— — (3,680.5)Gain on sale of antibiotic business in China (Note 3)— — (309.8)Depreciation and amortization1,547.6 1,323.9 1,232.6 Debt extinguishment loss (Note 11)405.2 — 252.5 Change in deferred income taxes(802.3)(134.5)62.4 Stock-based compensation expense342.8 308.1 312.4 Net investment gains(178.0)(1,438.5)(403.1)Acquired in-process research and development (Note 3)874.9 660.4 239.6 Other non-cash operating activities, net511.4 333.9 499.3 Other changes in operating assets and liabilities, net of acquisitions and divestitures:Receivables—(increase) decrease(1,278.3)(1,350.2)(127.2)Inventories—(increase) decrease(235.9)(533.4)(258.7)Other assets—(increase) decrease1,515.4 (457.1)(602.3)Income taxes payable—increase (decrease)(359.7)322.0 (221.3)Accounts payable and other liabilities—increase (decrease)(664.1)1,271.3 (477.7)Net Cash Provided by Operating Activities7,260.7 6,499.6 4,836.6 Cash Flows from Investing ActivitiesPurchases of property and equipment(1,309.8)(1,387.9)(1,033.9)Proceeds from sales and maturities of short-term investments47.4 129.7 136.6 Purchases of short-term investments(83.5)(11.4)(42.7)Proceeds from sales of noncurrent investments800.0 757.1 609.8 Purchases of noncurrent investments(929.9)(358.7)(247.5)Purchases of in-process research and development(563.4)(641.2)(319.6)Cash paid for acquisitions, net of cash acquired (Note 3)(747.4)(849.3)(6,917.7)Cash distributed to Elanco upon disposition— — (374.0)Cash received for sale of antibiotic business in China— — 354.8 Other investing activities, net24.3 102.8 (248.7)Net Cash Used for Investing Activities(2,762.3)(2,258.9)(8,082.9)Cash Flows from Financing ActivitiesDividends paid(3,086.8)(2,687.1)(2,409.8)Net change in short-term borrowings(4.0)(1,494.2)995.4 Proceeds from issuance of long-term debt2,410.8 2,062.3 6,556.4 Repayments of long-term debt(1,905.4)(276.5)(2,866.4)Purchases of common stock(1,250.0)(500.0)(4,400.0)Other financing activities, net(295.9)(241.6)(200.1)Net Cash Used for Financing Activities(4,131.3)(3,137.1)(2,324.5)Effect of exchange rate changes on cash and cash equivalents(205.7)216.0 (89.9)Net increase (decrease) in cash and cash equivalents161.4 1,319.6 (5,660.7)Cash and cash equivalents at beginning of year (2019 includes $677.5 of discontinued operations)3,657.1 2,337.5 7,998.2 Cash and Cash Equivalents at End of Year$3,818.5 $3,657.1 $2,337.5 See notes to consolidated financial statements.59Notes to Consolidated Financial StatementsELI LILLY AND COMPANY AND SUBSIDIARIES(Tables present dollars in millions, except per-share data)Note 1: Summary of Significant Accounting Policies and Implementation of New Financial Accounting StandardBasis of PresentationThe accompanying consolidated financial statements include Eli Lilly and Company and all subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). We consider majority voting interests, as well as effective economic or other control over an entity when deciding whether or not to consolidate an entity. We generally do not have control by means other than voting interests. Where our ownership of consolidated subsidiaries is less than 100 percent, the noncontrolling shareholders' interests are reflected as a separate component of equity. All intercompany balances and transactions have been eliminated.The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates. We issued our financial statements by filing with the Securities and Exchange Commission (SEC) and have evaluated subsequent events up to the time of the filing of this Annual Report on Form 10-K.Certain reclassifications have been made to prior periods in the consolidated financial statements and accompanying notes to conform with the current presentation.All per-share amounts, unless otherwise noted in the footnotes, are presented on a diluted basis.On March 11, 2019, we completed the disposition of our remaining 80.2 percent ownership of Elanco Animal Health Incorporated (Elanco) common stock through a tax-free exchange offer. As a result, Elanco has been presented as discontinued operations in our consolidated financial statements for all periods presented.We operate as a single operating segment engaged in the discovery, development, manufacturing, marketing, and sales of pharmaceutical products worldwide. A global research and development organization and a supply chain organization are responsible for the discovery, development, manufacturing, and supply of our products. Regional commercial organizations market, distribute, and sell the products. The business is also supported by global corporate staff functions. Our determination that we operate as a single segment is consistent with the financial information regularly reviewed by the chief operating decision maker for purposes of evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting for future periods.Research and Development Expenses and Acquired In-Process Research and Development (IPR&D)Research and development expenses include the following:•Research and development costs, which are expensed as incurred.•Milestone payment obligations incurred prior to regulatory approval of the product, which are accrued when the event requiring payment of the milestone occurs.Acquired IPR&D expense includes the initial costs of externally developed IPR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use.Earnings Per Share (EPS)We calculate basic EPS based on the weighted-average number of common shares outstanding plus the effect of incremental shares from potential participating securities. We calculate diluted EPS based on the weighted-average number of common shares outstanding plus the effect of incremental shares from our stock-based compensation programs. 60Foreign Currency TranslationOperations in our subsidiaries outside the United States (U.S.) are recorded in the functional currency of each subsidiary which is determined by a review of the environment where each subsidiary primarily generates and expends cash. The results of operations for our subsidiaries outside the U.S. are translated from functional currencies into U.S. dollars using the weighted average currency rate for the period. Assets and liabilities are translated using the period end exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries are recorded in other comprehensive income (loss).Advertising ExpensesCosts associated with advertising are expensed as incurred and are included in marketing, selling, and administrative expenses. Advertising expenses, comprised primarily of television, radio, print media, and Internet advertising, totaled approximately $1.2 billion, $1.1 billion, and $1.1 billion in 2021, 2020, and 2019, respectively, which was less than 5 percent of revenue each year.Other Significant Accounting PoliciesOur other significant accounting policies are described in the remaining appropriate notes to the consolidated financial statements.Implementation of New Financial Accounting StandardAccounting Standards Update 2021-01, Reference Rate Reform, provides for temporary optional expedients and exceptions in applying current GAAP to contracts, hedging relationships, and other transactions affected by the transition from the use of the London Interbank Offered Rate (LIBOR) to an alternative reference rate. The standard can be adopted immediately and is applicable to contracts entered into before January 1, 2023. We do not expect the transition from the use of LIBOR to an alternative reference rate to have a material impact to our consolidated statements of operations or balance sheets at the initial transition. Note 2: RevenueThe following table summarizes our revenue recognized in our consolidated statements of operations:202120202019Net product revenue$25,957.9 $22,694.8 $20,377.3 Collaboration and other revenue(1)2,360.5 1,845.0 1,942.2 Revenue$28,318.4 $24,539.8 $22,319.5 (1) Collaboration and other revenue associated with prior period transfers of intellectual property was $175.0 million, $135.6 million, and $301.5 million during the years ended December 31, 2021, 2020, and 2019, respectively.We recognize revenue primarily from two different types of contracts, product sales to customers (net product revenue) and collaborations and other arrangements. Revenue recognized from collaborations and other arrangements will include our share of profits from the collaboration, as well as royalties, upfront and milestone payments we receive under these types of contracts. See Note 4 for additional information related to our collaborations and other arrangements. Collaboration and other revenue disclosed above includes the revenue from the Jardiance® and Trajenta® families of products resulting from our collaboration with Boehringer Ingelheim discussed in Note 4. Substantially all of the remainder of collaboration and other revenue is related to contracts accounted for as contracts with customers.61Net Product RevenueRevenue from sales of products is recognized at the point where the customer obtains control of the goods and we satisfy our performance obligation, which generally is at the time we ship the product to the customer. Payment terms differ by jurisdiction and customer, but payment terms in most of our major jurisdictions typically range from 30 to 70 days from date of shipment. Revenue for our product sales has not been adjusted for the effects of a financing component as we expect, at contract inception, that the period between when we transfer control of the product and when we receive payment will be one year or less. Any exceptions are either not material or we collect interest for payments made after the due date. Provisions for rebates, discounts, and returns are established in the same period the related sales are recognized. We generally ship product shortly after orders are received; therefore, we generally only have a few days of orders received but not yet shipped at the end of any reporting period. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation. We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are imposed on our sales of product and collected from a customer.Most of our products are sold to wholesalers that serve pharmacies, physicians and other health care professionals, and hospitals. For the years ended December 31, 2021, 2020, and 2019, our three largest wholesalers each accounted for between 15 percent and 20 percent of consolidated revenue. Further, they each accounted for between 18 percent and 28 percent of accounts receivable as of December 31, 2021 and 2020. Significant judgments must be made in determining the transaction price for our sales of products related to anticipated rebates, discounts and returns. The following describe the most significant of these judgments:Sales Rebates and Discounts - Background and Uncertainties•We initially invoice our customers at contractual list prices. Contracts with direct and indirect customers may provide for various rebates and discounts that may differ in each contract. As a consequence, to determine the appropriate transaction price for our product sales at the time we recognize a sale to a direct customer, we must estimate any rebates or discounts that ultimately will be due to the direct customer and other customers in the distribution chain under the terms of our contracts. Significant judgments are required in making these estimates.•The rebate and discount amounts are recorded as a deduction to arrive at our net product revenue. Sales rebates and discounts that require the use of judgment in the establishment of the accrual include managed care, Medicare, Medicaid, chargebacks, long-term care, hospital, patient assistance programs, and various other programs. We estimate these accruals using an expected value approach.•The largest of our sales rebate and discount amounts are rebates associated with sales covered by managed care, Medicare, Medicaid, chargeback, and patient assistance programs in the U.S. In determining the appropriate accrual amount, we consider our historical rebate payments for these programs by product as a percentage of our historical sales as well as any significant changes in sales trends (e.g., patent expiries and product launches), an evaluation of the current contracts for these programs, the percentage of our products that are sold via these programs, and our product pricing. Although we accrue a liability for rebates related to these programs at the time we record the sale, the rebate related to that sale is typically paid up to six months later. Because of this time lag, in any particular period our rebate adjustments may incorporate revisions of accruals for several periods.•Most of our rebates outside the U.S. are contractual or legislatively mandated and are estimated and recognized in the same period as the related sales. In some large European countries, government rebates are based on the anticipated budget for pharmaceutical payments in the country. An estimate of these rebates, updated as governmental authorities revise budgeted deficits, is recognized in the same period as the related sale.62Sales Returns - Background and Uncertainties•When product sales occur, to determine the appropriate transaction price for our sales, we estimate a reserve for future product returns related to those sales using an expected value approach. This estimate is based on several factors, including: historical return rates, expiration date by product (on average, approximately 24 months after the initial sale of a product to our customer), and estimated levels of inventory in the wholesale and retail channels, as well as any other specifically-identified anticipated returns due to known factors such as the loss of patent exclusivity, product recalls and discontinuances, or a changing competitive environment. We maintain a returns policy that allows most U.S. customers to return product for dating issues within a specified period prior to and subsequent to the product's expiration date. Following the loss of exclusivity for a patent-dependent product, we expect to experience an elevated level of product returns as product inventory remaining in the wholesale and retail channels expires. Adjustments to the returns reserve have been and may in the future be required based on revised estimates to our assumptions. We record the return amounts as a deduction to arrive at our net product revenue. Once the product is returned, it is destroyed; we do not record a right of return asset. Our returns policies outside the U.S. are generally more restrictive than in the U.S. as returns are not allowed for reasons other than failure to meet product specifications in many countries. Our reserve for future product returns for product sales outside the U.S. is not material.•As a part of our process to estimate a reserve for product returns, we regularly review the supply levels of our significant products at the major wholesalers in the U.S. and in major markets outside the U.S., primarily by reviewing periodic inventory reports supplied by our major wholesalers and available prescription volume information for our products, or alternative approaches. We attempt to maintain U.S. wholesaler inventory levels at an average of approximately one month or less on a consistent basis across our product portfolio. Causes of unusual wholesaler buying patterns include actual or anticipated product-supply issues, weather patterns, anticipated changes in the transportation network, redundant holiday stocking, and changes in wholesaler business operations. In the U.S., the current structure of our arrangements provides us with data on inventory levels at our wholesalers; however, our data on inventory levels in the retail channel is more limited. Wholesaler stocking and destocking activity historically has not caused any material changes in the rate of actual product returns.•Actual U.S. product returns have been less than 2 percent of our U.S. revenue during each of the past three years and have not fluctuated significantly as a percentage of revenue, although fluctuations are more likely in periods following loss of patent exclusivity for major products in the U.S. market. Adjustments to RevenueWe record adjustments to revenue as a result of changes in estimates, for the judgments described above, for our most significant U.S. sales returns, rebates and discounts liability balances. Such adjustments for products shipped in previous periods resulted in approximately 2 percent or less increase to U.S revenue during each of the years ended December 31, 2021, 2020, and 2019.Collaboration and Other ArrangementsWe recognize several types of revenue from our collaborations and other arrangements, which we discuss in general terms immediately below and more specifically in Note 4 for each of our material collaborations and other arrangements. Our collaborations and other arrangements are not contracts with customers but are evaluated to determine whether any aspects of the arrangements are contracts with customers. •Revenue related to products we sell pursuant to these arrangements is included in net product revenue, while other sources of revenue (e.g., royalties and profit sharing from our partner) are included in collaboration and other revenue.•Initial fees and developmental milestones we receive in collaborative and other similar arrangements from the partnering of our compounds under development are generally deferred and amortized into income through the expected product approval date. •Profit-sharing due from our collaboration partners, which is based upon gross margins reported to us by our partners, is recognized as collaboration and other revenue as earned.63•Royalty revenue from licensees and certain of our collaboration partners, which is based on sales to third-parties of licensed products and technology, is recorded when the third-party sale occurs and the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). This royalty revenue is included in collaboration and other revenue.•For arrangements involving multiple goods or services (e.g., research and development, marketing and selling, manufacturing, and distribution), each required good or service is evaluated to determine whether it is distinct. If a good or service does not qualify as distinct, it is combined with the other non-distinct goods or services within the arrangement and these combined goods or services are treated as a single performance obligation for accounting purposes. The arrangement's transaction price is then allocated to each performance obligation based on the relative standalone selling price of each performance obligation. For arrangements that involve variable consideration where we have sold intellectual property, we recognize revenue based on estimates of the amount of consideration we believe we will be entitled to receive from the other party, subject to a constraint. These estimates are adjusted to reflect the actual amounts to be collected when those facts and circumstances become known.•Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development will not receive regulatory approval, we generally do not recognize any contingent payments that would be due to us upon or after regulatory approval. Contract LiabilitiesOur contract liabilities result from arrangements where we have received payment in advance of performance under the contract and do not include sales returns, rebates, and discounts. Changes in contract liabilities are generally due to either receipt of additional advance payments or our performance under the contract. The following table summarizes contract liability balances: 20212020Contract liabilities$262.6 $276.8 The contract liabilities balances disclosed above as of December 31, 2021 and 2020 were primarily related to the remaining license period of symbolic intellectual property and obligations to perform research and development activities or supply product for a defined period of time.During the years ended December 31, 2021, 2020, and 2019, revenue recognized from contract liabilities as of the beginning of the respective year was not material. Revenue expected to be recognized in the future from contract liabilities as the related performance obligations are satisfied is not expected to be material in any one year.64Disaggregation of Revenue The following table summarizes revenue by product:U.S.Outside U.S.202120202019202120202019Revenue—to unaffiliated customers:Diabetes:Trulicity®$4,914.4 $3,835.9 $3,155.2 $1,557.6 $1,232.2 $972.7 Humalog® (1)1,320.7 1,485.6 1,669.7 1,132.3 1,140.3 1,151.0 Jardiance (2)807.3 620.8 565.9 683.5 533.0 378.3 Humulin®832.9 866.4 879.7 389.6 393.2 410.4 Basaglar®588.3 842.3 876.2 304.2 282.1 236.3 Trajenta (3)82.1 95.6 224.8 290.4 263.0 365.8 Other Diabetes173.6 162.5 158.0 111.2 81.5 88.1 Total Diabetes8,719.3 7,909.1 7,529.5 4,468.8 3,925.3 3,602.6 Oncology:Alimta®1,233.9 1,265.3 1,219.5 827.5 1,064.7 896.4 Verzenio®834.9 618.2 454.8 515.0 294.4 124.9 Cyramza®358.1 381.9 335.3 674.8 650.8 589.9 Erbitux®481.8 480.1 487.9 66.4 56.3 55.4 Tyvyt®— — — 418.1 308.7 134.0 Other Oncology120.1 46.6 111.0 210.7 152.3 205.3 Total Oncology3,028.8 2,792.1 2,608.5 2,712.5 2,527.2 2,005.9 Immunology:Taltz®1,542.4 1,288.5 1,016.8 670.4 500.0 349.6 Olumiant® (4)324.1 63.8 42.2 791.0 575.0 384.7 Other Immunology15.3 20.0 — 17.6 14.6 — Total Immunology1,881.8 1,372.3 1,059.0 1,479.0 1,089.6 734.3 Neuroscience:Cymbalta®38.7 42.1 49.6 542.8 725.6 675.8 Emgality®434.5 325.9 154.9 142.7 37.0 7.7 Zyprexa®39.6 46.1 41.0 390.7 360.5 377.6 Other Neuroscience102.0 73.2 111.0 207.5 220.9 305.3 Total Neuroscience614.8 487.3 356.5 1,283.7 1,344.0 1,366.4 Other:COVID-19 Antibodies (5)1,978.0 850.0 — 261.4 21.2 — Forteo®441.6 510.3 645.5 360.3 536.0 759.1 Cialis®10.6 61.8 231.7 707.9 545.4 658.8 Other136.1 246.4 291.9 233.9 321.8 469.7 Total Other2,566.4 1,668.4 1,169.1 1,563.5 1,424.4 1,887.7 Revenue$16,811.0 $14,229.3 $12,722.6 $11,507.4 $10,310.5 $9,596.8 Numbers may not add due to rounding.(1) Humalog revenue includes insulin lispro.(2) Jardiance revenue includes Glyxambi®, Synjardy®, and Trijardy® XR.(3) Trajenta revenue includes Jentadueto®.(4) Olumiant revenue includes sales for baricitinib, for treatment in hospitalized COVID-19 patients, that were made pursuant to Emergency Use Authorization (EUA) or similar regulatory authorizations.(5) COVID-19 antibodies include sales for bamlanivimab administered alone as well as sales for bamlanivimab and etesevimab administered together and were made pursuant to EUAs or similar regulatory authorizations. 65The following table summarizes revenue by geographical area:202120202019Revenue—to unaffiliated customers(1):U.S.$16,811.0 $14,229.3 $12,722.6 Europe4,776.8 4,187.7 3,765.0 Japan2,367.0 2,583.1 2,547.6 China1,661.4 1,116.9 939.4 Other foreign countries2,702.2 2,422.7 2,344.9 Revenue$28,318.4 $24,539.8 $22,319.5 Numbers may not add due to rounding.(1) Revenue is attributed to the countries based on the location of the customer.Note 3: Acquisitions and DivestitureIn January 2021, February 2020 and 2019, we completed the acquisitions of Prevail Therapeutics Inc. (Prevail), Dermira, Inc. (Dermira) and Loxo Oncology, Inc. (Loxo), respectively. These transactions, as further discussed in this note below in Acquisitions of Businesses, were accounted for as business combinations under the acquisition method of accounting. Under this method, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date in our consolidated financial statements. The determination of estimated fair value required management to make significant estimates and assumptions. The excess of the purchase price over the fair value of the acquired net assets, where applicable, has been recorded as goodwill. The results of operations of these acquisitions have been included in our consolidated financial statements from the date of acquisition.We also acquired assets in development in 2021, 2020, and 2019, which are further discussed in this note below in Asset Acquisitions. Upon each acquisition, the cost allocated to acquired IPR&D was immediately expensed because the compound acquired had no alternative future use. For the years ended December 31, 2021, 2020, and 2019, we recorded acquired IPR&D charges of $874.9 million, $660.4 million, and $239.6 million, respectively.Acquisitions of BusinessesPrevail AcquisitionOverview of TransactionIn January 2021, we acquired all shares of Prevail for a purchase price that included $22.50 per share in cash (or an aggregate of $747.4 million, net of cash acquired) plus one non-tradable contingent value right (CVR) per share. The CVR entitles Prevail stockholders up to an additional $4.00 per share in cash (or an aggregate of approximately $160 million) payable, subject to certain terms and conditions, upon the first regulatory approval of a Prevail product in one of the following countries: U.S., Japan, United Kingdom, Germany, France, Italy or Spain. To achieve the full value of the CVR, such regulatory approval must occur by December 31, 2024. If such regulatory approval occurs after December 31, 2024, the value of the CVR will be reduced by approximately 8.3 cents per month until December 1, 2028, at which point the CVR will expire without payment.Under the terms of the agreement, we acquired potentially disease-modifying AAV9-based gene therapies for patients with neurodegenerative diseases. The acquisition establishes a new modality for drug discovery and development, extending our research efforts through the creation of a gene therapy program that is being anchored by Prevail's portfolio of assets. The lead gene therapies in clinical development that we acquired were PR001 for patients with Parkinson's disease with GBA1 mutations and neuronopathic Gaucher disease and PR006 for patients with frontotemporal dementia with GRN mutations. Both PR001 and PR006 were granted Fast Track designation from the U.S. Food and Drug Administration (FDA). 66Assets Acquired and Liabilities AssumedThe following table summarizes the amounts recognized for assets acquired and liabilities assumed in the acquisition of Prevail as of the acquisition date:Estimated Fair Value at January 22, 2021Cash$90.5 Acquired IPR&D(1)824.0Goodwill(2)126.8Deferred tax liabilities(106.0)Other assets and liabilities, net(31.5)Acquisition date fair value of consideration transferred 903.8Less: Cash acquired(90.5) Fair value of CVR liability(3)(65.9)Cash paid, net of cash acquired$747.4 (1) Acquired IPR&D intangibles primarily relate to PR001.(2) The goodwill recognized from this acquisition is not deductible for tax purposes. (3) See Note 7 for a discussion on the estimation of the CVR liability. We are unable to provide the results of operations for the year ended December 31, 2021 attributable to Prevail as those operations were substantially integrated into our legacy business.Pro forma information has not been included as this acquisition did not have a material impact on our consolidated statements of operations for the years ended December 31, 2021 and 2020.Dermira AcquisitionOverview of TransactionIn February 2020, we acquired all shares of Dermira for a purchase price of approximately $849.3 million, net of cash acquired. Under terms of the agreement, we acquired lebrikizumab, a novel, investigational, monoclonal antibody being evaluated for the treatment of moderate-to-severe atopic dermatitis. Lebrikizumab was granted Fast Track designation from the FDA. We also acquired Qbrexza® (glycopyrronium) cloth, a medicated cloth approved by the FDA for the topical treatment of primary axillary hyperhidrosis (uncontrolled excessive underarm sweating). During the year ended December 31, 2021, we sold the rights to Qbrexza. See Note 5 for additional information.Assets Acquired and Liabilities AssumedThe fair values recognized related to the assets acquired and liabilities assumed in this acquisition included goodwill of $86.8 million, other intangibles of $1.20 billion primarily related to lebrikizumab, deferred income tax liabilities of $49.5 million, and long-term debt of $375.5 million. After the acquisition, we repaid $276.2 million of long-term debt assumed as part of our acquisition of Dermira.Revenue attributable to assets acquired in the Dermira acquisition did not have a material impact on our consolidated statement of operations for the year ended December 31, 2020. We are unable to provide the results of operations for the year ended December 31, 2020 attributable to Dermira as those operations were substantially integrated into our legacy business. Pro forma information has not been included because this acquisition did not have a material impact on our consolidated statements of operations for the years ended December 31, 2020 and 2019.Loxo AcquisitionOverview of TransactionIn February 2019, we acquired all shares of Loxo for a purchase price of $6.92 billion, net of cash acquired. The accelerated vesting of Loxo employee equity awards was recognized as transaction expense included in asset impairment, restructuring, and other special charges during the year ended December 31, 2019 (see Note 5).67Under the terms of the agreement, we acquired a pipeline of investigational medicines, including selpercatinib (LOXO-292), an oral RET inhibitor, and LOXO-305, an oral BTK inhibitor. In the second quarter of 2020, the FDA approved selpercatinib (Retevmo®) under its Accelerated Approval regulations and continued approval may be contingent upon verification and description of clinical benefit in confirmatory trials. At the time of approval, we reclassified our $4.60 billion intangible asset for selpercatinib (Retevmo) from indefinite-lived intangible assets to finite-lived intangible assets and began amortizing straight line over its estimated useful life.Assets Acquired and Liabilities AssumedThe following table summarizes the amounts recognized for assets acquired and liabilities assumed in the acquisition of Loxo as of the acquisition date:Estimated Fair Value at February 15, 2019Acquired IPR&D(1)$4,670.0 Finite-lived intangibles(2)980.0 Deferred income taxes(1,032.8)Other assets and liabilities - net(26.4)Total identifiable net assets4,590.8 Goodwill(3)2,326.9 Total consideration transferred - net of cash acquired$6,917.7 (1) $4.60 billion of the acquired IPR&D relates to selpercatinib (LOXO-292).(2) Contract-based intangibles for Vitrakvi and a Phase I molecule which were amortized to cost of sales on a straight-line basis over their estimated useful lives and were expected to have a weighted average useful life of approximately 12 years from the acquisition date. In the fourth quarter of 2021 we impaired the intangible for the Phase I molecule. See Note 5 for additional information. (3) The goodwill recognized from this acquisition is attributable primarily to future unidentified projects and products and the assembled workforce for Loxo and is not deductible for tax purposes.Asset AcquisitionsThe following table and narrative summarize our asset acquisitions during 2021, 2020, and 2019.CounterpartyCompound(s),Therapy, or AssetAcquisition MonthPhase of Development(1)Acquired IPR&D ExpensePrecision Biosciences, Inc. Potential in vivo therapies for genetic disordersJanuary 2021Pre-clinical$107.8 Merus N.V. CD3-engaging T-cell re-directing bispecific antibodies for the potential treatment of cancerJanuary 2021Pre-clinical46.5 Asahi Kasei Pharma CorporationAK1780, an orally bioavailable P2X7 receptor antagonist for the potential treatment of chronic pain conditionsJanuary 2021Phase I20.0 Rigel Pharmaceuticals, Inc. R552, a receptor-interacting serine/threonine-protein kinase 1 (RIPK1) inhibitor, for the potential treatment of autoimmune and inflammatory diseasesMarch 2021Phase I125.0 MiNA Therapeutics Limited Pre-clinical targets that could lead to potential new medicines May 2021Pre-clinical25.0 Protomer Technologies Inc. Glucose-sensing insulin programJuly 2021Pre-clinical57.3 68CounterpartyCompound(s),Therapy, or AssetAcquisition MonthPhase of Development(1)Acquired IPR&D ExpenseKumquat Biosciences Inc.Pre-clinical small molecules that stimulate tumor-specific immune responses July 2021Pre-clinical55.0 Lycia Therapeutics, Inc.Several potential modalities across a spectrum of therapeutic areas and diseasesAugust 2021Pre-clinical35.0 ProQR Therapeutics N.V. Pre-clinical targets that could lead to potential new medicines for genetic disorders in the liver and nervous systemSeptember 2021Pre-clinical26.7 QILU Regor Therapeutics Inc.Pre-clinical targets that could lead to potential new medicines for metabolic disordersDecember 2021Pre-clinical30.0 Foghorn Therapeutics Inc.Pre-clinical targets that could lead to potential new oncology medicinesDecember 2021Pre-clinical316.6 Entos Pharmaceuticals Inc.Pre-clinical targets that could lead to potential new nucleic acid-based therapies targeting the central and peripheral nervous systemDecember 2021Pre-clinical30.0 Sitryx Therapeutics LimitedPre-clinical targets that could lead to potential new medicines for autoimmune diseasesMarch 2020Pre-clinical52.3 AbCellera Biologics Inc. (AbCellera)Neutralizing antibodies for the treatment and prevention of COVID-19March 2020(2)Pre-clinical25.0 Shanghai Junshi Biosciences Co., Ltd. (Junshi Biosciences)Neutralizing antibodies for the treatment and prevention of COVID-19May 2020Pre-clinical20.0 Petra Pharma Corporation (Petra)Mutant-selective PI3Kα inhibitor that could lead to potential new medicineMay 2020Pre-clinical174.8 Evox Therapeutics LimitedPre-clinical targets for the potential treatment of neurological disordersJune 2020Pre-clinical22.0 Innovent Biologics, Inc. (Innovent)Sintilimab injection, an anti-PD-1 monoclonal antibody immuno-oncology medicine, for geographies outside of ChinaOctober 2020Phase III200.0 Disarm Therapeutics, Inc. Disease-modifying therapeutics program for patients with axonal degenerationOctober 2020Pre-clinical126.3 Fochon Pharmaceuticals, Ltd.Pre-clinical molecule targeting hematological malignanciesNovember 2020Pre-clinical40.0 69CounterpartyCompound(s),Therapy, or AssetAcquisition MonthPhase of Development(1)Acquired IPR&D ExpenseAC Immune SATau aggregation inhibitor small molecules for the potential treatment of Alzheimer's disease and other neurodegenerative diseasesJanuary 2019 & September 2019(3)Pre-clinical127.1 ImmuNext, Inc.Novel immunometabolism targetMarch 2019Pre-clinical40.0 Avidity Biosciences, Inc.Potential new medicines in immunology and other select indicationsApril 2019Pre-clinical25.0 Centrexion Therapeutics CorporationCNTX-0290, a novel, small molecule somatostatin receptor type 4 agonistJuly 2019Phase I47.5 (1) The phase of development presented is as of the date of the arrangement and represents the phase of development of the most advanced asset acquired, where applicable.(2) We recognized acquired IPR&D expense of $25.0 million in May 2020 upon closing of the transaction. (3) We recognized acquired IPR&D expenses of $96.9 million in January 2019 upon entering into a license agreement and $30.2 million in September 2019 upon entering into an amendment to the license agreement.In connection with these arrangements, our partners may be entitled to future royalties and/or commercial milestones based on sales should products be approved for commercialization and/or milestones based on the successful progress of compounds through the development process.DivestitureIn October 2019, we completed a transaction in which we sold the rights in China for two legacy antibiotic medicines, as well as a manufacturing facility in Suzhou, China to Eddingpharm, a China-based specialty pharmaceutical company. In connection with the sale, we received net cash proceeds of $354.8 million and $40.3 million from Eddingpharm in 2019 and 2020, respectively. We accounted for the transaction as the sale of a business. We recognized a gain of $309.8 million in other—net, (income) expense in our consolidated statement of operations during the year ended December 31, 2019. Note 4: Collaborations and Other ArrangementsWe often enter into collaborative and other similar arrangements to develop and commercialize drug candidates. Collaborative activities may include research and development, marketing and selling (including promotional activities and physician detailing), manufacturing, and distribution. These arrangements often require milestone as well as royalty or profit-share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development, as well as expense reimbursements from or payments to the collaboration partner. See Note 2 for amounts of collaboration and other revenue recognized from these types of arrangements.Operating expenses for costs incurred pursuant to these arrangements are reported in their respective expense line item, net of any payments due to or reimbursements due from our collaboration partners, with such reimbursements being recognized at the time the party becomes obligated to pay. Each collaboration is unique in nature, and our more significant arrangements are discussed below.Boehringer Ingelheim Diabetes CollaborationWe and Boehringer Ingelheim have a global agreement to jointly develop and commercialize a portfolio of diabetes compounds. Currently included in the collaboration are Boehringer Ingelheim's oral diabetes products: Jardiance, Glyxambi, Synjardy, Trijardy XR, Trajenta, and Jentadueto, as well as our basal insulin, Basaglar. Glyxambi, Synjardy, and Trijardy XR are included in the Jardiance product family. Jentadueto is included in the Trajenta product family. 70In connection with the regulatory approvals of Jardiance, Trajenta and Basaglar in the U.S, Europe and Japan, milestone payments made for Jardiance and Trajenta were capitalized as intangible assets and are being amortized to cost of sales, and milestone payments received for Basaglar were recorded as contract liabilities and are being amortized to collaboration and other revenue. These milestones are being amortized through their respective term under the collaboration which, depending on country or region, is determined based on the latest to occur of (a) a defined number of years following launch date, (b) the expiration of the compound patent, or (c) any supplementary protection certificates or extensions thereto. The table below summarizes the net milestones capitalized (deferred) at December 31 for the compounds included in this collaboration: Net Milestones Capitalized (Deferred)(1) 20212020Jardiance$136.1 $156.2 Trajenta88.5 114.6 Basaglar(149.3)(168.0)(1) This represents the amounts that have been capitalized (deferred) from the start of this collaboration through the end of the reporting period, net of amount amortized.Through December 31, 2019, in the most significant markets, we and Boehringer Ingelheim shared equally the ongoing development costs, commercialization costs, and agreed upon gross margin for any product resulting from the collaboration. We recorded our portion of the gross margin associated with Boehringer Ingelheim's products as collaboration and other revenue. We recorded our sales of Basaglar to third parties as net product revenue with the payments made to Boehringer Ingelheim for their portion of the gross margin recorded as cost of sales. For all compounds under this collaboration, we recorded our portion of the development and commercialization costs as research and development expense and marketing, selling, and administrative expense, respectively. Each company was entitled to potential performance payments depending on the sales of the molecules it contributes to the collaboration. These performance payments may have resulted in the owner of the molecule retaining a greater share of the agreed upon gross margin of that product. Subject to achieving these thresholds, in a given period, our reported revenue for Trajenta and Jardiance may have been reduced by any performance payments we made related to these products. Similarly, performance payments we may have received related to Basaglar effectively reduced Boehringer Ingelheim's share of the gross margin, which reduced our cost of sales.Effective January 1, 2020, we and Boehringer Ingelheim modernized the alliance. For the Jardiance product family, we and Boehringer Ingelheim share equally the ongoing development and commercialization costs in the most significant markets, and we record our portion of the development and commercialization costs as research and development expense and marketing, selling, and administrative expense, respectively. We receive a royalty on net sales of Boehringer Ingelheim's products in the most significant markets and recognize the royalty as collaboration and other revenue. Boehringer Ingelheim is entitled to potential performance payments depending on the net sales of the Jardiance product family; therefore, our reported revenue for Jardiance may be reduced by any potential performance payments we make related to this product family. Beginning January 1, 2021, the royalty received by us related to the Jardiance product family may also be increased or decreased depending on whether net sales for this product family exceed or fall below certain thresholds. We pay to Boehringer Ingelheim a royalty on net sales for Basaglar in the U.S. We record our sales of Basaglar to third parties as net product revenue with the royalty payments made to Boehringer Ingelheim recorded as cost of sales.The following table summarizes our collaboration and other revenue recognized with respect to the Jardiance and Trajenta families of products and net product revenue recognized with respect to Basaglar:202120202019Jardiance$1,490.8 $1,153.8 $944.2 Basaglar892.5 1,124.4 1,112.6 Trajenta372.5 358.5 590.6 71OlumiantWe have a worldwide license and collaboration agreement with Incyte Corporation (Incyte), which provides us the development and commercialization rights to its Janus tyrosine kinase (JAK) inhibitor compound, now known as Olumiant (baricitinib), and certain follow-on compounds, for the treatment of inflammatory and autoimmune diseases. Incyte has the right to receive tiered, double digit royalty payments on worldwide net sales with rates ranging up to 20 percent. The agreement calls for payments by us to Incyte associated with certain development, success-based regulatory, and sales-based milestones. In 2020, the agreement was amended to include the treatment of COVID-19, with Incyte obtaining the right to receive an additional royalty ranging up to the low teens on worldwide net sales for the treatment of COVID-19 that exceed a specified aggregate worldwide net sales threshold. In connection with the regulatory approvals of Olumiant in the U.S., Europe, and Japan, as well as achievement of a sales-based milestone, milestone payments of $260.0 million and $210.0 million were capitalized as intangible assets as of December 31, 2021 and 2020, respectively, and are being amortized to cost of sales through the term of the collaboration. This represents the cumulative amounts that have been capitalized from the start of this collaboration through the end of each reporting period.As of December 31, 2021, Incyte is eligible to receive up to $100.0 million of additional payments from us contingent upon certain success-based regulatory milestones. Incyte is also eligible to receive up to $100.0 million of potential sales-based milestones.We record our sales of Olumiant, including sales of baricitinib that were made pursuant to an EUA or similar regulatory authorizations, to third parties as net product revenue with the royalty payments made to Incyte recorded as cost of sales. The following table summarizes our net product revenue recognized with respect to Olumiant:202120202019Olumiant$1,115.1 $638.9 $426.9 COVID-19 antibodiesIn 2020, we entered into a worldwide license and collaboration agreement with AbCellera to co-develop therapeutic antibodies for the potential prevention and treatment of COVID-19, including bamlanivimab and bebtelovimab, for which we hold development and commercialization rights. AbCellera has the right to receive tiered royalty payments on worldwide net sales of bamlanivimab and bebtelovimab with percentages ranging in the mid-teens to mid-twenties. Royalty payments made to AbCellera are recorded as cost of sales. In 2020, we entered into a license and collaboration agreement with Junshi Biosciences to co-develop therapeutic antibodies for the potential prevention and treatment of COVID-19, including etesevimab, for which we hold development and commercialization rights outside of mainland China and the Special Administrative Regions of Hong Kong and Macau, and for which Junshi Biosciences currently maintains all rights in mainland China and the Special Administrative Regions of Hong Kong and Macau. Junshi Biosciences has the right to receive royalty payments in the mid-teens on our net sales of etesevimab. Junshi Biosciences also had the right to receive certain development, success-based regulatory and sales-based milestones. In connection with the regulatory authorizations of etesevimab (for administration with bamlanivimab) as well as achievement of sales-based milestones in 2021, milestone payments of $195.0 million were capitalized as intangible assets and are being amortized to cost of sales over the estimated useful life of etesevimab. During the year ended December 31, 2020, we recognized $50.0 million of research and development expenses related to development milestones.Pursuant to EUAs or similar regulatory authorizations, we recognized $2.24 billion and $871.2 million of net product revenue associated with our sales of our COVID-19 antibodies during the years ended December 31, 2021 and 2020, respectively. 72Sintilimab InjectionWe have a collaboration agreement with Innovent to jointly develop and commercialize sintilimab injection in China, where it is branded and trademarked as Tyvyt. In 2019, we and Innovent began co-commercializing Tyvyt in China. In 2020, we obtained an exclusive license for sintilimab injection from Innovent for geographies outside of China. Innovent, with collaboration from us, has filed the initial registration of sintilimab injection in the U.S., and we plan to pursue initial registration of sintilimab injection in other markets and all other subsequent registrations of sintilimab injection. We have exclusive commercialization rights outside of China. In connection with a regulatory approval for Tyvyt in China in 2021, we capitalized a milestone payment of $40.0 million as an intangible asset which is being amortized to cost of sales through the term of the collaboration. As of December 31, 2021, Innovent is eligible to receive up to $825.0 million for geographies outside of China and up to $195.0 million in China in success-based regulatory and sales-based milestones. Innovent is also eligible to receive tiered double digit royalties on net sales for geographies outside of China. We record our sales of Tyvyt to third parties as net product revenue, with payments made to Innovent for its portion of the gross margin reported as cost of sales. We report as collaboration and other revenue our portion of the gross margin for Tyvyt sales made by Innovent to third parties. The following table summarizes our revenue recognized in China with respect to Tyvyt: 202120202019Tyvyt$418.1 $308.7 $134.0 LebrikizumabAs a result of our acquisition of Dermira, we have a worldwide license agreement with F. Hoffmann-La Roche Ltd and Genentech, Inc. (collectively Roche), which provides us the worldwide development and commercialization rights to lebrikizumab. Roche has the right to receive tiered royalty payments on future worldwide net sales ranging in percentages from high single digits to high teens if the product is successfully commercialized. As of December 31, 2021, Roche is eligible to receive up to $180.0 million of payments from us contingent upon the achievement of success-based regulatory milestones, and up to $1.03 billion in a series of sales-based milestones, contingent upon the commercial success of lebrikizumab.As a result of our acquisition of Dermira, we have a license agreement with Almirall, S.A. (Almirall), under which Almirall licensed the rights to develop and commercialize lebrikizumab for the treatment or prevention of dermatology indications, including, but not limited to, atopic dermatitis in Europe. We have the right to receive tiered royalty payments on future net sales in Europe ranging in percentages from low double digits to low twenties if the product is successfully commercialized. As of December 31, 2021, we are eligible to receive additional payments of $85.0 million from Almirall contingent upon the achievement of success-based regulatory milestones and up to $1.25 billion in a series of sales-based milestones, contingent upon the commercial success of lebrikizumab. As of December 31, 2021 and 2020, contract liabilities were not material. During the twelve months ended December 31, 2021 and 2020, milestones received and collaboration and other revenue recognized were not material. PetraAs a result of our acquisition of Petra, we are required to make milestone payments to Petra shareholders contingent upon the occurrence of certain future events linked to the success of the mutant-selective PI3Kα inhibitor. Our more significant, near term milestones include a development milestone of approximately $205 million in 2022 contingent upon initiation of its Phase I trial and a further development milestone of approximately $164 million in 2023 contingent upon achieving clinical proof of concept.73Note 5: Asset Impairment, Restructuring, and Other Special ChargesThe components of the charges included in asset impairment, restructuring, and other special charges in our consolidated statements of operations are described below: 202120202019Severance$13.0 $151.2 $77.8 Asset impairment (gain) and other special charges303.1 (20.0)497.8 Total asset impairment, restructuring, and other special charges$316.1 $131.2 $575.6 Severance costs recognized during the years ended December 31, 2020 and 2019 were incurred as a result of actions taken worldwide to reduce our cost structure. During the year ended December 31, 2021, we recognized $128.0 million of intangible asset impairment as a result of the decision by Bayer AG to discontinue the development of a Phase I molecule related to a contract-based intangible asset from our acquisition of Loxo. Additionally, we recognized $108.1 million of intangible asset impairment from the sale of the rights to Qbrexza, as well as acquisition and integration costs associated with the acquisition of Prevail. Asset impairment and other special charges recognized during the year ended December 31, 2019 resulted primarily from $400.7 million of other special charges related to the acquisition of Loxo, substantially all of which is associated with the accelerated vesting of Loxo employee equity awards. Note 6: InventoriesWe use the last-in, first-out (LIFO) method for the majority of our inventories located in the continental U.S. Other inventories are valued by the first-in, first-out (FIFO) method. FIFO cost approximates current replacement cost. Inventories measured using LIFO must be valued at the lower of cost or market. Inventories measured using FIFO must be valued at the lower of cost or net realizable value. Inventories at December 31 consisted of the following:20212020Finished products$761.9 $758.9 Work in process2,372.7 2,535.4 Raw materials and supplies717.2 651.2 Total (approximates replacement cost)3,851.8 3,945.5 Increase to LIFO cost34.2 34.8 Inventories$3,886.0 $3,980.3 Inventories valued under the LIFO method comprised $1.36 billion and $1.21 billion of total inventories at December 31, 2021 and 2020, respectively.We recognized a net inventory impairment charge related to our COVID-19 antibodies of $339.7 million during the year ended December 31, 2021 in cost of sales in our consolidated statements of operations. As part of our response to the COVID-19 pandemic, and at the request of the U.S. and international governments, we invested in large-scale manufacturing of COVID-19 antibodies at risk, in order to ensure rapid access to patients around the world. As the COVID-19 pandemic evolved during 2021, we incurred a net inventory impairment charge primarily due to the combination of changes to current and forecasted demand from U.S. and international governments, including changes to our agreement with the U.S. government, and near-term expiry dates of COVID-19 antibodies. 74Note 7: Financial InstrumentsFinancial instruments that potentially subject us to credit risk consist principally of trade receivables and interest-bearing investments. Wholesale distributors of life-science products account for a substantial portion of our trade receivables; collateral is generally not required. We seek to mitigate the risk associated with this concentration through our ongoing credit-review procedures and insurance. A large portion of our cash is held by a few major financial institutions. We monitor our exposures with these institutions and do not expect any of these institutions to fail to meet their obligations. In accordance with documented corporate risk-management policies, we monitor the amount of credit exposure to any one financial institution or corporate issuer. We are exposed to credit-related losses in the event of nonperformance by counterparties to risk-management instruments but do not expect any counterparties to fail to meet their obligations given their high credit ratings.We consider all highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. The cost of these investments approximates fair value.Our equity investments are accounted for using three different methods depending on the type of equity investment:•Investments in companies over which we have significant influence but not a controlling interest are accounted for using the equity method, with our share of earnings or losses reported in other-net, (income) expense. •For equity investments that do not have readily determinable fair values, we measure these investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Any change in recorded value is recorded in other-net, (income) expense. •Our public equity investments are measured and carried at fair value. Any change in fair value is recognized in other-net, (income) expense. We review equity investments other than public equity investments for indications of impairment and observable price changes on a regular basis.Our derivative activities are initiated within the guidelines of documented corporate risk-management policies and are intended to offset losses and gains on the assets, liabilities, and transactions being hedged. Management reviews the correlation and effectiveness of our derivatives on a quarterly basis.For derivative instruments that are designated and qualify as fair value hedges, the derivative instrument is marked to market with gains and losses recognized currently in income to offset the respective losses and gains recognized on the underlying exposure. For derivative instruments that are designated and qualify as cash flow hedges, gains and losses are reported as a component of accumulated other comprehensive loss and reclassified into earnings in the same period the hedged transaction affects earnings. For derivative and non-derivative instruments that are designated and qualify as net investment hedges, the foreign currency translation gains or losses due to spot rate fluctuations are reported as a component of accumulated other comprehensive loss. Derivative contracts that are not designated as hedging instruments are recorded at fair value with the gain or loss recognized in earnings during the period of change.We may enter into foreign currency forward or option contracts to reduce the effect of fluctuating currency exchange rates (principally the euro, British pound, and Japanese yen). Foreign currency derivatives used for hedging are put in place using the same or like currencies and duration as the underlying exposures. Forward and option contracts are principally used to manage exposures arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. These contracts are recorded at fair value with the gain or loss recognized in other–net, (income) expense. We may enter into foreign currency forward and option contracts and currency swaps as fair value hedges of firm commitments. Forward contracts generally have maturities not exceeding 12 months. At December 31, 2021, we had outstanding foreign currency forward commitments to purchase 4.43 billion U.S. dollars and sell 3.92 billion euro; commitments to purchase 3.84 billion euro and sell 4.37 billion U.S. dollars; commitments to purchase 159.2 million U.S. dollars and sell 18.26 billion Japanese yen, and commitments to purchase 223.0 million British pounds and sell 296.0 million U.S. dollars, which all have settlement dates within 180 days.75Foreign currency exchange risk is also managed through the use of foreign currency debt and cross-currency interest rate swaps. Our foreign currency-denominated notes had carrying amounts of $7.90 billion and $6.02 billion as of December 31, 2021 and 2020, respectively, of which $5.79 billion and $4.50 billion have been designated as, and are effective as, economic hedges of net investments in certain of our foreign operations as of December 31, 2021 and 2020, respectively. At December 31, 2021, we had outstanding cross currency swaps with notional amounts of $1.02 billion swapping U.S. dollars to euro and $1.00 billion swapping Swiss francs to U.S. dollars which have settlement dates ranging through 2028. Our cross-currency interest rate swaps, for which a majority convert a portion of our U.S. dollar-denominated fixed rate debt to foreign-denominated fixed rate debt, have also been designated as, and are effective as, economic hedges of net investments.In the normal course of business, our operations are exposed to fluctuations in interest rates which can vary the costs of financing, investing, and operating. We seek to address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of controlling these risks is to limit the impact of fluctuations in interest rates on earnings. Our primary interest-rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest-rate exposures, we strive to achieve an acceptable balance between fixed- and floating-rate debt and investment positions and may enter into interest rate swaps or collars to help maintain that balance. Interest rate swaps or collars that convert our fixed-rate debt to a floating rate are designated as fair value hedges of the underlying instruments. Interest rate swaps or collars that convert floating-rate debt to a fixed rate are designated as cash flow hedges. Interest expense on the debt is adjusted to include the payments made or received under the swap agreements. Cash proceeds from or payments to counterparties resulting from the termination of interest rate swaps are classified as operating activities in our consolidated statements of cash flows. At December 31, 2021, substantially all of our total long-term debt is at a fixed rate. We have converted approximately 13 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps.We also may enter into forward-starting interest rate swaps, which we designate as cash flow hedges, as part of any anticipated future debt issuances in order to reduce the risk of cash flow volatility from future changes in interest rates. The change in fair value of these instruments is recorded as part of other comprehensive income (loss) and, upon completion of a debt issuance and termination of the swap, is amortized to interest expense over the life of the underlying debt. As of December 31, 2021, the total notional amounts of forward-starting interest rate contracts in designated cash flow hedging instruments were $1.75 billion, which have settlement dates ranging between 2023 and 2025.The Effect of Risk Management Instruments on the Consolidated Statements of OperationsThe following effects of risk-management instruments were recognized in other–net, (income) expense:202120202019Fair value hedges:Effect from hedged fixed-rate debt$(78.5)$86.9 $112.1 Effect from interest rate contracts78.5 (86.9)(112.1)Cash flow hedges:Effective portion of losses on interest rate contracts reclassified from accumulated other comprehensive loss16.6 16.4 15.9 Cross-currency interest rate swaps41.8 (102.4)(17.1)Net (gains) losses on foreign currency exchange contracts not designated as hedging instruments204.6 (123.7)61.9 Total $263.0 $(209.7)$60.7 During the years ended December 31, 2021, 2020, and 2019, the amortization of losses related to the portion of our risk management hedging instruments, fair value hedges, and cash flow hedges that was excluded from the assessment of effectiveness was not material. 76The Effect of Risk-Management Instruments on Other Comprehensive Income (Loss)The effective portion of risk-management instruments that was recognized in other comprehensive income (loss) is as follows:202120202019Net investment hedges: Foreign currency-denominated notes$435.0 $(404.0)$40.1 Cross-currency interest rate swaps213.7 (207.9)47.4 Cash flow hedges: Forward-starting interest rate swaps97.6 (110.9)31.6 Cross-currency interest rate swaps42.3 (53.7)(8.3)During the next 12 months, we expect to reclassify $16.5 million of pretax net losses on cash flow hedges from accumulated other comprehensive loss to other–net, (income) expense. During the years ended December 31, 2021, 2020, and 2019, the amounts excluded from the assessment of hedge effectiveness recognized in other comprehensive income (loss) were not material. 77Fair Value of Financial InstrumentsThe following tables summarize certain fair value information at December 31 for assets and liabilities measured at fair value on a recurring basis, as well as the carrying amount and amortized cost of certain other investments: Fair Value Measurements Using DescriptionCarryingAmountCost (1)Quoted Prices in Active Markets for Identical Assets(Level 1)SignificantOtherObservableInputs(Level 2)SignificantUnobservableInputs(Level 3)FairValueDecember 31, 2021Cash equivalents$2,379.5 $2,379.5 $2,361.0 $18.5 $— $2,379.5 Short-term investments:U.S. government and agency securities$25.7 $25.6 $25.7 $— $— $25.7 Corporate debt securities43.7 43.7 — 43.7 — 43.7 Mortgage-backed securities0.2 0.2 — 0.2 — 0.2 Asset-backed securities6.2 6.2 — 6.2 — 6.2 Other securities14.3 14.3 — — 14.3 14.3 Short-term investments$90.1 Noncurrent investments:U.S. government and agency securities$137.0 $136.8 $137.0 $— $— $137.0 Corporate debt securities235.3 232.7 — 235.3 — 235.3 Mortgage-backed securities109.8 108.1 — 109.8 — 109.8 Asset-backed securities23.1 23.1 — 23.1 — 23.1 Other securities108.1 22.2 — — 108.1 108.1 Marketable equity securities1,279.7 487.0 1,279.7 — — 1,279.7 Equity investments without readily determinable fair values(2)548.1 Equity method investments(2)771.5 Noncurrent investments$3,212.6 December 31, 2020Cash equivalents$2,097.9 $2,097.9 $2,097.9 $— $— $2,097.9 Short-term investments:U.S. government and agency securities$9.9 $9.9 $9.9 $— $— $9.9 Corporate debt securities2.8 2.8 — 2.8 — 2.8 Asset-backed securities1.2 1.2 — 1.2 — 1.2 Other securities10.3 10.3 — — 10.3 10.3 Short-term investments$24.2 Noncurrent investments:U.S. government and agency securities$78.7 $74.3 $78.7 $— $— $78.7 Corporate debt securities137.0 126.8 — 137.0 — 137.0 Mortgage-backed securities106.4 101.4 — 106.4 — 106.4 Asset-backed securities24.3 23.7 — 24.3 — 24.3 Other securities110.5 31.8 — — 110.5 110.5 Marketable equity securities1,664.2 311.6 1,664.2 — — 1,664.2 Equity investments without readily determinable fair values(2)373.9 Equity method investments(2)471.8 Noncurrent investments$2,966.8 (1) For available-for-sale debt securities, amounts disclosed represent the securities' amortized cost.(2) Fair value disclosures are not applicable for equity method investments and investments accounted for under the measurement alternative for equity investments.78 Fair Value Measurements Using DescriptionCarryingAmountQuoted Prices in Active Markets for Identical Assets(Level 1)SignificantOtherObservableInputs(Level 2)SignificantUnobservableInputs(Level 3)FairValueLong-term debt, including current portionDecember 31, 2021$(16,884.7)$— $(18,157.7)$— $(18,157.7)December 31, 2020(16,595.3)— (19,038.9)— (19,038.9)79 Fair Value Measurements Using DescriptionCarryingAmountQuoted Prices in Active Markets for Identical Assets(Level 1)SignificantOtherObservableInputs(Level 2)SignificantUnobservableInputs(Level 3)FairValueDecember 31, 2021Risk-management instrumentsInterest rate contracts designated as fair value hedges:Other receivables$4.8 $— $4.8 $— $4.8 Other noncurrent assets78.3 — 78.3 — 78.3 Other noncurrent liabilities(7.6)— (7.6)— (7.6)Interest rate contracts designated as cash flow hedges:Other noncurrent assets49.2 — 49.2 — 49.2 Other noncurrent liabilities(31.7)— (31.7)— (31.7)Cross-currency interest rate contracts designated as net investment hedges:Other noncurrent assets31.3 — 31.3 — 31.3 Other current liabilities(1.2)— (1.2)— (1.2)Cross-currency interest rate contracts designated as cash flow hedges:Other noncurrent assets33.2 — 33.2 — 33.2 Other noncurrent liabilities(1.3)— (1.3)— (1.3)Foreign exchange contracts not designated as hedging instruments:Other receivables9.9 — 9.9 — 9.9 Other current liabilities(35.3)— (35.3)— (35.3)Contingent consideration liabilities:Other noncurrent liabilities(70.5)— — (70.5)(70.5)December 31, 2020Risk-management instrumentsInterest rate contracts designated as fair value hedges:Other noncurrent assets158.9 — 158.9 — 158.9 Interest rate contracts designated as cash flow hedges:Other noncurrent assets38.1 — 38.1 — 38.1 Other noncurrent liabilities(97.8)— (97.8)— (97.8)Cross-currency interest rate contracts designated as net investment hedges: Other current liabilities(92.6)— (92.6)— (92.6)Other noncurrent liabilities(97.2)— (97.2)— (97.2)Cross-currency interest rate contracts designated as cash flow hedges:Other noncurrent assets34.4 — 34.4 — 34.4 Other noncurrent liabilities(2.9)— (2.9)— (2.9)Foreign exchange contracts not designated as hedging instruments:Other receivables41.1 — 41.1 — 41.1 Other current liabilities(15.2)— (15.2)— (15.2)80Risk-management instruments above are disclosed on a gross basis. There are various rights of setoff associated with certain of the risk-management instruments above that are subject to enforceable master netting arrangements or similar agreements. Although various rights of setoff and master netting arrangements or similar agreements may exist with the individual counterparties to the risk-management instruments above, individually, these financial rights are not material.We determine our Level 1 and Level 2 fair value measurements based on a market approach using quoted market values, significant other observable inputs for identical or comparable assets or liabilities, or discounted cash flow analyses. Level 3 fair value measurements for other investment securities are determined using unobservable inputs, including the investments' cost adjusted for impairments and price changes from orderly transactions. Fair values are not readily available for certain equity investments measured under the measurement alternative. As of December 31, 2021, we had approximately $828 million of unfunded commitments to invest in venture capital funds, which we anticipate will be invested over a period of up to 10 years.Contingent consideration liability relates to our liability arising in connection with the CVR issued as a result of the Prevail acquisition. The fair value of the CVR liability was estimated using a discounted cash flow analysis and Level 3 inputs, including projections representative of a market participant's view of the expected cash payment associated with the first potential regulatory approval of a Prevail compound in the applicable countries based on probabilities of technical success, timing of the potential approval events for the compounds, and an estimated discount rate. See Note 3 for additional information related to the CVR arrangement. The table below summarizes the contractual maturities of our investments in debt securities measured at fair value as of December 31, 2021: Maturities by PeriodTotalLess Than1 Year1-5 Years6-10 YearsMore Than 10 YearsFair value of debt securities$581.0 $75.9 $216.5 $126.4 $162.2 The net gains recognized in our consolidated statements of operations for equity securities were $176.9 million, $1.44 billion, and $401.2 million for the years ended December 31, 2021, 2020, and 2019, respectively. The net gains/losses recognized for the years ended December 31, 2021, 2020, and 2019 on equity securities sold during the respective periods were not material.We adjust our equity investments without readily determinable fair values based upon changes in the equity instruments' values resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Downward adjustments resulting from an impairment are recorded based upon impairment considerations, including the financial condition and near term prospects of the issuer, general market conditions, and industry specific factors. Adjustments recorded for the years ended December 31, 2021, 2020, and 2019 were not material.A summary of the amount of unrealized gains and losses in accumulated other comprehensive loss and the fair value of available-for-sale securities in an unrealized gain or loss position follows:20212020Unrealized gross gains$9.7 $20.9 Unrealized gross losses5.2 0.5 Fair value of securities in an unrealized gain position250.7 348.9 Fair value of securities in an unrealized loss position290.2 11.4 We periodically assess our investment in available-for-sale securities for impairment losses and credit losses. The amount of credit losses are determined by comparing the difference between the present value of future cash flows expected to be collected on these securities and the amortized cost. Factors considered in assessing credit losses include the position in the capital structure, vintage and amount of collateral, delinquency rates, current credit support, and geographic concentration. Impairment and credit losses related to available-for-sale securities were not material for the years ended December 31, 2021, 2020, and 2019.81As of December 31, 2021, the available-for-sale securities in an unrealized loss position include primarily fixed-rate debt securities of varying maturities, which are sensitive to changes in the yield curve and other market conditions. Approximately 97 percent of the fixed-rate debt securities in a loss position are investment-grade debt securities. As of December 31, 2021, we do not intend to sell, and it is not more likely than not that we will be required to sell, the securities in a loss position before the market values recover or the underlying cash flows have been received, and there is no indication of default on interest or principal payments for any of our debt securities.Activity related to our available-for-sale securities was as follows:202120202019Proceeds from sales$174.7 $264.8 $431.6 Realized gross gains on sales2.8 4.5 4.9 Realized gross losses on sales1.7 8.2 3.0 Realized gains and losses on sales of available-for-sale investments are computed based upon specific identification of the initial cost adjusted for any other-than-temporary declines in fair value that were recorded in earnings.Accounts Receivable Factoring ArrangementsWe have entered into accounts receivable factoring agreements with financial institutions to sell certain of our non-U.S. accounts receivable. These transactions are accounted for as sales and result in a reduction in accounts receivable because the agreements transfer effective control over and risk related to the receivables to the buyers. Our factoring agreements do not allow for recourse in the event of uncollectibility, and we do not retain any interest in the underlying accounts receivable once sold. We derecognized $550.5 million and $754.9 million of accounts receivable as of December 31, 2021 and 2020, respectively, under these factoring arrangements. The costs of factoring such accounts receivable on our consolidated results of operations for the years ended December 31, 2021, 2020, and 2019 were not material.Note 8: Goodwill and Other IntangiblesGoodwillGoodwill results from excess consideration in a business combination over the fair value of identifiable net assets acquired. Goodwill is not amortized but is reviewed for impairment at least annually, or more frequently if impairment indicators are present, by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. If we conclude it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value to its carrying value is performed to determine the amount of any impairment. The changes in goodwill during 2021 and 2020 were primarily related to our acquisitions of Prevail and Dermira, respectively. See Note 3 for additional information.No impairments occurred with respect to the carrying value of goodwill for the years ended December 31, 2021, 2020, and 2019.82Other IntangiblesThe components of intangible assets other than goodwill at December 31 were as follows: 20212020DescriptionCarryingAmount, GrossAccumulatedAmortizationCarryingAmount, NetCarryingAmount, GrossAccumulatedAmortizationCarryingAmount, NetFinite-lived intangible assets:Marketed products$7,987.2 $(2,229.2)$5,758.0 $7,984.0 $(1,659.5)$6,324.5 Other69.4 (60.5)8.9 92.8 (68.3)24.5 Total finite-lived intangible assets8,056.6 (2,289.7)5,766.9 8,076.8 (1,727.8)6,349.0 Indefinite-lived intangible assets:Acquired IPR&D1,925.0 — 1,925.0 1,101.0 — 1,101.0 Other intangibles$9,981.6 $(2,289.7)$7,691.9 $9,177.8 $(1,727.8)$7,450.0 Marketed products consist of the amortized cost of the rights to assets acquired in business combinations and approved for marketing in a significant global jurisdiction (U.S., Europe, and Japan) and capitalized milestone payments. For transactions other than a business combination, we capitalize milestone payments incurred at or after the product has obtained regulatory approval for marketing.Other finite-lived intangible assets consist primarily of the amortized cost of licensed platform technologies that have alternative future uses in research and development, manufacturing technologies, and customer relationships from business combinations. Acquired IPR&D consists of the fair values of acquired IPR&D projects acquired in business combination, adjusted for subsequent impairments, if any. The costs of acquired IPR&D projects acquired directly in a transaction other than a business combination are capitalized as other intangible assets if the projects have an alternative future use; otherwise, they are expensed immediately. See Note 3 for acquired IPR&D projects that had no alternative future use. Several methods may be used to determine the estimated fair value of other intangibles acquired in a business combination. We utilize the "income method," which is a Level 3 fair value measurement and applies a probability weighting that considers the risk of development and commercialization to the estimated future net cash flows that are derived from projected revenues and estimated costs. These projections are based on factors such as relevant market size, patent protection, historical pricing of similar products, analyst expectations, and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. This analysis is performed for each asset independently. The acquired IPR&D assets are treated as indefinite-lived intangible assets until completion or abandonment of the projects, at which time the assets are tested for impairment and amortized over the remaining useful life or written off, as appropriate. The change in marketed products in 2021 primarily related to the sale of rights to Qbrexza in 2021 as well as the impairment of a Phase I molecule related to a contract-based intangible. See Note 5 for additional information. These decreases were more than offset by the recognition of several milestones related to the COVID-19 therapies that occurred in 2021. The increase in the acquired IPR&D in 2021 is due to the acquisition of Prevail. See Note 3 for additional information regarding intangible assets acquired in a recent business combination and Note 4 for additional information regarding capitalized milestone payments. Indefinite-lived intangible assets are reviewed for impairment at least annually, or more frequently if impairment indicators are present, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. If we conclude it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the intangible asset to its carrying value is performed to determine the amount of any impairment. Finite-lived intangible assets are reviewed for impairment when an indicator of impairment is present. When required, a comparison of fair value to the carrying amount of assets is performed to determine the amount of any impairment. When determining the fair value of indefinite-lived acquired IPR&D as well as the fair value of finite-lived intangible assets for impairment testing purposes, we utilize the "income method" discussed above. 83Intangible assets with finite lives are capitalized and are amortized primarily to cost of sales over their estimated useful lives, ranging from one to 20 years. As of December 31, 2021, the remaining weighted-average amortization period for finite-lived intangible assets was approximately 14 years. Amortization expense related to finite-lived intangible assets was as follows:202120202019Amortization expense$628.8 $428.2 $225.8 The estimated amortization expense for each of the next five years associated with our finite-lived intangible assets as of December 31, 2021 is as follows:20222023202420252026Estimated amortization expense$570.9 $483.5 $433.7 $417.1 $408.8 Note 9: Property and EquipmentProperty and equipment is stated on the basis of cost. Provisions for depreciation of buildings and equipment are computed generally by the straight-line method at rates based on their estimated useful lives (12 to 50 years for buildings and three to 25 years for equipment). We review the carrying value of long-lived assets for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Impairment is determined by comparing projected undiscounted cash flows to be generated by the asset to its carrying value. If an impairment is identified, a loss is recorded equal to the excess of the asset's net book value over its fair value, and the cost basis is adjusted.At December 31, property and equipment consisted of the following:20212020Land$258.7 $226.8 Buildings7,588.1 7,326.1 Equipment8,937.2 8,560.9 Construction in progress2,177.8 2,138.8 18,961.8 18,252.6 Less accumulated depreciation(9,976.7)(9,570.7)Property and equipment, net$8,985.1 $8,681.9 84Depreciation expense related to property and equipment was as follows:202120202019Depreciation expense$787.0 $765.2 $814.7 Capitalized interest costs were not material for the years ended December 31, 2021, 2020, and 2019. The following table summarizes long-lived assets by geographical area:20212020Long-lived assets(1):U.S. and Puerto Rico$6,620.0 $6,113.6 Ireland1,702.3 1,786.9 Other foreign countries1,691.0 1,747.7 Long-lived assets$10,013.3 $9,648.2 (1) Long-lived assets consist of property and equipment, net, operating lease assets, and certain other noncurrent assets.Note 10: LeasesWe determine if an arrangement is a lease at inception. We have leases with terms up to 14 years primarily for corporate offices, research and development facilities, vehicles, and equipment, including some of which have options to extend and/or early-terminate the leases. We determine the lease term by assuming the exercise of any renewal and/or early-termination options that are reasonably assured.Operating lease right-of-use assets are presented as other noncurrent assets in our consolidated balance sheets, and the current and long-term portions of operating lease liabilities are included in other current liabilities and other noncurrent liabilities, respectively, in our consolidated balance sheets. Short-term leases, which are deemed at inception to have a lease term of 12 months or less, are not recorded on the consolidated balance sheets. Operating lease assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease expense for operating lease assets, which is recognized on a straight-line basis over the lease term, was $159.4 million, $154.6 million, and $172.8 million during the years ended December 31, 2021, 2020, and 2019, respectively. Variable lease payments, which represent non-lease components such as maintenance, insurance and taxes, and which vary due to changes in facts or circumstances occurring after the commencement date other than the passage of time, are expensed in the period in which the payment obligation is incurred and were not material during the years ended December 31, 2021, 2020, and 2019. Short-term lease expense was not material during the years ended December 31, 2021, 2020, and 2019.85Supplemental balance sheet information related to operating leases as of December 31, 2021 and 2020 was as follows:20212020Weighted-average remaining lease term7 years7 yearsWeighted-average discount rate3.0 %3.3 %Supplemental cash flow information related to operating leases during the years ended December 31, 2021, 2020, and 2019 was as follows:202120202019Operating cash flows from operating leases$156.7 $160.9 $153.6 Right-of-use assets obtained in exchange for new operating lease liabilities163.5 136.781.2The annual minimum lease payments of our operating lease liabilities as of December 31, 2021 were as follows:2022$148.4 2023117.6 202495.4 202579.7 202664.5 After 2026270.2 Total lease payments775.8 Less imputed interest90.1 Total$685.7 Finance leases are included in property and equipment, short-term borrowings and current maturities of long-term debt, and long-term debt in our consolidated balance sheets. Finance leases are not material to our consolidated financial statements.Note 11: BorrowingsDebt at December 31 consisted of the following:20212020Long-term notes $16,741.2 $16,348.7 Other long-term debt10.8 14.8 Unamortized debt issuance costs(84.2)(89.1)Fair value adjustment on hedged long-term notes216.9 320.9 Total debt16,884.7 16,595.3 Less current portion(1,538.3)(8.7)Long-term debt$15,346.4 $16,586.6 86The following table summarizes long-term notes at December 31:202120202.35% notes due 2022$750.0 $750.0 3.00% notes due 202299.2 99.2 1.00% euro denominated notes due 2022678.2 737.9 0.15% Swiss franc denominated notes due 2024654.7 679.7 7.125% notes due 2025217.5 229.7 2.75% notes due 2025560.6 560.6 1.625% euro denominated notes due 2026847.7 922.4 5.5% notes due 2027364.3 377.5 3.1% notes due 2027401.5 401.5 0.45% Swiss franc denominated notes due 2028436.4 453.2 3.375% notes due 2029930.6 1,150.0 0.42% Japanese yen denominated notes due 2029199.0 222.4 2.125% euro denominated notes due 2030847.7 922.4 0.625% euro denominated notes due 2031678.2 737.9 0.50% euro denominated notes due 2033678.2 — 0.56% Japanese yen denominated notes due 203480.5 90.0 6.77% notes due 2036158.6 174.4 5.55% notes due 2037444.7 476.2 5.95% notes due 2037266.8 284.1 3.875% notes due 2039240.3 360.7 1.625% British pound denominated notes due 2043337.1 — 4.65% notes due 204438.3 43.0 3.7% notes due 2045386.8 412.5 3.95% notes due 2047347.0 436.1 3.95% notes due 2049958.2 1,500.0 1.70% euro denominated notes due 20491,130.3 1,229.9 0.97% Japanese yen denominated notes due 204966.3 74.1 2.25% notes due 20501,250.0 1,250.0 1.125% euro denominated notes due 2051565.2 — 4.15% notes due 2059591.3 1,000.0 2.50% notes due 2060850.0 850.0 1.375% euro denominated notes due 2061791.2 — Unamortized note discounts(105.2)(76.7)Total long-term notes$16,741.2 $16,348.7 The weighted-average effective borrowing rate for each issuance of the long term-notes approximates the stated interest rate. At December 31, 2021, we had a total of $5.26 billion of unused committed bank credit facilities, which consisted primarily of a $3.00 billion credit facility that expires in December 2026 and a $2.00 billion 364-day facility that expires in November 2022, both of which are available to support our commercial paper program. We have not drawn against the $3.00 billion and $2.00 billion facilities as of December 31, 2021. Of the remaining committed bank credit facilities, the outstanding balances as of December 31, 2021 and 2020 were not material. Compensating balances and commitment fees are not material, and there are no conditions that are probable of occurring under which the lines may be withdrawn. 87In September 2021, we issued euro-denominated notes consisting of €600.0 million of 0.50 percent fixed-rate notes due in September 2033, with interest to be paid annually. The net proceeds from the offering have been, and will continue to be, used to fund, in whole or in part, eligible projects designed to advance one or more of our environmental, social, and governance objectives.In September 2021, we issued euro-denominated notes consisting of €500.0 million of 1.125 percent fixed-rate notes due in September 2051 and €700.0 million of 1.375 percent fixed-rate notes due in September 2061, with interest to be paid annually, and British pound-denominated notes consisting of £250.0 million of 1.625 percent fixed-rate notes due in September 2043, with interest to be paid annually. We paid $1.91 billion of the net cash proceeds from the offering to purchase and redeem certain higher interest rate U.S. dollar-denominated notes with an aggregate principal amount of $1.50 billion, resulting in a debt extinguishment loss of $405.2 million. This loss was included in other-net, (income) expense in our consolidated statement of operations for the year ended December 31, 2021. The $1.50 billion principal amount of higher interest rate U.S. dollar-denominated notes that were redeemed primarily included $541.8 million of 3.95 percent notes due 2049, $408.7 million of 4.15 percent notes due 2059, and $219.4 million of 3.375 percent notes due 2029. We used the remaining net proceeds from the offering to prefund certain 2022 debt maturities and for general corporate purposes. In May 2020, we issued $1.00 billion of 2.25 percent fixed-rate notes due in May 2050, with interest to be paid semi-annually. We used the net cash proceeds from the offering of $988.6 million for general corporate purposes, including the repayment of outstanding commercial paper. In August 2020, we issued $850.0 million of 2.50 percent fixed-rate notes due in September 2060 and an additional $250.0 million of our 2.25 percent fixed-rate notes due in May 2050, with interest to be paid semi-annually. We used the net cash proceeds from the offering of $1.07 billion for general corporate purposes, including the repayment of outstanding commercial paper. In February 2019, we issued $1.15 billion of 3.375 percent fixed-rate notes due in March 2029, $850.0 million of 3.875 percent fixed-rate notes due in March 2039, $1.50 billion of 3.95 percent fixed-rate notes due in March 2049, and $1.00 billion of 4.15 percent fixed-rate notes due in March 2059, with interest to be paid semi-annually. We used the net cash proceeds of $4.45 billion from the offering to repay commercial paper that was issued in connection with the acquisition of Loxo and for general corporate purposes.In November 2019, we issued euro-denominated notes consisting of €600.0 million of 0.625 percent fixed-notes due November 2031 and €1.00 billion of 1.70 percent fixed-rate notes due in November 2049 with interest to be paid annually. We paid $2.27 billion, comprised of $1.75 billion of net cash proceeds from the offering and proceeds from commercial paper, to purchase and redeem certain higher interest rate U.S. dollar denominated notes with an aggregate principal amount of $2.00 billion and a net carrying value of $2.01 billion, resulting in a debt extinguishment loss of $252.5 million. This loss was included in other-net, (income) expense in our consolidated statement of operations during the year ended December 31, 2019.In November 2019, we issued Japanese Yen-denominated notes consisting of ¥22.92 billion of 0.42 percent fixed-rate notes due in November 2029, ¥9.28 billion of 0.56 percent fixed-rate notes due in November 2034, and ¥7.64 billion of 0.97 percent fixed-rate notes due in November 2049, with interest to be paid semi-annually. We used the net cash proceeds from the offering of $356.6 million for general corporate purposes, including the repayment of outstanding commercial paper.The aggregate amounts of maturities on long-term debt for the next five years are as follows:20222023202420252026Maturities on long-term debt$1,531.5 $3.3 $657.1 $778.9 $847.9 We have converted approximately 13 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps. The weighted-average effective borrowing rates based on long-term debt obligations and interest rates at December 31, 2021 and 2020, including the effects of interest rate swaps for hedged debt obligations, were 2.27 percent and 2.61 percent, respectively.88The aggregate amount of cash payments for interest on borrowings, net of capitalized interest, are as follows:202120202019Cash payments for interest on borrowings$338.0 $345.8 $305.5 In accordance with the requirements of derivatives and hedging guidance, the portion of our fixed-rate debt obligations that is hedged as a fair value hedge is reflected in the consolidated balance sheets as an amount equal to the sum of the debt's carrying value plus the fair value adjustment representing changes in fair value of the hedged debt attributable to movements in market interest rates subsequent to the inception of the hedge.Note 12: Stock-Based CompensationOur stock-based compensation expense consists of performance awards (PAs), shareholder value awards (SVAs), relative value awards (RVAs), and restricted stock units (RSUs). We recognize the fair value of stock-based compensation as expense over the requisite service period of the individual grantees, which generally equals the vesting period. We provide newly issued shares of our common stock and treasury stock to satisfy the issuance of PA, SVA, RVA, and RSU shares.Stock-based compensation expense and the related tax benefits were as follows:202120202019Stock-based compensation expense$342.8 $308.1 $306.8 Tax benefit72.0 64.7 64.4 At December 31, 2021, stock-based compensation awards may be granted under the 2002 Lilly Stock Plan for not more than 50.6 million additional shares. Performance Award ProgramPAs are granted to officers and management and are payable in shares of our common stock. The number of PA shares actually issued, if any, varies depending on the achievement of certain pre-established earnings-per-share targets over a two-year period. PA shares are accounted for at fair value based upon the closing stock price on the date of grant and fully vest at the end of the measurement period. The fair values of PAs granted for the years ended December 31, 2021, 2020, and 2019 were $198.57, $137.33, and $112.09, respectively. The number of shares ultimately issued for the PA program is dependent upon the EPS achieved during the vesting period. Pursuant to this program, approximately 0.7 million shares, 1.1 million shares, and 1.2 million shares were issued during the years ended December 31, 2021, 2020, and 2019, respectively. Approximately 0.7 million shares are expected to be issued in 2022. As of December 31, 2021, the total remaining unrecognized compensation cost related to nonvested PAs was $66.1 million, which will be amortized over the weighted-average remaining requisite service period of 12 months.89Shareholder Value Award ProgramSVAs are granted to officers and management and are payable in shares of our common stock. The number of shares actually issued, if any, varies depending on our stock price at the end of the three-year vesting period compared to pre-established target stock prices. We measure the fair value of the SVA unit on the grant date using a Monte Carlo simulation model. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model are based on implied volatilities from traded options on our stock, historical volatility of our stock price, and other factors. Similarly, the dividend yield is based on historical experience and our estimate of future dividend yields. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The weighted-average fair values of the SVA units granted during the years ended December 31, 2021, 2020, and 2019 were $230.19, $139.14, and $95.01, respectively, determined using the following assumptions:(Percents)202120202019Expected dividend yield2.50 %2.50 %2.50 %Risk-free interest rate0.19 1.38 2.46 Volatility31.42 20.90 21.00 Pursuant to this program, approximately 1.0 million shares, 0.8 million shares, and 1.0 million shares were issued during the years ended December 31, 2021, 2020, and 2019, respectively. Approximately 0.5 million shares are expected to be issued in 2022. As of December 31, 2021, the total remaining unrecognized compensation cost related to nonvested SVAs was $47.0 million, which will be amortized over the weighted-average remaining requisite service period of 21 months.Relative Value Award ProgramBeginning in 2020, we granted RVAs to officers and management that are payable in shares of our common stock. The number of shares actually issued, if any, varies depending on the growth of our stock price at the end of the three-year vesting period compared to our peers. We measure the fair value of the RVA unit on the grant date using a Monte Carlo simulation model. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model are based on implied volatilities from traded options on our stock, historical volatility of our stock price and our peers' stock price, and other factors. Similarly, the dividend yield is based on historical experience and our estimate of future dividend yields. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The weighted-average fair value of the RVA units granted during the years ended December 31, 2021 and 2020 were $286.71 and $179.90, respectively, determined using the following assumptions:(Percents)20212020Expected dividend yield2.50 %2.50 %Risk-free interest rate0.19 1.38 Volatility30.95 19.89 As of December 31, 2021, the total remaining unrecognized compensation cost related to nonvested RVAs was $18.6 million, which will be amortized over the weighted-average remaining requisite service period of 21 months.90Restricted Stock UnitsRSUs are granted to certain employees and are payable in shares of our common stock. RSU shares are accounted for at fair value based upon the closing stock price on the date of grant. The corresponding expense is amortized over the vesting period, typically three years. The fair values of RSU awards granted during the years ended December 31, 2021, 2020, and 2019 were $196.30, $135.42, and $108.43, respectively. The number of shares ultimately issued for the RSU program remains constant with the exception of forfeitures. Pursuant to this program, 0.7 million, 1.1 million, and 1.5 million shares were granted and approximately 0.6 million, 0.6 million, and 0.8 million shares were issued during the years ended December 31, 2021, 2020, and 2019, respectively. Approximately 0.9 million shares are expected to be issued in 2022. As of December 31, 2021, the total remaining unrecognized compensation cost related to nonvested RSUs was $161.4 million, which will be amortized over the weighted-average remaining requisite service period of 25 months.Note 13: Shareholders' EquityIn 2021, 2020, and 2019, we repurchased $1.25 billion, $500.0 million, and $4.40 billion, respectively, of shares associated with our share repurchase programs. In 2021, we repurchased $1.00 billion of shares, which completed our $8.00 billion share repurchase program authorized in June 2018. Additionally, our board authorized a $5.00 billion share repurchase program in May 2021. In 2021, we repurchased $250.0 million of shares under the $5.00 billion share repurchase program. As of December 31, 2021, we had $4.75 billion remaining under the $5.00 billion share repurchase program. We have 5.0 million authorized shares of preferred stock. As of December 31, 2021 and 2020, no preferred stock was issued.We have an employee benefit trust that held 50.0 million shares of our common stock at both December 31, 2021 and 2020, to provide a source of funds to assist us in meeting our obligations under various employee benefit plans. The cost basis of the shares held in the trust was $3.01 billion at both December 31, 2021 and 2020, and is shown as a reduction of shareholders' equity. Any dividend transactions between us and the trust are eliminated. Stock held by the trust is not considered outstanding in the computation of EPS. The assets of the trust were not used to fund any of our obligations under these employee benefit plans during the years ended December 31, 2021, 2020, and 2019.Note 14: Income TaxesDeferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. Deferred taxes related to global intangible low-taxed income (GILTI) are also recognized for the future tax effects of temporary differences.We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position, based on its technical merits, will be sustained upon examination by the taxing authority. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.91Following is the composition of income tax expense:202120202019Current:Federal(1)$938.5 $567.6 $280.2 Foreign466.0 650.4 299.8 State(28.4)(47.3)(14.4)Total current tax expense1,376.1 1,170.7 565.6 Deferred:Federal(977.5)(97.4)141.3 Foreign174.6 (16.6)(24.1)State0.6 (20.5)(54.8)Total deferred tax (benefit) expense(802.3)(134.5)62.4 Income taxes$573.8 $1,036.2 $628.0 (1) The 2021, 2020, and 2019 current tax expense includes $64.7 million, $144.4 million, and $153.1 million of tax benefit, respectively, from utilization of net operating loss and tax credit carryforwards. Significant components of our deferred tax assets and liabilities as of December 31 were as follows:20212020Deferred tax assets:Purchases of intangible assets$2,347.4 $2,560.6 Compensation and benefits634.7 1,045.6 Tax credit carryforwards and carrybacks463.7 523.5 Tax loss and other tax carryforwards and carrybacks645.4 488.3 Sales rebates and discounts832.3 461.3 Correlative tax adjustments560.8 404.2 Foreign tax redeterminations274.9 242.8 Operating lease liabilities150.0 150.7 Capitalized research and development275.1 135.2 Other477.9 605.8 Total gross deferred tax assets6,662.2 6,618.0 Valuation allowances(875.6)(816.3)Total deferred tax assets5,786.6 5,801.7 Deferred tax liabilities:Earnings of foreign subsidiaries(1,583.3)(1,905.3)Intangibles(1,516.1)(1,465.7)Inventories(596.4)(623.7)Prepaid employee benefits(560.6)(410.1)Property and equipment(338.7)(315.2)Financial instruments(303.0)(216.9)Operating lease assets(132.6)(134.3)Total deferred tax liabilities(5,030.7)(5,071.2)Deferred tax assets - net$755.9 $730.5 The deferred tax asset and related valuation allowance amounts for U.S. federal, international, and state net operating losses and tax credits shown above have been reduced for differences between financial reporting and tax return filings.92At December 31, 2021, based on filed tax returns we have tax credit carryforwards and carrybacks of $859.9 million available to reduce future income taxes; $148.8 million, if unused, will expire by 2026, and $21.5 million, if unused, will expire between 2030 and 2040. The remaining portion of the tax credit carryforwards is related to federal tax credits of $76.2 million, international tax credits of $115.3 million, and state tax credits of $498.1 million, all of which are fully reserved.At December 31, 2021, based on filed tax returns we had net operating losses and other carryforwards for international and U.S. federal income tax purposes of $2.21 billion: $832.6 million will expire by 2026; $818.2 million will expire between 2027 and 2041; and $561.5 million of the carryforwards will never expire. Net operating losses and other carryforwards for international and U.S. federal income tax purposes are partially reserved. Deferred tax assets related to state net operating losses and other carryforwards of $230.0 million are fully reserved as of December 31, 2021.Domestic and Puerto Rican companies contributed approximately 28 percent, 39 percent, and 44 percent for the years ended December 31, 2021, 2020, and 2019, respectively, to consolidated income before income taxes. We have a subsidiary operating in Puerto Rico under a tax incentive grant effective through the end of 2031.Substantially all of the unremitted earnings of our foreign subsidiaries are considered not to be indefinitely reinvested for continued use in our foreign operations. At December 31, 2021 and December 31, 2020, we accrued an immaterial amount of foreign withholding taxes and state income taxes that would be owed upon future distributions of unremitted earnings of our foreign subsidiaries that are not indefinitely reinvested. For the amount considered to be indefinitely reinvested, it is not practicable to determine the amount of the related deferred income tax liability due to the complexities in the tax laws and assumptions we would have to make.Cash payments of U.S. federal, state, and foreign income taxes, net of refunds, were as follows: 202120202019Cash payments of income taxes$1,598.8 $954.6 $1,180.5 In December 2017, the Tax Cuts and Job Act (2017 Tax Act) was signed into law. The 2017 Tax Act included significant changes to the U.S. corporate income tax system, including a one-time repatriation transition tax (also known as the 'Toll Tax') on unremitted foreign earnings. The 2017 Tax Act provided an election to taxpayers subject to the Toll Tax to make payments over an eight-year period beginning in 2018 through 2025. Having made this election, our future cash payments relating to the Toll Tax as of December 31, 2021 are as follows:TotalLess than 1 Year1-3 Years3-5 Years 2017 Tax Act Toll Tax$2,149.5 $253.7 $1,109.9 $785.9 We have additional noncurrent income tax payables of $2.02 billion unrelated to the Toll Tax; we cannot reasonably estimate the timing of future cash outflows associated with these liabilities. Following is a reconciliation of the consolidated income tax expense applying the U.S. federal statutory rate to income before income taxes to reported consolidated income tax expense: 202120202019Income tax at the U.S. federal statutory tax rate$1,292.6 $1,518.3 $1,105.8 Add (deduct):International operations, including Puerto Rico(1)(458.2)(297.2)(242.0)General business credits(100.5)(97.9)(108.8)Foreign-derived intangible income deduction(86.7)(71.5)(15.5)Other(73.4)(15.5)(111.5)Income taxes$573.8 $1,036.2 $628.0 (1) Includes the impact of Puerto Rico Excise Tax, GILTI tax, and other U.S. taxation of foreign income.93A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:202120202019Beginning balance at January 1$2,551.9 $2,108.6 $2,034.6 Additions based on tax positions related to the current year310.3 225.6 187.2 Additions for tax positions of prior years98.6 310.8 425.3 Reductions for tax positions of prior years(8.1)(52.4)(100.3)Settlements(38.5)(72.0)(260.5)Lapses of statutes of limitation(49.7)(41.7)(161.5)Changes related to the impact of foreign currency translation(66.2)73.0 (16.2)Ending balance at December 31$2,798.3 $2,551.9 $2,108.6 The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $1.70 billion and $1.67 billion at December 31, 2021 and 2020, respectively.We file U.S. federal, foreign, and various state and local income tax returns. We are no longer subject to U.S. federal income tax examination for years before 2016. In most major foreign and state jurisdictions, we are no longer subject to income tax examination for years before 2012.The U.S. examination of tax years 2016-2018 began in 2019 and remains ongoing; therefore, the resolution of this audit period will likely extend beyond the next 12 months. For tax years 2013-2015, all matters were effectively settled in 2019. As a result, our gross uncertain tax positions were reduced by approximately $200 million, we made a cash payment of approximately $125 million, and our consolidated results were benefited by an immaterial reduction in tax expense. We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized income tax (benefit) expense related to interest and penalties as follows:202120202019Income tax (benefit) expense$20.5 $34.0 $(26.4)At December 31, 2021 and 2020, our accruals for the payment of interest and penalties totaled $220.1 million and $196.7 million, respectively.94Note 15: Retirement BenefitsWe use a measurement date of December 31 to develop the change in benefit obligation, change in plan assets, funded status, and amounts recognized in the consolidated balance sheets at December 31 for our defined benefit pension and retiree health benefit plans, which were as follows: Defined BenefitPension PlansRetiree HealthBenefit Plans2021202020212020Change in benefit obligation:Benefit obligation at beginning of year$18,225.5 $16,251.0 $1,753.7 $1,601.4 Service cost369.2 325.5 49.2 40.8 Interest cost337.8 425.8 32.5 43.7 Actuarial (gain) loss(564.3)1,563.1 (86.1)142.1 Benefits paid(630.1)(587.2)(79.3)(75.1)Curtailment loss— 2.2 — — Foreign currency exchange rate changes and other adjustments(173.1)245.1 (6.2)0.8 Benefit obligation at end of year17,565.0 18,225.5 1,663.8 1,753.7 Change in plan assets:Fair value of plan assets at beginning of year14,579.0 12,858.0 3,227.0 2,768.2 Actual return on plan assets2,458.1 1,802.4 202.6 539.0 Employer contribution131.2 318.8 11.1 (5.1)Benefits paid(630.1)(587.2)(79.3)(75.1)Foreign currency exchange rate changes and other adjustments(122.2)187.0 — — Fair value of plan assets at end of year16,416.0 14,579.0 3,361.4 3,227.0 Funded status(1,149.0)(3,646.5)1,697.6 1,473.3 Unrecognized net actuarial (gain) loss3,908.2 6,515.5 (497.2)(349.1)Unrecognized prior service (benefit) cost11.2 15.4 (117.6)(177.6)Net amount recognized$2,770.4 $2,884.4 $1,082.8 $946.6 Amounts recognized in the consolidated balance sheet consisted of:Other noncurrent assets$668.5 $299.6 $1,910.2 $1,697.0 Other current liabilities(68.3)(67.9)(7.9)(7.4)Accrued retirement benefits(1,749.3)(3,878.2)(204.8)(216.3)Accumulated other comprehensive (income) loss before income taxes3,919.5 6,530.9 (614.7)(526.7)Net amount recognized$2,770.4 $2,884.4 $1,082.8 $946.6 The unrecognized net actuarial (gain) loss and unrecognized prior service (benefit) cost have not yet been recognized in net periodic pension costs and were included in accumulated other comprehensive loss at December 31, 2021 and 2020.95The $750.4 million decrease in benefit obligation in 2021 was driven primarily by an increase in the discount rate. The $2.13 billion increase in the benefit obligation in 2020 was driven by a decrease in the discount rate.The following represents our weighted-average assumptions as of December 31: Defined BenefitPension PlansRetiree HealthBenefit Plans(Percents)202120202019202120202019Discount rate for benefit obligation2.8 %2.4 %3.0 %3.0 %2.6 %3.3 %Discount rate for net benefit costs2.4 3.0 4.0 2.6 3.3 4.4 Rate of compensation increase for benefit obligation3.5 3.3 3.3 Rate of compensation increase for net benefit costs3.3 3.3 3.4 Expected return on plan assets for net benefit costs6.8 7.3 7.4 5.0 6.0 6.0 We annually evaluate the expected return on plan assets in our defined benefit pension and retiree health benefit plans. In evaluating the expected rate of return, we consider many factors, with a primary analysis of current and projected market conditions; asset returns and asset allocations; and the views of leading financial advisers and economists. We may also review our historical assumptions compared with actual results, as well as the assumptions and trend rates utilized by similar plans, where applicable. Given the design of our retiree health benefit plans, healthcare-cost trend rates do not have a material impact on our financial condition or results of operations.The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:202220232024202520262027-2031Defined benefit pension plans$631.9 $641.8 $669.4 $686.6 $707.5 $3,919.7 Retiree health benefit plans89.4 89.5 93.1 93.9 94.5 477.7 Amounts relating to defined benefit pension plans with projected benefit obligations in excess of plan assets were as follows at December 31: 20212020Projected benefit obligation$3,360.3 $15,770.7 Fair value of plan assets1,542.8 11,824.4 Amounts relating to defined benefit pension plans and retiree health benefit plans with accumulated benefit obligations in excess of plan assets were as follows at December 31:Defined BenefitPension PlansRetiree Health Benefit Plans 2021202020212020Accumulated benefit obligation$2,532.0 $14,682.3 $212.6 $223.8 Fair value of plan assets973.4 11,824.4 — — The total accumulated benefit obligation for our defined benefit pension plans was $16.44 billion and $17.03 billion at December 31, 2021 and 2020, respectively.96Net pension and retiree health benefit expense included the following components: Defined BenefitPension PlansRetiree HealthBenefit Plans202120202019202120202019Components of net periodic (benefit) cost:Service cost$369.2 $325.5 $250.4 $49.2 $40.8 $36.3 Interest cost337.8 425.8 486.0 32.5 43.7 58.0 Expected return on plan assets(949.3)(901.5)(839.6)(146.2)(158.1)(144.3)Amortization of prior service (benefit) cost4.2 4.5 6.1 (59.6)(59.5)(62.9)Recognized actuarial (gain) loss487.7 396.3 284.9 3.2 (3.0)1.9 Curtailment loss— — 2.2 — — — Net periodic (benefit) cost$249.6 $250.6 $190.0 $(120.9)$(136.1)$(111.0)The following represents the amounts recognized in other comprehensive income (loss) for the years ended December 31, 2021, 2020, and 2019:Defined BenefitPension PlansRetiree HealthBenefit Plans202120202019202120202019Actuarial gain (loss) arising during period$2,072.4 $(663.0)$(1,461.0)$142.5 $238.8 $246.1 Plan amendments during period— (2.2)— — — — Curtailment gain — — 19.0 — — — Amortization of prior service (benefit) cost included in net income4.2 4.5 6.1 (59.6)(59.5)(62.9)Amortization of net actuarial (gain) loss included in net income487.7 396.3 284.9 3.2 (3.0)1.9 Foreign currency exchange rate changes and other47.2 (71.5)(7.7)1.9 2.4 3.6 Total other comprehensive income (loss) during period$2,611.5 $(335.9)$(1,158.7)$88.0 $178.7 $188.7 We have defined contribution savings plans that cover our eligible employees worldwide. The purpose of these plans is generally to provide additional financial security during retirement by providing employees with an incentive to save. Our contributions to the plans are based on employee contributions and the level of our match. Expenses under the plans totaled $167.3 million, $164.3 million, and $145.2 million for the years ended December 31, 2021, 2020, and 2019, respectively.We provide certain other postemployment benefits primarily related to disability benefits and accrue for the related cost over the service lives of employees. Expenses associated with these benefit plans for the years ended December 31, 2021, 2020, and 2019 were not material.Benefit Plan InvestmentsOur benefit plan investment policies are set with specific consideration of return and risk requirements in relationship to the respective liabilities. U.S. and Puerto Rico plans represent approximately 80 percent of our global investments. Given the long-term nature of our liabilities, these plans have the flexibility to manage an above-average degree of risk in the asset portfolios. At the investment-policy level, there are no specifically prohibited investments. However, within individual investment manager mandates, restrictions and limitations are contractually set to align with our investment objectives, ensure risk control, and limit concentrations.We manage our portfolio to minimize concentration of risk by allocating funds within asset categories. In addition, within a category we use different managers with various management objectives to eliminate any significant concentration of risk.97Our global benefit plans may enter into contractual arrangements (derivatives) to implement the local investment policy or manage particular portfolio risks. Derivatives are principally used to increase or decrease exposure to a particular public equity, fixed income, commodity, or currency market more rapidly or less expensively than could be accomplished through the use of the cash markets. The plans utilize both exchange-traded and over-the-counter instruments. The maximum exposure to either a market or counterparty credit loss is limited to the carrying value of the receivable, and is managed within contractual limits. We expect all of our counterparties to meet their obligations. The gross values of these derivative receivables and payables are not material to the global asset portfolio, and their values are reflected within the tables below.The defined benefit pension and retiree health benefit plan allocation for the U.S. and Puerto Rico currently comprises approximately 75 percent growth investments and 25 percent fixed-income investments. The growth investment allocation encompasses U.S. and international public equity securities, hedge funds, private equity-like investments, and real estate. These portfolio allocations are intended to reduce overall risk by providing diversification, while seeking moderate to high returns over the long term.Public equity securities are well diversified and invested in U.S. and international small-to-large companies across various asset managers and styles. The remaining portion of the growth portfolio is invested in private alternative investments.Fixed-income investments primarily consist of fixed-income securities in U.S. treasuries and agencies, emerging market debt obligations, corporate bonds, bank loans, mortgage-backed securities, commercial mortgage-backed obligations, and any related repurchase agreements.Hedge funds are privately owned institutional investment funds that generally have moderate liquidity. Hedge funds seek specified levels of absolute return regardless of overall market conditions, and generally have low correlations to public equity and debt markets. Hedge funds often invest substantially in financial market instruments (stocks, bonds, commodities, currencies, derivatives, etc.) using a very broad range of trading activities to manage portfolio risks. Hedge fund strategies focus primarily on security selection and seek to be neutral with respect to market moves. Common groupings of hedge fund strategies include relative value, tactical, and event driven. Relative value strategies include arbitrage, when the same asset can simultaneously be bought and sold at different prices, achieving an immediate profit. Tactical strategies often take long and short positions to reduce or eliminate overall market risks while seeking a particular investment opportunity. Event strategy opportunities can evolve from specific company announcements such as mergers and acquisitions, and typically have little correlation to overall market directional movements. Our hedge fund investments are made through limited partnership interests in fund-of-funds structures and directly into hedge funds. Plan holdings in hedge funds are valued based on net asset values (NAVs) calculated by each fund or general partner, as applicable, and we have the ability to redeem these investments at NAV.Private equity-like investment funds typically have low liquidity and are made through long-term partnerships or joint ventures that invest in pools of capital invested in primarily non-publicly traded entities. Underlying investments include venture capital (early stage investing), buyout, special situations, private debt, and private real estate investments. Private equity management firms typically acquire and then reorganize private companies to create increased long term value. Private equity-like funds usually have a limited life of approximately 10-15 years, and require a minimum investment commitment from their limited partners. Our private equity-like investments are made both directly into funds and through fund-of-funds structures to ensure broad diversification of management styles and assets across the portfolio. Plan holdings in private equity-like investments are valued using the value reported by the partnership, adjusted for known cash flows and significant events through our reporting date. Values provided by the partnerships are primarily based on analysis of and judgments about the underlying investments. Inputs to these valuations include underlying NAVs, discounted cash flow valuations, comparable market valuations, and may also include adjustments for currency, credit, liquidity and other risks as applicable. The vast majority of these private partnerships provide us with annual audited financial statements including their compliance with fair valuation procedures consistent with applicable accounting standards.Real estate is composed of public holdings. Real estate investments in registered investment companies that trade on an exchange are classified as Level 1 on the fair value hierarchy. Real estate investments in funds measured at fair value on the basis of NAV provided by the fund manager are classified as such. These NAVs are developed with inputs including discounted cash flow, independent appraisal, and market comparable analyses.Other assets include cash and cash equivalents and mark-to-market value of derivatives.98The cash value of the trust-owned insurance contract is primarily invested in investment-grade publicly traded equity and fixed-income securities.Other than hedge funds, private equity-like investments, and a portion of the real estate holdings, which are discussed above, we determine fair values based on a market approach using quoted market values, significant other observable inputs for identical or comparable assets or liabilities, or discounted cash flow analyses.The fair values of our defined benefit pension plan and retiree health plan assets as of December 31, 2021 by asset category were as follows: Fair Value Measurements UsingAsset ClassTotalQuoted Prices in Active Markets forIdentical Assets(Level 1)SignificantObservable Inputs(Level 2)SignificantUnobservable Inputs(Level 3)Investments Valued at Net Asset Value(1)Defined Benefit Pension PlansPublic equity securities:U.S.$1,325.4 $430.4 $0.1 $1.2 $893.7 International2,722.7 815.0 — — 1,907.7 Fixed income:Developed markets4,496.0 2.6 3,356.6 — 1,136.8 Developed markets - repurchase agreements(1,376.2)— (1,376.2)— — Emerging markets611.0 11.3 250.5 0.1 349.1 Private alternative investments:Hedge funds3,046.8 — — — 3,046.8 Equity-like funds3,816.4 2.1 — 5.5 3,808.8 Real estate630.3 363.8 7.5 10.7 248.3 Other1,143.6 103.2 263.2 (2.1)779.3 Total$16,416.0 $1,728.4 $2,501.7 $15.4 $12,170.5 Retiree Health Benefit PlansPublic equity securities:U.S.$124.7 $40.9 $— $0.1 $83.7 International180.6 47.7 — — 132.9 Fixed income:Developed markets102.2 — 80.5 — 21.7 Emerging markets51.6 — 23.7 — 27.9 Private alternative investments:Hedge funds275.4 — — — 275.4 Equity-like funds317.8 — — 0.5 317.3 Cash value of trust owned insurance contract2,166.8 — 2,166.8 — — Real estate36.2 34.5 0.7 1.0 — Other106.1 24.4 18.3 (0.1)63.5 Total$3,361.4 $147.5 $2,290.0 $1.5 $922.4 (1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy.No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31, 2021. The activity in the Level 3 investments during the year ended December 31, 2021 was not material.99The fair values of our defined benefit pension plan and retiree health plan assets as of December 31, 2020 by asset category were as follows: Fair Value Measurements UsingAsset ClassTotalQuoted Prices in Active Markets for Identical Assets(Level 1)Significant Observable Inputs(Level 2)Significant Unobservable Inputs(Level 3)Investments Valued at Net Asset Value(1)Defined Benefit Pension PlansPublic equity securities:U.S.$737.6 $476.1 $— $1.0 $260.5 International2,635.8 1,102.3 — — 1,533.5 Fixed income:Developed markets4,301.3 2.9 3,179.2 — 1,119.2 Developed markets - repurchase agreements(1,670.8)— (1,670.8)— — Emerging markets631.0 14.2 262.7 0.1 354.0 Private alternative investments:Hedge funds2,661.3 — — — 2,661.3 Equity-like funds2,844.7 — — 16.9 2,827.8 Real estate558.9 259.6 6.9 5.8 286.6 Other1,879.2 60.4 301.2 18.0 1,499.6 Total$14,579.0 $1,915.5 $2,079.2 $41.8 $10,542.5 Retiree Health Benefit PlansPublic equity securities:U.S.$68.3 $45.0 $— $0.1 $23.2 International162.3 58.1 — — 104.2 Fixed income:Developed markets101.5 — 80.3 — 21.2 Emerging markets53.5 — 24.7 — 28.8 Private alternative investments:Hedge funds229.7 — — — 229.7 Equity-like funds223.4 — — 1.6 221.8 Cash value of trust owned insurance contract2,204.6 — 2,204.6 — — Real estate25.8 24.5 0.7 0.6 — Other157.9 14.1 21.1 1.7 121.0 Total$3,227.0 $141.7 $2,331.4 $4.0 $749.9 (1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy.No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31, 2020. The activity in the Level 3 investments during the year ended December 31, 2020 was not material.In 2022, we expect to contribute approximately $40 million to our defined benefit pension plans to satisfy minimum funding requirements for the year. We do not currently expect to make material discretionary contributions in 2022.100Note 16: ContingenciesWe are involved in various lawsuits, claims, government investigations and other legal proceedings that arise in the ordinary course of business. These claims or proceedings can involve various types of parties, including governments, competitors, customers, suppliers, service providers, licensees, employees, or shareholders, among others. These matters may involve patent infringement, antitrust, securities, pricing, sales and marketing practices, environmental, commercial, contractual rights, licensing obligations, health and safety matters, consumer fraud, employment matters, product liability and insurance coverage, among others. The resolution of these matters often develops over a long period of time and expectations can change as a result of new findings, rulings, appeals or settlement arrangements. Legal proceedings that are significant or that we believe could become significant or material are described below. We believe the legal proceedings in which we are named as defendants are without merit and we are defending against them vigorously. It is not possible to determine the final outcome of these matters, and we cannot reasonably estimate the maximum potential exposure or the range of possible loss in excess of amounts accrued for any of these matters; however, we believe that the resolution of all such matters will not have a material adverse effect on our consolidated financial position or liquidity, but could possibly be material to our consolidated results of operations in any one accounting period.Litigation accruals, environmental liabilities, and the related estimated insurance recoverables are reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets. With respect to the product liability claims currently asserted against us, we have accrued for our estimated exposures to the extent they are both probable and reasonably estimable based on the information available to us. We accrue for certain product liability claims incurred but not filed to the extent we can formulate a reasonable estimate of their costs. We estimate these expenses based primarily on historical claims experience and data regarding product usage. Legal defense costs expected to be incurred in connection with significant product liability loss contingencies are accrued when both probable and reasonably estimable.Because of the nature of pharmaceutical products, it is possible that we could become subject to large numbers of additional product liability and related claims in the future. Due to a very restrictive market for litigation liability insurance, we are self-insured for litigation liability losses for all our currently and previously marketed products. Patent LitigationAlimta Patent Litigation U.S. Patent LitigationAlimta (pemetrexed) was protected by a vitamin regimen patent until November 2021, and since then has been protected by pediatric exclusivity through May 2022.In December 2019, we settled a lawsuit we filed against Eagle Pharmaceuticals, Inc. (Eagle) in response to its application to market a product using an alternative form of pemetrexed. Per the settlement agreement, Eagle has a limited initial entry into the market with its product starting February 2022 (up to an approximate three-week supply) and subsequent unlimited entry starting April 2022. European Patent LitigationIn Europe, Alimta was protected by the vitamin regimen patent through June 2021. Despite the recent patent expiration, a number of legal proceedings that were initiated prior to expiration are ongoing. Emgality Patent LitigationIn September 2018, we were named as a defendant in litigation filed by Teva Pharmaceuticals International GMBH and Teva Pharmaceuticals USA, Inc. (collectively, Teva) in the U.S. District Court for the District of Massachusetts seeking a ruling that various claims in nine different Teva patents would be infringed by our launch and continued sales of Emgality for the prevention of migraine in adults. Trial is currently scheduled to begin in October 2022. In June 2021, we were named as a defendant in a second litigation filed by Teva in the U.S. District Court for the District of Massachusetts seeking a ruling that two of Teva's patents, which are directed toward use of the active ingredient in Emgality to treat migraine, would be infringed by our continued sales of Emgality.101Jardiance Patent LitigationIn November 2018, Boehringer Ingelheim (BI), our partner in marketing and development of Jardiance, initiated U.S. patent litigation in the U.S. District Court of Delaware alleging infringement arising from submissions of Abbreviated New Drug Applications (ANDA) by a number of generic companies seeking approval to market generic versions of Jardiance, Glyxambi, and Synjardy in accordance with the procedures set out in the Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Act). Particularly with respect to Jardiance, the generic companies' ANDAs seek approval to market generic versions of Jardiance prior to the expiration of the relevant patents, and allege that certain patents, including in some allegations the compound patent, are invalid or would not be infringed. We are not a party to this litigation. This litigation has been stayed. Taltz Patent LitigationIn April 2021, we petitioned the High Court of Ireland to declare invalid the patent that Novartis Pharma AG (Novartis) purchased from Genentech, Inc. in 2020. Novartis responded by filing a claim against us alleging patent infringement related to our commercialization of Taltz and seeking damages for past infringement and an injunction against future infringement. This matter is ongoing. In April 2021 and November 2021, Novartis petitioned the Court of Rome Intellectual Property Division and the Swiss Federal Patent Court, respectively, in preliminary injunction (PI) and main infringement proceedings against us related to our commercialization of Taltz. In June 2021, the Court of Rome Intellectual Property Division dismissed Novartis' PI action. Novartis appealed the ruling and in October 2021, the panel hearing Novartis' appeal appointed a technical expert to assess the merits of the case. Both matters are ongoing. Hearings on the Italian and Swiss PI requests are scheduled for May 2022.In June 2021, Novartis petitioned the Commercial Court of Vienna in PI proceedings and in November 2021, the Austrian court denied Novartis' request. Novartis did not appeal the ruling, and this matter is now closed.Zyprexa Canada Patent LitigationBeginning in the mid-2000s, several generic companies in Canada challenged the validity of our Zyprexa compound patent. In 2012, the Canadian Federal Court of Appeals denied our appeal of a lower court's decision that certain patent claims were invalid for lack of utility. In 2013, Apotex Inc. and Apotex Pharmachem Inc. (collectively, Apotex) brought claims against us in the Ontario Superior Court of Justice at Toronto for damages related to our enforcement of the Zyprexa compound patent under Canadian regulations governing patented drugs. Apotex seeks compensation based on novel legal theories under the Statute of Monopolies, Trade-Mark Act, and common law. In March 2021, the Ontario Superior Court granted our motion for summary judgement, thereby dismissing Apotex's case. Apotex appealed that ruling to the Court of Appeal for Ontario in April 2021 and a hearing occurred February 2022. We await a decision.Product Liability LitigationActos® Product LiabilityWe are named along with Takeda Chemical Industries, Ltd. and Takeda affiliates (collectively, Takeda) as a defendant in four purported product liability class actions in Canada related to Actos, which we commercialized with Takeda in Canada until 2009, including one in Ontario filed December 2011 (Casseres et al. v. Takeda Pharmaceutical North America, Inc., et al.), one in Quebec filed July 2012 (Whyte et al. v. Eli Lilly et al.), one in Saskatchewan filed November 2017 (Weiler v. Takeda Canada Inc. et al.), and one in Alberta filed January 2013 (Epp v. Takeda Canada Inc. et al.). In general, plaintiffs in these actions alleged that Actos caused or contributed to their bladder cancer. An agreement to settle these actions became effective in May 2021. The relevant courts approved the settlement and the deadline for class members to seek settlement funds has now expired. The lawsuits have been dismissed or discontinued. 102Byetta® Product LiabilityWe are named as a defendant in approximately 570 Byetta product liability lawsuits in the U.S. which were first initiated in March 2009 and involve approximately 805 plaintiffs. Approximately 55 of these lawsuits, covering about 285 plaintiffs, are filed in California state court and coordinated in a Los Angeles Superior Court. Approximately 515 of the lawsuits, covering about 515 plaintiffs, are filed in federal court, the majority of which are coordinated in a multi-district litigation (MDL) in the U.S. District Court for the Southern District of California. Two lawsuits, representing approximately two plaintiffs, have also been filed in various state courts. Approximately 565 of the lawsuits, involving approximately 800 plaintiffs, contain allegations that Byetta caused or contributed to the plaintiffs' cancer (primarily pancreatic cancer or thyroid cancer); while six plaintiffs allege Byetta caused or contributed to pancreatitis. In addition, one case alleges that Byetta caused or contributed to ampullary cancer. The federal and state trial courts granted summary judgment in favor of us and our co-defendants on the claims alleging pancreatic cancer. The plaintiffs appealed those rulings. In November 2017, the U.S. Court of Appeals for the Ninth Circuit reversed the U.S. District Court for the Southern District of California's grant of summary judgment in the MDL based on that court's discovery rulings and remanded the cases back to the U.S. District Court for further proceedings. In March 2021, the U.S. District Court granted summary judgment for the defendants. In April 2021, the plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit, but we have now been dismissed from that appeal. Certain plaintiffs have agreed to dismiss their lawsuits in exchange for a waiver of costs, and individual plaintiffs have begun dismissing their claims based upon this agreement. Approximately 311 of the MDL lawsuits have been dismissed as of February 2022. In the state court actions, in November 2018, the California Court of Appeal reversed the Los Angeles County Superior Court of California's grant of summary judgment based on that court's discovery rulings and remanded for further proceedings. In April 2021, the Los Angeles County Superior Court of California granted summary judgment for the defendants and the parties await entry of the order of judgment. Approximately 17 of the state court lawsuits have been dismissed as of February 2022. We are aware of approximately 20 additional potential claimants who have not yet filed suit. These additional possible claims allege damages for pancreatic cancer or thyroid cancer.Cialis Product LiabilityWe are named as a defendant in approximately 350 Cialis product liability lawsuits in the U.S. which were first initiated in August 2015. These cases, many of which were originally filed in various federal courts, contain allegations that Cialis caused or contributed to the plaintiffs' cancer (melanoma). In December 2016, the Judicial Panel on Multidistrict Litigation (JPML) granted the plaintiffs' petition to have filed cases and an unspecified number of future cases coordinated into a federal MDL in the U.S. District Court for the Northern District of California, alongside an existing coordinated proceeding involving Viagra®. The JPML ordered the transfer of the existing cases to the now-renamed MDL In re: Viagra (Sildenafil Citrate) and Cialis (Tadalafil) Products Liability Litigation. In April 2020, the MDL court granted summary judgment to the defendants on all of the claims brought against them by the plaintiffs. In May 2020, plaintiffs filed an appeal in the U.S. Court of Appeals for the Ninth Circuit. The parties have reached agreement to resolve the majority of claims pending in the appeal and expect those claims to soon be dismissed.Jardiance Product Liability First initiated in January 2019, we and Boehringer Ingelheim Pharmaceuticals, Inc., a subsidiary of BI, have been named as a defendant in 5 currently pending product liability lawsuits in Stamford Superior Court in Connecticut, alleging that Jardiance caused or contributed to plaintiffs' Fournier's gangrene. Our agreement with BI calls for BI to defend and indemnify us against any damages, costs, expenses, and certain other losses with respect to product liability claims in accordance with the terms of the agreement. All pending cases have been paused to allow for settlement negotiations and dismissals. Environmental Proceedings Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as "Superfund," we have been designated as one of several potentially responsible parties with respect to the cleanup of fewer than 10 sites. Under Superfund, each responsible party may be jointly and severally liable for the entire amount of the cleanup.103Other Matters340B Litigation and InvestigationsWe are the plaintiff in a lawsuit filed in January 2021 in the U.S. District Court for the Southern District of Indiana against the U.S. Department of Health and Human Services (HHS), the Secretary of HHS, the Health Resources and Services Administration (HRSA), and the Administrator of HRSA. The lawsuit challenges the HHS's December 30, 2020 advisory opinion stating that drug manufacturers are required to deliver discounts under the 340B program to all contract pharmacies. We seek a declaratory judgment that the defendants violated the Administrative Procedures Act and the U.S. Constitution, a preliminary injunction enjoining implementation of the administrative dispute resolution process created by defendants and, with it, their application of the advisory opinion, and other related relief. In March 2021, the court entered an order preliminarily enjoining the government's enforcement of the administrative dispute resolution process against us. In May 2021, HRSA notified us that it determined that our policy was contrary to the 340B statute. In response, in May 2021, we filed a motion for preliminary injunction and temporary restraining order requesting that the U.S. District Court for the Southern District of Indiana enjoin defendants from taking any action against us relating to the 340B drug pricing program until after the court issues a final judgment on the aforementioned litigation. In May 2021, the court denied our motion for a temporary restraining order but deferred resolution of our motion for preliminary injunction. In June 2021, the defendants withdrew the HHS December 30, 2020 advisory opinion. In July 2021, the court held oral argument on the parties' cross motions for summary judgment, the defendants' motion to dismiss, and our motion for preliminary injunction related to HRSA's May 2021 enforcement letter. In October 2021, the court denied the defendants' motion to dismiss, and granted in part and denied in part the parties' cross motions for summary judgment. We have filed a notice of appeal. This matter is ongoing.In January 2021, we, along with other pharmaceutical manufacturers, were named as a defendant in a petition currently pending before the HHS Administrative Dispute Resolution Panel. Petitioner seeks declaratory and other injunctive relief related to the 340B program. As described above, the U.S. District Court for the Southern District of Indiana has entered a preliminary injunction enjoining the government's enforcement of this administrative dispute resolution process against us. In July 2021, we, along with Sanofi-Aventis U.S., LLC (Sanofi), Novo Nordisk Inc. (Novo Nordisk), and AstraZeneca Pharmaceuticals LP, were named as a defendant in a purported class action lawsuit filed in the U.S. District Court for the Western District of New York by Mosaic Health, Inc. alleging antitrust and unjust enrichment claims related to the defendants' 340B distribution programs. We, with Sanofi and Novo Nordisk, filed a motion to dismiss the lawsuit. This matter is ongoing.We received a civil investigative subpoena in February 2021 from the Office of the Attorney General for the State of Vermont relating to the sale of pharmaceutical products to Vermont covered entities under the 340B program. We are cooperating with this subpoena. Branchburg Manufacturing Facility In May 2021, we received a subpoena from the United States Department of Justice requesting the production of certain documents relating to our manufacturing site in Branchburg, New Jersey. We are cooperating with the subpoena.104Brazil Litigation – Cosmopolis Facility Labor Attorney LitigationFirst initiated in 2008, our subsidiary in Brazil, Eli Lilly do Brasil Limitada (Lilly Brasil), is named in a Public Civil Action brought by the Labor Attorney for the 15th Region in the Labor Court of Paulinia, State of Sao Paulo, Brazil, (the Labor Court) alleging possible harm to employees and former employees caused by alleged exposure to soil and groundwater contaminants at a former Lilly Brasil manufacturing facility in Cosmopolis, Brazil, operated by the company between 1977 and 2003. In May 2014, the Labor Court judge ruled against Lilly Brasil, ordering it to undertake several actions, including some with unspecified financial impact, consisting primarily of paying lifetime health coverage for the employees and contractors who worked at the Cosmopolis facility for more than six months during the affected years and their children who were born during and after this period. We appealed this decision. In July 2018, the appeals court (TRT) generally affirmed the Labor Court's ruling, which included a liquidated award of 300 million Brazilian real. This 300 million Brazilian real liquidated award, when adjusted for inflation and the addition of pre and post judgment interest using the current Central Bank of Brazil's special system of clearance and custody rate, is approximately 950 million Brazilian real (approximately $170 million as of December 31, 2021). The TRT also restricted the broad health coverage awarded by the Labor Court to health problems that claimants could prove in a separate evidentiary proceeding arose from exposure to the alleged contamination. In August 2019, Lilly Brasil filed an appeal to the superior labor court (TST) and in June 2021, the TRT published its decision on the admissibility of Lilly Brasil's appeal, allowing the majority of the elements of the appeal to proceed; elements not proceeding are subject to an interlocutory appeal to the TST that was filed in June 2021. In September 2019, the TRT stayed a number of elements of its trial court decision pending the determination of Lilly Brasil's appeal to the TST.In June 2019, the Labor Public Attorney (LPA) filed an application in the Labor Court for enforcement of the healthcare coverage granted by the TRT in its July 2018 ruling, requested restrictions on Lilly Brasil’s assets in Brazil, and required Lilly Brasil and Antibióticos do Brasil Ltda. (ABL) to submit a list of potential beneficiaries of the Public Civil Action for the LPA to identify and contact those individuals. In July 2019, the Labor Court issued a ruling requiring a freeze of Lilly Brasil’s immovable property or, alternatively, a security deposit or lien of 500 million Brazilian real. Lilly Brasil filed a writ of mandamus challenging this ruling. In June 2021, the court reduced the security deposit or lien to 100 million Brazilian real and limited the scope of the initial order. ABL and LPA appealed to the TST, which appeal is currently still under review. In addition, in September 2020, the LPA initiated a second preliminary enforcement of the portion of the July 2018 TRT decision in the Labor Court that prohibits the exposure of workers to the contaminated areas. The Labor Court is currently assessing the status of Lilly Brasil’s compliance with such portion of the July 2018 TRT decision. These matters are ongoing.Individual Former Employee LitigationLilly Brasil is also named in approximately 25 pending lawsuits filed in the Labor Court by individual former employees making similar claims. These lawsuits are each at various stages in the litigation process, with judgments being handed down in more than half of the lawsuits by the trial courts, of which, approximately half of those judgements are on appeal in the labor courts.China NDRC Antitrust MatterThe competition authority in China has investigated our distributor pricing practices in China in connection with a broader inquiry into pharmaceutical industry pricing. We cooperated with this investigation. In July 2021 Lilly divested Cialis in China. We consider this matter closed.105Puerto Rico Tax MatterIn May 2013, the Municipality of Carolina in Puerto Rico (Municipality) filed a lawsuit against us alleging noncompliance with respect to a contract with the Municipality and seeking a declaratory judgment. In December 2020, the Puerto Rico Appellate Court (AP) reversed the summary judgment previously granted by the Court of First Instance (CFI) in our favor, dismissing the Municipality's complaint in its entirety. The AP remanded the case to the CFI for trial on the merits.In October 2021, the Municipality filed a motion to execute a purported judgment, and the CFI scheduled a hearing in March 2022 to consider the Municipality's motion. We have opposed the Municipality's motion. This matter is ongoing. Eastern District of Pennsylvania Pricing (Average Manufacturer Price) InquiryIn November 2014, we, along with another pharmaceutical manufacturer, were named as co-defendants in United States et al. ex rel. Streck v. Takeda Pharm. Am., Inc., et al., which was filed in November 2014 and unsealed in the U.S. District Court for the Northern District of Illinois. The complaint alleges that the defendants should have treated certain credits from distributors as retroactive price increases and included such increases in calculating average manufacturer prices. In October 2021 the parties filed cross motions for summary judgment. Trial is scheduled for April 2022. Health Choice Alliance We are named as a defendant in a lawsuit filed in June 2017 in the U.S. District Court for the Eastern District of Texas seeking damages under the federal anti-kickback statute and state and federal false claims acts for certain patient support programs related to our products Humalog, Humulin, and Forteo. In September 2019, the U.S. District Court granted the U.S. Department of Justice's motion to dismiss the relator's second amended complaint. In January 2020, the relator appealed the District Court's dismissal to the U.S. Court of Appeals for the Fifth Circuit. In July 2021, the U.S. Court of Appeals for the Fifth Circuit affirmed the dismissal of the lawsuit, and the relator did not petition the U.S. Supreme Court for certiorari. We are also named as a defendant in two similar lawsuits filed in Texas and New Jersey state courts in October 2019 seeking damages under the Texas Medicaid Fraud Prevention Act and New Jersey Medicaid False Claims Act, respectively. In November 2020, the Texas state court action was stayed pending a final determination with respect to the aforementioned federal lawsuit. In April 2021, the New Jersey state court action was dismissed with prejudice and in June 2021, the relator appealed the state court's decision to the Appellate Division of the New Jersey Superior Court. In January 2022, the relator filed its appellate brief. Pricing Litigation, Investigations, and InquiriesLitigationIn December 2017, we, along with Sanofi and Novo Nordisk were named as defendants in a consolidated purported class action lawsuit, In re. Insulin Pricing Litigation, in the U.S. District Court for the District of New Jersey relating to insulin pricing seeking damages under various state consumer protection laws and the Federal Racketeer Influenced and Corrupt Organization Act (federal RICO Act). Separately, in February 2018, we, along with Sanofi and Novo Nordisk, were named as defendants in MSP Recovery Claims, Series, LLC et al. v. Sanofi Aventis U.S. LLC et al., in the same court, seeking damages under various state consumer protection laws, common law fraud, unjust enrichment, and the federal RICO Act. In both In re. Insulin Pricing Litigation and the MSP Recovery Claims litigation, the court dismissed claims under the federal RICO Act and certain state laws. In April 2021, the plaintiffs in In re. Insulin Pricing Litigation amended their complaint to allege additional state law claims for civil conspiracy and violations of state RICO statutes. The court has allowed the Arizona RICO statute and certain state civil conspiracy law claims to proceed. Also, we, along with Sanofi, Novo Nordisk, CVS, Express Scripts, and Optum, have been sued in a purported class action, FWK Holdings, LLC v. Novo Nordisk Inc., et al., filed in the same court in November 2020, for alleged violations of the federal RICO Act as well as the New Jersey RICO Act and antitrust law. That same group of defendants, along with Medco Health and United Health Group, also have been sued in other purported class actions in the same court, Rochester Drug Co-Operative Inc. v. Eli Lilly & Co. et al. and Value Drug Co. v. Eli Lilly & Co. et al. both initiated in March 2020, for alleged violations of the federal RICO Act. In September 2020, the U.S. District Court for the District of New Jersey granted plaintiffs' motion to consolidate FWK Holdings, LLC v. Novo Nordisk Inc., et al., Rochester Drug Co-Operative Inc. v. Eli Lilly & Co. et al., and Value Drug Co. v. Eli Lilly & Co. et al. In July 2021, the U.S. District Court for the District of New Jersey dismissed the three antitrust claims alleged by plaintiffs in the consolidated litigation and denied dismissal of the RICO claims.106In October 2018, the Minnesota Attorney General's Office initiated litigation against us, Sanofi, and Novo Nordisk, State of Minnesota v. Sanofi-Aventis U.S. LLC et al., in the U.S. District Court for the District of New Jersey, alleging unjust enrichment, violations of various Minnesota state consumer protection laws, and the federal RICO Act. In March 2021, the U.S. District Court for the District of New Jersey dismissed with prejudice the Minnesota Attorney General's federal RICO claims and false advertising claims under state law; the consumer fraud and other related state law claims remain ongoing. Additionally, in May 2019, the Kentucky Attorney General's Office filed a complaint against us, Sanofi, and Novo Nordisk, Commonwealth of Kentucky v. Novo Nordisk, Inc. et al., in Kentucky state court, alleging violations of the Kentucky consumer protection law, false advertising, and unjust enrichment. In November 2019, Harris County in Texas initiated litigation against us, Sanofi, Novo Nordisk, Express Scripts, CVS, Optum, and Aetna, County of Harris Texas v. Eli Lilly & Co., et al., in federal court in the Southern District of Texas alleging violations of the federal RICO Act, the state deceptive trade practices-consumer protection act, and common law claims such as fraud, unjust enrichment, and civil conspiracy. Harris County also alleged violations of federal and state antitrust law, but voluntarily dismissed them. This lawsuit relates to our insulin products as well as Trulicity. In June 2021, the City of Miami, Florida initiated litigation against us, Sanofi, Novo Nordisk, ESI, CVS/Caremark/Aetna, and Optum, asserting state law antitrust, common law fraud, money had and received, unjust enrichment, and civil conspiracy claims. After removing the case to federal court, we, along with the other defendants, filed a motion to dismiss the lawsuit. In January 2022, the court granted the motion in part but has allowed the antitrust and conspiracy claims to proceed against us, Sanofi and Novo Nordisk. We, along with Sanofi and Novo Nordisk, have moved the court to reconsider its denial of our motion to dismiss the antitrust and conspiracy claims.In June 2021, the Mississippi Attorney General's Office (Mississippi AG) initiated litigation against us, Sanofi, Novo Nordisk, Evernorth/ESI, CVS/Caremark, and United/Optum in the Hinds County, Mississippi Chancery Court, alleging state law consumer protection, unjust enrichment, and civil conspiracy claims. After the case was removed to federal court, we, along with the other defendants, filed a motion to dismiss the lawsuit. In response, the Mississippi AG filed a motion to amend its complaint, which the court granted. This matter is ongoing.Investigations, Subpoenas, and InquiriesWe received subpoenas from the New York and Vermont Attorney General Offices and civil investigative demands from the Washington, New Mexico, and Colorado Attorney General Offices relating to the pricing and sale of our insulin products. The Offices of the Attorney General in Mississippi, Washington D.C., California, Florida, Hawaii, and Nevada have requested information relating to the pricing and sale of our insulin products. We also received interrogatories and a subpoena from the California Attorney General's Office regarding our competition in the long-acting insulin market, which was subsequently withdrawn in June 2021. In January 2022, the Michigan Attorney General filed against us in state court a petition seeking authorization to investigate Lilly for potential violations of the Michigan Consumer Protection Act (MCPA), and a complaint seeking a declaratory judgment that the MCPA applies to the conduct it seeks to investigate and allows it to conduct the investigation. The state court granted the State's petition to investigate, authorizing the State to issue civil investigative subpoenas. The State's complaint for declaratory judgment remains pending.We received a request in January 2019 from the House of Representatives' Committee on Oversight and Reform seeking commercial information and business records related to the pricing of insulin products, among other issues. We also received requests from the Senate Finance Committee and the Senate Committee on Health, Education, Labor, and Pensions, and separate requests from the House Committee on Energy and Commerce majority and minority members. Those requests sought pricing and other commercial information regarding Lilly's insulin products. In January 2021, the Senate Finance Committee released a report summarizing the findings of its investigation. In December 2021 the House of Representatives' Committee on Oversight and Reform majority and minority staffs released separate reports with findings from their investigations into drug pricing, including of insulin products.We are cooperating with all of these aforementioned investigations, subpoenas, and inquiries.107Research Corporation Technologies, Inc. In April 2016, we were named as a defendant in litigation filed by Research Corporation Technologies, Inc. (RCT) in the U.S. District Court for the District of Arizona. RCT is seeking damages for breach of contract, unjust enrichment, and conversion related to processes used to manufacture certain products, including Humalog and Humulin. Both parties moved for summary judgment and hearing on the motions took place in August 2021. In October 2021, the Court issued a summary judgment decision finding in favor of RCT on certain issues, including with respect to a disputed royalty. Both parties filed motions for reconsideration, which are underway. Potential damages payable under the litigation, if finally awarded after an appeal, could be material but are not currently reasonably estimable. A trial date has not been set.Note 17: Other Comprehensive Income (Loss)The following table summarizes the activity related to each component of other comprehensive income (loss):Continuing Operations(Amounts presented net of taxes)Foreign Currency Translation Gains (Losses)Unrealized Net Gains (Losses) on SecuritiesDefined Benefit Pension and Retiree Health Benefit PlansEffective Portion of Cash Flow HedgesDiscontinued OperationsAccumulated Other Comprehensive LossBeginning balance at January 1, 2019(1)$(1,569.7)$(22.1)$(3,852.7)$(238.9)$(56.8)$(5,740.2)Other comprehensive income (loss) before reclassifications(46.2)28.9 (967.6)14.5 (27.2)(997.6)Net amount reclassified from accumulated other comprehensive loss(62.1)(1.9)181.7 12.5 84.0 214.2 Net other comprehensive income (loss)(108.3)27.0 (785.9)27.0 56.8 (783.4)Balance at December 31, 2019(1,678.0)4.9 (4,638.6)(211.9)— (6,523.6)Other comprehensive income (loss) before reclassifications250.5 6.8 (379.7)(133.8)— (256.2)Net amount reclassified from accumulated other comprehensive loss— 3.1 267.3 13.0 — 283.4 Net other comprehensive income (loss)250.5 9.9 (112.4)(120.8)— 27.2 Balance at December 31, 2020(1,427.5)14.8 (4,751.0)(332.7)— (6,496.4)Other comprehensive income (loss) before reclassifications(122.7)(11.9)1,823.4 106.6 — 1,795.4 Net amount reclassified from accumulated other comprehensive loss— 0.8 344.0 13.1 — 357.9 Net other comprehensive income (loss)(122.7)(11.1)2,167.4 119.7 — 2,153.3 Ending balance at December 31, 2021$(1,550.2)$3.7 $(2,583.6)$(213.0)$— $(4,343.1)(1) Accumulated other comprehensive loss as of January 1, 2019 consists of $5.73 billion of accumulated other comprehensive loss attributable to controlling interest and $11.0 million of accumulated other comprehensive loss attributable to noncontrolling interest.108The tax effects on the net activity related to each component of other comprehensive income (loss) for the years ended December 31, were as follows:Tax benefit (expense)202120202019Foreign currency translation gains/losses$(136.2)$128.3 $(18.4)Unrealized net gains/losses on securities4.7 (4.3)(7.4)Defined benefit pension and retiree health benefit plans(532.0)44.8 184.1 Effective portion of cash flow hedges(31.8)32.1 (7.3)Benefit/(provision) for income taxes allocated to other comprehensive income (loss) items$(695.3)$200.9 $151.0 Except for the tax effects of foreign currency translation gains and losses related to our foreign currency-denominated notes, cross-currency interest rate swaps, and other foreign currency exchange contracts designated as net investment hedges (see Note 7), income taxes were not provided for foreign currency translation. Generally, the assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rate. For those operations, changes in exchange rates generally do not affect cash flows; therefore, resulting translation adjustments are made in shareholders' equity rather than in the consolidated statements of operations.Reclassifications out of accumulated other comprehensive loss were as follows:Details about Accumulated Other Comprehensive Loss ComponentsYear Ended December 31,Affected Line Item in the Consolidated Statements of Operations202120202019Amortization of retirement benefit items:Prior service benefits, net$(55.4)$(55.0)$(56.8)Other—net, (income) expenseActuarial losses490.9 393.3 286.8 Other—net, (income) expenseTotal before tax435.5 338.3 230.0 Tax benefit(91.5)(71.0)(48.3)Income taxesNet of tax344.0 267.3 181.7 Other, net of tax13.9 16.1 (51.5)Other—net, (income) expenseReclassifications from continuing operations (net of tax)357.9 283.4 130.2 Reclassifications from discontinued operations (net of tax)— — 84.0 Net income from discontinued operationsTotal reclassifications for the period, net of tax$357.9 $283.4 $214.2 109Note 18: Other–Net, (Income) ExpenseOther–net, (income) expense consisted of the following:202120202019Interest expense$339.8 $359.6 $400.6 Interest income(25.4)(33.0)(80.4)Net investment gains on equity securities (Note 7)(176.9)(1,442.2)(401.2)Debt extinguishment loss (Note 11)405.2 — 252.5 Gain on sale of antibiotic business in China (Note 3)— — (309.8)Retirement benefit plans(289.7)(251.8)(209.9)Other (income) expense(51.4)195.5 56.6 Other–net, (income) expense$201.6 $(1,171.9)$(291.6)Note 19: Discontinued OperationsOn March 11, 2019, we completed the disposition of our remaining 80.2 percent ownership of Elanco common stock through a tax-free exchange offer. The earnings attributable to the divested, noncontrolling interest for the period from the initial public offering until disposition were not material. As a result of the disposition, in the first quarter of 2019, we recognized a gain related to the disposition of approximately $3.7 billion, and we presented Elanco, including the gain related to the disposition, as discontinued operations in our consolidated financial statements for all periods presented. Revenue and net income from discontinued operations in 2019 was $580.0 million and $3.68 billion, respectively. There were no discontinued operations in 2020 and 2021. The gain related to the disposition of Elanco in the consolidated statement of cash flows includes the operating results of Elanco through the disposition date, which were not material. Net cash flows of our discontinued operations for operating and investing activities were not material for the year ended December 31, 2019. We entered into a transitional services agreement (TSA) with Elanco to facilitate the orderly transfer of various services to Elanco. The TSA related primarily to administrative services, which were generally provided over 24 months from the date of disposition, and is now complete. This agreement was not material and did not confer upon us the ability to influence the operating and/or financial policies of Elanco subsequent to the disposition date.110Management's ReportsManagement's Report for Financial Statements—Eli Lilly and Company and SubsidiariesManagement of Eli Lilly and Company and subsidiaries is responsible for the accuracy, integrity, and fair presentation of the financial statements. The statements have been prepared in accordance with generally accepted accounting principles in the United States and include amounts based on judgments and estimates by management. In management's opinion, the consolidated financial statements present fairly our financial position, results of operations, and cash flows.In addition to the system of internal accounting controls, we maintain a code of conduct (known as "The Red Book") that applies to all employees worldwide, requiring proper overall business conduct, avoidance of conflicts of interest, compliance with laws, and confidentiality of proprietary information. All employees must take training annually on The Red Book and are required to report suspected violations. A hotline number is available on our lilly.com website and on the internal LillyNow website to enable reporting of suspected violations anonymously. Employees who report suspected violations are protected from discrimination or retaliation by the company. In addition to The Red Book, the chief executive officer and all financial management must sign a financial code of ethics, which further reinforces their ethical and fiduciary responsibilities.The consolidated financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm (PCAOB ID: 42). Their responsibility is to examine our consolidated financial statements in accordance with generally accepted auditing standards of the Public Company Accounting Oversight Board (United States). Ernst & Young's opinion with respect to the fairness of the presentation of the statements is included in Item 8 of our Annual Report on Form 10-K. Ernst & Young reports directly to the audit committee of the board of directors.Our audit committee includes six nonemployee members of the board of directors, all of whom are independent from our company. The committee charter, which is available on our website, outlines the members' roles and responsibilities. It is the audit committee's responsibility to appoint an independent registered public accounting firm subject to shareholder ratification, pre-approve both audit and non-audit services performed by the independent registered public accounting firm, and review the reports submitted by the firm. The audit committee meets several times during the year with management, the internal auditors, and the independent public accounting firm to discuss audit activities, internal controls, and financial reporting matters, including reviews of our externally published financial results. The internal auditors and the independent registered public accounting firm have full and free access to the committee.We are dedicated to ensuring that we maintain the high standards of financial accounting and reporting that we have established. We are committed to providing financial information that is transparent, timely, complete, relevant, and accurate. Our culture demands integrity and an unyielding commitment to strong internal practices and policies. Finally, we have the highest confidence in our financial reporting, our underlying system of internal controls, and our people, who are objective in their responsibilities, operate under a code of conduct and are subject to the highest level of ethical standards.Management's Report on Internal Control Over Financial Reporting—Eli Lilly and Company and SubsidiariesManagement of Eli Lilly and Company and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. We have global financial policies that govern critical areas, including internal controls, financial accounting and reporting, fiduciary accountability, and safeguarding of corporate assets. Our internal accounting control systems are designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and are properly recorded, and that accounting records are adequate for preparation of financial statements and other financial information. A staff of internal auditors regularly monitors, on a worldwide basis, the adequacy and effectiveness of internal accounting controls. The general auditor reports directly to the audit committee of the board of directors.We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in "Internal Control—Integrated Framework" (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 111Based on our evaluation under this framework, we concluded that our internal control over financial reporting was effective as of December 31, 2021. However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.The effectiveness of internal control over financial reporting as of December 31, 2021 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report, which appears herein. Their responsibility is to evaluate whether internal control over financial reporting was designed and operating effectively.David A. RicksAnat AshkenaziChair, President, and Chief Executive OfficerSenior Vice President and Chief Financial OfficerFebruary 23, 2022 112Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Eli Lilly and CompanyOpinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Eli Lilly and Company and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 23, 2022 expressed an unqualified opinion thereon.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.113Medicaid, Managed Care, and Medicare sales rebate accrualsDescription of the MatterAs described in Note 2 to the consolidated financial statements under the caption "Net Product Revenue," the Company establishes provisions for sales rebate and discounts in the same period as the related sales occur. At December 31, 2021 the Company had $6,845.8 million in sales rebate and discount accruals. A large portion of these accruals are rebates associated with sales in the United States for which payment for purchase of the product is covered by Medicaid, Managed Care, and Medicare. Auditing the Medicaid, Managed Care, and Medicare sales rebate and discount liabilities is challenging because of the subjectivity of certain assumptions required to estimate the rebate liabilities. In calculating the appropriate accrual amount, the Company considers historical Medicaid, Managed Care, and Medicare rebate payments by product as a percentage of their historical sales as well as any significant changes in sales trends, the lag in payment timing, an evaluation of the current Medicaid and Medicare laws and interpretations, the percentage of products that are sold via Medicaid, Managed Care, and Medicare, and product pricing. For Medicaid, there is significant complexity associated with calculating the legislated Medicaid rebates. Management utilizes employees with legislative experience and knowledge in developing assumptions used to calculate Medicaid rebates. Similarly, for Managed Care and Medicare, given variability in prescription drug costs, continued historical year over year increases in enrollees and variability in prescription data, historical rebate information may not be predictive for management to estimate the rebate accrual and thus, management supplements its historical data analysis with qualitative adjustments based upon current utilization.How We Addressed the Matter in Our AuditWe tested the Company's controls addressing the identified risks of material misstatement related to the valuation of the sales rebate and discount liabilities. This included testing controls over management's review of the significant assumptions used to calculate the Medicaid, Managed Care, and Medicare rebate liabilities, including the significant assumptions discussed above. This testing also included management's control to compare actual activity to forecasted activity and controls to ensure the data used to evaluate the significant assumptions was complete and accurate.Our audit procedures included, among others, evaluating for reasonableness the significant assumptions in light of economic trends, product profiles, and other regulatory factors. Our testing involved assessing the historical accuracy of management's estimates by comparing actual activity to previous estimates and performing analytical procedures, based on internal and external data sources, to evaluate the completeness of the reserves. Additionally, our procedures included reviewing a sample of contracts, testing a sample of rebate payments and testing the underlying data used in management's evaluation. For Medicaid, we involved our professionals with an understanding of the statutory reimbursement requirements to assess the consistency of the Company's calculation methodologies with the applicable government regulations and policy. For Medicare we evaluated the reasonableness of assumptions made by management in estimating the Medicare coverage gap liability.114Retirement Benefits - Valuation of Alternative InvestmentsDescription of the MatterAs described in Note 15 to the consolidated financial statements under the caption "Benefit Plan Investments," the Company's benefit plan investment policies are set with specific consideration of return and risk requirements in relationship to the respective liabilities. At December 31, 2021 the Company had $19,777.4 million in plan assets related to the defined benefit pension plans and retiree health benefit plans. Approximately 38 percent of the total pension and retiree health assets are in hedge funds and private equity-like investment funds ("alternative investments"). These alternative investments are valued using significant unobservable inputs or are valued at net asset value (NAV) reported by the counterparty, adjusted as necessary.Auditing the fair value of these alternative investments is challenging because of the higher estimation uncertainty of the inputs to the fair value calculations, including the underlying net asset values ("NAVs"), discounted cash flow valuations, comparable market valuations, and adjustments for currency, credit, liquidity and other risks. Additionally, certain information regarding the fair value of these alternative investments is based on unaudited information available to management at the time of valuation. How We Addressed the Matter in Our AuditWe tested the Company's controls addressing the risks of material misstatement relating to valuation of alternative investments. This included testing management's review controls over alternative investment valuation, which included a comparison of returns to benchmarks and in-person or telephonic meetings with investment firms to discuss valuation policies and procedures, as well as portfolio performance. Our audit procedures included, among others, comparing fund returns to selected relevant benchmarks and understanding variations, obtaining the latest audited financial statements and comparing to the Company's estimated fair values and reconciling any differences. We also inquired of management about changes to the investment portfolio and/or related investment strategies and considerations. We assessed the historical accuracy of management's estimates by comparing actual activity to previous estimates. We evaluated for contrary evidence by confirming the fair value of the investments and ownership interest directly with the trustees and a sample of managers at year end. /s/ Ernst & Young LLPWe have served as the Company's auditor since 1940. Indianapolis, IndianaFebruary 23, 2022 115Report of Independent Registered Public Accounting FirmTo the Board of Directors and Shareholders of Eli Lilly and CompanyOpinion on Internal Control Over Financial ReportingWe have audited Eli Lilly and Company and subsidiaries' internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Eli Lilly and Company and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated February 23, 2022 expressed an unqualified opinion thereon.Basis for OpinionThe Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.116Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ Ernst & Young LLPIndianapolis, IndianaFebruary 23, 2022 117Item 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A.Controls and ProceduresEvaluation of Disclosure Controls and ProceduresUnder applicable Securities and Exchange Commission (SEC) regulations, management of a reporting company, with the participation of the principal executive officer and principal financial officer, must periodically evaluate the company's "disclosure controls and procedures," which are defined generally as controls and other procedures designed to ensure that information required to be disclosed by the reporting company in its periodic reports filed with the SEC (such as this Form 10-K) is recorded, processed, summarized, and reported on a timely basis.Our management, with the participation of David A. Ricks, president and chief executive officer, and Anat Ashkenazi, senior vice president and chief financial officer, evaluated our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2021, and concluded that they were effective.Management's Report on Internal Control over Financial ReportingMr. Ricks and Ms. Ashkenazi provided a report on behalf of management on our internal control over financial reporting, in which management concluded that the company's internal control over financial reporting is effective at December 31, 2021 based on the framework in "Internal Control—Integrated Framework" (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Due to the inherent limitations, no evaluation over internal control can provide absolute assurance that no material misstatements or fraud exist. In addition, Ernst & Young LLP, the company's independent registered public accounting firm, issued an attestation report on the company's internal control over financial reporting as of December 31, 2021. You can find the full text of management's report and Ernst & Young's attestation report in Item 8.Changes in Internal Control over Financial ReportingDuring the fourth quarter of 2021, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Item 9B.Other InformationNone.Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent InspectionsNot applicable.118Part IIIItem 10.Directors, Executive Officers, and Corporate GovernanceDirectors and Executive OfficersInformation relating to our board of directors is found in our Definitive Proxy Statement, to be dated on or about March 18, 2022 (Proxy Statement), under "Governance - Board Operations and Governance" and is incorporated in this Annual Report on Form 10-K by reference.Information relating to our executive officers is found at Item 1, "Business - Executive Officers of the Company" and is incorporated by reference herein. Code of EthicsInformation relating to our code of ethics is found in our Proxy Statement under "Governance - Board Oversight of Strategy, Compliance, and Risk Management - Code of Ethics" and is incorporated in this Annual Report on Form 10-K by reference.Corporate GovernanceInformation about the procedures by which shareholders can recommend nominees to our board of directors is found in our Proxy Statement under "Shareholder Engagement on Governance Issues - Shareholder Recommendations and Nominations for Director Candidates" and is incorporated in this Annual Report on Form 10-K by reference.The board of directors has appointed an audit committee consisting entirely of independent directors in accordance with applicable Securities and Exchange Commission and New York Stock Exchange requirements for audit committees. Information about our audit committee is found in our Proxy Statement under "Governance - Membership and Meetings of the Board and Its Committees - Audit Committee" and is incorporated in this Annual Report on Form 10-K by reference.Item 11.Executive CompensationInformation on director compensation, executive compensation, and compensation committee matters can be found in the Proxy Statement under "Governance - Director Compensation," "- Membership and Meetings of the Board and Its Committees - Compensation Committee," "Compensation - Compensation Discussion and Analysis," and "- Executive Compensation." Such information is incorporated in this Annual Report on Form 10-K by reference. 119Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersSecurity Ownership of Certain Beneficial Owners and ManagementInformation relating to ownership of the company's common stock by management and by persons known by the company to be the beneficial owners of more than five percent of the outstanding shares of common stock is found in the Proxy Statement under "Ownership of Company Stock" and incorporated in this Annual Report on Form 10-K by reference.Securities Authorized for Issuance Under Equity Compensation PlansThe following table presents information as of December 31, 2021 regarding the company's compensation plans under which shares of the company's common stock have been authorized for issuance.Plan category(a) Number of securities to be issued upon exercise of outstanding options, warrants, and rights (1)(b) Weighted-average exercise price of outstanding options, warrants, and rights(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))Equity compensation plans approved by security holders— $—50,646,706 Equity compensation plan not approved by security holders— —— Total— —50,646,706 (1) 5,605,694 shares are underlying outstanding equity awards other than options.Item 13.Certain Relationships and Related Transactions, and Director IndependenceRelated Person TransactionsInformation relating to the policies and procedures for approval of related person transactions by our board of directors can be found in the Proxy Statement under "Governance - Highlights of the Company's Corporate Governance - Conflicts of Interest and Transactions with Related Persons." Such information is incorporated in this Annual Report on Form 10-K by reference.Director IndependenceInformation relating to director independence can be found in the Proxy Statement under "Governance - Director Independence" and is incorporated in this Annual Report on Form 10-K by reference.Item 14.Principal Accountant Fees and ServicesInformation related to the fees and services of our principal independent accountants, Ernst & Young LLP, can be found in the Proxy Statement under "Audit Matters - Item 3. Ratification of the Appointment of the Independent Auditor - Audit Committee Report - Services Performed by the Independent Auditor" and "- Independent Auditor Fees." Such information is incorporated in this Annual Report on Form 10-K by reference.120Item 15.Exhibits and Financial Statement Schedules(a)1. Financial StatementsThe following consolidated financial statements of the company and its subsidiaries are found at Item 8:•Consolidated Statements of Operations—Years Ended December 31, 2021, 2020, and 2019 •Consolidated Statements of Comprehensive Income (Loss)—Years Ended December 31, 2021, 2020, and 2019•Consolidated Balance Sheets—December 31, 2021 and 2020•Consolidated Statements of Shareholders' Equity—Years Ended December 31, 2021, 2020, and 2019•Consolidated Statements of Cash Flows—Years Ended December 31, 2021, 2020, and 2019•Notes to Consolidated Financial Statements(a)2. Financial Statement SchedulesThe consolidated financial statement schedules of the company and its subsidiaries have been omitted because they are not required, are inapplicable, or are adequately explained in the financial statements.Financial statements of interests of 50 percent or less, which are accounted for by the equity method, have been omitted because they do not, considered in the aggregate as a single subsidiary, constitute a significant subsidiary.(a)3. ExhibitsThe following documents are filed as part of this report:Exhibit Location3.1 Amended Articles of Incorporation Incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2013 3.2 Bylaws, as amended Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on December 16, 2021 4.1 Indenture, dated February 1, 1991, between the Company and Deutsche Bank Trust Company Americas, as successor trustee to Citibank, N.A., as Trustee Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, Registration No. 333-1869794.2 Tripartite Agreement, dated September 13, 2007, appointing Deutsche Bank Trust Company Americas as Successor Trustee under the Indenture listed in Exhibit 4.1 Incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 20084.3Description of the Company's Common StockIncorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 20194.4Description of the Company's 1.000% Notes due 2022, 1.625% Notes due 2026, and 2.125% Notes due 2030Incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 20194.5Description of the Company's 6.77% Notes due 2036Incorporated by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 20194.6Description of the Company's 7 1/8% Notes due 2025Incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 20191214.7Description of the Company's 0.625% Notes due 2031 and 1.700% Notes due 2049Incorporated by reference to Exhibit 4.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 20194.8Description of the Company's 0.500% Notes due 2033, 1.125% Notes due 2051, and 1.375% Notes due 2061Attached 4.9Description of the Company's 1.625% Notes due 2043Attached10.1 Amended and Restated 2002 Lilly Stock Plan(1) Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 201810.2 Form of Performance Award under the 2002 Lilly Stock Plan(1) Attached10.3Form of Performance Award under the 2002 Lilly Stock Plan (with non-compete)(1)Attached10.4Form of Performance Award under the 2002 Lilly Stock Plan (non-executive officer)(1)Attached10.5 Form of Shareholder Value Award under the 2002 Lilly Stock Plan(1) Attached10.6Form of Shareholder Value Award under the 2002 Lilly Stock Plan (with non-compete)(1)Attached10.7Form of Shareholder Value Award under the 2002 Lilly Stock Plan (non-executive officer)(1)Attached10.8 Form of Relative Value Award under the 2002 Lilly Stock Plan(1) Attached10.9 Form of Relative Value Award under the 2002 Lilly Stock Plan (with non-compete)(1) Attached10.10Form of Relative Value Award under the 2002 Lilly Stock Plan (non-executive)(1)Attached10.11 Form of Restricted Stock Unit Award under the 2002 Lilly Stock Plan(1) Attached 10.12Form of Restricted Stock Unit Award under the 2002 Lilly Stock Plan (with non-compete)(1)Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 202110.13Release Agreement, effective as of February 9, 2021, by and between Eli Lilly and Company and Joshua L. Smiley(1)Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 202110.14The Lilly Deferred Compensation Plan, as amended(1)Incorporated by reference to Exhibit 10.5 to the Company's annual report on Form 10-K for the year ended December 31, 201310.15The Lilly Directors' Deferral Plan, as amended(1)Incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 201710.16The Eli Lilly and Company Bonus Plan, as amended(1)Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 202010.17The Loxo Oncology, Inc. Bonus Plan(1)Attached 12210.18 2007 Change in Control Severance Pay Plan for Select Employees, as amended(1) Incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 202021 List of Subsidiaries Attached23 Consent of Independent Registered Public Accounting Firm Attached31.1 Rule 13a-14(a) Certification of David A. Ricks, Chair, President, and Chief Executive Officer Attached31.2 Rule 13a-14(a) Certification of Anat Ashkenazi, Senior Vice President and Chief Financial Officer Attached32 Section 1350 Certification Attached101 Interactive Data File Attached104Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)Attached(1) Indicates management contract or compensatory plan.Item 16.Form 10-K SummaryNot applicable.123SignaturesPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.Eli Lilly and CompanyBy /s/ David A. RicksDavid A. RicksChair, President, and Chief Executive OfficerFebruary 23, 2022 124Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 23, 2022 by the following persons on behalf of the Registrant and in the capacities indicated.SignatureTitle/s/ David A. RicksChair, President, and Chief Executive Officer (principal executive officer)DAVID A. RICKS/s/ Anat AshkenaziSenior Vice President and Chief Financial Officer (principal financial officer)ANAT ASHKENAZI/s/ Donald A. ZakrowskiVice President, Finance, and Chief Accounting Officer (principal accounting officer)DONALD A. ZAKROWSKI/s/ Ralph AlvarezDirectorRALPH ALVAREZ/s/ Katherine Baicker, Ph.D.DirectorKATHERINE BAICKER, Ph.D./s/ Michael L. EskewDirectorMICHAEL L. ESKEW/s/ J. Erik FyrwaldDirectorJ. ERIK FYRWALD/s/ Jamere JacksonDirectorJAMERE JACKSON/s/ Kimberly H. JohnsonDirectorKIMBERLY H. JOHNSON/s/ William G. Kaelin, Jr., M.D.DirectorWILLIAM G. KAELIN, JR., M.D./s/ Juan R. LucianoDirectorJUAN R. LUCIANO/s/ Marschall S. Runge, M.D., Ph.D.DirectorMARSCHALL S. RUNGE, M.D., Ph.D./s/ Gabrielle SulzbergerDirectorGABRIELLE SULZBERGER/s/ Jackson P. TaiDirectorJACKSON P. TAI/s/ Karen WalkerDirectorKAREN WALKER125Trademarks Used In This ReportTrademarks or service marks owned by Eli Lilly and Company or its affiliates, when first used in each item of this report, appear with an initial capital and are followed by the symbol ® or ™, as applicable. In subsequent uses of the marks in the item, the symbols may be omitted.Actos® is a trademark of Takeda Pharmaceutical Company Limited.Byetta® is a trademark of Amylin Pharmaceuticals, Inc.Glyxambi®, Jardiance®, Jentadueto®, Synjardy®, Trajenta®, and Trijardy® are trademarks of Boehringer Ingelheim International GmbH.Tyvyt® is a trademark of Innovent Biologics (Suzhou) Co., Ltd. Viagra® is a trademark of G.D. Searle LLC, a Viatris Company.126
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false 0000789019 0000789019 2022-10-25 2022-10-25 0000789019 us-gaap:CommonStockMember 2022-10-25 2022-10-25 0000789019 msft:NotesThreePointOneTwoFivePercentDueDecemberSixTwentyTwentyEightMember 2022-10-25 2022-10-25 0000789019 msft:NotesTwoPointSixTwoFivePercentDueMayTwoTwentyThirtyThreeMember 2022-10-25 2022-10-25 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) October 25, 2022 Microsoft Corporation
Washington
001-37845
91-1144442
(State or Other Jurisdiction of Incorporation)
(Commission File Number)
(IRS Employer Identification No.)
One Microsoft Way, Redmond, Washington
98052-6399 (425) 882-8080 www.microsoft.com/investor Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common stock, $0.00000625 par value per share
MSFT
NASDAQ
3.125% Notes due 2028
MSFT
NASDAQ
2.625% Notes due 2033
MSFT
NASDAQ Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐ Item 2.02. Results of Operations and Financial Condition On October 25, 2022, Microsoft Corporation issued a press release announcing its financial results for the fiscal quarter ended September 30, 2022. A copy of the press release is furnished as Exhibit 99.1 to this report. In accordance with General Instruction B.2 of Form 8-K, the information in this Current Report on Form 8-K, including Exhibit 99.1, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. Item 9.01. Financial Statements and Exhibits (d) Exhibits:
99.1
Press release, dated October 25, 2022, issued by Microsoft Corporation
104
Cover Page Interactive Data File (embedded within the Inline XBRL document) SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
MICROSOFT CORPORATION
(Registrant)
Date: October 25, 2022
/S/ ALICE L. JOLLA
Alice L. Jolla
Corporate Vice President and Chief AccountingOfficer
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8-K
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d835619d8k.htm
FORM 8-K
Form 8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT Pursuant to Section 13
OR 15(d) of The Securities Exchange Act of 1934 January 27, 2015
Date of Report (Date of earliest event reported)
Apple Inc.
(Exact name of registrant as specified in its charter)
California
001-36743
94-2404110
(State or other jurisdiction
of incorporation)
(Commission File
Number)
(IRS. Employer
Identification No.)
1 Infinite Loop
Cupertino, California 95014 (Address of principal
executive offices) (Zip Code) (408) 996-1010
(Registrants telephone number, including area code)
Not applicable (Former name or former address,
if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of
the registrant under any of the following provisions:
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.02
Results of Operations and Financial Condition.
On January 27, 2015, Apple Inc. (Apple) issued a press release regarding Apples financial results for its first fiscal quarter
ended December 27, 2014 and a related data sheet. A copy of Apples press release is attached hereto as Exhibit 99.1 and a copy of the related data sheet is attached hereto as Exhibit 99.2.
The information contained in this Current Report shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of
1934, as amended (the Exchange Act), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
Item 9.01
Financial Statements and Exhibits.
(d)
Exhibits.
Exhibit
Number
Exhibit Description
99.1
Press release issued by Apple Inc. on January 27, 2015.
99.2
Data sheet issued by Apple Inc. on January 27, 2015.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: January 27, 2015
By:
/s/ Luca Maestri
Luca Maestri Senior Vice President,
Chief Financial Officer
Exhibit Index
Exhibit
Number
Exhibit Description
99.1
Press release issued by Apple Inc. on January 27, 2015.
99.2
Data sheet issued by Apple Inc. on January 27, 2015.
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8-K
1
d852964d8k.htm
8-K
8-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) January 15, 2015
BERKSHIRE HATHAWAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
001-14905
47-0813844
(STATE OR OTHER JURISDICTION
(COMMISSION
(I.R.S. EMPLOYER
OF INCORPORATION)
FILE NUMBER)
IDENTIFICATION NO.)
3555 Farnam Street
Omaha, Nebraska
68131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(402) 346-1400
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE
Check the appropriate box below
if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 8.01 Other Events.
On January 15, 2015, Berkshire Hathaway Finance Corporation (BHFC) issued (i) $400,000,000 aggregate principal amount of
its Floating Rate Senior Notes due 2017 and (ii) $600,000,000 aggregate principal amount of its Floating Rate Senior Notes due 2018 ((i) and (ii) collectively, the Notes) under a registration statement on Form S-3 under the
Securities Act of 1933, as amended (the Securities Act), filed with the Securities and Exchange Commission (the Commission) on January 28, 2013 (Registration No. 333-186257) (the Registration Statement).
The Notes, which will be fully and unconditionally guaranteed by Berkshire Hathaway Inc. (Berkshire), were sold pursuant to an underwriting agreement entered into on January 13, 2015, by and between (a) BHFC and Berkshire and
(b) Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC (collectively, the Underwriters).
The Notes are issued under an Indenture, dated as of February 1, 2010, by and among BHFC, as issuer, Berkshire, as guarantor, and The
Bank of New York Mellon Trust Company, N.A., as trustee (the Indenture), and officers certificates dated as of January 15, 2015 by BHFC with respect to the Notes (the Officers Certificates).
The relevant terms of the Notes and the Indenture are further described under the caption Description of the Notes and Guarantees
in the prospectus supplement, dated January 13, 2015, filed with the Commission by Berkshire on January 14, 2015, pursuant to Rule 424(b)(2) under the Securities Act, and in the section entitled Description of the Debt
Securities in the base prospectus relating to debt securities of BHFC, dated January 28, 2013, included in the Registration Statement, which descriptions are incorporated herein by reference.
A copy of the Indenture is set forth in Exhibit 4.1 of Berkshires registration statement on Form S-3 under the Securities Act filed with
the Commission on February 1, 2010 (Registration No. 333-164611) and is incorporated herein by reference. Copies of the Officers Certificates (including the forms of the Notes) are attached hereto as Exhibits 4.2 and 4.3 and are
incorporated herein by reference. The descriptions of the Indenture, the Officers Certificates and the Notes in this report are summaries and are qualified in their entirety by the terms of the Indenture, the Officers Certificates and
the Notes, respectively. Item 9.01 Financial Statements and Exhibits.
(d) Exhibits
1.1
Underwriting Agreement, dated January 13, 2015, by and between (a) Berkshire Hathaway Finance Corporation and Berkshire Hathaway Inc. and (b) Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Wells Fargo Securities, LLC.
4.1
Indenture, dated as of February 1, 2010, among Berkshire Hathaway Inc., Berkshire Hathaway Finance Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of
Berkshires Registration Statement on Form S-3 (Registration No. 333-164611) filed with the Commission on February 1, 2010).
4.2
Officers Certificate of Berkshire Hathaway Finance Corporation, dated as of January 15, 2015, including the form of Berkshire Hathaway Finance Corporations Floating Rate Senior Notes due 2017.
4.3
Officers Certificate of Berkshire Hathaway Finance Corporation, dated as of January 15, 2015, including the form of Berkshire Hathaway Finance Corporations Floating Rate Senior Notes due 2018.
5.1
Opinion of Munger, Tolles & Olson LLP, dated January 15, 2015.
23.1
Consent of Munger, Tolles & Olson LLP (included in Exhibit 5.1).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
January 15, 2015
BERKSHIRE HATHAWAY INC.
/s/ Marc D. Hamburg
By: Marc D. Hamburg
Senior Vice President and Chief Financial Officer
[8-K Signature Page]
Exhibit Index
1.1
Underwriting Agreement, dated January 13, 2015, by and between (a) Berkshire Hathaway Finance Corporation and Berkshire Hathaway Inc. and (b) Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Wells Fargo Securities, LLC.
4.1
Indenture, dated as of February 1, 2010, among Berkshire Hathaway Inc., Berkshire Hathaway Finance Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of
Berkshires Registration Statement on Form S-3 (Registration No. 333-164611) filed with the Commission on February 1, 2010).
4.2
Officers Certificate of Berkshire Hathaway Finance Corporation, dated as of January 15, 2015, including the form of Berkshire Hathaway Finance Corporations Floating Rate Senior Notes due 2017.
4.3
Officers Certificate of Berkshire Hathaway Finance Corporation, dated as of January 15, 2015, including the form of Berkshire Hathaway Finance Corporations Floating Rate Senior Notes due 2018.
5.1
Opinion of Munger, Tolles & Olson LLP, dated January 15, 2015.
23.1
Consent of Munger, Tolles & Olson LLP (included in Exhibit 5.1).
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8-K
false 0000789019 false 0000789019 2020-06-26 2020-06-26 0000789019 us-gaap:CommonStockMember 2020-06-26 2020-06-26 0000789019 msft:NotesTwoPointOneTwoFivePercentDueDecemberSixTwentyTwentyOneMember 2020-06-26 2020-06-26 0000789019 msft:NotesThreePointOneTwoFivePercentDueDecemberSixTwentyTwentyEightMember 2020-06-26 2020-06-26 0000789019 msft:NotesTwoPointSixTwoFivePercentDueMayTwoTwentyThirtyThreeMember 2020-06-26 2020-06-26 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) June 26, 2020 Microsoft Corporation
Washington
001-37845
91-1144442
(State or Other Jurisdictionof Incorporation)
(CommissionFile Number)
(IRS EmployerIdentification No.)
One Microsoft Way, Redmond, Washington
98052-6399 (425) 882-8080 www.microsoft.com/investor Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common stock, $0.00000625 par value per share
MSFT
NASDAQ
2.125% Notes due 2021
MSFT
NASDAQ
3.125% Notes due 2028
MSFT
NASDAQ
2.625% Notes due 2033
MSFT
NASDAQ
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐ Item 7.01. Regulation FD Disclosure On June 26, Microsoft Corporation issued a press release announcing a strategic change in its retail operations, including closing Microsoft Store physical locations. A copy of the press release is furnished as Exhibit 99.1 to this report. In accordance with General Instruction B.2 of Form 8-K, the information in this Current Report on Form 8-K, including Exhibit 99.1, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. Item 9.01. Financial Statements and Exhibits (d) Exhibits:
99.1
Press release, dated June 26, 2020, issued by Microsoft Corporation
104
Cover Page Interactive Data File (embedded within the Inline XBRL document) SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
MICROSOFT CORPORATION
(Registrant)
Date: June 26, 2020
/s/ Frank H. Brod
Frank H. Brod
Corporate Vice President, Finance and Administration; Chief Accounting Officer
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amzn-202302020001018724false00010187242023-02-022023-02-02Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 _________________________ FORM 8-K _________________________ CURRENT REPORTPursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934February 2, 2023 Date of Report(Date of earliest event reported) _________________________AMAZON.COM, INC. (Exact name of registrant as specified in its charter)_________________________ Delaware000-2251391-1646860(State or other jurisdiction ofincorporation)(Commission File Number)(IRS Employer Identification No.)410 Terry Avenue North, Seattle, Washington 98109-5210 (Address of principal executive offices, including Zip Code)(206) 266-1000 (Registrant’s telephone number, including area code)_________________________ Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which RegisteredCommon Stock, par value $.01 per shareAMZNNasdaq Global Select MarketIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).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.☐Table of ContentsTABLE OF CONTENTS ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.3ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.3SIGNATURES4EXHIBIT 99.1EXHIBIT 99.2Table of ContentsITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.On February 2, 2023, Amazon.com, Inc. announced its fourth quarter 2022 and year ended December 31, 2022 financial results. A copy of the press release containing the announcement is included as Exhibit 99.1 and additional information regarding the inclusion of non-GAAP financial measures in certain of Amazon.com, Inc.’s public disclosures, including its fourth quarter 2022 and year ended December 31, 2022 financial results announcement, is included as Exhibit 99.2. Both of these exhibits are incorporated herein by reference.ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.(d) Exhibits. ExhibitNumberDescription99.1Press Release dated February 2, 2023 announcing Amazon.com, Inc.’s Fourth Quarter 2022 and Year Ended December 31, 2022 Financial Results.99.2Information Regarding Non-GAAP Financial Measures.104The cover page from this Current Report on Form 8-K, formatted in Inline XBRL (included as Exhibit 101).3Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AMAZON.COM, INC. (REGISTRANT)By:/s/ Brian T. OlsavskyBrian T. OlsavskySenior Vice President andChief Financial OfficerDated: February 2, 2023 4
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8-K_1326801_0001326801-23-000083.htm
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meta-202305310001326801false00013268012023-05-312023-05-31UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Date of Report (Date of earliest event reported): May 31, 2023 Meta Platforms, Inc.(Exact name of registrant as specified in its charter)Delaware001-3555120-1665019(State or Other Jurisdiction of Incorporation)(Commission File Number)(IRS Employer Identification No.)1 Meta Way, Menlo Park, California 94025 (Address of principal executive offices and Zip Code)(650) 543-4800 (Registrant’s telephone number, including area code)N/A(Former name or former address, if changed since last report)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading symbol(s)Name of each exchange on which registeredClass A Common Stock, $0.000006 par valueMETAThe Nasdaq Stock Market LLCIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐Item 5.07 Submission of Matters to a Vote of Security Holders.On May 31, 2023, Meta Platforms, Inc. (the "Company") held its annual meeting of shareholders via live audio webcast (the "Annual Meeting"). At the Annual Meeting, the Company's shareholders voted on thirteen proposals, each of which is described in more detail in the Company's definitive proxy statement filed with the Securities and Exchange Commission on April 14, 2023 (the "Proxy Statement"). At the beginning of the Annual Meeting, there were 1,754,606,529 shares of Class A common stock and 3,502,603,040 shares of Class B common stock present or represented by proxy at the Annual Meeting, which represented 91.90% of the combined voting power of the shares of Class A common stock and Class B common stock entitled to vote at the Annual Meeting (voting together as a single class), and which constituted a quorum for the transaction of business. Holders of the Company's Class A common stock were entitled to one vote for each share held as of the close of business on April 6, 2023 (the "Record Date"), and holders of the Company's Class B common stock were entitled to ten votes for each share held as of the Record Date.The shareholders of the Company voted on the following proposals at the Annual Meeting: 1.To elect nine directors, each to serve until the next annual meeting of shareholders and until his or her successor has been elected and qualified, or until his or her earlier death, resignation, or removal.2.To ratify the appointment of Ernst & Young LLP as the Company's independent registered public accounting firm for the fiscal year ending December 31, 2023.3.A shareholder proposal regarding government takedown requests.4.A shareholder proposal regarding dual class capital structure.5.A shareholder proposal regarding human rights impact assessment of targeted advertising.6.A shareholder proposal regarding report on lobbying disclosures.7.A shareholder proposal regarding report on allegations of political entanglement and content management biases in India.8.A shareholder proposal regarding report on framework to assess company lobbying alignment with climate goals.9.A shareholder proposal regarding report on reproductive rights and date privacy.10.A shareholder proposal regarding report on enforcement of Community Standards and user content.11.A shareholder proposal regarding report on child safety impacts and actual harm reduction to children.12.A shareholder proposal regarding report on pay calibration to externalized costs.13.A shareholder proposal regarding performance review of the audit & risk oversight committee.1.Election of DirectorsNomineeForWithheldBroker Non-VotesPeggy Alford4,397,201,474638,028,279223,805,267Marc L. Andreessen4,562,109,965473,119,788223,805,267Andrew W. Houston4,575,049,246460,180,507223,805,267Nancy Killefer4,988,759,91746,469,836223,805,267Robert M. Kimmitt4,905,696,922129,532,831223,805,267Sheryl K. Sandberg4,995,842,49839,387,255223,805,267Tracey T. Travis4,886,849,193148,380,560223,805,267Tony Xu4,588,903,919446,325,834223,805,267Mark Zuckerberg4,628,709,257406,520,496223,805,267Each of the nine nominees for director was elected to serve until the next annual meeting of shareholders and until his or her successor has been elected and qualified, or until his or her earlier death, resignation, or removal.2.Ratification of Appointment of Independent Registered Public Accounting FirmForAgainstAbstentions5,176,904,63178,164,9763,965,413There were no broker non-votes on this proposal.The shareholders ratified the appointment of Ernst & Young LLP as the Company's independent registered public accounting firm for the fiscal year ending December 31, 2023.3.Shareholder Proposal Regarding Government Takedown RequestsForAgainstAbstentionsBroker Non-Votes21,161,6184,997,674,45916,393,676223,805,267The shareholders did not approve the shareholder proposal regarding government takedown requests.4.Shareholder Proposal Regarding Dual Class Capital StructureForAgainstAbstentionsBroker Non-Votes1,406,841,3693,621,542,3066,846,078223,805,267The shareholders did not approve the shareholder proposal regarding dual class capital structure.5.Shareholder Proposal Regarding Human Rights Impact Assessment of Targeted AdvertisingForAgainstAbstentionsBroker Non-Votes845,051,2624,119,907,71270,270,779223,805,267The shareholders did not approve the shareholder proposal regarding human rights impact assessment of targeted advertising.6.Shareholder Proposal Regarding Report on Lobbying DisclosuresForAgainstAbstentionsBroker Non-Votes731,006,9984,289,286,57014,936,185223,805,267The shareholders did not approve the shareholder proposal regarding report on lobbying disclosures.7.Shareholder Proposal Regarding Report on Allegations of Political Entanglement and Content Management Biases in IndiaForAgainstAbstentionsBroker Non-Votes228,827,9654,738,909,94167,491,847223,805,267The shareholders did not approve the shareholder proposal regarding report on allegations of political entanglement and content management biases in India.8.Shareholder Proposal Regarding Report on Framework to Assess Company Lobbying Alignment with Climate GoalsForAgainstAbstentionsBroker Non-Votes492,189,4694,527,617,35215,422,932223,805,267The shareholders did not approve the shareholder proposal regarding report on framework to assess company lobbying alignment with climate goals.9.Shareholder Proposal Regarding Report on Reproductive Rights and Data PrivacyForAgainstAbstentionsBroker Non-Votes481,236,6504,527,112,58326,880,520223,805,267The shareholders did not approve the shareholder proposal regarding report on reproductive rights and data privacy.10.Shareholder Proposal Regarding Report on Enforcement of Community Standards and User ContentForAgainstAbstentionsBroker Non-Votes359,502,7584,658,516,75717,210,238223,805,267The shareholders did not approve the shareholder proposal regarding report on enforcement of Community Standards and user content.11.Shareholder Proposal Regarding Report on Child Safety Impacts and Actual Harm Reduction to ChildrenForAgainstAbstentionsBroker Non-Votes817,020,9154,202,589,50515,619,333223,805,267The shareholders did not approve the shareholder proposal regarding report on child safety impacts and actual harm reduction to children.12.Shareholder Proposal Regarding Report on Pay Calibration to Externalized CostsForAgainstAbstentionsBroker Non-Votes359,570,6184,662,026,38413,632,751223,805,267The shareholders did not approve the shareholder proposal regarding report on pay calibration to externalized costs.13.Shareholder Proposal Regarding Performance Review of the Audit & Risk Oversight CommitteeForAgainstAbstentionsBroker Non-Votes333,995,5254,687,312,55313,921,675223,805,267The shareholders did not approve the shareholder proposal regarding performance review of the audit & risk oversight committee.Item 9.01 Financial Statements and Exhibits.(d) Exhibits Exhibit NumberExhibit Title or Description104Cover Page Interactive Data File (the cover page XBRL tags are embedded within the inline XBRL document)SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.META PLATFORMS, INC.Date: June 1, 2023By:/s/ Katherine R. KellyName:Katherine R. KellyTitle:Vice President, Deputy General Counsel and Secretary
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amzn-202310260001018724false00010187242023-10-262023-10-26Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 _________________________ FORM 8-K _________________________ CURRENT REPORTPursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934October 26, 2023 Date of Report(Date of earliest event reported) _________________________AMAZON.COM, INC. (Exact name of registrant as specified in its charter)_________________________ Delaware000-2251391-1646860(State or other jurisdiction ofincorporation)(Commission File Number)(IRS Employer Identification No.)410 Terry Avenue North, Seattle, Washington 98109-5210 (Address of principal executive offices, including Zip Code)(206) 266-1000 (Registrant’s telephone number, including area code)_________________________ Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which RegisteredCommon Stock, par value $.01 per shareAMZNNasdaq Global Select MarketIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).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.☐Table of ContentsTABLE OF CONTENTS ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.3ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.3SIGNATURES4EXHIBIT 99.1EXHIBIT 99.2Table of ContentsITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.On October 26, 2023, Amazon.com, Inc. announced its third quarter 2023 financial results. A copy of the press release containing the announcement is included as Exhibit 99.1 and additional information regarding the inclusion of non-GAAP financial measures in certain of Amazon.com, Inc.’s public disclosures, including its third quarter 2023 financial results announcement, is included as Exhibit 99.2. Both of these exhibits are incorporated herein by reference.ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.(d) Exhibits. ExhibitNumberDescription99.1Press Release dated October 26, 2023 announcing Amazon.com, Inc.’s Third Quarter 2023 Financial Results.99.2Information Regarding Non-GAAP Financial Measures.104The cover page from this Current Report on Form 8-K, formatted in Inline XBRL (included as Exhibit 101).3Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AMAZON.COM, INC. (REGISTRANT)By:/s/ Brian T. OlsavskyBrian T. OlsavskySenior Vice President andChief Financial OfficerDated: October 26, 2023 4
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1
d686949d8k.htm
8-K
8-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) March 1, 2014
BERKSHIRE HATHAWAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
001-14905
47-0813844
(STATE OR OTHER JURISDICTION
(COMMISSION
(I.R.S. EMPLOYER
OF INCORPORATION)
FILE NUMBER)
IDENTIFICATION NO.)
3555 Farnam Street
Omaha, Nebraska
68131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(402) 346-1400
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE
Check the appropriate box below
if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
ITEM 2.02
Results of Operations and Financial Condition. On March 1, 2014, Berkshire
Hathaway Inc. issued a press release announcing the Companys earnings for the fourth quarter and year ended December 31, 2013. A copy of this press release is furnished with this report as an exhibit to this Form 8-K.
ITEM 7.01
Regulation FD Disclosure On March 1, 2014, Berkshire Hathaway Inc. posted its 2013
Annual Report to Shareholders on its website. A copy of the 2013 Annual Report is furnished with this report as an exhibit to this Form 8-K.
ITEM 9.01 Financial Statements and Exhibits
Exhibit 99.1 Berkshire Hathaway Inc. Earnings Release Dated March 1, 2014.
Exhibit 99.2 Berkshire Hathaway Inc. 2013 Annual Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
March 4, 2014
BERKSHIRE HATHAWAY INC.
/s/ Marc D. Hamburg
By: Marc D. Hamburg Senior Vice President and
Chief Financial Officer
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8-K
false 0001652044 0001652044 2023-04-18 2023-04-18 0001652044 us-gaap:CommonClassAMember 2023-04-18 2023-04-18 0001652044 goog:CapitalClassCMember 2023-04-18 2023-04-18 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) April 18, 2023 ALPHABET INC. (Exact name of registrant as specified in its charter)
Delaware
001-37580
61-1767919
(State or other jurisdictionof incorporation)
(Commission File Number)
(IRS EmployerIdentification No.) 1600 Amphitheatre Parkway Mountain View, CA 94043 (Address of principal executive offices, including zip code) (650) 253-0000 (Registrant’s telephone number, including area code) Not Applicable (Former name or former address, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
TradingSymbol(s)
Name of each exchange on which registered
Class A Common Stock, $0.001 par value
GOOGL
Nasdaq Stock Market LLC (Nasdaq Global Select Market)
Class C Capital Stock, $0.001 par value
GOOG
Nasdaq Stock Market LLC (Nasdaq Global Select Market) Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐ Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. On April 18, 2023, the Leadership Development, Inclusion and Compensation Committee (“LDICC”) of the Board of Directors of Alphabet Inc. (“Alphabet”) approved equity awards for the following executive officers: Ruth Porat, Senior Vice President, Chief Financial Officer, Alphabet and Google LLC (“Google”); Prabhakar Raghavan, Senior Vice President, Knowledge and Information, Google; Philipp Schindler, Senior Vice President, Chief Business Officer, Google; and Kent Walker, President, Global Affairs, Chief Legal Officer and Secretary, Alphabet and Google. The equity awards, which are expected to be granted on May 3, 2023 (the first Wednesday of the month following LDICC approval), are as follows:
•
Ms. Porat will be granted one tranche of performance stock units (“PSUs”) with a target value of $5,000,000, and one tranche of restricted stock units (“GSUs”) in the amount of $18,000,000.
•
Mr. Raghavan will be granted one tranche of PSUs with a target value of $12,000,000, and one tranche of GSUs in the amount of $23,000,000.
•
Mr. Schindler will be granted one tranche of PSUs with a target value of $12,000,000, and one tranche of GSUs in the amount of $23,000,000.
•
Mr. Walker will be granted one tranche of PSUs with a target value of $5,000,000, and one tranche of GSUs in the amount of $18,000,000. The number of PSUs represented by the target value will be calculated by dividing the target value by the average closing price of Alphabet’s Class C capital stock during the month of April 2023 (the “Average Closing Price”) and rounding up the next full unit. The PSUs will vest, if at all, based on the Total Shareholder Return performance of Alphabet relative to the companies comprising the S&P 100 over a 2023-2025 performance period, subject to continued employment. Depending upon performance, the number of PSUs that vest will range from 0%-200% of target. Upon vesting, each PSU will entitle the grantee to receive one share of Alphabet’s Class C capital stock. Upon termination of employment by reason of death, unvested PSUs will immediately vest, as though target performance had been achieved (or based on actual performance if the performance period ended prior to death), and be settled in shares of Alphabet’s Class C capital stock. Upon termination of employment by Alphabet without cause, PSUs will vest based on actual performance, but will be prorated based on the number of calendar days in the performance period the grantee performed services and any remaining unvested PSUs will be forfeited. The PSUs are subject to the terms and conditions of Alphabet’s Amended and Restated 2021 Stock Plan. The foregoing description is only a summary of the terms of the PSU award and is qualified in its entirety by reference to the full text of the PSU Agreement, which will be filed as an exhibit to Alphabet’s Form 10-Q. The number of GSUs comprising the grant will be calculated by dividing the equity award amount by the Average Closing Price. These GSUs will vest as follows: 1/6th will vest on June 25, 2023 and an additional 1/12th will vest quarterly thereafter until fully vested, in each case subject to continued employment. Upon vesting, each GSU will entitle the grantee to receive one share of Alphabet’s Class C capital stock. Upon termination of employment by reason of death, all unvested GSUs will immediately vest in full and be settled in shares of Alphabet’s Class C capital stock. All GSUs are subject to the terms and conditions of Alphabet’s Amended and Restated 2021 Stock Plan. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
ALPHABET INC.
Date: April 21, 2023
/s/ Kathryn W. Hall
Kathryn W. HallAssistant Secretary
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8-K_1730168_0001730168-22-000091.htm
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avgo-202209010001730168FALSE00017301682022-09-012022-09-010001730168us-gaap:CommonStockMember2022-09-012022-09-010001730168us-gaap:SeriesAPreferredStockMember2022-09-012022-09-01UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 8-K CURRENT REPORTPURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934Date of Report (Date of earliest event reported): September 1, 2022 Broadcom Inc. (Exact Name of Registrant as Specified in Charter) Delaware001-3844935-2617337(State or other jurisdiction of incorporation)(Commission File Number)(I.R.S. Employer Identification No.)1320 Ridder Park Drive,San Jose,California95131-2313(Address of principal executive offices including zip code)(408)433-8000( Registrant’s telephone number, including area code)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which RegisteredCommon Stock, $0.001 par valueAVGOThe NASDAQ Global Select Market8.00% Mandatory Convertible Preferred Stock, Series A, $0.001 par valueAVGOPThe NASDAQ Global Select MarketIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).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. ¨Item 2.02 Results of Operations and Financial Condition.On September 1, 2022, Broadcom Inc. (the “Company”) issued a press release announcing its unaudited financial results for the third fiscal quarter ended July 31, 2022. A copy of the press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference. The information in Item 2.02 of this Report and the press release attached hereto as Exhibit 99.1 are furnished and shall not be treated as filed for purposes of the Securities Exchange Act of 1934, as amended.Item 8.01 Other Events.On September 1, 2022, the Company announced that the Board of Directors has declared a quarterly cash dividend on the Company’s 8.00% Mandatory Convertible Preferred Stock, Series A (the “Mandatory Convertible Preferred Stock”), of $20.00 per share. This dividend is payable on September 30, 2022 to Mandatory Convertible Preferred Stock holders of record at the close of business (5:00 p.m., Eastern Time) on September 15, 2022. The Company also announced that the Board of Directors has declared a quarterly cash dividend on the Company’s common stock of $4.10 per share. This dividend is payable on September 30, 2022 to common stockholders of record at the close of business (5:00 p.m., Eastern Time) on September 22, 2022. Item 9.01 Financial Statements and Exhibits.(d) Exhibits Exhibit No.Description99.1Press release issued by Broadcom Inc. dated September 1, 2022104Cover Page Interactive Data File (formatted as Inline XBRL). SIGNATUREPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.Date: September 1, 2022 Broadcom Inc.By:/s/ Kirsten SpearsName:Kirsten SpearsTitle:Vice President, Chief Financial Officer and Chief Accounting Officer
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STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549___________________________________________FORM 10-K ___________________________________________(Mark One)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2023 OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .Commission file number: 001-37580 ___________________________________________Alphabet Inc. (Exact name of registrant as specified in its charter)___________________________________________Delaware61-1767919(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)1600 Amphitheatre Parkway Mountain View, CA 94043 (Address of principal executive offices, including zip code)(650) 253-0000 (Registrant's telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredClass A Common Stock, $0.001 par valueGOOGLNasdaq Stock Market LLC(Nasdaq Global Select Market)Class C Capital Stock, $0.001 par valueGOOGNasdaq Stock Market LLC(Nasdaq Global Select Market)Securities registered pursuant to Section 12(g) of the Act:Title of each classNone___________________________________________Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.Large accelerated filer☒ Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒As of June 30, 2023, the aggregate market value of shares held by non-affiliates of the registrant (based upon the closing sale prices of such shares on the Nasdaq Global Select Market on June 30, 2023) was approximately $1,331.2 billion. For purposes of calculating the aggregate market value of shares held by non-affiliates, we have assumed that all outstanding shares are held by non-affiliates, except for shares held by each of our executive officers, directors, and 5% or greater stockholders. In the case of 5% or greater stockholders, we have not deemed such stockholders to be affiliates unless there are facts and circumstances which would indicate that such stockholders exercise any control over our company, or unless they hold 10% or more of our outstanding common stock. These assumptions should not be deemed to constitute an admission that all executive officers, directors, and 5% or greater stockholders are, in fact, affiliates of our company, or that there are not other persons who may be deemed to be affiliates of our company. Further information concerning shareholdings of our officers, directors, and principal stockholders is included or incorporated by reference in Part III, Item 12 of this Annual Report on Form 10-K.As of January 23, 2024, there were 5,893 million shares of Alphabet’s Class A stock outstanding, 869 million shares of Alphabet’s Class B stock outstanding, and 5,671 million shares of the Alphabet’s Class C stock outstanding.___________________________________________DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s Proxy Statement for the 2024 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2023. Table of ContentsAlphabet Inc.Alphabet Inc.Form 10-KFor the Fiscal Year Ended December 31, 2023 TABLE OF CONTENTS PageNote About Forward-Looking Statements3PART IItem 1.Business4Item 1A.Risk Factors11Item 1B.Unresolved Staff Comments24Item 1C.Cybersecurity24Item 2.Properties25Item 3.Legal Proceedings25Item 4.Mine Safety Disclosures25PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities25Item 6.[Reserved]28Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations29Item 7A.Quantitative and Qualitative Disclosures About Market Risk45Item 8.Financial Statements and Supplementary Data47Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure88Item 9A.Controls and Procedures88Item 9B.Other Information89Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections89PART IIIItem 10.Directors, Executive Officers, and Corporate Governance90Item 11.Executive Compensation90Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters90Item 13.Certain Relationships and Related Transactions, and Director Independence90Item 14.Principal Accountant Fees and Services90PART IVItem 15.Exhibits, Financial Statement Schedules91Item 16.Form 10-K Summary94Signatures2. Table of ContentsAlphabet Inc.Note About Forward-Looking StatementsThis Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include, among other things, statements regarding:•the growth of our business and revenues and our expectations about the factors that influence our success and trends in our business;•fluctuations in our revenues and margins and various factors contributing to such fluctuations;•our expectation that the continuing shift from an offline to online world will continue to benefit our business;•our expectation that the portion of our revenues that we derive beyond advertising will continue to increase and may affect our margins;•our expectation that our traffic acquisition costs (TAC) and the associated TAC rate will fluctuate, which could affect our overall margins;•our expectation that our monetization trends will fluctuate, which could affect our revenues and margins;•fluctuations in paid clicks and cost-per-click as well as impressions and cost-per-impression, and various factors contributing to such fluctuations;•our expectation that we will continue to periodically review, refine, and update our methodologies for monitoring, gathering, and counting the number of paid clicks and impressions;•our expectation that our results will be affected by our performance in international markets as users in developing economies increasingly come online;•our expectation that our foreign exchange risk management program will not fully offset our net exposure to fluctuations in foreign currency exchange rates;•the expected variability of gains and losses related to hedging activities under our foreign exchange risk management program;•the amount and timing of revenue recognition from customer contracts with commitments for performance obligations, including our estimate of the remaining amount of commitments and when we expect to recognize revenue;•our expectation that our capital expenditures will increase, including the expected increase in our technical infrastructure investment to support the growth of our business and our long-term initiatives, in particular in support of artificial intelligence (AI) products and services;•our plans to continue to invest in new businesses, products, services and technologies, and systems, as well as to continue to invest in acquisitions and strategic investments;•our pace of hiring and our plans to provide competitive compensation programs;•our expectation that our cost of revenues, research and development (R&D) expenses, sales and marketing expenses, and general and administrative expenses may increase in amount and/or may increase as a percentage of revenues and may be affected by a number of factors;•estimates of our future compensation expenses;•our expectation that our other income (expense), net (OI&E), will fluctuate in the future, as it is largely driven by market dynamics;•our expectation that our effective tax rate and cash tax payments could increase in future years;•seasonal fluctuations in internet usage and advertiser expenditures, underlying business trends such as traditional retail seasonality, which are likely to cause fluctuations in our quarterly results;•the sufficiency of our sources of funding;•our potential exposure in connection with new and pending investigations, proceedings, and other contingencies, including the possibility that certain legal proceedings to which we are a party could harm our business, financial condition, and operating results;•our expectation that we will continue to face heightened regulatory scrutiny and changes in regulatory conditions, laws, and public policies, which could affect our business practices and financial results;3. Table of ContentsAlphabet Inc.•the expected timing, amount, and effect of Alphabet Inc.'s share repurchases;•our long-term sustainability and diversity goals;as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may appear throughout this report and other documents we file with the Securities and Exchange Commission (SEC), including without limitation, the following sections: Part I, Item 1 "Business;" Part I, Item 1A "Risk Factors;" and Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements generally can be identified by words such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "predicts," "projects," "will be," "will continue," "will likely result," and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 10-K, including the risks discussed in Part I, Item 1A "Risk Factors" and the trends discussed in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," and those discussed in other documents we file with the SEC. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.As used herein, "Alphabet," "the company," "we," "us," "our," and similar terms include Alphabet Inc. and its subsidiaries, unless the context indicates otherwise."Alphabet," "Google," and other trademarks of ours appearing in this report are our property. We do not intend our use or display of other companies' trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.PART IITEM 1.BUSINESSOverviewAs our founders Larry and Sergey wrote in the original founders' letter, "Google is not a conventional company. We do not intend to become one." That unconventional spirit has been a driving force throughout our history, inspiring us to tackle big problems and invest in moonshots. It led us to be a pioneer in the development of AI and, since 2016, an AI-first company. We continue this work under the leadership of Alphabet and Google CEO, Sundar Pichai.Alphabet is a collection of businesses — the largest of which is Google. We report Google in two segments, Google Services and Google Cloud, and all non-Google businesses collectively as Other Bets. Alphabet's structure is about helping each of our businesses prosper through strong leaders and independence. Access and Technology for EveryoneThe Internet is one of the world’s most powerful equalizers; it propels ideas, people, and businesses large and small. Our mission to organize the world’s information and make it universally accessible and useful is as relevant today as it was when we were founded in 1998. Since then, we have evolved from a company that helps people find answers to a company that also helps people get things done. We are focused on building an even more helpful Google for everyone, and we aspire to give everyone the tools they need to increase their knowledge, health, happiness, and success. Google Search helps people find information and make sense of the world in more natural and intuitive ways, with trillions of searches on Google every year. YouTube provides people with entertainment, information, and opportunities to learn something new. Google Assistant offers the best way to get things done seamlessly across different devices, providing intelligent help throughout a person's day, no matter where they are. Google Cloud helps customers solve today’s business challenges, improve productivity, reduce costs, and unlock new growth engines. We are continually innovating and building new products and features that will help our users, partners, customers, and communities and have invested more than $150 billion in research and development in the last five years in support of these efforts.Making AI Helpful for EveryoneAI is a transformational technology that can bring meaningful and positive change to people and societies across the world, and for our business. At Google, we have been bringing AI into our products and services for more than a decade and making them available to our users. Our journey began in 2001, when machine learning was first incorporated into Google Search to suggest better spellings to users searching the web. Today, AI in our products is 4. Table of ContentsAlphabet Inc.used by billions of people globally through features like autocomplete suggestions in Google Search; translation across 133 languages in Google Translate; and organization, searching, and editing in Google Photos.Large language models (LLMs) are an exciting aspect of our work in AI based on deep learning architectures, such as the Transformer, a neural network architecture that we introduced in 2017 that helped with language understanding. This led to the Bidirectional Encoder Representations from Transformers, or BERT, in 2019 that helped Search understand the intent of user search queries better than ever before.Google was a company built in the cloud, and we continue to invest in our Google Cloud offerings, including Google Cloud Platform and Google Workspace, to help organizations stay at the forefront of AI innovation with our AI-optimized infrastructure, mature AI platform and world-class models, and assistive agents.We believe AI can solve some of the hardest societal, scientific and engineering challenges of our time. For example, in 2020, Google DeepMind’s AlphaFold system solved a 50-year-old protein folding challenge. Since then, we have open-sourced to the scientific community 200 million of AlphaFold’s protein structures which are used to work on everything from accelerating new malaria vaccines to advancing cancer drug discovery and developing plastic-eating enzymes. As another example, AI can also have a transformative effect on climate progress by providing helpful information, predicting climate-related events, and optimizing climate action. Using advanced AI and geospatial analysis, Google Research has developed flood forecasting models that can provide early warning and real-time flooding information to communities and individuals. As AI continues to improve rapidly, we are focused on giving helpful features to our users and customers as we deliver on our mission to organize the world’s information and make it universally accessible and useful. With a bold and responsible approach, we continue to take the next steps to make this technology even more helpful for everyone.Deliver the Most Advanced, Safe, and Responsible AIWe aim to build the most advanced, safe, and responsible AI with models that are developed, trained, and rigorously tested at scale powered by our continued investment in AI technical infrastructure. In December 2023, we launched Gemini, our most capable and general model. It was built from the ground up to be multimodal, which means it can generalize and seamlessly understand, operate across, and combine different types of information, including text, code, audio, images, and video. Our teams across Alphabet will leverage Gemini, as well as other AI models we have previously developed and announced, across our business to deliver the best product and service experiences for our users, advertisers, partners, customers, and developers.We believe our approach to AI must be both bold and responsible. That means developing AI in a way that maximizes the positive benefits to society while addressing the challenges, guided by our AI Principles. We published these in 2018, as one of the first companies to articulate principles that put beneficial use, users, safety, and avoidance of harms above business considerations. While there is natural tension between being bold and being responsible, we believe it is possible — and in fact critical — to embrace that tension productively.Enable Organizations and Developers to Innovate on Google CloudAI is not only a powerful enabler, it is also a major platform shift. Globally, businesses from startups to large enterprises, and the public sector are thinking about how to drive transformation. That is why we are focused on making it easy and scalable for others to innovate, and grow, with AI. That means providing the most advanced computing infrastructure and expanding access to Google’s latest AI models that have been rigorously tested in our own products. Our Vertex AI platform gives developers the ability to train, tune, augment, and deploy applications using generative AI models and services such as Enterprise Search and Conversations. Duet AI for Google Cloud provides pre-packaged AI agents that assist developers to write, test, document, and operate software.Improve Knowledge, Learning, Creativity, and ProductivityThings that we now consider routine – like spell check, mobile check deposit, or Google Search, Google Translate, and Google Maps – all use AI. As AI continues to improve rapidly, we are focused on giving helpful features to our users as we continue to deliver on our mission to organize the world’s information and make it universally accessible and useful.While we have been integrating AI into our products for years, we are now embedding the power of generative AI to continue helping our users express themselves and get things done. For example, Duet AI in Google Workspace helps users write, organize, visualize, accelerate workflows, and have richer meetings. Bard allows users to collaborate with experimental AI with new features that include image capabilities, coding support, and app integration. Dream Screen, a new experimental feature in YouTube, allows for the creation of AI-generated video or image backgrounds to Shorts by typing an idea into a prompt.5. Table of ContentsAlphabet Inc.We also know businesses of all sizes around the world rely on Google Ads to find customers and grow their businesses — and we make that even easier with AI. With Performance Max, advertisers simply tell us their campaign goals and share their creative assets, and AI will automatically produce and run a highly effective ad campaign across all of Google’s properties, to meet their budget. Product Studio brings the benefits of AI to businesses of all sizes, helping them easily create uniquely-tailored imagery featuring their products — for free. Additionally, we are experimenting with Search and Shopping ads that are directly integrated into the AI-powered snapshot and conversational mode in Search Generative Experience.Build the Most Helpful Personal Computing Platforms and DevicesOver the years, our Pixel phones have incorporated AI compute directly into the device and built experiences on top of it. Our latest Pixel devices were built around AI, bringing the best AI-assistive experiences to our users, such as Best Take, Magic Editor, and Audio Magic Eraser. As we look ahead, we are designing our Android and Chrome operating systems with new AI-forward user experiences. MoonshotsMany companies get comfortable doing what they have always done, making only incremental changes. This incrementalism leads to irrelevance over time, especially in technology, where change tends to be revolutionary, not evolutionary. People thought we were crazy when we acquired YouTube and Android and when we launched Chrome, but those efforts have matured into major platforms for digital video and mobile devices and a safer, popular browser. Our early investments in AI started out as moonshots but are now incorporated into our core products and central to future developments. We continue to look toward the future and to invest for the long term, most notably for the application of AI to our products and services, as well as other frontier technologies such as quantum computing. As we said in the original founders' letter, we will not shy away from high-risk, high-reward projects that we believe in, as they are the key to our long-term success.Privacy and SecurityWe make it a priority to protect the privacy and security of our products, users, and customers, even if there are near-term financial consequences. We do this by continuously investing in building products that are secure by default; strictly upholding responsible data practices that emphasize privacy by design; and building easy-to-use settings that put people in control. We are continually enhancing these efforts over time, whether by enabling users to auto-delete their data, giving them tools, such as My Ad Center, to control their ad experience, or advancing anti-malware, anti-phishing, and password security features.GoogleFor reporting purposes Google comprises two segments: Google Services and Google Cloud.Google ServicesServing Our UsersWe have always been committed to building helpful products that can improve the lives of millions of people worldwide. Our product innovations are what make our services widely used, and our brand one of the most recognized in the world. Google Services' core products and platforms include ads, Android, Chrome, devices, Gmail, Google Drive, Google Maps, Google Photos, Google Play, Search, and YouTube, with broad and growing adoption by users around the world.Our products and services have come a long way since the company was founded more than 25 years ago. While Google Search started as a way to find web pages, organized into ten blue links, we have driven technical advancements and product innovations that have transformed Google Search into a dynamic, multimodal experience. We first expanded from traditional desktop browsers into mobile web search, making it easier to navigate on smaller screens. As new types of content surfaced on the internet, Universal Search made it possible to search multiple content types, like news, images, videos, and more, to deliver rich, relevant results. The introduction of new search modalities, like voice and visual search, made it easier for people to express their curiosity in natural and intuitive ways. We took that a step further with multisearch, which lets people search with text and images at the same time. Large language models like BERT and Multitask Unified Models, or MUMs, have made it possible to express more natural language queries, vastly improving the quality of results. Each advancement has made it easier and more natural for people to find what they are looking for.This drive to make information more accessible and helpful has led us over the years to improve the discovery and creation of digital content both on the web and through platforms like Google Play and YouTube. People are consuming many forms of digital content, including watching videos, streaming TV, playing games, listening to music, 6. Table of ContentsAlphabet Inc.reading books, and using apps. Working with content creators and partners, we continue to build new ways for people around the world to create and find great digital content.Fueling all of these great digital experiences are extraordinary platforms and devices. That is why we continue to invest in platforms like our Android mobile operating system, Chrome browser, and Chrome operating system, as well as growing our family of devices. We see tremendous potential for devices to be helpful and make people's lives easier by combining the best of our AI, software, and hardware. This potential is reflected in our latest generation of devices, such as the new Pixel 8 and Pixel 8 Pro, and the Pixel Watch 2. Creating products and services that people rely on every day is a journey that we are investing in for the long-term.How We Make MoneyWe have built world-class advertising technologies for advertisers, agencies, and publishers to power their digital marketing businesses. Our advertising solutions help millions of companies grow their businesses through our wide range of products across devices and formats, and we aim to ensure positive user experiences by serving the right ads at the right time and by building deep partnerships with brands and agencies. AI has been foundational to our advertising business for more than a decade. Products like Performance Max and Product Studio use the full power of our AI to help advertisers find untapped and incremental conversion opportunities.Google Services generates revenues primarily by delivering both performance and brand advertising that appears on Google Search & other properties, YouTube, and Google Network partners' properties ("Google Network properties"). We continue to invest in both performance and brand advertising and seek to improve the measurability of advertising so advertisers understand the effectiveness of their campaigns.•Performance advertising creates and delivers relevant ads that users will click on leading to direct engagement with advertisers. Performance advertising lets our advertisers connect with users while driving measurable results. Our ads tools allow performance advertisers to create simple text-based ads.•Brand advertising helps enhance users' awareness of and affinity for advertisers' products and services, through videos, text, images, and other interactive ads that run across various devices. We help brand advertisers deliver digital videos and other types of ads to specific audiences for their brand-building marketing campaigns. We have allocated substantial resources to stopping bad advertising practices and protecting users on the web. We focus on creating the best advertising experiences for our users and advertisers in many ways, including filtering out invalid traffic, removing billions of bad ads from our systems every year, and closely monitoring the sites, apps, and videos where ads appear and blocklisting them when necessary to ensure that ads do not fund bad content.In addition, Google Services increasingly generates revenues from products and services beyond advertising, including:•consumer subscriptions, which primarily include revenues from YouTube services, such as YouTube TV, YouTube Music and Premium, and NFL Sunday Ticket, as well as Google One;•platforms, which primarily include revenues from Google Play from the sales of apps and in-app purchases; and•devices, which primarily include sales of the Pixel family of devices.Google CloudThrough our Google Cloud Platform and Google Workspace offerings, Google Cloud generates revenues primarily from consumption-based fees and subscriptions for infrastructure, platform, collaboration tools and other cloud services. Customers use five key capabilities from Google Cloud.•AI-optimized Infrastructure: provides open, reliable, and scalable compute, networking, and storage to enable customers to run workloads anywhere — on our Cloud, at the edge, or in their data centers. It can be used to migrate and modernize IT systems and to train and serve various types of AI models. •Cybersecurity: helps customers detect, protect, and respond to a broad range of cybersecurity threats, with AI integrated to further strengthen security outcomes, prioritize which threats to investigate, and identify attack paths, as well as accelerate resolution of cybersecurity threats. •Databases and Analytics: provides a variety of different types of databases — relational, key-value, in-memory — to store and manage data for different types of applications. Our Data Cloud also unifies data lakes, data warehouses, data governance, and advanced machine learning into a single platform that can analyze data across any cloud.7. Table of ContentsAlphabet Inc.•Collaboration Tools: Google Workspace and Duet AI in Google Workspace provide easy-to-use, secure communication and collaboration tools, including apps like Gmail, Docs, Drive, Calendar, Meet, and more. These tools enable secure hybrid and remote work, boosting productivity and collaboration. AI has been used in Google Workspace for years to improve grammar, efficiency, security, and more with features like Smart Reply, Smart Compose, and malware and phishing protection in Gmail. Duet AI in Google Workspace helps users write, organize, visualize, accelerate workflows, and have richer meetings.•AI Platform and Duet AI for Google Cloud: Our Vertex AI platform gives developers the ability to train, tune, augment, and deploy applications using generative AI models and services such as Enterprise Search and Conversations. Duet AI for Google Cloud provides pre-packaged AI agents that assist developers to write, test, document, and operate software.Other Bets Across Alphabet, we are also using technology to try to solve big problems that affect a wide variety of industries from improving transportation and health technology to exploring solutions to address climate change. Alphabet’s investment in the portfolio of Other Bets includes businesses that are at various stages of development, ranging from those in the R&D phase to those that are in the beginning stages of commercialization. Our goal is for them to become thriving, successful businesses. Other Bets operate as independent companies and some of them have their own boards with independent members and outside investors. While these early-stage businesses naturally come with considerable uncertainty, some of them are already generating revenue and making important strides in their industries. Revenues from Other Bets are generated primarily from the sale of healthcare-related services and internet services.CompetitionOur business is characterized by rapid change as well as new and disruptive technologies. We face formidable competition in every aspect of our business, including, among others, from:•general purpose search engines and information services;•vertical search engines and e-commerce providers for queries related to travel, jobs, and health, which users may navigate directly to rather than go through Google;•online advertising platforms and networks;•other forms of advertising, such as billboards, magazines, newspapers, radio, and television as our advertisers typically advertise in multiple media, both online and offline;•digital content and application platform providers;•providers of enterprise cloud services;•developers and providers of AI products and services;•companies that design, manufacture, and market consumer hardware products, including businesses that have developed proprietary platforms;•providers of digital video services; •social networks, which users may rely on for product or service referrals, rather than seeking information through traditional search engines;•providers of workspace communication and connectivity products; and •digital assistant providers.Competing successfully depends heavily on our ability to develop and distribute innovative products and technologies to the marketplace across our businesses. For example, for advertising, competing successfully depends on attracting and retaining:•users, for whom other products and services are literally one click away, largely on the basis of the relevance of our advertising, as well as the general usefulness, security, and availability of our products and services;•advertisers, primarily based on our ability to generate sales leads, and ultimately customers, and to deliver their advertisements in an efficient and effective manner across a variety of distribution channels; and•content providers, primarily based on the quality of our advertiser base, our ability to help these partners generate revenues from advertising, and the terms of our agreements with them.8. Table of ContentsAlphabet Inc.For additional information about competition, see Item 1A Risk Factors of this Annual Report on Form 10-K. Ongoing Commitment to SustainabilityWe believe that every business has the opportunity and obligation to protect our planet. Sustainability is one of our core values at Google, and we strive to build sustainability into everything we do. We have been a leader on sustainability and climate change since Google’s founding more than 25 years ago. Our sustainability work is focused on empowering individuals to take action, working together with our partners and customers, and working to reduce our carbon footprint across our operations and supply chain.In 2020, we shared our aspiration to help individuals, cities, and other partners collectively reduce one gigaton of their carbon equivalent emissions annually by 2030. This is an ambitious vision that we have set to push us to contribute meaningfully to helping with climate solutions beyond our own operations and value chain. In 2021, we set an ambitious goal to achieve net-zero emissions across all of our operations and value chain, by 2030. To accomplish this, we aim to reduce 50% of our combined Scope 1, Scope 2 (market-based), and Scope 3 absolute emissions (versus our 2019 baseline) before 2030, and plan to invest in nature-based and technology-based carbon removal solutions to neutralize our remaining emissions. We have formally committed to the Science Based Targets initiative to seek their validation of our absolute emissions reduction target. One of the key levers for reducing emissions from our operations is transitioning to clean energy. Since 2017, we have matched 100% of the electricity consumption of our global operations with purchases of renewable energy on an annual basis. However, because of differences in the availability of renewable energy sources like solar and wind across the regions where we operate—and because of the variable supply of these resources—we still need to rely on carbon-emitting energy sources that power local grids. That is why we set a goal to run on 24/7 carbon-free energy (CFE) on every grid where we operate by 2030.Achieving net-zero emissions and 24/7 CFE by 2030 are extremely ambitious goals. We also know that our path to net-zero emissions will not be easy or linear. Some of our plans may take years to deliver results, particularly where they involve building new large-scale infrastructure with long lead times. So as our business continues to evolve, we expect our emissions to rise before dropping towards our absolute emissions reduction target.To benefit the people and places where we operate, we have set goals to replenish 120% of the freshwater volume we consume, on average, across our offices and data centers by 2030 and to help restore and improve the quality of water and health of ecosystems in the communities where we operate. We also aim to maximize the reuse of finite resources across our operations, products, and supply chains. Our circularity principles focus on designing out waste from the start, keeping materials in use for as long as possible, and promoting healthy materials—for our data centers, workplaces, and products.More information on our approach to sustainability can be found in our annual sustainability reports, including Google’s Environmental Report. The contents of our sustainability reports are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC. For additional information about risks and uncertainties applicable to our commitments to attain certain sustainability goals, see Item 1A Risk Factors of this Annual Report on Form 10-K.Culture and WorkforceWe are a company of curious, talented, and passionate people. We embrace collaboration and creativity, and encourage the iteration of ideas to address complex challenges in technology and society.Our people are critical for our continued success, so we work hard to create an environment where employees can have fulfilling careers, and be happy, healthy, and productive. We offer industry-leading benefits and programs to take care of the diverse needs of our employees and their families, including opportunities for career growth and development, resources to support their financial health, and access to excellent healthcare choices. Our competitive compensation programs help us to attract and retain top candidates, and we will continue to invest in recruiting talented people to technical and non-technical roles, and rewarding them well. We provide a variety of high quality training and support to managers to build and strengthen their capabilities-–ranging from courses for new managers, to learning resources that help them provide feedback and manage performance, to coaching and individual support.At Alphabet, we are committed to making diversity, equity, and inclusion part of everything we do and to growing a workforce that is representative of the users we serve. More information on Google’s approach to diversity can be found in our annual diversity reports, available publicly at diversity.google. The contents of our diversity reports are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC.9. Table of ContentsAlphabet Inc. As of December 31, 2023, Alphabet had 182,502 employees. We have work councils and statutory employee representation obligations in certain countries, and we are committed to supporting protected labor rights, maintaining an open culture, and listening to all employees. Supporting healthy and open dialogue is central to how we work, and we communicate information about the company through multiple internal channels to our employees.When necessary we contract with businesses around the world to provide specialized services where we do not have appropriate in-house expertise or resources, often in fields that require specialized training like cafe operations, content moderation, customer support, and physical security. We also contract with temporary staffing agencies when we need to cover short-term leaves, when we have spikes in business needs, or when we need to quickly incubate special projects. We choose our partners and staffing agencies carefully, and review their compliance with Google’s Supplier Code of Conduct. We continually make improvements to promote a respectful and positive working environment for everyone — employees, vendors, and temporary staff alike.Government RegulationWe are subject to numerous United States (U.S.) federal, state, and local, as well as foreign laws and regulations covering a wide variety of subjects, and the scope of this coverage continues to broaden with continuing new legal and regulatory developments in the U.S. and internationally. Like other companies in the technology industry, we face increasingly heightened scrutiny from both U.S. and foreign governments with respect to our compliance with laws and regulations. Many of these laws and regulations are evolving and their applicability and scope, as interpreted by the courts, remain uncertain. Particularly with regard to AI; climate change and sustainability; competition; consumer protection; content moderation; data privacy and security; news publications; and reporting on human capital and diversity, we have seen an increase in new and evolving laws and regulations, as well as related enforcement actions and investigations, being proposed and implemented in recent years by legislative and regulatory bodies around the world.Our compliance with these laws and regulations may be onerous and could, individually or in the aggregate, increase our cost of doing business, make our products and services less useful, limit our ability to pursue certain business models, cause us to change our business practices, affect our competitive position relative to our peers, and/or otherwise harm our business, reputation, financial condition, and operating results.For additional information about government regulation applicable to our business, see Item 1A Risk Factors; Trends in Our Business and Financial Effect in Part II, Item 7; and Legal Matters in Note 10 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.Intellectual PropertyWe rely on various intellectual property laws, confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We have registered, and applied for the registration of, U.S. and international trademarks, service marks, domain names, and copyrights. We have also filed patent applications in the U.S. and foreign countries covering certain of our technology, and acquired patent assets to supplement our portfolio. We have licensed in the past, and expect that we may license in the future, certain of our rights to other parties. For additional information, see Item 1A Risk Factors of this Annual Report on Form 10-K.Available InformationOur website is located at www.abc.xyz, and our investor relations website is located at www.abc.xyz/investor. Access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and our Proxy Statements, and any amendments to these reports, is available on our investor relations website, free of charge, after we file or furnish them with the SEC and they are available on the SEC's website at www.sec.gov.We webcast via our investor relations website our earnings calls and certain events we participate in or host with members of the investment community. Our investor relations website also provides notifications of news or announcements regarding our financial performance and other items that may be material or of interest to our investors, including SEC filings, investor events, press and earnings releases, and blogs. We also share Google news and product updates on Google's Keyword blog at https://www.blog.google/, which may be of interest or material to our investors. Further, corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters, and code of conduct, is also available on our investor relations website under the heading "Governance." The content of our websites are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.10. Table of ContentsAlphabet Inc.ITEM 1A.RISK FACTORSOur operations and financial results are subject to various risks and uncertainties, including but not limited to those described below, which could harm our business, reputation, financial condition, and operating results, and affect the trading price of our Class A and Class C stock.Risks Specific to our CompanyWe generate a significant portion of our revenues from advertising. Reduced spending by advertisers, a loss of partners, or new and existing technologies that block ads online and/or affect our ability to customize ads could harm our business. We generated more than 75% of total revenues from online advertising in 2023. Many of our advertisers, companies that distribute our products and services, digital publishers, and content providers can terminate their contracts with us at any time. These partners may not continue to do business with us if we do not create more value (such as increased numbers of users or customers, new sales leads, increased brand awareness, or more effective monetization) than their available alternatives. Changes to our advertising policies and data privacy practices, such as our initiatives to phase out third-party cookies, as well as changes to other companies’ advertising and/or data privacy practices have in the past, and may in the future, affect the advertising that we are able to provide. In addition, technologies have been developed that make customized ads more difficult, or that block the display of ads altogether, and some providers of online services have integrated these technologies that could potentially impair the availability and functionality of third-party digital advertising. Failing to provide superior value or deliver advertisements effectively and competitively could harm our business, reputation, financial condition, and operating results. In addition, expenditures by advertisers tend to correlate with overall economic conditions. Adverse macroeconomic conditions have affected, and may in the future affect, the demand for advertising, resulting in fluctuations in the amounts our advertisers spend on advertising, which could harm our financial condition and operating results. We face intense competition. If we do not continue to innovate and provide products and services that are useful to users, customers, and other partners, we may not remain competitive, which could harm our business, financial condition, and operating results. Our business environment is rapidly evolving and intensely competitive. Our businesses face changing technologies, shifting user needs, and frequent introductions of rival products and services. To compete successfully, we must accurately anticipate technology developments and deliver innovative, relevant and useful products, services, and technologies in a timely manner. As our businesses evolve, the competitive pressure to innovate will encompass a wider range of products and services. We must continue to invest significant resources in technical infrastructure and R&D, including through acquisitions, in order to enhance our technology, products, and services. We have many competitors in different industries. Our current and potential domestic and international competitors range from large and established companies to emerging start-ups. Some competitors have longer operating histories and well-established relationships in various sectors. They can use their experience and resources in ways that could affect our competitive position, including by making acquisitions and entering into other strategic arrangements; continuing to invest heavily in technical infrastructure, R&D, and in talent; initiating intellectual property and competition claims (whether or not meritorious); and continuing to compete for users, advertisers, customers, and content providers. Further, discrepancies in enforcement of existing laws may enable our lesser known competitors to aggressively interpret those laws without commensurate scrutiny, thereby affording them competitive advantages. Our competitors may also be able to innovate and provide products and services faster than we can or may foresee the need for products and services before we do. We are expanding our investment in AI across the entire company. This includes generative AI and continuing to integrate AI capabilities into our products and services. AI technology and services are highly competitive, rapidly evolving, and require significant investment, including development and operational costs, to meet the changing needs and expectations of our existing users and attract new users. Our ability to deploy certain AI technologies critical for our products and services and for our business strategy may depend on the availability and pricing of third-party equipment and technical infrastructure. Additionally, other companies may develop AI products and technologies that are similar or superior to our technologies or more cost-effective to deploy. Other companies may also have (or in the future may obtain) patents or other proprietary rights that would prevent, limit, or interfere with our ability to make, use, or sell our own AI products and services.Our financial condition and operating results may also suffer if our products and services are not responsive to the evolving needs and desires of our users, advertisers, publishers, customers, and content providers. As new and existing technologies continue to develop, competitors and new entrants may be able to offer experiences that are, or 11. Table of ContentsAlphabet Inc.that are seen to be, substantially similar to or better than ours. These technologies could reduce usage of our products and services, and force us to compete in different ways and expend significant resources to develop and operate equal or better products and services. Competitors’ success in providing compelling products and services or in attracting and retaining users, advertisers, publishers, customers, and content providers could harm our financial condition and operating results. Our ongoing investment in new businesses, products, services, and technologies is inherently risky, and could divert management attention and harm our business, financial condition, and operating results. We have invested and expect to continue to invest in new businesses, products, services, and technologies in a wide range of industries beyond online advertising. The investments that we are making across our businesses, such as building AI capabilities into new and existing products and services, reflect our ongoing efforts to innovate and provide products and services that are helpful to users, advertisers, publishers, customers, and content providers. Our investments ultimately may not be commercially viable or may not result in an adequate return of capital and, in pursuing new strategies, we may incur unanticipated liabilities. Innovations in our products and services could also result in changes to user behavior and affect our revenue trends. These endeavors involve significant risks and uncertainties, including diversion of resources and management attention from current operations, different monetization models, and the use of alternative investment, governance, or compensation structures that may fail to adequately align incentives across the company or otherwise accomplish their objectives.Within Google Services, we continue to invest heavily in devices, including our smartphones, home devices, and wearables, which is a highly competitive market with frequent introduction of new products and services, rapid adoption of technological advancements by competitors, increased market saturation in developed countries, short product life cycles, evolving industry standards, continual improvement in performance characteristics, and price and feature sensitivity on the part of consumers and businesses. There can be no assurance we will be able to provide devices that compete effectively. Within Google Cloud, we devote significant resources to develop and deploy our enterprise-ready cloud services, including Google Cloud Platform and Google Workspace, and we are advancing our AI platforms and models to support these tools and technologies. We are incurring costs to build and maintain infrastructure to support cloud computing services, invest in cybersecurity, and hire talent, particularly to support and scale our sales force. At the same time, our competitors are rapidly developing and deploying cloud-based services. Pricing and delivery models are competitive and constantly evolving, and we may not attain sufficient scale and profitability to achieve our business objectives. Further, our business with public sector customers may present additional risks, including regulatory compliance risks. For instance, we may be subject to government audits and cost reviews, and any failure to comply or any deficiencies found may expose us to legal, financial, and/or reputational risks. Evolving laws and regulations may require us to make new capital investments, build new products, and seek partners to deliver localized services in other countries, and we may not be able to meet sovereign operating requirements. Within Other Bets, we are investing significantly in the areas of health, life sciences, and transportation, among others. These investment areas face intense competition from large, experienced, and well-funded competitors, and our offerings, many of which involve the development of new and emerging technologies, may not be successful, or be able to compete effectively or operate at sufficient levels of profitability. In addition, new and evolving products and services, including those that use AI, raise ethical, technological, legal, regulatory, and other challenges, which may negatively affect our brands and demand for our products and services. Because all of these investment areas are inherently risky, no assurance can be given that such strategies and offerings will be successful or will not harm our reputation, financial condition, and operating results. Our revenue growth rate could decline over time, and we may experience downward pressure on our operating margin in the future. Our revenue growth rate could decline over time as a result of a number of factors, including changes in the devices and modalities used to access our products and services; changes in geographic mix; deceleration or declines in advertiser spending; competition; customer usage and demand for our products; decreases in our pricing of our products and services; ongoing product and policy changes; and shifts to lower priced products and services. In addition, we may experience downward pressure on our operating margin resulting from a variety of factors, such as an increase in the mix of lower-margin products and services, in particular from the continued expansion of our business into new fields, including products and services such as our devices, Google Cloud, and consumer subscription products, as well as significant investments in Other Bets, all of which may have margins lower than those we generate from advertising. In particular, margins on our devices have had, and may continue to have, an adverse effect on our consolidated margins due to pressures on pricing and higher cost of sales. We may also experience 12. Table of ContentsAlphabet Inc.downward pressure on our operating margins from increasing regulations, increasing competition, and increasing costs for many aspects of our business. Further, certain of our costs and expenses are generally less variable in nature and may not correlate to changes in revenue. We may also not be able to execute our efforts to re-engineer our cost base successfully or in a timely manner. Due to these factors and the evolving nature of our business, our historical revenue growth rate and historical operating margin may not be indicative of our future performance. For additional information, see Trends in Our Business and Financial Effect and Revenues and Monetization Metrics in Part II, Item 7 of this Annual Report on Form 10-K. Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services, and brands as well as affect our ability to compete. Our patents, trademarks, trade secrets, copyrights, and other intellectual property rights are important assets for us. Various events outside of our control pose a threat to our intellectual property rights, as well as to our products, services, and technologies. For example, effective intellectual property protection may not be available in every country in which our products and services are distributed or made available through the Internet. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Although we seek to obtain patent protection for our innovations, it is possible we may not be able to protect some of these innovations. Moreover, we may not have adequate patent or copyright protection for certain innovations that later turn out to be important. There is always the possibility that the scope of the protection gained will be insufficient or that an issued patent may be deemed invalid or unenforceable. We also seek to maintain certain intellectual property as trade secrets. The secrecy of such trade secrets and other sensitive information could be compromised, which could cause us to lose the competitive advantage resulting from these trade secrets. We also face risks associated with our trademarks. For example, there is a risk that the word “Google” could become so commonly used that it becomes synonymous with the word “search.” Some courts have ruled that "Google" is a protectable trademark, but it is possible that other courts, particularly those outside of the U.S., may reach a different determination. If this happens, we could lose protection for this trademark, which could result in other people using the word “Google” to refer to their own products, thus diminishing our brand. Any significant impairment of our intellectual property rights could harm our business and our ability to compete. Also, protecting our intellectual property rights is costly and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our financial condition and operating results. Our business depends on strong brands, and failing to maintain and enhance our brands would hurt our ability to expand our base of users, advertisers, customers, content providers, and other partners. Our strong brands have significantly contributed to the success of our business. Maintaining and enhancing the brands within Google Services, Google Cloud, and Other Bets increases our ability to enter new categories and launch new and innovative products and services that better serve the needs of our users, advertisers, customers, content providers, and other partners. Our brands have been, and may in the future be, negatively affected by a number of factors, including, among others, reputational issues, third-party content shared on our platforms, data privacy and security issues and developments, and product or technical performance failures. For example, if we fail to respond appropriately to the sharing of misinformation or objectionable content on our services and/or products or objectionable practices by advertisers, or otherwise to adequately address user concerns, our users may lose confidence in our brands. Furthermore, failure to maintain and enhance our brands could harm our business, reputation, financial condition, and operating results. Our success will depend largely on our ability to remain a technology leader and continue to provide high-quality, trustworthy, innovative products and services that are truly useful and play a valuable role in a range of settings. We face a number of manufacturing and supply chain risks that could harm our business, financial condition, and operating results. We face a number of risks related to manufacturing and supply chain management, which could affect our ability to supply both our products and our services. We rely on contract manufacturers to manufacture or assemble our devices and servers and networking equipment used in our technical infrastructure, and we may supply the contract manufacturers with components to assemble the devices and equipment. We also rely on other companies to participate in the supply of components and distribution of our products and services. Our business could be negatively affected if we are not able to engage these companies with the necessary capabilities or capacity on reasonable terms, or if those we engage fail to meet their 13. Table of ContentsAlphabet Inc.obligations (whether due to financial difficulties or other reasons), or make adverse changes in the pricing or other material terms of our arrangements with them. We have experienced and/or may in the future experience supply shortages, price increases, quality issues, and/or longer lead times that could negatively affect our operations, driven by raw material, component availability, manufacturing capacity, labor shortages, industry allocations, logistics capacity, inflation, foreign currency exchange rates, tariffs, sanctions and export controls, trade disputes and barriers, forced labor concerns, sustainability sourcing requirements, geopolitical tensions, armed conflicts, natural disasters or pandemics, the effects of climate change (such as sea level rise, drought, flooding, heat waves, wildfires and resultant air quality effects and power shutdowns associated with wildfire prevention, and increased storm severity), power loss, and significant changes in the financial or business condition of our suppliers. Some of the components we use in our technical infrastructure and our devices are available from only one or limited sources, and we may not be able to find replacement vendors on favorable terms in the event of a supply chain disruption. A significant supply interruption that affects us or our vendors could delay critical data center upgrades or expansions and delay consumer product availability. We may enter into long-term contracts for materials and products that commit us to significant terms and conditions. We may face costs for materials and products that are not consumed due to market demand, technological change, changed consumer preferences, quality, product recalls, and warranty issues. For instance, because certain of our hardware supply contracts have volume-based pricing or minimum purchase requirements, if the volume of sales of our devices decreases or does not reach projected targets, we could face increased materials and manufacturing costs or other financial liabilities that could make our products more costly per unit to manufacture and harm our financial condition and operating results. Furthermore, certain of our competitors may negotiate more favorable contractual terms based on volume and other commitments that may provide them with competitive advantages and may affect our supply. Our devices have had, and in the future may have, quality issues resulting from design, manufacturing, or operations. Sometimes, these issues may be caused by components we purchase from other manufacturers or suppliers. If the quality of our products and services does not meet expectations or our products or services are defective or require a recall, it could harm our reputation, financial condition, and operating results. We require our suppliers and business partners to comply with laws and, where applicable, our company policies and practices, such as the Google Supplier Code of Conduct, regarding workplace and employment practices, data security, environmental compliance, and intellectual property licensing, but we do not control them or their practices. Violations of law or unethical business practices could result in supply chain disruptions, canceled orders, harm to key relationships, and damage to our reputation. Their failure to procure necessary license rights to intellectual property could affect our ability to sell our products or services and expose us to litigation or financial claims. Interruption to, interference with, or failure of our complex information technology and communications systems could hurt our ability to effectively provide our products and services, which could harm our reputation, financial condition, and operating results. The availability of our products and services and fulfillment of our customer contracts depend on the continuing operation of our information technology and communications systems. Our systems are vulnerable to damage, interference, or interruption from modifications or upgrades, terrorist attacks, state-sponsored attacks, natural disasters or pandemics, geopolitical tensions or armed conflicts, export controls and sanctions, the effects of climate change (such as sea level rise, drought, flooding, heat waves, wildfires and resultant air quality effects and power shutdowns associated with wildfire prevention, and increased storm severity), power loss, utility outages, telecommunications failures, computer viruses, software bugs, ransomware attacks, supply-chain attacks, computer denial of service attacks, phishing schemes, or other attempts to harm or access our systems. Some of our data centers are located in areas with a high risk of major earthquakes or other natural disasters. Our data centers are also subject to break-ins, sabotage, and intentional acts of vandalism, and, in some cases, to potential disruptions resulting from problems experienced by facility operators or disruptions as a result of geopolitical tensions and conflicts happening in the area. Some of our systems are not fully redundant, and disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster or pandemic, closure of a facility, or other unanticipated problems affecting our data centers could result in lengthy interruptions in our service. In addition, our products and services are highly technical and complex and have contained in the past, and may contain in the future, errors or vulnerabilities, which could result in interruptions in or failure of our services or systems. Any of these incidents could impede or prevent us from effectively offering products and providing services, which could harm our reputation, financial condition, and operating results. Our international operations expose us to additional risks that could harm our business, financial condition, and operating results.14. Table of ContentsAlphabet Inc.Our international operations are significant to our revenues and net income, and we plan to continue to grow internationally. International revenues accounted for approximately 53% of our consolidated revenues in 2023. In addition to risks described elsewhere in this section, our international operations expose us to other risks, including the following:•restrictions on foreign ownership and investments, and stringent foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S.;•sanctions, import and export controls, other market access barriers, political unrest, geopolitical tensions, changes in regimes, or armed conflict (such as ongoing conflicts in the Middle East and Ukraine), any of which may affect our business continuity, increase our operating costs, limit demand for our products and services, limit our ability to source components or final products, or prevent or impede us from operating in certain jurisdictions, complying with local laws, or offering products or services;•longer payment cycles in some countries, increased credit risk, and higher levels of payment fraud;•an evolving foreign policy landscape that may adversely affect our revenues and could subject us to litigation, new regulatory costs and challenges (including new customer requirements), uncertainty regarding regulatory outcomes, and other liabilities under local laws that may not offer due process or clear legal precedent;•anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, and other local laws prohibiting certain payments to government officials, violations of which could result in civil and criminal penalties; and•different employee/employer relationships, existence of works councils and differing labor practices, and other challenges caused by distance, language, local expertise, and cultural differences, increasing the complexity of doing business in multiple jurisdictions.Because we conduct business in currencies other than U.S. dollars but report our financial results in U.S. dollars, we have faced, and will continue to face, exposure to fluctuations in foreign currency exchange rates. Although we hedge a portion of our international currency exposure, significant fluctuations in exchange rates between the U.S. dollar and foreign currencies have in the past and may in the future adversely affect our revenues and earnings. Hedging programs are also inherently risky and could expose us to additional risks that could harm our financial condition and operating results. We are exposed to fluctuations in the fair values of our investments and, in some instances, our financial statements incorporate inherently subjective valuation methodologies. The fair value of our debt and equity investments may in the future be, and certain investments have been in the past, negatively affected by liquidity, credit deterioration or losses, performance and financial results of the underlying entities, foreign exchange rates, changes in interest rates, including changes that may result from the implementation of new benchmark rates, the effect of new or changing regulations, the stock market in general, or other factors. We measure certain of our non-marketable equity and debt securities, certain other instruments including stock-based compensation awards settled in the stock of Other Bet companies, and certain assets and liabilities acquired in a business combination, at fair value on a nonrecurring basis, which is inherently subjective and requires management judgment and estimation. All gains and losses on non-marketable equity securities are recognized in OI&E, which increases the volatility of our OI&E. The unrealized gains and losses or impairments we record from fair value remeasurements in any particular period may differ significantly from the gains or losses we ultimately realize on such investments. As a result of these factors, the value of our investments could decline, which could harm our financial condition and operating results. Risks Related to our Industry People access our products and services through a variety of platforms and devices that continue to evolve with the advancement of technology and user preferences. If manufacturers and users do not widely adopt versions of our products and services developed for these interfaces, our business could be harmed. People access our products and services through a growing variety of devices such as desktop computers, mobile phones, smartphones, laptops and tablets, video game consoles, voice-activated speakers, wearables (including virtual reality and augmented reality devices), automobiles, and television-streaming devices. Our products and services may be less popular on some interfaces. Each manufacturer or distributor may establish unique technical standards for its devices, and our products and services may not be available or may only be available with limited functionality for our users or our advertisers on these devices as a result. Some manufacturers may also elect not to include our products on their devices. In addition, search queries may be undertaken via voice-activated search, apps, 15. Table of ContentsAlphabet Inc.social media or other platforms, which could harm our business. It is hard to predict the challenges we may encounter in adapting our products and services and developing competitive new products and services. We expect to continue to devote significant resources to creating and supporting products and services across multiple platforms and devices. Failing to attract and retain a substantial number of new device manufacturers, suppliers, distributors, developers, and users, or failing to develop products and technologies that work well on new devices and platforms, could harm our business, financial condition, and operating results and ability to capture future business opportunities. Issues in the development and use of AI may result in reputational harm and increased liability exposure. Our evolving AI-related efforts may give rise to risks related to harmful content, inaccuracies, discrimination, intellectual property infringement or misappropriation, defamation, data privacy, cybersecurity, and other issues. As a result of these and other challenges associated with innovative technologies, our implementation of AI systems could subject us to competitive harm, regulatory action, legal liability (including under new and proposed legislation and regulations), new applications of existing data protection, privacy, intellectual property, and other laws, and brand or reputational harm. Some uses of AI will present ethical issues and may have broad effects on society. In order to implement AI responsibly and minimize unintended harmful effects, we have already devoted and will continue to invest significant resources to develop, test, and maintain our products and services, but we may not be able to identify or resolve all AI-related issues, deficiencies, and/or failures before they arise. Unintended consequences, uses, or customization of our AI tools and systems may negatively affect human rights, privacy, employment, or other social concerns, which may result in claims, lawsuits, brand or reputational harm, and increased regulatory scrutiny, any of which could harm our business, financial condition, and operating results.Data privacy and security concerns relating to our technology and our practices could harm our reputation, cause us to incur significant liability, and deter current and potential users or customers from using our products and services. Computer viruses, software bugs or defects, security breaches, and attacks on our systems could result in the improper disclosure and use of user data and interference with our users’ and customers’ ability to use our products and services, harming our business and reputation. Concerns about, including the adequacy of, our practices with regard to the collection, use, governance, disclosure, or security of personal data or other data-privacy-related matters, even if unfounded, could harm our business, reputation, financial condition, and operating results. Our policies and practices may change over time as expectations and regulations regarding privacy and data change. Our products and services involve the storage, handling, and transmission of proprietary and other sensitive information. Software bugs, theft, misuse, defects, vulnerabilities in our products and services, and security breaches expose us to a risk of loss or improper use and disclosure of such information, which could result in litigation and other potential liabilities, including regulatory fines and penalties, as well as reputational harm. Additionally, our products incorporate highly technical and complex technologies, and thus our technologies and software have contained, and are likely in the future to contain, undetected errors, bugs, and/or vulnerabilities. We continue to add new features involving AI to our offerings and internal systems, and features that rely on AI may be susceptible to unanticipated security threats as our and the market’s understanding of AI-centric security risks and protection methods continue to develop. We have in the past discovered, and may in the future discover, some errors in our software code only after we have released the code. Systems and control failures, security breaches, failure to comply with our privacy policies, and/or inadvertent disclosure of user data could result in government and legal exposure, seriously harm our reputation, brand, and business, and impair our ability to attract and retain users or customers. Such incidents have occurred in the past and may continue to occur due to the scale and nature of our products and services. While there is no guarantee that such incidents will not cause significant damage, we expect to continue to expend significant resources to maintain security protections that limit the effect of bugs, theft, misuse, and security vulnerabilities or breaches. We experience cyber attacks and other attempts to gain unauthorized access to our systems on a regular basis. Cyber attacks continue to evolve in sophistication and volume, and inherently may be difficult to detect for long periods of time. We have seen, and will continue to see, industry-wide software supply chain vulnerabilities, which could affect our or other parties’ systems. We expect to continue to experience such incidents or vulnerabilities in the future. Our efforts to address undesirable activity on our platform may also increase the risk of retaliatory attack. In addition, we face the risk of cyber attacks by nation-states and state-sponsored actors. These attacks may target us or our customers, particularly our public sector customers (including federal, state, and local governments). Geopolitical tensions or armed conflicts, such as the ongoing conflict in the Middle East and Ukraine, may increase these risks. We may experience security issues, whether due to employee or insider error or malfeasance, system errors, or vulnerabilities in our or other parties’ systems. While we may not determine some of these issues to be material at the 16. Table of ContentsAlphabet Inc.time they occur and may remedy them quickly, there is no guarantee that these issues will not ultimately result in significant legal, financial, and reputational harm, including government inquiries, enforcement actions, litigation, and negative publicity. There is also no guarantee that a series of related issues may not be determined to be material at a later date in the aggregate, even if they may not be material individually at the time of their occurrence. Because the techniques used to obtain unauthorized access to, disable or degrade service provided by or otherwise sabotage systems change frequently and often are recognized only after being launched against a target, even taking all reasonable precautions, including those required by law, we have been unable in the past and may continue to be unable to anticipate or detect attacks or vulnerabilities or implement adequate preventative measures. Further, if any partners with whom we share user or other customer information fail to implement adequate data-security practices, fail to comply with our terms and policies, or otherwise suffer a network or other security breach, our users’ data may be improperly accessed, used, or disclosed. If an actual or perceived breach of our or our business partners’ or service providers’ security occurs, the market perception of the effectiveness of our security measures would be harmed, we could lose users and customers, our trade secrets or those of our business partners may be compromised, and we may be exposed to significant legal and financial risks, including legal claims (which may include class-action litigation) and regulatory actions, fines, and penalties. Any of the foregoing consequences could harm our business, reputation, financial condition, and operating results. While we have dedicated significant resources to privacy and security incident response capabilities, including dedicated worldwide incident response teams, our response process, particularly during times of a natural disaster or pandemic, may not be adequate, may fail to accurately assess the severity of an incident, may not be fast enough to prevent or limit harm, or may fail to sufficiently remediate an incident. As a result, we may suffer significant legal, reputational, or financial exposure, which could harm our business, financial condition, and operating results. For additional information, see also our risk factor on privacy and data protection regulations under ‘Risks Related to Laws, Regulations, and Policies’ below.Our ongoing investments in safety, security, and content review will likely continue to identify abuse of our platforms and misuse of user data. In addition to our efforts to prevent and mitigate cyber attacks, we are making significant investments in safety, security, and review efforts to combat misuse of our services and unauthorized access to user data by third parties, including investigation and review of platform applications that could access the information of users of our services. As a result of these efforts, we have in the past discovered, and may in the future discover, incidents of unnecessary access to or misuse of user data or other undesirable activity by third parties. However, we may not have discovered, and may in the future not discover, all such incidents or activity, whether as a result of our data limitations, including our lack of visibility over our encrypted services, the scale of activity on our platform, or other factors, including factors outside of our control such as a natural disaster or pandemic, and we may learn of such incidents or activity via third parties. Such incidents and activities may include the use of user data or our systems in a manner inconsistent with our terms, contracts or policies, the existence of false or undesirable user accounts, election interference, improper ad purchases, activities that threaten people’s safety on- or off-line, or instances of spamming, scraping, or spreading disinformation. While we may not determine some of these incidents to be material at the time they occurred and we may remedy them quickly, there is no guarantee that these issues will not ultimately result in significant legal, financial, and reputational harm, including government inquiries and enforcement actions, litigation, and negative publicity. There is also no guarantee that a series of related issues may not be determined to be material at a later date in the aggregate, even if they may not be material individually at the time of their occurrence. We may also be unsuccessful in our efforts to enforce our policies or otherwise prevent or remediate any such incidents. Any of the foregoing developments may negatively affect user trust and engagement, harm our reputation and brands, require us to change our business practices in ways that harm our business operations, and adversely affect our business and financial results. Any such developments may also subject us to additional litigation and regulatory inquiries, which could result in monetary penalties and damages, divert management’s time and attention, and lead to enhanced regulatory oversight. Problematic content on our platforms, including low-quality user-generated content, web spam, content farms, and other violations of our guidelines could affect the quality of our services, which could harm our reputation and deter our current and potential users from using our products and services. We, like others in the industry, face violations of our content guidelines across our platforms, including sophisticated attempts by bad actors to manipulate our hosting and advertising systems to fraudulently generate revenues, or to otherwise generate traffic that does not represent genuine user interest or intent. While we invest significantly in efforts to promote high-quality and relevant results and to detect and prevent low-quality content and invalid traffic, we have been unable and may continue to be unable to detect and prevent all such abuses or promote 17. Table of ContentsAlphabet Inc.uniformly high-quality content. Increased use of AI in our offerings and internal systems may create new avenues of abuse for bad actors.Many websites violate or attempt to violate our guidelines, including by seeking to inappropriately rank higher in search results than our search engine's assessment of their relevance and utility would rank them. Such efforts have affected, and may continue to affect, the quality of content on our platforms and lead them to display false, misleading, or undesirable content. Although English-language web spam in our search results has been reduced, and web spam in most other languages is limited, we expect web spammers will continue to seek inappropriate ways to improve their rankings. Although we continue to invest in and deploy proprietary technology to detect and prevent web spam on our platforms, there is no guarantee that our technology will always be successful, and our users may have negative experiences on our platforms if our technology fails to work as intended, which may affect our users' decisions in continuing to use our platforms. We also face other challenges from low-quality and irrelevant content websites, including content farms, which are websites that generate large quantities of low-quality content to help them improve their search rankings. We are continually launching algorithmic changes designed to detect and prevent abuse from low-quality websites, but we may not always be successful. We also face other challenges on our platforms, including violations of our content guidelines involving incidents such as attempted election interference, activities that threaten the safety and/or well-being of our users on- or off-line, and the spreading of misinformation or disinformation. If we fail to either detect and prevent an increase in problematic content or effectively promote high-quality content, it could hurt our reputation for delivering relevant information or reduce use of our platforms, harming our financial condition and operating results. It may also subject us to litigation and regulatory actions, which could result in monetary penalties and damages and divert management’s time and attention. Our business depends on continued and unimpeded access to the Internet by us and our users. Internet access providers may be able to restrict, block, degrade, or charge for access to certain of our products and services, which could lead to additional expenses and the loss of users and advertisers. Our products and services depend on the ability of our users to access the Internet, and certain of our products require significant bandwidth to work effectively. Currently, this access is provided by companies that have significant market power in the broadband and internet access marketplace, including incumbent telephone companies, cable companies, mobile communications companies, and government-owned service providers. Some of these providers have taken, or have stated that they may take, measures that could degrade, disrupt, or increase the cost of user access to certain of our products by restricting or prohibiting the use of their infrastructure to support or facilitate our offerings, by charging increased fees to us or our users to provide our offerings, or by providing our competitors preferential access. Some jurisdictions have adopted regulations prohibiting certain forms of discrimination by internet access providers; however, substantial uncertainty exists in the U.S. and elsewhere regarding such protections. For example, in 2018 the U.S. Federal Communications Commission repealed net neutrality rules, which could permit internet access providers to restrict, block, degrade, or charge for access to certain of our products and services. In addition, in some jurisdictions, our products and services have been subject to government-initiated restrictions or blockages. These could harm existing key relationships, including with our users, customers, advertisers, and/or content providers, and impair our ability to attract new ones; harm our reputation; and increase costs, thereby negatively affecting our business. Risks Related to Laws, Regulations, and Policies We are subject to a variety of new, existing, and changing laws and regulations worldwide that could harm our business, and will likely be subject to an even broader scope of laws and regulations as we continue to expand our business. We are subject to numerous U.S. and foreign laws and regulations covering a wide variety of subjects, and our introduction of new businesses, products, services, and technologies will likely continue to subject us to additional laws and regulations. In recent years, governments around the world have proposed and adopted a large number of new laws and regulations relevant to the digital economy, particularly in the areas of data privacy and security, competition, environmental, social and governance (ESG) requirements, AI, and online content. The costs of compliance with these measures are high and are likely to increase in the future. New or changing laws and regulations, or new interpretations or applications of existing laws and regulations in a manner inconsistent with our practices, have resulted in, and may continue to result in, less useful products and services, altered business practices, limited ability to pursue certain business models or offer certain products and services, substantial costs, and civil or criminal liability. Examples include laws and regulations regarding: •Competition and technology platforms’ business practices: Laws and regulations focused on large technology platforms, including the Digital Markets Act in the European Union (EU); regulations and legal 18. Table of ContentsAlphabet Inc.settlements in the U.S., South Korea, and elsewhere that affect Google Play’s billing policies, fees, and business model; as well as litigation and new regulations under consideration in a range of jurisdictions.•AI: Laws and regulations focused on the development, use, and provision of AI technologies and other digital products and services, which could result in monetary penalties or other regulatory actions. For example, while legislative text has yet to be finalized and formally approved, provisional political agreement on a proposed EU AI Act was reached between co-legislators in December 2023, including that specific transparency and other requirements would be introduced for general purpose AI systems and the models on which those systems are based. In addition, the White House's Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence devises a framework for the U.S. government, among other things, to regulate private sector use and development of certain foundation models. •Data privacy, collection, and processing: Laws and regulations further restricting the collection, processing, and/or sharing of user or advertising-related data, including privacy and data protection laws; laws affecting the processing of children's data (as discussed further below), data breach notification laws, and laws limiting data transfers (including data localization laws). •Copyright and other intellectual property: Copyright and related laws, including the EU Directive on Copyright in the Digital Single Market and European Economic Area transpositions, which may introduce new licensing regimes, increase liability with respect to content uploaded by users or linked to from our platforms, or create property rights in news publications that could require payments to news agencies and publishers, which may result in other regulatory actions. •Content moderation: Various laws covering content moderation and removal, and related disclosure obligations, such as the EU's Digital Services Act, Florida’s Senate Bill 7072 and Texas’ House Bill 20, and laws and proposed legislation in Singapore, Australia, and the United Kingdom that impose penalties for failure to remove certain types of content or require disclosure of information about the operation of our services and algorithms, which may make it harder for services like Google Search and YouTube to detect and deal with low-quality, deceptive, or harmful content.•Consumer protection: Consumer protection laws, including the EU’s New Deal for Consumers, which could result in monetary penalties and create a range of new compliance obligations.In addition, the applicability and scope of these and other laws and regulations, as interpreted by courts, regulators, or administrative bodies, remain uncertain and could be interpreted in ways that harm our business. For example, we rely on statutory safe harbors, like those set forth in the Digital Millennium Copyright Act and Section 230 of the Communications Decency Act in the U.S. and the E-Commerce Directive in Europe, to protect against liability for various linking, caching, ranking, recommending, and hosting activities. Legislation or court rulings affecting these safe harbors may adversely affect us and may impose significant operational challenges. There are legislative proposals and pending litigation in the U.S., EU, and around the world that could diminish or eliminate safe harbor protection for websites and online platforms. Our development, use, and commercialization of AI products and services (including our implementation of AI in our offerings and internal systems) could subject us to regulatory action and legal liability, including under specific legislation regulating AI, as well as new applications of existing data protection, cybersecurity, privacy, intellectual property, and other laws.We are and may continue to be subject to claims, lawsuits, regulatory and government investigations, enforcement actions, consent orders, and other forms of regulatory scrutiny and legal liability that could harm our business, reputation, financial condition, and operating results.We are subject to claims, lawsuits, regulatory and government investigations, other proceedings, and orders involving competition, intellectual property, data privacy and security, tax and related compliance, labor and employment, commercial disputes, content generated by our users, goods and services offered by advertisers or publishers using our platforms, personal injury, and other matters. We are also subject to a variety of claims including product warranty, product liability, and consumer protection claims related to product defects, among other litigation, and we may also be subject to claims involving health and safety, hazardous materials usage, other environmental effects, AI training, development, and commercialization, or service disruptions or failures. Claims have been brought, and we expect will continue to be brought, against us for defamation, negligence, breaches of contract, copyright and trademark infringement, unfair competition, unlawful activity, torts, privacy rights violations, fraud, or other legal theories based on the nature and content of information available on or via our services, the design and effect of our products and services, or due to our involvement in hosting, transmitting, marketing, branding, or providing access to content created by third parties. 19. Table of ContentsAlphabet Inc.For example, in December 2023, a California jury delivered a verdict in Epic Games v. Google finding that Google violated antitrust laws related to Google Play's billing practices. The presiding judge will determine remedies in 2024 and the range of potential remedies vary widely. We plan to appeal. In addition, the U.S. Department of Justice, various U.S. states, and other plaintiffs have filed several antitrust lawsuits about various aspects of our business, including our advertising technologies and practices, the operation and distribution of Google Search, and the operation and distribution of the Android operating system and Play Store. Other regulatory agencies in the U.S. and around the world, including competition enforcers, consumer protection agencies, and data protection authorities, have challenged and may continue to challenge our business practices and compliance with laws and regulations. We are cooperating with these investigations and defending litigation or appealing decisions where appropriate. Various laws, regulations, investigations, enforcement lawsuits, and regulatory actions have involved in the past, and may in the future result in substantial fines and penalties, injunctive relief, ongoing monitoring and auditing obligations, changes to our products and services, alterations to our business models and operations, including divestiture, and collateral related civil litigation or other adverse consequences, all of which could harm our business, reputation, financial condition, and operating results. Any of these legal proceedings could result in legal costs, diversion of management resources, negative publicity and other harms to our business. Estimating liabilities for our pending proceedings is a complex, fact-specific, and speculative process that requires significant judgment, and the amounts we are ultimately liable for may be less than or exceed our estimates. The resolution of one or more such proceedings has resulted in, and may in the future result in, additional substantial fines, penalties, injunctions, and other sanctions that could harm our business, reputation, financial condition, and operating results. For additional information about the ongoing material legal proceedings to which we are subject, see Legal Proceedings in Part I, Item 3 of this Annual Report on Form 10-K.Privacy, data protection, and data usage regulations are complex and rapidly evolving areas. Any failure or alleged failure to comply with these laws could harm our business, reputation, financial condition, and operating results. Authorities around the world have adopted and are considering a number of legislative and regulatory proposals concerning data protection, data usage, and encryption of user data. Adverse legal rulings, legislation, or regulation have resulted in, and may continue to result in, fines and orders requiring that we change our practices, which have had and could continue to have an adverse effect on how we provide services, harming our business, reputation, financial condition, and operating results. These laws and regulations are evolving and subject to interpretation, and compliance obligations could cause us to incur substantial costs or harm the quality and operations of our products and services in ways that harm our business. Examples of these laws include: •The General Data Protection Regulation and the United Kingdom General Data Protection Regulations, which apply to all of our activities conducted from an establishment in the EU or the United Kingdom, respectively, or related to products and services that we offer to EU or the United Kingdom users or customers, respectively, or the monitoring of their behavior in the EU or the UK, respectively.•Various comprehensive U.S. state and foreign privacy laws, which give new data privacy rights to their respective residents (including, in California, a private right of action in the event of a data breach resulting from our failure to implement and maintain reasonable security procedures and practices) and impose significant obligations on controllers and processors of consumer data.•State laws governing the processing of biometric information, such as the Illinois Biometric Information Privacy Act and the Texas Capture or Use of Biometric Identifier Act, which impose obligations on businesses that collect or disclose consumer biometric information. •Various federal, state, and foreign laws governing how companies provide age appropriate experiences to children and minors, including the collection and processing of children and minor’s data. These include the Children’s Online Privacy Protection Act of 1998, and the United Kingdom Age-Appropriate Design Code, all of which address the use and disclosure of the personal data of children and minors and impose obligations on online services or products directed to or likely to be accessed by children. •The California Internet of Things Security Law, which regulates the security of data used in connection with internet-connected devices.•The EU’s Digital Markets Act, which will require in-scope companies to obtain user consent for combining data across certain products and require search engines to share anonymized data with rival companies, among other changes. 20. Table of ContentsAlphabet Inc.Further, we are subject to evolving laws and regulations that dictate whether, how, and under what circumstances we can transfer, process and/or receive personal data, as well as ongoing enforcement actions from supervisory authorities related to cross-border transfers of personal data. The validity of various data transfer mechanisms we currently rely upon remains subject to legal, regulatory, and political developments in both Europe and the U.S., which may require us to adapt our existing arrangements.We face, and may continue to face, intellectual property and other claims that could be costly to defend, result in significant damage awards or other costs (including indemnification awards), and limit our ability to use certain technologies. We, like other internet, technology, and media companies, are frequently subject to litigation based on allegations of infringement or other violations of intellectual property rights, including patent, copyright, trade secrets, and trademarks. Parties have also sought broad injunctive relief against us by filing claims in U.S. and international courts and the U.S. International Trade Commission (ITC) for exclusion and cease-and-desist orders. In addition, patent-holding companies may frequently seek to generate income from patents they have obtained by bringing claims against us. As we continue to expand our business, the number of intellectual property claims against us has increased and may continue to increase as we develop and acquire new products, services, and technologies. Adverse results in any of these lawsuits may include awards of monetary damages, costly royalty or licensing agreements (if licenses are available at all), or orders limiting our ability to sell our products and services in the U.S. or elsewhere, including by preventing us from offering certain features, functionalities, products, or services in certain jurisdictions. They may also cause us to change our business practices in ways that could result in a loss of revenues for us and otherwise harm our business. Many of our agreements with our customers and partners, including certain suppliers, require us to defend against certain intellectual property infringement claims and in some cases indemnify them for certain intellectual property infringement claims against them, which could result in increased costs for defending such claims or significant damages if there were an adverse ruling in any such claims. Such customers and partners may also discontinue the use of our products, services, and technologies, as a result of injunctions or otherwise, which could result in loss of revenues and harm our business. Moreover, intellectual property indemnities provided to us by our suppliers, when obtainable, may not cover all damages and losses suffered by us and our customers arising from intellectual property infringement claims. Furthermore, in connection with our divestitures, we have agreed, and may in the future agree, to provide indemnification for certain potential liabilities, including those associated with intellectual property claims. Regardless of their merits, intellectual property claims are often time consuming and expensive to litigate or settle. To the extent such claims are successful, they could harm our business, including our product and service offerings, financial condition, and operating results. Expectations relating to ESG considerations could expose us to potential liabilities, increased costs, and reputational harm. We are subject to laws, regulations, and other measures that govern a wide range of topics, including those related to matters beyond our core products and services. For instance, new laws, regulations, policies, and international accords relating to ESG matters, including sustainability, climate change, human capital, and diversity, are being developed and formalized in Europe, the U.S., and elsewhere, which may entail specific, target-driven frameworks and/or disclosure requirements. We have implemented robust ESG programs, adopted reporting frameworks and principles, and announced a number of goals and initiatives. The implementation of these goals and initiatives may require considerable investments, and our goals, with all of their contingencies, dependencies, and in certain cases, reliance on third-party verification and/or performance, are complex and ambitious, and may change. We cannot guarantee that our goals and initiatives will be fully realized on the timelines we expect or at all, and projects that are completed as planned may not achieve the results we anticipate. Any failure, or perceived failure, by us to adhere to our public statements, comply fully with developing interpretations of ESG laws and regulations, or meet evolving and varied stakeholder expectations and standards could harm our business, reputation, financial condition, and operating results.We could be subject to changes in tax rates, the adoption of new U.S. or international tax legislation, or exposure to additional tax liabilities. We are subject to a variety of taxes and tax collection obligations in the U.S. and numerous foreign jurisdictions. Our effective tax rates are affected by a variety of factors, including changes in the mix of earnings in jurisdictions with different statutory tax rates, net gains and losses on hedges and related transactions under our foreign exchange risk management program, changes in our stock price for shares issued as employee compensation, changes in the valuation of our deferred tax assets or liabilities, and the application of different provisions of tax laws or changes in tax laws, regulations, or accounting principles (including changes in the interpretation of existing laws). Further, if we are 21. Table of ContentsAlphabet Inc.unable or fail to collect taxes on behalf of customers, employees and partners as the withholding agent, we could become liable for taxes that are levied against third parties. We are subject to regular review and audit by both domestic and foreign tax authorities. As a result, we have received, and may in the future receive, assessments in multiple jurisdictions, on various tax-related assertions, such as transfer-pricing adjustments or permanent-establishment claims. Any adverse outcome of such a review or audit could harm our financial condition and operating results, require adverse changes to our business practices, or subject us to additional litigation and regulatory inquiries. In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment and often involves uncertainty. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may affect our financial results in the period or periods for which such determination is made. Furthermore, due to shifting economic and political conditions, tax policies, laws, or rates in various jurisdictions may be subject to significant changes in ways that could harm our financial condition and operating results. For example, various jurisdictions around the world have enacted or are considering revenue-based taxes such as digital services taxes and other targeted taxes, which could lead to inconsistent and potentially overlapping international tax regimes. The Organization for Economic Cooperation and Development (OECD) is coordinating negotiations among more than 140 countries with the goal of achieving consensus around substantial changes to international tax policies, including the implementation of a minimum global effective tax rate of 15%. Our effective tax rate and cash tax payments could increase in future years as a result of these changes.Risks Related to Ownership of our Stock We cannot guarantee that any share repurchase program will be fully consummated or will enhance long-term stockholder value, and share repurchases could increase the volatility of our stock prices and could diminish our cash reserves. We engage in share repurchases of our Class A and Class C stock from time to time in accordance with authorizations from the Board of Directors of Alphabet. Our repurchase program does not have an expiration date and does not obligate Alphabet to repurchase any specific dollar amount or to acquire any specific number of shares. Further, our share repurchases could affect our share trading prices, increase their volatility, reduce our cash reserves and may be suspended or terminated at any time, which may result in a decrease in the trading prices of our stock. The concentration of our stock ownership limits our stockholders’ ability to influence corporate matters. Our Class B stock has 10 votes per share, our Class A stock has one vote per share, and our Class C stock has no voting rights. As of December 31, 2023, Larry Page and Sergey Brin beneficially owned approximately 86.5% of our outstanding Class B stock, which represented approximately 51.5% of the voting power of our outstanding common stock. Through their stock ownership, Larry and Sergey have significant influence over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or our assets, for the foreseeable future. In addition, because our Class C stock carries no voting rights (except as required by applicable law), the issuance of the Class C stock, including in future stock-based acquisition transactions and to fund employee equity incentive programs, could continue Larry and Sergey’s current relative voting power and their ability to elect all of our directors and to determine the outcome of most matters submitted to a vote of our stockholders. The share repurchases made pursuant to our repurchase program may also affect Larry and Sergey’s relative voting power. This concentrated control limits or severely restricts other stockholders’ ability to influence corporate matters and we may take actions that some of our stockholders do not view as beneficial, which could reduce the market price of our Class A stock and our Class C stock. Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable. Provisions in Alphabet’s certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following: •Our Board of Directors has the right to elect directors to fill a vacancy created by the expansion of the Board of Directors or the resignation, death, or removal of a director.•Our stockholders may not act by written consent, which makes it difficult to take certain actions without holding a stockholders' meeting.•Our certificate of incorporation prohibits cumulative voting in the election of directors. This limits the ability of minority stockholders to elect director candidates.22. Table of ContentsAlphabet Inc.•Stockholders must provide advance notice to nominate individuals for election to the Board of Directors or to propose matters that can be acted upon at a stockholders’ meeting. These provisions may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer's own slate of directors or otherwise attempting to obtain control of our company. •Our Board of Directors may issue, without stockholder approval, shares of undesignated preferred stock, which makes it possible for our Board of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us. As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its outstanding voting stock unless the holder has held the stock for three years or, among other things, the Board of Directors has approved the transaction. Our Board of Directors could rely on Delaware law to prevent or delay an acquisition of us. The trading price for our Class A stock and non-voting Class C stock may continue to be volatile. The trading price of our stock has at times experienced significant volatility and may continue to be volatile. In addition to the factors discussed in this report, the trading prices of our Class A stock and Class C stock have fluctuated, and may continue to fluctuate widely, in response to various factors, many of which are beyond our control, including, among others, the activities of our peers and changes in broader economic and political conditions around the world. These broad market and industry factors could harm the market price of our Class A stock and our Class C stock, regardless of our actual operating performance. General Risks Our operating results may fluctuate, which makes our results difficult to predict and could cause our results to fall short of expectations. Our operating results have fluctuated, and may in the future fluctuate, as a result of a number of factors, many outside of our control, including the cyclical nature and seasonality in our business and geopolitical events. As a result, comparing our operating results (including our expenses as a percentage of our revenues) on a period-to-period basis may not be meaningful, and our past results should not be relied on as an indication of our future performance. Consequently, our operating results in future quarters may fall below expectations. Acquisitions, joint ventures, investments, and divestitures could result in operating difficulties, dilution, and other consequences that could harm our business, financial condition, and operating results. Acquisitions, joint ventures, investments, and divestitures are important elements of our overall corporate strategy and use of capital, and these transactions could be material to our financial condition and operating results. We expect to continue to evaluate and enter into discussions regarding a wide array of such potential strategic arrangements, which could create unforeseen operating difficulties and expenditures. Some of the areas where we face risks include: •diversion of management time and focus from operating our business to challenges related to acquisitions and other strategic arrangements; •failure to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval that could, among other things, delay or prevent us from completing a transaction, or otherwise restrict our ability to realize the expected financial or strategic goals of a transaction;•failure to successfully integrate the acquired operations, technologies, services, and personnel (including cultural integration and retention of employees) and further develop the acquired business or technology; •implementation of controls (or remediation of control deficiencies), procedures, and policies at the acquired company; •integration of the acquired company’s accounting and other administrative systems, and the coordination of product, engineering, and sales and marketing functions;•transition of operations, users, and customers onto our existing platforms;•in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries; •failure to accomplish commercial, strategic or financial objectives with respect to investments, joint ventures, and other strategic arrangements;•failure to realize the value of investments and joint ventures due to a lack of liquidity;23. Table of ContentsAlphabet Inc.•liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, data privacy and security issues, violations of laws, commercial disputes, tax liabilities, warranty claims, product liabilities, and other known and unknown liabilities; and•litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders, or other third parties.Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and other strategic arrangements could cause us to fail to realize their anticipated benefits, incur unanticipated liabilities, and harm our business generally. Our acquisitions and other strategic arrangements could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, or amortization expenses, or impairment of goodwill and/or purchased long-lived assets, and restructuring charges, any of which could harm our financial condition and operating results. Also, the anticipated benefits or value of our acquisitions and other strategic arrangements may not materialize. In connection with our divestitures, we have agreed, and may in the future agree, to provide indemnification for certain potential liabilities, which could harm our financial condition and operating results. We rely on highly skilled personnel and, if we are unable to retain or motivate key personnel, hire qualified personnel, or maintain and continue to adapt our corporate culture, we may not be able to grow or operate effectively. Our performance and future success depends in large part upon the continued service of key technical leads as well as members of our senior management team. For instance, Sundar Pichai is critical to the overall management of Alphabet and its subsidiaries and plays an important role in the development of our technology, maintaining our culture, and setting our strategic direction. Our ability to compete effectively and our future success depend on our continuing to identify, hire, develop, motivate, and retain highly skilled personnel for all areas of our organization. Competition in our industry for qualified employees is intense, and certain of our competitors have directly targeted, and may continue to target, our employees. In addition, our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees. Restrictive immigration policy and regulatory changes may also affect our ability to hire, mobilize, or retain some of our global talent. All of our executive officers and key employees are at-will employees, and we do not maintain any key-person life insurance policies.In addition, we believe that our corporate culture fosters innovation, creativity, and teamwork. As our organization grows and evolves, we may need to adapt our corporate culture and work environments to ever-changing circumstances, such as during times of a natural disaster or pandemic, and these changes could affect our ability to compete effectively or have an adverse effect on our corporate culture. Under our hybrid work models, we may experience increased costs and/or disruption, in addition to potential effects on our ability to operate effectively and maintain our corporate culture. ITEM 1B.UNRESOLVED STAFF COMMENTSNot applicable.ITEM 1C. CYBERSECURITYWe maintain a comprehensive process for identifying, assessing, and managing material risks from cybersecurity threats as part of our broader risk management system and processes. We obtain input, as appropriate, for our cybersecurity risk management program on the security industry and threat trends from multiple external experts and internal threat intelligence teams. Teams of dedicated privacy, safety, and security professionals oversee cybersecurity risk management and mitigation, incident prevention, detection, and remediation. Leadership for these teams are professionals with deep cybersecurity expertise across multiple industries, including our Vice President of Privacy, Safety, and Security Engineering. Our executive leadership team, along with input from the above teams, are responsible for our overall enterprise risk management system and processes and regularly consider cybersecurity risks in the context of other material risks to the company.As part of our cybersecurity risk management system, our incident management teams track and log privacy and security incidents across Alphabet, our vendors, and other third-party service providers to remediate and resolve any such incidents. Significant incidents are reviewed regularly by a cross-functional working group to determine whether further escalation is appropriate. Any incident assessed as potentially being or potentially becoming material is immediately escalated for further assessment, and then reported to designated members of our senior management. We consult with outside counsel as appropriate, including on materiality analysis and disclosure matters, and our 24. Table of ContentsAlphabet Inc.senior management makes the final materiality determinations and disclosure and other compliance decisions. Our management apprises Alphabet’s independent public accounting firm of matters and any relevant developments.The Audit and Compliance Committee has oversight responsibility for risks and incidents relating to cybersecurity threats, including compliance with disclosure requirements, cooperation with law enforcement, and related effects on financial and other risks, and it reports any findings and recommendations, as appropriate, to the full Board for consideration. Senior management regularly discusses cyber risks and trends and, should they arise, any material incidents with the Audit and Compliance Committee. Internal Audit maintains a dedicated cybersecurity auditing team that independently tests our cybersecurity controls. Our business strategy, results of operations and financial condition have not been materially affected by risks from cybersecurity threats, including as a result of previously identified cybersecurity incidents, but we cannot provide assurance that they will not be materially affected in the future by such risks or any future material incidents. For more information on our cybersecurity related risks, see Item 1A Risk Factors of this Annual Report on Form 10-K.ITEM 2.PROPERTIESOur headquarters are located in Mountain View, California. We own and lease office facilities and data centers around the world, primarily in Asia, Europe, and North America. We believe our existing facilities are in good condition and suitable for the conduct of our business.ITEM 3.LEGAL PROCEEDINGSFor a description of our material pending legal proceedings, see Legal Matters in Note 10 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.ITEM 4.MINE SAFETY DISCLOSURESNot applicable.PART IIITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIESAs of October 2, 2015, Alphabet Inc. became the successor issuer of Google Inc. pursuant to Rule 12g-3(a) under the Exchange Act. Our Class A stock has been listed on the Nasdaq Global Select Market under the symbol “GOOG” since August 19, 2004, and under the symbol "GOOGL" since April 3, 2014. Prior to August 19, 2004, there was no public market for our stock. Our Class B stock is neither listed nor traded. Our Class C stock has been listed on the Nasdaq Global Select Market under the symbol “GOOG” since April 3, 2014.Holders of RecordAs of December 31, 2023, there were approximately 7,305 and 1,757 stockholders of record of our Class A stock and Class C stock, respectively. Because many of our shares of Class A stock and Class C stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. As of December 31, 2023, there were approximately 59 stockholders of record of our Class B stock.Dividend PolicyWe have never declared or paid any cash dividend on our common or capital stock. The primary use of capital continues to be to invest for the long-term growth of the business. We regularly evaluate our cash and capital structure, including the size, pace, and form of capital return to stockholders.25. Table of ContentsAlphabet Inc.Issuer Purchases of Equity SecuritiesThe following table presents information with respect to Alphabet's repurchases of Class A and Class C stock during the quarter ended December 31, 2023: PeriodTotal Number of Class A Shares Purchased (in thousands)(1)Total Number of Class C Shares Purchased (in thousands)(1)Average Price Paid per Class A Share(2)Average Price Paid per Class C Share(2)Total Number of Shares Purchased as Part of Publicly Announced Programs(in thousands)(1)Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (in millions)October 1 - 319,923 38,687 $134.66 $135.65 48,610 $45,736 November 1 - 309,197 28,198 $134.53 $135.16 37,395 $40,725 December 1 - 317,502 24,760 $135.76 $136.37 32,262 $36,347 Total26,622 91,645 118,267 (1) Repurchases are being executed from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated transactions, including through Rule 10b5-1 plans. The repurchase program does not have an expiration date. For additional information related to share repurchases, see Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.(2) Average price paid per share includes costs associated with the repurchases.26. Table of ContentsAlphabet Inc.Stock Performance GraphsThe graph below matches Alphabet Inc. Class A's cumulative five-year total stockholder return on common stock with the cumulative total returns of the S&P 500 index, the NASDAQ Composite index, and the RDG Internet Composite index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from December 31, 2018, to December 31, 2023. The returns shown are based on historical results and are not intended to suggest future performance.COMPARISON OF CUMULATIVE 5-YEAR TOTAL RETURN*ALPHABET INC. CLASS A COMMON STOCKAmong Alphabet Inc., the S&P 500 Index, theNASDAQ Composite Index, and the RDG Internet Composite Index*$100 invested on December 31, 2018, in stock or index, including reinvestment of dividends. Copyright© 2024 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.27. Table of ContentsAlphabet Inc.The graph below matches Alphabet Inc. Class C's cumulative five-year total stockholder return on capital stock with the cumulative total returns of the S&P 500 index, the NASDAQ Composite index, and the RDG Internet Composite index. The graph tracks the performance of a $100 investment in our Class C capital stock and in each index (with the reinvestment of all dividends) from December 31, 2018, to December 31, 2023. The returns shown are based on historical results and are not intended to suggest future performance.COMPARISON OF CUMULATIVE 5-YEAR TOTAL RETURN*ALPHABET INC. CLASS C CAPITAL STOCKAmong Alphabet Inc., the S&P 500 Index, theNASDAQ Composite Index, and the RDG Internet Composite Index*$100 invested on December 31, 2018, in stock or in index, including reinvestment of dividends.Copyright© 2024 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.ITEM 6.[Reserved]28. Table of ContentsAlphabet Inc.ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSPlease read the following discussion and analysis of our financial condition and results of operations together with “Note about Forward-Looking Statements,” Part I, Item 1 "Business," Part I, Item 1A "Risk Factors," and our consolidated financial statements and related notes included under Item 8 of this Annual Report on Form 10-K. The following section generally discusses 2023 results compared to 2022 results. Discussion of 2022 results compared to 2021 results to the extent not included in this report can be found in Item 7 of our 2022 Annual Report on Form 10-K.Understanding Alphabet’s Financial ResultsAlphabet is a collection of businesses — the largest of which is Google. We report Google in two segments, Google Services and Google Cloud; we also report all non-Google businesses collectively as Other Bets. For additional information on our segments, see Part I, Item 1 Business and Note 15 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.Trends in Our Business and Financial EffectThe following long-term trends have contributed to the results of our consolidated operations, and we anticipate that they will continue to affect our future results:•Users' behaviors and advertising continue to shift online as the digital economy evolves.The continuing evolution of the online world has contributed to the growth of our business and our revenues since inception. We expect that this evolution will continue to benefit our business and our revenues, although at a slower pace than we have experienced historically, in particular after the outsized growth in our advertising revenues during the COVID-19 pandemic. In addition, we face increasing competition for user engagement and advertisers, which may affect our revenues.•Users continue to access our products and services using diverse devices and modalities, which allows for new advertising formats that may benefit our revenues but adversely affect our margins.Our users are accessing our products and services via diverse devices and modalities, such as smartphones, wearables, connected TVs, and smart home devices, and want to be able to be connected no matter where they are or what they are doing. We are focused on expanding our products and services to stay in front of these trends in order to maintain and grow our business.We benefit from advertising revenues generated from different channels, including mobile, and newer advertising formats. The margins from these channels and newer products have generally been lower than those from traditional desktop search. Additionally, as the market for a particular device type or modality matures, our advertising revenues may be affected. For example, changing dynamics within the global smartphone market, such as increased market saturation in developed countries, can affect our mobile advertising revenues.We expect TAC paid to our distribution partners and Google Network partners to increase as our revenues grow and TAC as a percentage of our advertising revenues ("TAC rate") to be affected by changes in device mix; geographic mix; partner agreement terms; partner mix; the percentage of queries channeled through paid access points; product mix; the relative revenue growth rates of advertising revenues from different channels; and revenue share terms.We expect these trends to continue to affect our revenues and put pressure on our margins.•As online advertising evolves, we continue to expand our product offerings, which may affect our monetization.As interactions between users and advertisers change, and as online user behavior evolves, we continue to expand our product offerings to serve these changing needs, which may affect our monetization. For example, revenues from ads on YouTube and Google Play monetize at a lower rate than our traditional search ads. We also expect to continue to incorporate AI innovations into our products, such as AI in Search, that could affect our monetization trends. When developing new products and services we generally focus first on user experience and then on monetization.•As users in developing economies increasingly come online, our revenues from international markets continue to increase, and may require continued investments. In addition, movements in foreign exchange rates affect such revenues. 29. Table of ContentsAlphabet Inc.The shift to online, as well as the advent of the multi-device world, has brought opportunities outside of the U.S., including in emerging markets, such as India. We continue to invest heavily and develop localized versions of our products and advertising programs relevant to our users in these markets. This has led to a trend of increased revenues from emerging markets. We expect that our results will continue to be affected by our performance in these markets, particularly as low-cost mobile devices become more available. This trend could affect our revenues as developing markets initially monetize at a lower rate than more mature markets.International revenues represent a significant portion of our revenues and are subject to fluctuations in foreign currency exchange rates relative to the U.S. dollar. While we have a foreign exchange risk management program designed to reduce our exposure to these fluctuations, this program does not fully offset their effect on our revenues and earnings.•The revenues that we derive beyond advertising are increasing and may adversely affect our margins.Revenues from cloud, consumer subscriptions, platforms, and devices, which may have differing characteristics than our advertising revenues, have grown over time, and we expect this trend to continue as we focus on expanding our products and services. The margins on these revenues vary significantly and are generally lower than the margins on our advertising revenues. For example, sales of our devices adversely affect our consolidated margins due to pressures on pricing and higher cost of sales.•As we continue to serve our users and expand our businesses, we will invest heavily in operating and capital expenditures.We continue to make significant research and development investments in areas of strategic focus as we seek to develop new, innovative offerings, improve our existing offerings, and rapidly and responsibly deploy AI across our businesses. We also expect to increase, relative to 2023, our investment in our technical infrastructure, including servers, network equipment, and data centers, to support the growth of our business and our long-term initiatives, in particular in support of AI products and services. In addition, acquisitions and strategic investments contribute to the breadth and depth of our offerings, expand our expertise in engineering and other functional areas, and build strong partnerships around strategic initiatives.•We continue to face an evolving regulatory environment, and we are subject to claims, lawsuits, investigations, and other forms of potential legal liability, which could affect our business practices and financial results.Changes in social, political, economic, tax, and regulatory conditions or in laws and policies governing a wide range of topics and related legal matters, including investigations, lawsuits, and regulatory actions, have resulted in fines and caused us to change our business practices. As these global trends continue, our cost of doing business may increase, our ability to pursue certain business models or offer certain products or services may be limited, and we may need to change our business practices to comply with evolving regulatory and legal matters. Examples include the antitrust complaints filed by the U.S. Department of Justice and a number of state Attorneys General; legislative proposals and pending litigation in the U.S., EU, and around the world that could diminish or eliminate safe harbor protection for websites and online platforms; and the Digital Markets Act and Digital Services Act in Europe and various legislative proposals in the U.S. focused on large technology platforms. For additional information, see Item 1A Risk Factors and Legal Matters in Note 10 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.•Our employees are critical to our success and we expect to continue investing in them.Our employees are among our best assets and are critical for our continued success. We expect to continue hiring talented employees around the globe and to provide competitive compensation programs. For additional information, see Culture and Workforce in Part I, Item 1 Business of this Annual Report on Form 10-K.Revenues and Monetization MetricsWe generate revenues by delivering relevant, cost-effective online advertising; cloud-based solutions that provide enterprise customers of all sizes with infrastructure and platform services as well as communication and collaboration tools; sales of other products and services, such as apps and in-app purchases, and devices; and fees received for consumer subscription-based products. For additional information on how we recognize revenue, see Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.In addition to the long-term trends and their financial effect on our business discussed above, fluctuations in our revenues have been, and may continue to be, affected by a combination of general factors, including:•changes in foreign currency exchange rates;30. Table of ContentsAlphabet Inc.•changes in pricing, such as those resulting from changes in fee structures, discounts, and customer incentives;•general economic conditions and various external dynamics, including geopolitical events, regulations, and other measures and their effect on advertiser, consumer, and enterprise spending; •new product and service launches; and•seasonality.Additionally, fluctuations in our revenues generated from advertising ("Google advertising"), revenues from other sources ("Google subscriptions, platforms, and devices revenues"), Google Cloud, and Other Bets revenues have been, and may continue to be, affected by other factors unique to each set of revenues, as described below.Google ServicesGoogle Services revenues consist of Google advertising as well as Google subscriptions, platforms, and devices revenues.Google AdvertisingGoogle advertising revenues are comprised of the following: •Google Search & other, which includes revenues generated on Google search properties (including revenues from traffic generated by search distribution partners who use Google.com as their default search in browsers, toolbars, etc.), and other Google owned and operated properties like Gmail, Google Maps, and Google Play;•YouTube ads, which includes revenues generated on YouTube properties; and•Google Network, which includes revenues generated on Google Network properties participating in AdMob, AdSense, and Google Ad Manager.We use certain metrics to track how well traffic across various properties is monetized as it relates to our advertising revenues: paid clicks and cost-per-click pertain to traffic on Google Search & other properties, while impressions and cost-per-impression pertain to traffic on our Google Network properties.Paid clicks represent engagement by users and include clicks on advertisements by end-users on Google search properties and other Google owned and operated properties including Gmail, Google Maps, and Google Play. Cost-per-click is defined as click-driven revenues divided by our total number of paid clicks and represents the average amount we charge advertisers for each engagement by users.Impressions include impressions displayed to users on Google Network properties participating primarily in AdMob, AdSense, and Google Ad Manager. Cost-per-impression is defined as impression-based and click-based revenues divided by our total number of impressions, and represents the average amount we charge advertisers for each impression displayed to users. As our business evolves, we periodically review, refine, and update our methodologies for monitoring, gathering, and counting the number of paid clicks and the number of impressions, and for identifying the revenues generated by the corresponding click and impression activity.Fluctuations in our advertising revenues, as well as the change in paid clicks and cost-per-click on Google Search & other properties and the change in impressions and cost-per-impression on Google Network properties and the correlation between these items have been, and may continue to be, affected by factors in addition to the general factors described above, such as:•advertiser competition for keywords;•changes in advertising quality, formats, delivery or policy;•changes in device mix; •seasonal fluctuations in internet usage, advertising expenditures, and underlying business trends, such as traditional retail seasonality; and•traffic growth in emerging markets compared to more mature markets and across various verticals and channels.31. Table of ContentsAlphabet Inc.Google Subscriptions, Platforms, and DevicesGoogle subscriptions, platforms, and devices revenues are comprised of the following:•consumer subscriptions, which primarily include revenues from YouTube services, such YouTube TV, YouTube Music and Premium, and NFL Sunday Ticket, as well as Google One;•platforms, which primarily include revenues from Google Play from the sales of apps and in-app purchases;•devices, which primarily include sales of the Pixel family of devices; and•other products and services.Fluctuations in our Google subscriptions, platforms, and devices revenues have been, and may continue to be, affected by factors in addition to the general factors described above, such as changes in customer usage and demand, number of subscribers, and fluctuations in the timing of product launches.Google CloudGoogle Cloud revenues are comprised of the following:•Google Cloud Platform, which generates consumption-based fees and subscriptions for infrastructure, platform, and other services. These services provide access to solutions such as cybersecurity, databases, analytics, and AI offerings including our AI infrastructure, Vertex AI platform, and Duet AI for Google Cloud;•Google Workspace, which includes subscriptions for cloud-based communication and collaboration tools for enterprises, such as Calendar, Gmail, Docs, Drive, and Meet, with integrated features like Duet AI in Google Workspace; and•other enterprise services.Fluctuations in our Google Cloud revenues have been, and may continue to be, affected by factors in addition to the general factors described above, such as customer usage.Other BetsRevenues from Other Bets are generated primarily from the sale of healthcare-related services and internet services.Costs and Expenses Our cost structure has two components: cost of revenues and operating expenses. Our operating expenses include costs related to R&D, sales and marketing, and general and administrative functions. Certain of our costs and expenses, including those associated with the operation of our technical infrastructure as well as components of our operating expenses, are generally less variable in nature and may not correlate to changes in revenue. Additionally, fluctuations in compensation expenses may not directly correlate with changes in headcount, in particular due to annual stock-based compensation (SBC) awards that generally vest over four years. Cost of RevenuesCost of revenues is comprised of TAC and other costs of revenues.•TAC includes: ◦amounts paid to our distribution partners who make available our search access points and services. Our distribution partners include browser providers, mobile carriers, original equipment manufacturers, and software developers; and◦amounts paid to Google Network partners primarily for ads displayed on their properties.•Other cost of revenues primarily includes:◦compensation expense related to our data centers and other operations such as content review and customer and product support;◦content acquisition costs, which are payments to content providers from whom we license video and other content for distribution on YouTube and Google Play (we pay fees to these content providers based on revenues generated or a flat fee);◦depreciation expense related to our technical infrastructure; and◦inventory and other costs related to the devices we sell.32. Table of ContentsAlphabet Inc.TAC as a percentage of revenues generated from ads placed on Google Network properties are significantly higher than TAC as a percentage of revenues generated from ads placed on Google Search & other properties, because most of the advertiser revenues from ads served on Google Network properties are paid as TAC to our Google Network partners.Operating ExpensesOperating expenses are generally incurred during our normal course of business, which we categorize as either R&D, sales and marketing, or general and administrative.The main components of our R&D expenses are:•compensation expenses for engineering and technical employees responsible for R&D related to our existing and new products and services; •depreciation; and•third-party services fees primarily relating to consulting and outsourced services in support of our engineering and product development efforts.The main components of our sales and marketing expenses are:•compensation expenses for employees engaged in sales and marketing, sales support, and certain customer service functions; and•spending relating to our advertising and promotional activities in support of our products and services.The main components of our general and administrative expenses are:•compensation expenses for employees in finance, human resources, information technology, legal, and other administrative support functions; •expenses relating to legal matters, including certain fines and settlements; and •third-party services fees, including audit, consulting, outside legal, and other outsourced administrative services.Other Income (Expense), Net OI&E, net primarily consists of interest income (expense), the effect of foreign currency exchange gains (losses), net gains (losses) and impairment on our marketable and non-marketable securities, performance fees, and income (loss) and impairment from our equity method investments. For additional information, including how we account for our investments and factors that can drive fluctuations in the value of our investments, see Note 1 and Note 3 of the Notes to Consolidated Financial Statements included in Part II, Item 8 as well as Item 7A Quantitative and Qualitative Disclosures About Market Risk of this Annual Report on Form 10-K.Provision for Income Taxes Provision for income taxes represents the estimated amount of federal, state, and foreign income taxes incurred in the U.S. and the many jurisdictions in which we operate. The provision includes the effect of reserve provisions and changes to reserves that are considered appropriate as well as the related net interest and penalties.For additional information, including a reconciliation of the U.S. federal statutory rate to our effective tax rate, see Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.33. Table of ContentsAlphabet Inc.Executive OverviewThe following table summarizes our consolidated financial results (in millions, except for per share information and percentages):Year Ended December 31,20222023$ Change% ChangeConsolidated revenues$282,836 $307,394 $24,558 9 %Change in consolidated constant currency revenues(1)10 %Cost of revenues$126,203 $133,332 $7,129 6 %Operating expenses$81,791 $89,769 $7,978 10 %Operating income$74,842 $84,293 $9,451 13 %Operating margin26 %27 %1 %Other income (expense), net$(3,514)$1,424 $4,938 NMNet income$59,972 $73,795 $13,823 23 %Diluted EPS$4.56 $5.80 $1.24 27 %NM = Not Meaningful(1) See "Use of Non-GAAP Constant Currency Information" below for details relating to our use of constant currency information. •Revenues were $307.4 billion, an increase of 9% year over year, primarily driven by an increase in Google Services revenues of $19.0 billion, or 8%, and an increase in Google Cloud revenues of $6.8 billion, or 26%. •Total constant currency revenues, which exclude the effect of hedging, increased 10% year over year.•Cost of revenues was $133.3 billion, an increase of 6% year over year, primarily driven by increases in content acquisition costs, compensation expenses, and TAC. The increase in compensation expenses included charges related to employee severance associated with the reduction in our workforce. Additionally, cost of revenues benefited from a reduction in depreciation due to the change in estimated useful lives of our servers and network equipment.•Operating expenses were $89.8 billion, an increase of 10% year over year, primarily driven by an increase in compensation expenses and charges related to our office space optimization efforts. The increase in compensation expenses was largely the result of charges related to employee severance associated with the reduction in our workforce and an increase in SBC expense. Operating expenses benefited from the change in the estimated useful lives of our servers and certain network equipment.Other Information:•In January 2023, we announced a reduction of our workforce, and as a result we recorded employee severance and related charges of $2.1 billion for the year ended December 31, 2023. In addition, we are taking actions to optimize our global office space. As a result, exit charges recorded during the year ended December 31, 2023, were $1.8 billion. In addition to these exit charges, for the year ended December 31, 2023, we incurred $269 million in accelerated rent and accelerated depreciation. For additional information, see Note 8 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.•In January 2023, we completed an assessment of the useful lives of our servers and network equipment, resulting in a change in the estimated useful life of our servers and certain network equipment to six years. The effect of this change was a reduction in depreciation expense of $3.9 billion for the year ended December 31, 2023, recognized primarily in cost of revenues and R&D expenses. For additional information, see Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.34. Table of ContentsAlphabet Inc.•On July 21, 2023, the IRS announced a rule change allowing taxpayers to temporarily apply the regulations in effect prior to 2022 related to U.S. federal foreign tax credits. This announcement applies to foreign taxes paid or accrued in the fiscal years 2022 and 2023. A cumulative one-time adjustment applicable to the prior period for this tax rule change was recorded in 2023 and is reflected in our effective tax rate of 13.9% for the year ended December 31, 2023.•Repurchases of Class A and Class C shares were $62.2 billion for the year ended December 31, 2023. For additional information, see Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.•Operating cash flow was $101.7 billion for the year ended December 31, 2023.•Capital expenditures, which primarily reflected investments in technical infrastructure, were $32.3 billion for the year ended December 31, 2023.•As of December 31, 2023, we had 182,502 employees.Financial ResultsRevenuesThe following table presents revenues by type (in millions):Year Ended December 31,20222023Google Search & other$162,450 $175,033 YouTube ads29,243 31,510 Google Network32,780 31,312 Google advertising224,473 237,855 Google subscriptions, platforms, and devices29,055 34,688 Google Services total253,528 272,543 Google Cloud26,280 33,088 Other Bets1,068 1,527 Hedging gains (losses)1,960 236 Total revenues$282,836 $307,394 Google ServicesGoogle advertising revenuesGoogle Search & otherGoogle Search & other revenues increased $12.6 billion from 2022 to 2023. The overall growth was driven by interrelated factors including increases in search queries resulting from growth in user adoption and usage on mobile devices; growth in advertiser spending; and improvements we have made in ad formats and delivery.YouTube adsYouTube ads revenues increased $2.3 billion from 2022 to 2023. The growth was driven by our brand and direct response advertising products, both of which benefited from increased spending by our advertisers.Google NetworkGoogle Network revenues decreased $1.5 billion from 2022 to 2023, primarily driven by a decrease in Google Ad Manager and AdSense revenues.35. Table of ContentsAlphabet Inc.Monetization MetricsThe following table presents changes in monetization metrics for Google Search & other revenues (paid clicks and cost-per-click) and Google Network revenues (impressions and cost-per-impression), expressed as a percentage, from 2022 to 2023:Google Search & otherPaid clicks change7 %Cost-per-click change1 %Google NetworkImpressions change(5)%Cost-per-impression change0 %Changes in paid clicks and impressions are driven by a number of interrelated factors, including changes in advertiser spending; ongoing product and policy changes; and, as it relates to paid clicks, fluctuations in search queries resulting from changes in user adoption and usage, primarily on mobile devices.Changes in cost-per-click and cost-per-impression are driven by a number of interrelated factors including changes in device mix, geographic mix, advertiser spending, ongoing product and policy changes, product mix, property mix, and changes in foreign currency exchange rates.Google subscriptions, platforms, and devicesGoogle subscriptions, platforms, and devices revenues increased $5.6 billion from 2022 to 2023 primarily driven by growth in subscriptions, largely for YouTube services. The growth in YouTube services was primarily due to an increase in paid subscribers.Google subscriptions, platforms, and devices revenues increased $1.0 billion from 2021 to 2022 primarily driven by growth in subscription and device revenues, partially offset by a decrease in platform revenues. The growth in subscriptions was largely for YouTube services, primarily due to an increase in paid subscribers. The growth in device revenues was primarily driven by increased sales of Pixel devices. The decrease in platform revenues was primarily due to Google Play, driven by the fee structure changes we announced in 2021 as well as a decrease in buyer spending. Additionally, the overall increase in Google subscriptions, platforms, and devices revenues was adversely affected by the unfavorable effect of foreign currency exchange rates.Google CloudGoogle Cloud revenues increased $6.8 billion from 2022 to 2023. Growth was primarily driven by Google Cloud Platform followed by Google Workspace offerings. Google Cloud's infrastructure and platform services were the largest drivers of growth in Google Cloud Platform.Revenues by GeographyThe following table presents revenues by geography as a percentage of revenues, determined based on the addresses of our customers: Year Ended December 31, 20222023United States48 %47 %EMEA29 %30 %APAC16 %17 %Other Americas6 %6 %Hedging gains (losses)1 %0 %For additional information, see Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.36. Table of ContentsAlphabet Inc.Use of Non-GAAP Constant Currency InformationInternational revenues, which represent a significant portion of our revenues, are generally transacted in multiple currencies and therefore are affected by fluctuations in foreign currency exchange rates.The effect of currency exchange rates on our business is an important factor in understanding period-to-period comparisons. We use non-GAAP constant currency revenues ("constant currency revenues") and non-GAAP percentage change in constant currency revenues ("percentage change in constant currency revenues") for financial and operational decision-making and as a means to evaluate period-to-period comparisons. We believe the presentation of results on a constant currency basis in addition to U.S. Generally Accepted Accounting Principles (GAAP) results helps improve the ability to understand our performance, because it excludes the effects of foreign currency volatility that are not indicative of our core operating results.Constant currency information compares results between periods as if exchange rates had remained constant period over period. We define constant currency revenues as revenues excluding the effect of foreign currency exchange rate movements ("FX Effect") as well as hedging activities, which are recognized at the consolidated level. We use constant currency revenues to determine the constant currency revenue percentage change on a year-on-year basis. Constant currency revenues are calculated by translating current period revenues using prior year comparable period exchange rates, as well as excluding any hedging effects realized in the current period.Constant currency revenue percentage change is calculated by determining the change in current period revenues over prior year comparable period revenues where current period foreign currency revenues are translated using prior year comparable period exchange rates and hedging effects are excluded from revenues of both periods.These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with GAAP.The following table presents the foreign currency exchange effect on international revenues and total revenues (in millions, except percentages):Year Ended December 31, 2023% Change from Prior PeriodYear Ended December 31,Less FX EffectConstant Currency RevenuesAs ReportedLess Hedging EffectLess FX EffectConstant Currency Revenues20222023United States$134,814 $146,286 $0 $146,286 9 %0 %9 %EMEA82,062 91,038 460 90,578 11 %1 %10 %APAC47,024 51,514 (1,759)53,273 10 %(3)%13 %Other Americas16,976 18,320 (654)18,974 8 %(4)%12 %Revenues, excluding hedging effect280,876 307,158 (1,953)309,111 9 %(1)%10 %Hedging gains (losses)1,960 236 Total revenues(1)$282,836 $307,394 $309,111 9 %0 %(1)%10 %(1)Total constant currency revenues of $309.1 billion for 2023 increased $28.2 billion compared to $280.9 billion in revenues, excluding hedging effect, for 2022.EMEA revenue growth was favorably affected by changes in foreign currency exchange rates, primarily due to the U.S. dollar weakening relative to the Euro, partially offset by the U.S. dollar strengthening relative to the Turkish lira.APAC revenue growth was unfavorably affected by changes in foreign currency exchange rates, primarily due to the U.S. dollar strengthening relative to the Japanese yen.Other Americas revenue growth was unfavorably affected by changes in foreign currency exchange rates, primarily due to the U.S. dollar strengthening relative to the Argentine peso.37. Table of ContentsAlphabet Inc.Costs and ExpensesCost of RevenuesThe following table presents cost of revenues, including TAC (in millions, except percentages): Year Ended December 31, 202120222023TAC$45,566 $48,955 $50,886 Other cost of revenues65,373 77,248 82,446 Total cost of revenues$110,939 $126,203 $133,332 Total cost of revenues as a percentage of revenues43 %45 %43 %Cost of revenues increased $7.1 billion from 2022 to 2023 due to an increase in other cost of revenues and TAC of $5.2 billion and $1.9 billion, respectively.The increase in TAC from 2022 to 2023 was largely due to an increase in TAC paid to distribution partners, primarily driven by growth in revenues subject to TAC. The TAC rate decreased from 21.8% to 21.4% from 2022 to 2023 primarily due to a revenue mix shift from Google Network properties to Google Search & other properties. The TAC rate on Google Search & other revenues and the TAC rate on Google Network revenues were both substantially consistent from 2022 to 2023.The increase in other cost of revenues from 2022 to 2023 was primarily due to increases in content acquisition costs, largely for YouTube, and compensation expenses, which included $479 million of charges related to employee severance associated with the reduction in our workforce. Additionally, other cost of revenues benefited from a reduction in depreciation expense due to the change in estimated useful lives of our servers and network equipment.The increase in other cost of revenues of $11.9 billion from 2021 to 2022 was primarily due to increases in device costs, compensation expenses, depreciation, and equipment-related expenses.Research and DevelopmentThe following table presents R&D expenses (in millions, except percentages): Year Ended December 31, 20222023Research and development expenses$39,500 $45,427 Research and development expenses as a percentage of revenues14 %15 %R&D expenses increased $5.9 billion from 2022 to 2023 primarily driven by an increase in compensation expenses of $2.9 billion, $870 million in charges related to our office space optimization efforts, and an increase in depreciation expense of $722 million. The $2.9 billion increase in compensation expenses was largely the result of a 4% increase in average headcount, after adjusting for roles affected by the reduction in our workforce, and an increase in SBC expense. Additionally, the increase in compensation expenses included $848 million in employee severance charges associated with the reduction in our workforce. The $722 million increase in depreciation expense reflected an offsetting benefit of the change in the estimated useful lives of our servers and network equipment.Sales and MarketingThe following table presents sales and marketing expenses (in millions, except percentages): Year Ended December 31, 20222023Sales and marketing expenses$26,567 $27,917 Sales and marketing expenses as a percentage of revenues9 %9 %Sales and marketing expenses increased $1.4 billion from 2022 to 2023, primarily driven by an increase in compensation expenses of $1.6 billion, partially offset by a decrease in advertising and promotional activities of $441 million. The $1.6 billion increase in compensation expenses was largely the result of $497 million in employee severance charges associated with the reduction in our workforce in addition to a combination of other factors, none of which were individually significant.38. Table of ContentsAlphabet Inc.General and AdministrativeThe following table presents general and administrative expenses (in millions, except percentages): Year Ended December 31, 20222023General and administrative expenses$15,724 $16,425 General and administrative expenses as a percentage of revenues6 %5 %General and administrative expenses increased $701 million from 2022 to 2023, primarily driven by an increase in compensation expenses of $416 million, which was largely the result of $264 million in employee severance charges associated with the reduction in our workforce in addition to a combination of other factors, none of which were individually significant. Segment ProfitabilityThe following table presents segment operating income (loss) (in millions).Year Ended December 31,20222023Operating income (loss):Google Services$82,699 $95,858 Google Cloud(1,922)1,716 Other Bets(4,636)(4,095)Alphabet-level activities(1)(1,299)(9,186)Total income from operations$74,842 $84,293 (1)In addition to the costs included in Alphabet-level activities, hedging gains (losses) related to revenue were $2.0 billion and $236 million in 2022 and 2023, respectively. For the year ended December 31, 2023, Alphabet-level activities include charges related to the reduction in force and our office space optimization efforts totaling $3.9 billion. In addition, for the year ended December 31, 2023, we incurred $269 million in accelerated rent and accelerated depreciation. For additional information relating to our workforce reduction and other initiatives, see Note 8 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. For additional information relating to our segments, see Note 15 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.Google ServicesGoogle Services operating income increased $13.2 billion from 2022 to 2023. The increase in operating income was primarily driven by an increase in revenues, partially offset by an increase in content acquisition costs and compensation expenses including an increase in SBC expense. Additionally, operating income benefited from a reduction in costs driven by the change in the estimated useful lives of our servers and certain network equipment.Google CloudGoogle Cloud operating income of $1.7 billion for 2023 compared to an operating loss of $1.9 billion for 2022 represents an increase of $3.6 billion. The increase in operating income was primarily driven by an increase in revenues, partially offset by an increase in compensation expenses largely driven by headcount growth. Additionally, operating income benefited from a reduction in costs driven by the change in the estimated useful lives of our servers and certain network equipment.Other BetsOther Bets operating loss decreased $541 million from 2022 to 2023 primarily due to growth in revenues as well as a reduction in valuation-based compensation liabilities related to Other Bet companies.Other Income (Expense), NetThe following table presents OI&E, (in millions):39. Table of ContentsAlphabet Inc. Year Ended December 31, 20222023Interest income$2,174 $3,865 Interest expense(357)(308)Foreign currency exchange gain (loss), net(654)(1,238)Gain (loss) on debt securities, net(2,064)(1,215)Gain (loss) on equity securities, net(3,455)392 Performance fees798 257 Income (loss) and impairment from equity method investments, net(337)(628)Other381 299 Other income (expense), net$(3,514)$1,424 OI&E, net increased $4.9 billion from 2022 to 2023. The increase was primarily due to fluctuations in the value of equity securities reflecting market driven changes in the value of our marketable equity securities, investment specific event driven changes in our non-marketable equity securities, and increased interest income due to interest rates. For additional information, see Note 7 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.Provision for Income TaxesThe following table presents provision for income taxes (in millions, except for effective tax rate): Year Ended December 31, 20222023Income before provision for income taxes$71,328 $85,717 Provision for income taxes$11,356 $11,922 Effective tax rate15.9 %13.9 %In 2023, the Internal Revenue Services (IRS) issued a rule change allowing taxpayers to temporarily apply the regulations in effect prior to 2022 related to U.S. federal foreign tax credits, as well as a separate rule change with interim guidance on the capitalization and amortization of R&D expenses. A cumulative one-time adjustment applicable to the prior period for these tax rule changes was recorded in 2023.The effective tax rate decreased from 2022 to 2023, reflecting the effect of the two tax rule changes described above, particularly the change related to foreign tax credits. The effect of these tax rule changes was partially offset by changes in uncertain tax benefits and a decrease in the U.S. federal Foreign Derived Intangible Income tax deduction.The OECD is coordinating negotiations among more than 140 countries with the goal of achieving consensus around substantial changes to international tax policies, including the implementation of a minimum global effective tax rate of 15%. While various countries have implemented the legislation as of January 1, 2024, we do not expect a resulting material change to our income tax provision for the 2024 fiscal year. As additional jurisdictions enact such legislation, we expect our effective tax rate and cash tax payments could increase in future years. Financial ConditionCash, Cash Equivalents, and Marketable SecuritiesAs of December 31, 2023, we had $110.9 billion in cash, cash equivalents, and short-term marketable securities. Cash equivalents and marketable securities are comprised of time deposits, money market funds, highly liquid government bonds, corporate debt securities, mortgage-backed and asset-backed securities, and marketable equity securities.Sources, Uses of Cash and Related TrendsOur principal sources of liquidity are cash, cash equivalents, and marketable securities, as well as the cash flow that we generate from operations. The primary use of capital continues to be to invest for the long-term growth of the business. We regularly evaluate our cash and capital structure, including the size, pace, and form of capital return to stockholders.40. Table of ContentsAlphabet Inc.The following table presents our cash flows (in millions): Year Ended December 31, 20222023Net cash provided by operating activities$91,495 $101,746 Net cash used in investing activities$(20,298)$(27,063)Net cash used in financing activities$(69,757)$(72,093)Cash Provided by Operating ActivitiesOur largest source of cash provided by operations are advertising revenues generated by Google Search & other properties, Google Network properties, and YouTube properties. In Google Services, we also generate cash through consumer subscriptions and the sale of apps and in-app purchases and devices. In Google Cloud we generate cash through consumption-based fees and subscriptions for infrastructure, platform, collaboration tools, and other cloud services.Our primary uses of cash from operating activities include payments to distribution and Google Network partners, to employees for compensation, and to content providers. Other uses of cash from operating activities include payments to suppliers for devices, to tax authorities for income taxes, and other general corporate expenditures.Net cash provided by operating activities increased from 2022 to 2023 due to the increase in cash received from customers, partially offset by increases in cash paid for cost of revenues and operating expenses.Cash Used in Investing ActivitiesCash provided by investing activities consists primarily of maturities and sales of investments in marketable and non-marketable securities. Cash used in investing activities consists primarily of purchases of marketable and non-marketable securities, purchases of property and equipment, and payments for acquisitions.Net cash used in investing activities increased from 2022 to 2023 due to a decrease in maturities and sales of marketable securities, partially offset by a decrease in payments for acquisitions.Cash Used in Financing ActivitiesCash provided by financing activities consists primarily of proceeds from issuance of debt and proceeds from the sale of interests in consolidated entities. Cash used in financing activities consists primarily of repurchases of stock, net payments related to stock-based award activities, and repayments of debt.Net cash used in financing activities increased from 2022 to 2023 due to an increase in repurchases of stock.Liquidity and Material Cash RequirementsWe expect existing cash, cash equivalents, short-term marketable securities, cash flows from operations and financing activities to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for at least the next 12 months and thereafter for the foreseeable future.Capital Expenditures and LeasesWe make investments in land and buildings for data centers and offices and information technology assets through purchases of property and equipment and lease arrangements to provide capacity for the growth of our services and products.Capital ExpendituresOur capital investments in property and equipment consist primarily of the following major categories:•technical infrastructure, which consists of our investments in servers and network equipment for computing, storage, and networking requirements for ongoing business activities, including AI, (collectively referred to as our information technology assets) and data center land and building construction; and•office facilities, ground-up development projects, and building improvements (also referred to as "fit-outs").Construction in progress consists primarily of technical infrastructure and office facilities which have not yet been placed in service. The time frame from date of purchase to placement in service of these assets may extend from months to years. For example, our data center construction projects are generally multi-year projects with multiple phases, where we acquire land and buildings, construct buildings, and secure and install information technology assets.41. Table of ContentsAlphabet Inc.During the years ended December 31, 2022 and 2023, we spent $31.5 billion and $32.3 billion on capital expenditures, respectively. We expect to increase, relative to 2023, our investment in our technical infrastructure, including servers, network equipment, and data centers, to support the growth of our business and our long-term initiatives, in particular in support of AI products and services. Depreciation of our property and equipment commences when the deployment of such assets are completed and are ready for our intended use. Land is not depreciated. For the years ended December 31, 2022 and 2023, our depreciation on property and equipment were $13.5 billion and $11.9 billion, respectively. Leases For the years ended December 31, 2022 and 2023, we recognized total operating lease assets of $4.4 billion and $2.9 billion, respectively. As of December 31, 2023, the amount of total future lease payments under operating leases, which had a weighted average remaining lease term of eight years, was $17.7 billion, of which $3.2 billion is short-term. As of December 31, 2023, we have entered into leases that have not yet commenced with future short-term and long-term lease payments of $657 million and $3.3 billion, that are not yet recorded on our Consolidated Balance Sheets. These leases will commence between 2024 and 2026 with non-cancelable lease terms of one to 25 years. For the years ended December 31, 2022 and 2023, our operating lease expenses (including variable lease costs) were $3.7 billion and $4.5 billion, respectively. Finance lease costs were not material for the years ended December 31, 2022 and 2023. For additional information, see Note 4 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.FinancingWe have a short-term debt financing program of up to $10.0 billion through the issuance of commercial paper. Net proceeds from this program are used for general corporate purposes. As of December 31, 2023, we had no commercial paper outstanding.As of December 31, 2023, we had $10.0 billion of revolving credit facilities, $4.0 billion expiring in April 2024 and $6.0 billion expiring in April 2028. The interest rates for all credit facilities are determined based on a formula using certain market rates, as well as our progress toward the achievement of certain sustainability goals. No amounts have been borrowed under the credit facilities.As of December 31, 2023, we had senior unsecured notes outstanding with a total carrying value of $12.9 billion with short-term and long-term future interest payments of $214 million and $3.6 billion, respectively. For additional information, see Note 6 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.We primarily utilize contract manufacturers for the assembly of our servers used in our technical infrastructure and devices we sell. We have agreements where we may purchase components directly from suppliers and then supply these components to contract manufacturers for use in the assembly of the servers and devices. Certain of these arrangements result in a portion of the cash received from and paid to the contract manufacturers to be presented as financing activities in the Consolidated Statements of Cash Flows included in Item 8 of this Annual Report on Form 10-K.Share Repurchase ProgramDuring 2023 we repurchased and subsequently retired 528 million shares for $62.2 billion.In April 2023, the Board of Directors of Alphabet authorized the company to repurchase up to an additional $70.0 billion of its Class A and Class C shares. As of December 31, 2023, $36.3 billion remains available for Class A and Class C share repurchases.The following table presents Class A and Class C shares repurchased and subsequently retired (in millions):Year Ended December 31, 2022Year Ended December 31, 2023SharesAmountSharesAmountClass A share repurchases61$6,719 78$9,316 Class C share repurchases46952,577 45052,868 Total share repurchases(1)530$59,296 528$62,184 (1) Shares repurchased include unsettled repurchases as of December 31, 2023.For additional information, see Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.42. Table of ContentsAlphabet Inc.European Commission FinesIn 2017, 2018 and 2019, the EC announced decisions that certain actions taken by Google infringed European competition law and imposed fines of €2.4 billion ($2.7 billion as of June 27, 2017), €4.3 billion ($5.1 billion as of June 30, 2018), and €1.5 billion ($1.7 billion as of March 20, 2019), respectively. On September 14, 2022, the General Court reduced the 2018 fine from €4.3 billion to €4.1 billion. We subsequently filed an appeal to the European Court of Justice.While each EC decision is under appeal, we included the fines in accrued expenses and other current liabilities on our Consolidated Balance Sheets as we provided bank guarantees (in lieu of a cash payment) for the fines. For additional information, see Note 10 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.TaxesAs of December 31, 2023, we had income taxes payable of $4.2 billion, of which $2.1 billion was short-term, related to a one-time transition tax payable incurred as a result of the U.S. Tax Cuts and Jobs Act ("Tax Act"). As permitted by the Tax Act, we will pay the transition tax in annual interest-free installments through 2025. We also have long-term taxes payable of $6.3 billion primarily related to uncertain tax positions as of December 31, 2023.Purchase Commitments and Other Contractual ObligationsAs of December 31, 2023, we had material purchase commitments and other contractual obligations of $45.9 billion, of which $31.6 billion was short-term. These amounts primarily consist of purchase orders for certain technical infrastructure as well as the non-cancelable portion or the minimum cancellation fee in certain agreements related to commitments to purchase licenses, including content licenses, inventory and network capacity. For those agreements with variable terms, we do not estimate the non-cancelable obligation beyond any minimum quantities and/or pricing as of December 31, 2023. In certain instances, the amount of our contractual obligations may change based on the expected timing of order fulfillment from our suppliers. For more information related to our content licenses, see Note 10 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.In addition, we regularly enter into multi-year, non-cancellable agreements to purchase renewable energy and energy attributes, such as renewable energy certificates. These agreements do not include a minimum dollar commitment. The amounts to be paid under these agreements are based on the actual volumes to be generated and are not readily determinable.Critical Accounting EstimatesWe prepare our consolidated financial statements in accordance with GAAP. In doing so, we have to make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in them have had or are reasonably likely to have a material effect on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We have reviewed our critical accounting estimates with the Audit and Compliance Committee of our Board of Directors.For a summary of significant accounting policies and the effect on our financial statements, see Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.Fair Value Measurements of Non-Marketable Equity SecuritiesWe measure certain financial instruments at fair value on a nonrecurring basis, consisting primarily of our non-marketable equity securities. These investments are accounted for under the measurement alternative method ("the measurement alternative") and are measured at cost, less impairment, subject to upward and downward adjustments resulting from observable price changes for identical or similar investments of the same issuer. These adjustments require quantitative assessments of the fair value of our securities, which may require the use of unobservable inputs. Adjustments are determined primarily based on a market approach as of the transaction date and involve the use of estimates using the best information available, which may include cash flow projections or other available market data.Non-marketable equity securities are also evaluated for impairment, based on qualitative factors including the companies' financial and liquidity position and access to capital resources, among others. When indicators of impairment exist, we prepare quantitative measurements of the fair value of our equity investments using a market approach or an income approach, which requires judgment and the use of unobservable inputs, including discount rates, investee revenues and costs, and comparable market data of private and public companies, among others. 43. Table of ContentsAlphabet Inc.When the quantitative remeasurements of fair value indicate an impairment exists, we write down the investment to its current fair value.We also have compensation arrangements with payouts based on realized returns from certain investments, i.e. performance fees. We record compensation expense based on the estimated payouts on an ongoing basis, which may result in expense recognized before investment returns are realized and compensation is paid and may require the use of unobservable inputs.Property and EquipmentWe assess the reasonableness of the useful lives of our property and equipment periodically as well as when other changes occur, such as when there are changes to ongoing business operations, changes in the planned use and utilization of assets, or technological advancements, that could indicate a change in the period over which we expect to benefit from the assets. Income TaxesWe are subject to income taxes in the U.S. and foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes.Recording an uncertain tax position involves various qualitative considerations, including evaluation of comparable and resolved tax exposures, applicability of tax laws, and likelihood of settlement. We evaluate uncertain tax positions periodically, considering changes in facts and circumstances, such as new regulations or recent judicial opinions, as well as the status of audit activities by taxing authorities. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes and the effective tax rate in the period in which such determination is made.The provision for income taxes includes the effect of reserve provisions and changes to reserves as well as the related net interest and penalties. In addition, we are subject to the continuous examination of our income tax returns by the IRS and other tax authorities which may assert assessments against us. We regularly assess the likelihood of adverse outcomes resulting from these examinations and assessments to determine the adequacy of our provision for income taxes.Loss ContingenciesWe are regularly subject to claims, lawsuits, regulatory and government investigations, other proceedings, and consent orders involving competition, intellectual property, privacy, data security, tax and related compliance, labor and employment, commercial disputes, content generated by our users, goods and services offered by advertisers or publishers using our platforms, personal injury consumer protection, and other matters. Certain of these matters include speculative claims for substantial or indeterminate amounts of damages. We record a liability when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the possible loss in Note 10 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. We evaluate, on a regular basis, developments in our legal matters that could affect the amount of liability that has been previously accrued, and the matters and related reasonably possible losses disclosed, and make adjustments and changes to our disclosures. Significant judgment is required to determine both the likelihood and the estimated amount of a loss related to such matters. Until the final resolution of such matters, there may be an exposure to loss in excess of the amount recorded, and such amounts could be material.Change in Accounting EstimateIn January 2023, we completed an assessment of the useful lives of our servers and network equipment resulting in a change in the estimated useful life of our servers and certain network equipment to six years. This change in accounting estimate was effective beginning fiscal year 2023. For additional information, see Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.44. Table of ContentsAlphabet Inc.ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKWe are exposed to financial market risks, including changes in foreign currency exchange rates, interest rates, and equity investment risks. Foreign Currency Exchange RiskWe transact business globally in multiple currencies. International revenues, as well as costs and expenses denominated in foreign currencies, expose us to the risk of fluctuations in foreign currency exchange rates against the U.S. dollar. As discussed below, we enter into derivative instruments to hedge foreign currency risk. Principal currencies hedged included the Australian dollar, British pound, Canadian dollar, Euro, and Japanese yen. For the purpose of analyzing foreign currency exchange risk, we considered the historical trends in foreign currency exchange rates and determined that it was reasonably possible that adverse changes in exchange rates of 10% could be experienced.We use foreign currency forward and option contracts to offset the foreign exchange risk on assets and liabilities denominated in currencies other than the functional currency of the subsidiary. These forward and option contracts reduce, but do not entirely eliminate, the effect of foreign currency exchange rate movements on our assets and liabilities. The foreign currency gains and losses on these assets and liabilities are recorded in OI&E, which are offset by the gains and losses on the forward and option contracts.If an adverse 10% foreign currency exchange rate change was applied to total monetary assets, liabilities, and commitments denominated in currencies other than the functional currencies at the balance sheet date, it would have resulted in an adverse effect on income before income taxes of approximately $136 million and $503 million as of December 31, 2022 and 2023, respectively, after consideration of the effect of foreign exchange contracts in place for the years ended December 31, 2022 and 2023.We use foreign currency forward and option contracts, including collars (an option strategy comprised of a combination of purchased and written options) to protect forecasted U.S. dollar-equivalent earnings from changes in foreign currency exchange rates. When the U.S. dollar strengthens, gains from foreign currency forward and option contacts reduce the foreign currency losses related to our earnings. When the U.S. dollar weakens, losses from foreign currency forward and option contracts offset the foreign currency gains related to our earnings. These hedging contracts reduce, but do not entirely eliminate, the effect of foreign currency exchange rate movements. We designate these contracts as cash flow hedges for accounting purposes. We reflect the gains or losses of foreign currency spot rate changes as a component of accumulated other comprehensive income (AOCI) and subsequently reclassify them into revenues to offset the hedged exposures as they occur. If the U.S. dollar weakened by 10% as of December 31, 2022 and 2023, the amount recorded in AOCI related to our cash flow hedges before tax effect would have been approximately $1.3 billion and $1.5 billion lower as of December 31, 2022 and 2023, respectively. The change in the value recorded in AOCI would be expected to offset a corresponding foreign currency change in forecasted hedged revenues when recognized.We use foreign exchange forward contracts designated as net investment hedges to hedge the foreign currency risks related to investment in foreign subsidiaries. These forward contracts serve to offset the foreign currency translation risk from our foreign operations.If the U.S. dollar weakened by 10%, the amount recorded in cumulative translation adjustment (CTA) within AOCI related to our net investment hedges before tax effect would have been approximately $903 million and $946 million lower as of December 31, 2022 and 2023, respectively. The change in value recorded in CTA would be expected to offset a corresponding foreign currency translation gain or loss from our investment in foreign subsidiaries.Interest Rate RiskOur Corporate Treasury investment strategy is to achieve a return that will allow us to preserve capital and maintain liquidity. We invest primarily in debt securities, including government bonds, corporate debt securities, mortgage-backed and asset-backed securities, money market and other funds, time deposits, and interest rate derivatives. By policy, we limit the amount of credit exposure to any one issuer. Our investments in both fixed rate and floating rate interest earning securities carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall. Unrealized gains or losses on our marketable debt securities are primarily due to interest rate fluctuations as compared to interest rates at the time of purchase. For certain fixed and variable rate debt securities, we have elected the fair value option for which changes in fair value are recorded in OI&E. We measure securities for which we have not elected the fair value option at fair value with gains and losses recorded in AOCI until the securities are sold, less any expected credit losses. 45. Table of ContentsAlphabet Inc.We use value-at-risk (VaR) analysis to determine the potential effect of fluctuations in interest rates on the value of our marketable debt security portfolio. The VaR is the expected loss in fair value, for a given confidence interval, for our investment portfolio due to adverse movements in interest rates. We use a variance/covariance VaR model with 95% confidence interval. The estimated one-day loss in fair value of marketable debt securities as of December 31, 2022 and 2023 are shown below (in millions): As of December 31,12-Month Average As of December 31, 2022202320222023Risk category - interest rate$256 $296 $198 $271 Actual future gains and losses associated with our marketable debt security portfolio may differ materially from the sensitivity analyses performed as of December 31, 2022 and 2023 due to the inherent limitations associated with predicting the timing and amount of changes in interest rates and our actual exposures and positions. VaR analysis is not intended to represent actual losses but is used as a risk estimation.Equity Investment RiskOur marketable and non-marketable equity securities are subject to a wide variety of market-related risks that could substantially reduce or increase the fair value of our holdings.Our marketable equity securities are publicly traded stocks or funds and our non-marketable equity securities are investments in privately held companies, some of which are in the startup or development stages.We record marketable equity securities not accounted for under the equity method at fair value based on readily determinable market values, of which publicly traded stocks and mutual funds are subject to market price volatility, and represent $5.2 billion and $6.0 billion of our investments as of December 31, 2022 and 2023, respectively. A hypothetical adverse price change of 10% on our December 31, 2023 balance would decrease the fair value of marketable equity securities by $597 million. From time to time, we may enter into derivatives to hedge the market price risk on certain of our marketable equity securities.Our non-marketable equity securities not accounted for under the equity method are adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). The fair value measured at the time of the observable transaction is not necessarily an indication of the current fair value as of the balance sheet date. These investments, especially those that are in the early stages, are inherently risky because the technologies or products these companies have under development are typically in the early phases and may never materialize, and they may experience a decline in financial condition, which could result in a loss of a substantial part of our investment in these companies. Valuations of our equity investments in private companies are inherently more complex due to the lack of readily available market data and observable transactions at lower valuations could result in significant losses. In addition, global economic conditions could result in additional volatility. The success of our investment in any private company is also typically dependent on the likelihood of our ability to realize appreciation in the value of investments through liquidity events such as public offerings, acquisitions, private sales or other market events. Changes in the valuation of non-marketable equity securities may not directly correlate with changes in valuation of marketable equity securities. As of December 31, 2022 and 2023, the carrying value of our non-marketable equity securities, which were accounted for under the measurement alternative, was $28.5 billion and $28.8 billion, respectively. The carrying values of our equity method investments, which totaled approximately $1.7 billion as of December 31, 2022 and 2023, generally do not fluctuate based on market price changes. However, these investments could be impaired if the carrying value exceeds the fair value and is not expected to recover.For additional information about our equity investments, see Note 1 and Note 3 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.46. Table of ContentsAlphabet Inc.ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAAlphabet Inc.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReports of Independent Registered Public Accounting Firm (PCAOB ID: 42)48Financial Statements:Consolidated Balance Sheets51Consolidated Statements of Income52Consolidated Statements of Comprehensive Income53Consolidated Statements of Stockholders’ Equity54Consolidated Statements of Cash Flows55Notes to Consolidated Financial Statements5647. Table of ContentsAlphabet Inc.REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholders and the Board of Directors of Alphabet Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Alphabet Inc. (the Company) as of December 31, 2022 and 2023, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated January 30, 2024 expressed an unqualified opinion thereon.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.Critical Audit MatterThe critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates. 48. Table of ContentsAlphabet Inc.Loss Contingencies Description of the MatterThe Company is regularly subject to claims, lawsuits, regulatory and government investigations, other proceedings, and consent orders involving competition, intellectual property, data privacy and security, tax and related compliance, labor and employment, commercial disputes, content generated by its users, goods and services offered by advertisers or publishers using their platforms, personal injury, consumer protection, and other matters. As described in Note 10 to the consolidated financial statements “Commitments and contingencies” such claims, lawsuits, regulatory and government investigations, other proceedings, and consent orders could result in adverse consequences.Significant judgment is required to determine both the likelihood, and the estimated amount, of a loss related to such matters. Auditing management’s accounting for and disclosure of loss contingencies from these matters involved challenging and subjective auditor judgment in assessing the Company’s evaluation of the probability of a loss, and the estimated amount or range of loss.How We Addressed the Matter in Our AuditWe tested relevant controls over the identified risks associated with management’s accounting for and disclosure of these matters. This included controls over management’s assessment of the probability of incurrence of a loss and whether the loss or range of loss was reasonably estimable and the development of related disclosures.Our audit procedures included gaining an understanding of previous rulings and the status of ongoing lawsuits, reviewing letters addressing the matters from internal and external legal counsel, meeting with internal legal counsel to discuss the allegations, and obtaining a representation letter from management on these matters. We also evaluated the Company’s disclosures in relation to these matters./s/ Ernst & Young LLPWe have served as the Company's auditor since 1999.San Jose, CaliforniaJanuary 30, 202449. Table of ContentsAlphabet Inc.REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholders and the Board of Directors of Alphabet Inc.Opinion on Internal Control Over Financial ReportingWe have audited Alphabet Inc.’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Alphabet Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2023 consolidated financial statements of the Company and our report dated January 30, 2024 expressed an unqualified opinion thereon. Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ Ernst & Young LLPSan Jose, CaliforniaJanuary 30, 202450. Table of ContentsAlphabet Inc.Alphabet Inc.CONSOLIDATED BALANCE SHEETS(in millions, except par value per share amounts)As of December 31,20222023AssetsCurrent assets:Cash and cash equivalents$21,879 $24,048 Marketable securities91,883 86,868 Total cash, cash equivalents, and marketable securities113,762 110,916 Accounts receivable, net40,258 47,964 Other current assets10,775 12,650 Total current assets164,795 171,530 Non-marketable securities30,492 31,008 Deferred income taxes5,261 12,169 Property and equipment, net112,668 134,345 Operating lease assets14,381 14,091 Goodwill28,960 29,198 Other non-current assets8,707 10,051 Total assets$365,264 $402,392 Liabilities and Stockholders’ EquityCurrent liabilities:Accounts payable$5,128 $7,493 Accrued compensation and benefits14,028 15,140 Accrued expenses and other current liabilities37,866 46,168 Accrued revenue share8,370 8,876 Deferred revenue3,908 4,137 Total current liabilities69,300 81,814 Long-term debt14,701 13,253 Deferred revenue, non-current599 911 Income taxes payable, non-current9,258 8,474 Deferred income taxes514 485 Operating lease liabilities12,501 12,460 Other long-term liabilities2,247 1,616 Total liabilities109,120 119,013 Commitments and Contingencies (Note 10)Stockholders’ equity:Preferred stock, $0.001 par value per share, 100 shares authorized; no shares issued and outstanding0 0 Class A, Class B, and Class C stock and additional paid-in capital, $0.001 par value per share: 300,000 shares authorized (Class A 180,000, Class B 60,000, Class C 60,000); 12,849 (Class A 5,964, Class B 883, Class C 6,002) and 12,460 (Class A 5,899, Class B 870, Class C 5,691) shares issued and outstanding68,184 76,534 Accumulated other comprehensive income (loss)(7,603)(4,402)Retained earnings195,563 211,247 Total stockholders’ equity256,144 283,379 Total liabilities and stockholders’ equity$365,264 $402,392 See accompanying notes.51. Table of ContentsAlphabet Inc.Alphabet Inc.CONSOLIDATED STATEMENTS OF INCOME(in millions, except per share amounts) Year Ended December 31, 202120222023Revenues$257,637 $282,836 $307,394 Costs and expenses:Cost of revenues110,939 126,203 133,332 Research and development31,562 39,500 45,427 Sales and marketing22,912 26,567 27,917 General and administrative13,510 15,724 16,425 Total costs and expenses178,923 207,994 223,101 Income from operations78,714 74,842 84,293 Other income (expense), net12,020 (3,514)1,424 Income before income taxes90,734 71,328 85,717 Provision for income taxes14,701 11,356 11,922 Net income$76,033 $59,972 $73,795 Basic net income per share of Class A, Class B, and Class C stock$5.69 $4.59 $5.84 Diluted net income per share of Class A, Class B, and Class C stock$5.61 $4.56 $5.80 See accompanying notes.52. Table of ContentsAlphabet Inc.Alphabet Inc.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in millions) Year Ended December 31, 202120222023Net income$76,033 $59,972 $73,795 Other comprehensive income (loss):Change in foreign currency translation adjustment(1,442)(1,836)735 Available-for-sale investments:Change in net unrealized gains (losses)(1,312)(4,720)1,344 Less: reclassification adjustment for net (gains) losses included in net income(64)1,007 1,168 Net change, net of income tax benefit (expense) of $394, $1,056, and $(698)(1,376)(3,713)2,512 Cash flow hedges:Change in net unrealized gains (losses)716 1,275 168 Less: reclassification adjustment for net (gains) losses included in net income(154)(1,706)(214)Net change, net of income tax benefit (expense) of $(122), $110, and $2562 (431)(46)Other comprehensive income (loss)(2,256)(5,980)3,201 Comprehensive income$73,777 $53,992 $76,996 See accompanying notes.53. Table of ContentsAlphabet Inc.Alphabet Inc.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in millions) Class A, Class B, Class C Stock andAdditional Paid-In CapitalAccumulatedOtherComprehensiveIncome (Loss)RetainedEarningsTotalStockholders’Equity SharesAmountBalance as of December 31, 202013,504 $58,510 $633 $163,401 $222,544 Stock issued145 12 0 0 12 Stock-based compensation expense0 15,539 0 0 15,539 Tax withholding related to vesting of restricted stock units and other0 (10,273)0 0 (10,273)Repurchases of stock(407)(2,324)0 (47,950)(50,274)Sale of interest in consolidated entities0 310 0 0 310 Net income0 0 0 76,033 76,033 Other comprehensive income (loss)0 0 (2,256)0 (2,256)Balance as of December 31, 202113,242 61,774 (1,623)191,484 251,635 Stock issued137 8 0 0 8 Stock-based compensation expense0 19,525 0 0 19,525 Tax withholding related to vesting of restricted stock units and other0 (9,754)0 (1)(9,755)Repurchases of stock(530)(3,404)0 (55,892)(59,296)Sale of interest in consolidated entities0 35 0 0 35 Net income0 0 0 59,972 59,972 Other comprehensive income (loss)0 0 (5,980)0 (5,980)Balance as of December 31, 202212,849 68,184 (7,603)195,563 256,144 Stock issued139 0 0 0 0 Stock-based compensation expense0 22,578 0 0 22,578 Tax withholding related to vesting of restricted stock units and other0 (10,164)0 9 (10,155)Repurchases of stock(528)(4,064)0 (58,120)(62,184)Net income0 0 0 73,795 73,795 Other comprehensive income (loss)0 0 3,201 0 3,201 Balance as of December 31, 202312,460 $76,534 $(4,402)$211,247 $283,379 See accompanying notes.54. Table of ContentsAlphabet Inc.Alphabet Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS(in millions) Year Ended December 31, 202120222023Operating activitiesNet income$76,033 $59,972 $73,795 Adjustments:Depreciation of property and equipment10,273 13,475 11,946 Stock-based compensation expense15,376 19,362 22,460 Deferred income taxes1,808 (8,081)(7,763)(Gain) loss on debt and equity securities, net(12,270)5,519 823 Other1,955 3,483 4,330 Changes in assets and liabilities, net of effects of acquisitions:Accounts receivable, net(9,095)(2,317)(7,833)Income taxes, net(625)584 523 Other assets(1,846)(5,046)(2,143)Accounts payable283 707 664 Accrued expenses and other liabilities7,304 3,915 3,937 Accrued revenue share1,682 (445)482 Deferred revenue774 367 525 Net cash provided by operating activities91,652 91,495 101,746 Investing activitiesPurchases of property and equipment(24,640)(31,485)(32,251)Purchases of marketable securities(135,196)(78,874)(77,858)Maturities and sales of marketable securities128,294 97,822 86,672 Purchases of non-marketable securities(2,838)(2,531)(3,027)Maturities and sales of non-marketable securities934 150 947 Acquisitions, net of cash acquired, and purchases of intangible assets(2,618)(6,969)(495)Other investing activities541 1,589 (1,051)Net cash used in investing activities(35,523)(20,298)(27,063)Financing activitiesNet payments related to stock-based award activities(10,162)(9,300)(9,837)Repurchases of stock(50,274)(59,296)(61,504)Proceeds from issuance of debt, net of costs20,199 52,872 10,790 Repayments of debt(21,435)(54,068)(11,550)Proceeds from sale of interest in consolidated entities, net310 35 8 Net cash used in financing activities(61,362)(69,757)(72,093)Effect of exchange rate changes on cash and cash equivalents(287)(506)(421)Net increase (decrease) in cash and cash equivalents(5,520)934 2,169 Cash and cash equivalents at beginning of period26,465 20,945 21,879 Cash and cash equivalents at end of period$20,945 $21,879 $24,048 Supplemental disclosures of cash flow informationCash paid for income taxes, net of refunds$13,412 $18,892 $19,164 See accompanying notes.55. Table of ContentsAlphabet Inc.Alphabet Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1. Summary of Significant Accounting PoliciesNature of OperationsGoogle was incorporated in California in September 1998 and re-incorporated in the State of Delaware in August 2003. In 2015, we implemented a holding company reorganization, and as a result, Alphabet Inc. ("Alphabet") became the successor issuer to Google.We generate revenues by delivering relevant, cost-effective online advertising; cloud-based solutions that provide enterprise customers with infrastructure and platform services as well as communication and collaboration tools; sales of other products and services, such as fees received for consumer subscription-based products, apps and in-app purchases, and devices.Basis of ConsolidationThe consolidated financial statements of Alphabet include the accounts of Alphabet and entities consolidated under the variable interest and voting models. Intercompany balances and transactions have been eliminated.Use of EstimatesPreparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates due to uncertainties. On an ongoing basis, we evaluate our estimates, including those related to the allowance for credit losses; content licenses; contingent liabilities; fair values of financial instruments and goodwill; income taxes; inventory; and useful lives of property and equipment, among others. We base our estimates on assumptions, both historical and forward looking, that are believed to be reasonable, and the results of which form the basis for making judgments about the carrying values of assets and liabilities.In January 2023, we completed an assessment of the useful lives of our servers and network equipment and adjusted the estimated useful life of our servers from four years to six years and the estimated useful life of certain network equipment from five years to six years. This change in accounting estimate was effective beginning in fiscal year 2023. Based on the carrying value of servers and certain network equipment as of December 31, 2022, and those placed in service during the year ended December 31, 2023, the effect of this change in estimate was a reduction in depreciation expense of $3.9 billion and an increase in net income of $3.0 billion, or $0.24 per basic and $0.24 per diluted share, for the year ended December 31, 2023.Revenue RecognitionRevenues are recognized when control of the promised goods or services is transferred to our customers, and the collectibility of an amount that we expect in exchange for those goods or services is probable. Sales and other similar taxes are excluded from revenues. Advertising RevenuesWe generate advertising revenues primarily by delivering advertising on:•Google Search and other properties, including revenues from traffic generated by search distribution partners who use Google.com as their default search in browsers, toolbars, etc. and other Google owned and operated properties like Gmail, Google Maps, and Google Play;•YouTube properties; and•Google Network properties, including revenues from Google Network properties participating in AdMob, AdSense, and Google Ad Manager.Our customers generally purchase advertising inventory through Google Ads, Google Ad Manager, Google Display & Video 360, and Google Marketing Platform, among others.We offer advertising by delivering both performance and brand advertising. We recognize revenues for performance advertising when a user engages with the advertisement. For brand advertising, we recognize revenues when the ad is displayed, or a user views the ad.For ads placed on Google Network properties, we evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis). Generally, we report advertising revenues for ads placed on Google Network properties on a gross basis, that is, the amounts billed to our customers are recorded as revenues, 56. Table of ContentsAlphabet Inc.and amounts paid to Google Network partners are recorded as cost of revenues. Where we are the principal, we control the advertising inventory before it is transferred to our customers. Our control is evidenced by our sole ability to monetize the advertising inventory before it is transferred to our customers and is further supported by us being primarily responsible to our customers and having a level of discretion in establishing pricing.Google Subscriptions, Platforms, and DevicesGoogle subscriptions, platforms, and devices revenues consist of revenues from:•consumer subscriptions, which primarily include revenues from YouTube services, such YouTube TV, YouTube Music and Premium, and NFL Sunday Ticket, as well as Google One;•platforms, which primarily include revenues from Google Play from the sales of apps and in-app purchases;•devices, which primarily include sales of the Pixel family of devices; and•other products and services.Subscription revenues are recognized ratably over the period of the subscription, primarily monthly. We report revenues from Google Play app sales and in-app purchases on a net basis, because our performance obligation is to facilitate a transaction between app developers and end users, for which we earn a service fee. Google Cloud RevenuesGoogle Cloud revenues consist of revenues from:•Google Cloud Platform, which generates consumption-based fees and subscriptions for infrastructure, platform, and other services. These services provide access to solutions such as cybersecurity, databases, analytics, and AI offerings including our AI infrastructure, Vertex AI platform, and Duet AI for Google Cloud;•Google Workspace, which includes subscriptions for cloud-based communication and collaboration tools for enterprises, such as Calendar, Gmail, Docs, Drive, and Meet, with integrated features like Duet AI in Google Workspace; and•other enterprise services.Our cloud services are generally provided on either a consumption or subscription basis and may have contract terms longer than a year. Revenues related to cloud services provided on a consumption basis are recognized when the customer utilizes the services, based on the quantity of services consumed. Revenues related to cloud services provided on a subscription basis are recognized ratably over the contract term as the customer receives and consumes the benefits of the cloud services.Arrangements with Multiple Performance ObligationsOur contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenues to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers.Customer Incentives and CreditsCertain customers receive cash-based incentives or credits, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues. We believe that there will not be significant changes to our estimates of variable consideration.Sales CommissionsWe expense sales commissions when incurred when the period of the expected benefit is one year or less. We recognize an asset for certain sales commissions and amortize if the expected benefit period is greater than one year. These costs are recorded within sales and marketing expenses.Cost of RevenuesCost of revenues consists of TAC and other costs of revenues.•TAC includes: ◦amounts paid to our distribution partners who make available our search access points and services. Our distribution partners include browser providers, mobile carriers, original equipment manufacturers, and software developers; and◦amounts paid to Google Network partners primarily for ads displayed on their properties.57. Table of ContentsAlphabet Inc.•Other cost of revenues includes:◦compensation expense related to our data centers and other operations such as content review and customer and product support;◦content acquisition costs, which are payments to content providers from whom we license video and other content for distribution on YouTube and Google Play (we pay fees to these content providers based on revenues generated or a flat fee);◦depreciation expense related to our technical infrastructure; and◦inventory and other costs related to the devices we sell.Software Development CostsWe expense software development costs, including costs to develop software products or the software component of products to be sold, leased, or marketed to external users, before technological feasibility is reached. Technological feasibility is typically reached shortly before the release of such products. As a result, development costs that meet the criteria for capitalization were not material for the periods presented.Software development costs also include costs to develop software to be used solely to meet internal needs and cloud-based applications used to deliver our services. We capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended. Costs capitalized for developing such software applications were not material for the periods presented.Stock-based Compensation Stock-based compensation (SBC) primarily consists of Alphabet restricted stock units (RSUs). RSUs are equity classified and measured at the fair market value of the underlying stock at the grant date. We recognize RSU expense using the straight-line attribution method over the requisite service period and account for forfeitures as they occur.For RSUs, shares are issued on the vesting dates net of the applicable statutory income tax withholding to be paid by us on behalf of our employees. As a result, fewer shares are issued than the number of RSUs outstanding, and the income tax withholding is recorded as a reduction to additional paid-in capital.Additionally, SBC includes other stock-based awards, such as performance stock units (PSUs) that include market conditions and awards that may be settled in cash or the stock of certain Other Bet companies. PSUs and certain awards granted by Other Bet companies are equity classified and expense is recognized over the requisite service period. Certain awards granted by Other Bet companies are liability classified and remeasured at fair value through settlement. The fair value of awards granted by Other Bet companies is based on the equity valuation of the respective Other Bet company.Advertising and Promotional ExpensesWe expense advertising and promotional costs in the period in which they are incurred. For the years ended December 31, 2021, 2022, and 2023, advertising and promotional expenses totaled approximately $7.9 billion, $9.2 billion, and $8.7 billion, respectively.Performance FeesPerformance fees refer to compensation arrangements with payouts based on realized returns from certain investments. We record compensation expense based on the estimated payouts on an ongoing basis, which may result in expense recognized before investment returns are realized and compensation is paid and may require the use of unobservable inputs. Performance fees are recorded as a component of OI&E.Fair Value Measurements Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value:Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.58. Table of ContentsAlphabet Inc.Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings.Level 3 - Unobservable inputs that are supported by little or no market activities.The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The determination of fair value involves the use of appropriate valuation methods and relevant inputs into valuation models.Our financial assets and liabilities that are measured at fair value on a recurring basis include cash equivalents, marketable securities, derivative financial instruments, and certain non-marketable debt securities. Our financial assets measured at fair value on a nonrecurring basis include non-marketable equity securities. Other financial assets and liabilities are carried at cost with fair value disclosed, if required.We measure certain other instruments, including SBC awards settled in the stock of Other Bet companies, and certain assets and liabilities acquired in a business combination, also at fair value on a nonrecurring basis. Financial InstrumentsOur financial instruments include cash, cash equivalents, marketable and non-marketable securities, derivative financial instruments and accounts receivable.Credit RisksWe are subject to credit risk primarily from cash equivalents, marketable debt securities, derivative financial instruments, including foreign exchange contracts, and accounts receivable. We manage our credit risk exposure through timely assessment of our counterparty creditworthiness, credit limits and use of collateral management. Foreign exchange contracts are transacted with various financial institutions with high credit standing. Accounts receivable are typically unsecured and are derived from revenues earned from customers located around the world. We manage our credit risk exposure by performing ongoing evaluations to determine customer credit and we limit the amount of credit we extend. We generally do not require collateral from our customers.Cash EquivalentsWe invest excess cash primarily in government bonds, corporate debt securities, mortgage-backed and asset-backed securities, time deposits, and money market funds.Marketable SecuritiesWe classify all marketable debt securities that have effective maturities of three months or less from the date of purchase as cash equivalents and those with effective maturities of greater than three months as marketable securities on our Consolidated Balance Sheets. We determine the appropriate classification of our investments in marketable debt securities at the time of purchase and reevaluate such designation at each balance sheet date. We have classified and accounted for our marketable debt securities as available-for-sale. After consideration of our risk versus reward objectives, as well as our liquidity requirements, we may sell these debt securities prior to their effective maturities. As we view these securities as available to support current operations, we classify highly liquid securities with maturities beyond 12 months as current assets under the caption marketable securities on the Consolidated Balance Sheets. We carry these securities at fair value, and report the unrealized gains and losses, net of taxes, as a component of stockholders’ equity, except for the changes in allowance for expected credit losses, which are recorded in OI&E. For certain marketable debt securities we have elected the fair value option, for which changes in fair value are recorded in OI&E. We determine any realized gains or losses on the sale of marketable debt securities on a specific identification method, and we record such gains and losses as a component of OI&E.Our investments in marketable equity securities are measured at fair value with the related gains and losses, including unrealized, recognized in OI&E. We classify our marketable equity securities subject to long-term lock-up restrictions beyond 12 months as other non-current assets on the Consolidated Balance Sheets.Non-Marketable SecuritiesNon-marketable securities primarily consist of equity securities. We account for non-marketable equity securities through which we exercise significant influence but do not have control over the investee under the equity method. All other non-marketable equity securities that we hold are primarily accounted for under the measurement alternative. Under the measurement alternative, the carrying value is measured at cost, less any impairment, plus or minus 59. Table of ContentsAlphabet Inc.changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. Adjustments are determined primarily based on a market approach as of the transaction date and are recorded as a component of OI&E.Non-marketable securities that do not have effective contractual maturity dates are classified as other non-current assets on the Consolidated Balance Sheets.Derivative Financial InstrumentsSee Note 3 for the accounting policy pertaining to derivative financial instruments. Accounts ReceivableOur payment terms for accounts receivable vary by the types and locations of our customers and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customers, we require payment before the products or services are delivered to the customer. Additionally, accounts receivable includes amounts for services performed in advance of the right to invoice the customer.We maintain an allowance for credit losses for accounts receivable, which is recorded as an offset to accounts receivable, and changes in such are classified as general and administrative expense in the Consolidated Statements of Income. We assess collectibility by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when we identify specific customers with known disputes or collectibility issues. In determining the amount of the allowance for credit losses, we consider historical collectibility based on past due status and make judgments about the creditworthiness of customers based on ongoing credit evaluations. We also consider customer-specific information, current market conditions, and reasonable and supportable forecasts of future economic conditions.OtherOur financial instruments also include debt and equity investments in companies with which we also entered into commercial arrangements at or near the same time. For these transactions, judgment is required in assessing the substance of the arrangements, including assessing whether the components of the arrangements should be accounted for as separate transactions under the applicable GAAP, and determining the value of the components of the arrangements, including the fair value of the investments. Additionally, if our investment in such companies becomes impaired, any remaining performance obligations would be reassessed and may be reduced.Impairment of InvestmentsWe periodically review our debt and non-marketable equity securities for impairment. For debt securities in an unrealized loss position, we determine whether a credit loss exists. The credit loss is estimated by considering available information relevant to the collectibility of the security and information about past events, current conditions, and reasonable and supportable forecasts. Any credit loss is recorded as a charge to OI&E, not to exceed the amount of the unrealized loss. Unrealized losses other than the credit loss are recognized in AOCI. If we have an intent to sell, or if it is more likely than not that we will be required to sell a debt security in an unrealized loss position before recovery of its amortized cost basis, we will write down the security to its fair value and record the corresponding charge as a component of OI&E. For non-marketable equity securities, including equity method investments, we consider whether impairment indicators exist by evaluating the companies' financial and liquidity position and access to capital resources, among other indicators. If the assessment indicates that the investment is impaired, we write down the investment to its fair value by recording the corresponding charge as a component of OI&E. We prepare quantitative measurements of the fair value of our equity investments using a market approach or an income approach.InventoryInventory consists primarily of finished goods and is stated at the lower of cost and net realizable value. Cost is computed using the first-in, first-out method.Variable Interest EntitiesWe determine at the inception of each arrangement whether an entity in which we have made an investment or in which we have other variable interests is considered a variable interest entity (VIE). We consolidate VIEs when we are the primary beneficiary. We are the primary beneficiary of a VIE when we have the power to direct activities that most significantly affect the economic performance of the VIE and have the obligation to absorb the majority of their losses 60. Table of ContentsAlphabet Inc.or benefits. If we are not the primary beneficiary in a VIE, we account for the investment or other variable interests in a VIE in accordance with applicable GAAP.Periodically, we assess whether any changes in our interest or relationship with the entity affect our determination of whether the entity is a VIE and, if so, whether we are the primary beneficiary. Property and EquipmentProperty and equipment includes the following categories: land and buildings, information technology assets, construction in progress, leasehold improvements, and furniture and fixtures. Land and buildings include land, offices, data centers, and related building improvements. Information technology assets include servers and network equipment. Construction in progress is the construction or development of property and equipment that have not yet been placed in service. Property and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets, which we regularly evaluate. Land is not depreciated. We depreciate buildings over periods of seven to 25 years. We depreciate information technology assets generally over a period of six years for servers and network equipment. We depreciate leasehold improvements over the shorter of the remaining lease term or the estimated useful lives of the assets. Depreciation for buildings, information technology assets, leasehold improvements, and furniture and fixtures commences once they are ready for our intended use.GoodwillWe allocate goodwill to reporting units based on the expected benefit from the business combination. We evaluate our reporting units periodically, as well as when changes in our operating segments occur. For changes in reporting units, we reassign goodwill using a relative fair value allocation approach. We test our goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. Goodwill impairments were not material for the periods presented.LeasesWe determine if an arrangement is a lease at inception. Our lease agreements generally contain lease and non-lease components. Payments under our lease arrangements are primarily fixed. Non-lease components primarily include payments for maintenance and utilities. We combine fixed payments for non-lease components with lease payments and account for them together as a single lease component which increases the amount of our lease assets and liabilities.Certain lease agreements contain variable payments, which are expensed as incurred and not included in the lease assets and liabilities. These amounts primarily include payments affected by the Consumer Price Index, and payments for maintenance and utilities.Lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate, because the interest rate implicit in our leases is not readily determinable. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We generally use the base, non-cancelable, lease term when determining the lease assets and liabilities. Lease assets also include any prepaid lease payments and lease incentives.Operating lease assets and liabilities are included on our Consolidated Balance Sheets. The current portion of our operating lease liabilities is included in accrued expenses and other current liabilities, and the long-term portion is included in operating lease liabilities. Finance lease assets are included in property and equipment, net. Finance lease liabilities are included in accrued expenses and other current liabilities or long-term debt.Operating lease expense (excluding variable lease costs) is recognized on a straight-line basis over the lease term.Impairment of Long-Lived AssetsWe review leases, property and equipment, and intangible assets, excluding goodwill, for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets. We measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows that the assets or the asset group are expected 61. Table of ContentsAlphabet Inc.to generate. If the carrying value of the assets or asset group is not recoverable, the impairment recognized is measured as the amount by which the carrying value exceeds its fair value. Income TaxesWe account for income taxes using the asset and liability method, under which we recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. We measure current and deferred tax assets and liabilities based on provisions of enacted tax law. We evaluate the likelihood of future realization of our deferred tax assets based on all available evidence and establish a valuation allowance to reduce deferred tax assets when it is more likely than not that they will not be realized or release a valuation allowance to increase deferred tax assets when it is more likely than not that they will be realized. We have elected to account for the tax effects of the global intangible low tax Income provision as a current period expense.We recognize the financial statement effects of a tax position when it is more likely than not that, based on technical merits, the position will be sustained upon examination. The tax benefits of the position recognized in the financial statements are then measured based on the largest amount of benefit that is greater than 50% likely to be realized upon settlement with a taxing authority. In addition, we recognize interest and penalties related to unrecognized tax benefits as a component of the income tax provision.Business CombinationsWe include the results of operations of the businesses that we acquire as of the acquisition date. We allocate the purchase price of the acquisitions to the assets acquired and liabilities assumed based on their estimated fair values, except for revenue contracts acquired, which are recognized in accordance with our revenue recognition policy. The excess of the purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.Foreign CurrencyWe translate the financial statements of our international subsidiaries to U.S. dollars using month-end exchange rates for assets and liabilities, and average rates for the annual period derived from month-end exchange rates for revenues, costs, and expenses. We record translation gains and losses in AOCI as a component of stockholders’ equity. We reflect net foreign exchange transaction gains and losses resulting from the conversion of the transaction currency to functional currency as a component of foreign currency exchange gain (loss) in OI&E.Recent Accounting PronouncementsIn November 2023, the Financial Standards Accounting Board (FASB) issued Accounting Standards Update (ASU) 2023-07 "Segment Reporting (Topic 280):Improvements to Reportable Segment Disclosures" which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for our annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted. We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.In December 2023, the FASB issued ASU 2023-09 "Income Taxes (Topics 740): Improvements to Income Tax Disclosures" to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for our annual periods beginning January 1, 2025, with early adoption permitted. We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.Prior Period ReclassificationsCertain amounts in prior periods have been reclassified to conform with current period presentation.62. Table of ContentsAlphabet Inc.Note 2. Revenues Disaggregated RevenuesThe following table presents revenues disaggregated by type (in millions):Year Ended December 31,202120222023Google Search & other$148,951 $162,450 $175,033 YouTube ads28,845 29,243 31,510 Google Network31,701 32,780 31,312 Google advertising209,497 224,473 237,855 Google subscriptions, platforms, and devices28,032 29,055 34,688 Google Services total237,529 253,528 272,543 Google Cloud19,206 26,280 33,088 Other Bets753 1,068 1,527 Hedging gains (losses)149 1,960 236 Total revenues$257,637 $282,836 $307,394 No individual customer or groups of affiliated customers represented more than 10% of our revenues in 2021, 2022, or 2023. The following table presents revenues disaggregated by geography, based on the addresses of our customers (in millions):Year Ended December 31, 202120222023United States$117,854 46 %$134,814 48 %$146,286 47 %EMEA(1)79,107 31 82,062 29 91,038 30 APAC(1)46,123 18 47,024 16 51,514 17 Other Americas(1)14,404 5 16,976 6 18,320 6 Hedging gains (losses)149 0 1,960 1 236 0 Total revenues$257,637 100 %$282,836 100 %$307,394 100 %(1) Regions represent Europe, the Middle East, and Africa (EMEA); Asia-Pacific (APAC); and Canada and Latin America ("Other Americas").Revenue BacklogAs of December 31, 2023, we had $74.1 billion of remaining performance obligations (“revenue backlog”), primarily related to Google Cloud. Our revenue backlog represents commitments in customer contracts for future services that have not yet been recognized as revenue. The estimated revenue backlog and timing of revenue recognition for these commitments is largely driven by our ability to deliver in accordance with relevant contract terms and when our customers utilize services. We expect to recognize approximately half of the revenue backlog as revenues over the next 24 months with the remaining to be recognized thereafter. Revenue backlog includes related deferred revenue currently recorded as well as amounts that will be invoiced in future periods, and excludes contracts with an original expected term of one year or less and cancellable contracts.Deferred RevenuesWe record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. Deferred revenues primarily relate to Google Cloud and Google subscriptions, platforms, and devices. Total deferred revenue as of December 31, 2022 was $4.5 billion, of which $2.4 billion was recognized as revenues for the year ended December 31, 2023.Note 3. Financial Instruments Fair Value MeasurementsInvestments Measured at Fair Value on a Recurring BasisCash, cash equivalents, and marketable equity securities are measured at fair value and classified within Level 1 63. Table of ContentsAlphabet Inc.and Level 2 in the fair value hierarchy, because we use quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar instruments in active markets.Debt securities are measured at fair value and classified within Level 2 in the fair value hierarchy, because we use quoted market prices to the extent available or alternative pricing sources and models utilizing market observable inputs to determine fair value. For certain marketable debt securities, we have elected the fair value option for which changes in fair value are recorded in OI&E. The fair value option was elected for these securities to align with the unrealized gains and losses from related derivative contracts.The following tables summarize our cash, cash equivalents, and marketable securities measured at fair value on a recurring basis (in millions):As of December 31, 2022Fair Value HierarchyAdjusted CostGross Unrealized GainsGross Unrealized LossesFair ValueCash and Cash EquivalentsMarketable SecuritiesFair value changes recorded in other comprehensive incomeTime depositsLevel 2$5,297 $0 $0 $5,297 $5,293 $4 Government bondsLevel 241,03664 (2,045)39,055 283 38,772 Corporate debt securitiesLevel 228,5788 (1,569)27,017 1 27,016 Mortgage-backed and asset-backed securitiesLevel 216,1765 (1,242)14,939 0 14,939 Total investments with fair value change reflected in other comprehensive income(1)$91,087 $77 $(4,856)$86,308 $5,577 $80,731 Fair value adjustments recorded in net incomeMoney market fundsLevel 1$7,234 $7,234 $0 Current marketable equity securities(2)Level 14,013 0 4,013 Mutual fundsLevel 2339 0 339 Government bondsLevel 21,877 440 1,437 Corporate debt securitiesLevel 23,744 65 3,679 Mortgage-backed and asset-backed securitiesLevel 21,686 2 1,684 Total investments with fair value change recorded in net income$18,893 $7,741 $11,152 Cash0 8,561 0 Total$91,087 $77 $(4,856)$105,201 $21,879 $91,883 (1)Represents gross unrealized gains and losses for debt securities recorded to AOCI.(2)The long-term portion of marketable equity securities (subject to long-term lock-up restrictions) of $803 million as of December 31, 2022 is included within other non-current assets.64. Table of ContentsAlphabet Inc.As of December 31, 2023Fair Value HierarchyAdjusted CostGross Unrealized GainsGross Unrealized LossesFair ValueCash and Cash EquivalentsMarketable SecuritiesFair value changes recorded in other comprehensive incomeTime depositsLevel 2$2,628 $0 $0 $2,628 $2,628 $0 Government bondsLevel 238,106 233 (679)37,660 1,993 35,667 Corporate debt securitiesLevel 222,457 112 (637)21,932 0 21,932 Mortgage-backed and asset-backed securitiesLevel 217,243 88 (634)16,697 0 16,697 Total investments with fair value change reflected in other comprehensive income(1)$80,434 $433 $(1,950)$78,917 $4,621 $74,296 Fair value adjustments recorded in net incomeMoney market fundsLevel 1$6,480 $6,480 $0 Current marketable equity securities(2)Level 14,2820 4,282Mutual fundsLevel 23110 311Government bondsLevel 21,952347 1,605Corporate debt securitiesLevel 23,78291 3,691Mortgage-backed and asset-backed securitiesLevel 22,6830 2,683Total investments with fair value change recorded in net income$19,490 $6,918 $12,572 Cash0 12,509 0 Total$80,434 $433 $(1,950)$98,407 $24,048 $86,868 (1)Represents gross unrealized gains and losses for debt securities recorded to AOCI.(2)The long-term portion of marketable equity securities (subject to long-term lock-up restrictions) of $1.4 billion as of December 31, 2023 is included within other non-current assets.Investments Measured at Fair Value on a Nonrecurring BasisOur non-marketable equity securities are investments in privately held companies without readily determinable market values. The carrying value of our non-marketable equity securities is adjusted to fair value upon observable transactions for identical or similar investments of the same issuer or impairment. Non-marketable equity securities that have been remeasured during the period based on observable transactions are classified within Level 2 or Level 3 in the fair value hierarchy because we estimate the value based on valuation methods, including option pricing models, market comparable approach, and common stock equivalent method, which may include a combination of the observable transaction price at the transaction date and other unobservable inputs including volatility, expected time to exit, risk free rate, and the rights, and obligations of the securities we hold. These inputs significantly vary based on investment type. The fair value of non-marketable equity securities that have been remeasured due to impairment are classified within Level 3.As of December 31, 2023, the carrying value of our non-marketable equity securities was $28.8 billion, of which $13.7 billion were remeasured at fair value during the year ended December 31, 2023, and primarily classified within Level 2 of the fair value hierarchy at the time of measurement. 65. Table of ContentsAlphabet Inc.Debt SecuritiesThe following table summarizes the estimated fair value of investments in available-for-sale marketable debt securities by effective contractual maturity dates (in millions):As of December 31, 2023Due in one year or less$11,231 Due in one year through five years41,477 Due in five years through 10 years15,351 Due after 10 years14,216 Total$82,275 The following tables present fair values and gross unrealized losses recorded to AOCI, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions): As of December 31, 2022 Less than 12 Months12 Months or GreaterTotal Fair ValueUnrealizedLossFair ValueUnrealizedLossFair ValueUnrealizedLossGovernment bonds$21,039 $(1,004)$13,438 $(1,041)$34,477 $(2,045)Corporate debt securities11,228 (440)15,125 (1,052)26,353 (1,492)Mortgage-backed and asset-backed securities7,725 (585)6,964 (657)14,689 (1,242)Total$39,992 $(2,029)$35,527 $(2,750)$75,519 $(4,779) As of December 31, 2023 Less than 12 Months12 Months or GreaterTotal Fair ValueUnrealizedLossFair ValueUnrealizedLossFair ValueUnrealizedLossGovernment bonds$1,456 $(22)$13,897 $(657)$15,353 $(679)Corporate debt securities827 (5)15,367 (592)16,194 (597)Mortgage-backed and asset-backed securities2,945 (26)7,916 (608)10,861 (634)Total$5,228 $(53)$37,180 $(1,857)$42,408 $(1,910)We determine realized gains or losses on the sale or extinguishment of debt securities on a specific identification method.The following table summarizes gains and losses for debt securities, reflected as a component of OI&E (in millions): Year Ended December 31, 202120222023Unrealized gain (loss) on fair value option debt securities$(122)$(557)$386 Gross realized gain on debt securities432 103 182 Gross realized loss on debt securities(329)(1,588)(1,833)(Increase) decrease in allowance for credit losses(91)(22)50 Total gain (loss) on debt securities recognized in other income (expense), net$(110)$(2,064)$(1,215)66. Table of ContentsAlphabet Inc.Equity InvestmentsThe carrying value of equity securities is measured as the total initial cost plus the cumulative net gain (loss). Gains and losses, including impairments, are included as a component of OI&E in the Consolidated Statements of Income. See Note 7 for further details on OI&E.The carrying values for marketable and non-marketable equity securities are summarized below (in millions):As of December 31, 2022As of December 31, 2023Marketable Equity SecuritiesNon-Marketable Equity SecuritiesTotalMarketable Equity SecuritiesNon-Marketable Equity SecuritiesTotalTotal initial cost$5,764 $16,157 $21,921 $5,418 $17,616 $23,034 Cumulative net gain (loss)(1)(608)12,372 11,764 555 11,150 11,705 Carrying value$5,156 $28,529 $33,685 $5,973 $28,766 $34,739 (1)Non-marketable equity securities cumulative net gain (loss) is comprised of $16.8 billion gains and $4.5 billion losses (including impairments) as of December 31, 2022 and $18.1 billion gains and $6.9 billion losses (including impairments) as of December 31, 2023.Gains and Losses on Marketable and Non-marketable Equity SecuritiesGains and losses (including impairments), net, for marketable and non-marketable equity securities included in OI&E are summarized below (in millions):Year Ended December 31, 202120222023Realized net gain (loss) on equity securities sold during the period$1,196 $(442)$690 Unrealized net gain (loss) on marketable equity securities1,335 (3,242)790 Unrealized net gain (loss) on non-marketable equity securities(1)9,849 229 (1,088)Total gain (loss) on equity securities in other income (expense), net$12,380 $(3,455)$392 (1)Unrealized gain (loss) on non-marketable equity securities accounted for under the measurement alternative is comprised of $10.0 billion, $3.3 billion, and $1.8 billion of upward adjustments as of December 31, 2021, 2022, and 2023, respectively, and $122 million, $3.0 billion, and $2.9 billion of downward adjustments (including impairments) as of December 31, 2021, 2022, and 2023, respectively.In the table above, realized net gain (loss) on equity securities sold during the period reflects the difference between the sale proceeds and the carrying value of the equity securities at the beginning of the period or the purchase date, if later.Cumulative net gains (losses) on equity securities sold during the period, which is summarized in the following table (in millions), represents the total net gains (losses) recognized after the initial purchase date of the equity security sold during the period. While these net gains (losses) may have been reflected in periods prior to the period of sale, we believe they are important supplemental information as they reflect the economic net gains (losses) on the securities sold during the period. Cumulative net gains (losses) are calculated as the difference between the sale price and the initial purchase price for the equity security sold during the period.Equity Securities Sold During the Year Ended December 31, 20222023Total sale price$1,784 $1,981 Total initial cost937 1,512 Cumulative net gains (losses)$847 $469 Equity Securities Accounted for Under the Equity MethodAs of December 31, 2022 and 2023, equity securities accounted for under the equity method had a carrying value of approximately $1.5 billion and $1.7 billion, respectively. Our share of gains and losses, including impairments, are included as a component of OI&E, in the Consolidated Statements of Income. See Note 7 for further details on OI&E. 67. Table of ContentsAlphabet Inc.Derivative Financial InstrumentsWe use derivative instruments to manage risks relating to our ongoing business operations. The primary risk managed is foreign exchange risk. We use foreign currency contracts to reduce the risk that our cash flows, earnings, and investment in foreign subsidiaries will be adversely affected by foreign currency exchange rate fluctuations. We also enter into derivative instruments to partially offset our exposure to other risks and enhance investment returns.We recognize derivative instruments in the Consolidated Balance Sheets at fair value and classify the derivatives primarily within Level 2 in the fair value hierarchy. We present our collar contracts (an option strategy comprised of a combination of purchased and written options) at net fair values and present all other derivatives at gross fair values. The accounting treatment for derivatives is based on the intended use and hedge designation.Cash Flow HedgesWe designate foreign currency forward and option contracts (including collars) as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the U.S. dollar. These contracts have maturities of 24 months or less.Cash flow hedge amounts included in the assessment of hedge effectiveness are deferred in AOCI and subsequently reclassified to revenue when the hedged item is recognized in earnings. We exclude forward points and time value from our assessment of hedge effectiveness and amortize them on a straight-line basis over the life of the hedging instrument in revenues. The difference between fair value changes of the excluded component and the amount amortized to revenues is recorded in AOCI.As of December 31, 2023, the net accumulated gain on our foreign currency cash flow hedges before tax effect was $47 million, which is expected to be reclassified from AOCI into revenues within the next 12 months.Fair Value HedgesWe designate foreign currency forward contracts as fair value hedges to hedge foreign currency risks for our marketable securities denominated in currencies other than the U.S. dollar. Fair value hedge amounts included in the assessment of hedge effectiveness are recognized in OI&E, along with the offsetting gains and losses of the related hedged items. We exclude forward points from the assessment of hedge effectiveness and recognize changes in the excluded component in OI&E.Net Investment HedgesWe designate foreign currency forward contracts as net investment hedges to hedge the foreign currency risks related to our investment in foreign subsidiaries. Net investment hedge amounts included in the assessment of hedge effectiveness are recognized in AOCI along with the foreign currency translation adjustment. We exclude forward points from the assessment of hedge effectiveness and recognize changes in the excluded component in OI&E.Other DerivativesWe enter into foreign currency forward and option contracts that are not designated as hedging instruments to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the functional currency of a subsidiary. Gains and losses on these derivatives that are not designated as accounting hedges are primarily recorded in OI&E along with the foreign currency gains and losses on monetary assets and liabilities.We also use derivatives not designated as hedging instruments to manage risks relating to interest rates, commodity prices, credit exposures, and to enhance investment returns. From time to time, we enter into derivatives to hedge the market price risk on certain of our marketable equity securities. Gains and losses arising from other derivatives are primarily reflected within the “other” component of OI&E. See Note 7 for further details. 68. Table of ContentsAlphabet Inc.The gross notional amounts of outstanding derivative instruments were as follows (in millions):As of December 31,20222023Derivatives designated as hedging instruments:Foreign exchange contractsCash flow hedges $15,972 $18,039 Fair value hedges$2,117 $2,065 Net investment hedges$8,751 $9,472 Derivatives not designated as hedging instruments:Foreign exchange contracts$34,979 $39,722 Other contracts$7,932 $10,818 The fair values of outstanding derivative instruments were as follows (in millions): As of December 31, 2022As of December 31, 2023 Assets(1)Liabilities(2)Assets(1)Liabilities(2)Derivatives designated as hedging instruments: Foreign exchange contracts$271 $556 $205 $242 Derivatives not designated as hedging instruments: Foreign exchange contracts365 207 134 156 Other contracts40 47 114 47 Total derivatives not designated as hedging instruments405 254 248 203 Total$676 $810 $453 $445 (1) Derivative assets are recorded as other current and non-current assets in the Consolidated Balance Sheets.(2) Derivative liabilities are recorded as accrued expenses and other liabilities, current and non-current in the Consolidated Balance Sheets.The gains (losses) on derivatives in cash flow hedging and net investment hedging relationships recognized in other comprehensive income (OCI) are summarized below (in millions): Year Ended December 31,202120222023Derivatives in cash flow hedging relationship:Foreign exchange contractsAmount included in the assessment of effectiveness$806 $1,699 $90 Amount excluded from the assessment of effectiveness48 (188)84 Derivatives in net investment hedging relationship:Foreign exchange contractsAmount included in the assessment of effectiveness754 608 (287)Total$1,608 $2,119 $(113)69. Table of ContentsAlphabet Inc.The table below presents the gains (losses) of our derivatives on the Consolidated Statements of Income: (in millions):Year Ended December 31,202120222023RevenuesOther income (expense), netRevenuesOther income (expense), netRevenuesOther income (expense), netTotal amounts in the Consolidated Statements of Income$257,637 $12,020 $282,836 $(3,514)$307,394 $1,424 Effect of cash flow hedges:Foreign exchange contractsAmount reclassified from AOCI to income$165 $0 $2,046 $0 $213 $0 Amount excluded from the assessment of effectiveness (amortized)(16)0 (85)0 24 0 Effect of fair value hedges:Foreign exchange contractsHedged items0 (95)0 (162)0 59 Derivatives designated as hedging instruments0 95 0 163 0 (59)Amount excluded from the assessment of effectiveness0 8 0 16 0 15 Effect of net investment hedges:Foreign exchange contractsAmount excluded from the assessment of effectiveness0 82 0 171 0 187 Effect of non designated hedges:Foreign exchange contracts0 (860)0(395)0 7 Other contracts0 101 0 144 0 53 Total gains (losses)$149 $(669)$1,961 $(63)$237 $262 Offsetting of DerivativesWe enter into master netting arrangements and collateral security arrangements to reduce credit risk. Cash collateral received related to derivative instruments under our collateral security arrangements are included in other current assets with a corresponding liability. Cash and non-cash collateral pledged related to derivative instruments under our collateral security arrangements are included in other current assets.70. Table of ContentsAlphabet Inc.The gross amounts of derivative instruments subject to master netting arrangements with various counterparties, and cash and non-cash collateral received and pledged under such agreements were as follows (in millions):As of December 31, 2022Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to OffsetGross Amounts RecognizedGross Amounts Offset in the Consolidated Balance SheetsNet Amounts Presented in the Consolidated Balance SheetsFinancial Instruments(1)Cash and Non-Cash Collateral Received or PledgedNet AmountsDerivatives assets$760 $(84)$676 $(463)$(132)$81 Derivatives liabilities$894 $(84)$810 $(463)$(28)$319 As of December 31, 2023Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to OffsetGross AmountsRecognizedGross Amounts Offset in the Consolidated Balance SheetsNet Amounts Presented in the Consolidated Balance SheetsFinancial Instruments(1)Cash and Non-Cash Collateral Received or PledgedNet AmountsDerivatives assets$535 $(82)$453 $(213)$(75)$165 Derivatives liabilities$527 $(82)$445 $(213)$(16)$216 (1) The balances as of December 31, 2022 and 2023 were related to derivatives allowed to be net settled in accordance with our master netting agreements.Note 4. Leases We have entered into operating lease agreements primarily for data centers, land, and offices throughout the world with lease periods expiring between 2024 and 2063. Components of operating lease expense were as follows (in millions):Year Ended December 31,202120222023Operating lease cost$2,699 $2,900 $3,362 Variable lease cost726 838 1,182 Total operating lease cost$3,425 $3,738 $4,544 Supplemental information related to operating leases was as follows (in millions):Year Ended December 31,202120222023Cash payments for operating leases$2,489 $2,722 $3,173 New operating lease assets obtained in exchange for operating lease liabilities$2,951 $4,383 $2,877 71. Table of ContentsAlphabet Inc.As of December 31, 2023, our operating leases had a weighted average remaining lease term of 8.1 years and a weighted average discount rate of 3.1%. Future lease payments under operating leases as of December 31, 2023 were as follows (in millions):2024$3,179 20252,929 20262,450 20271,951 20281,488 Thereafter5,685 Total future lease payments17,682 Less imputed interest(2,431)Total lease liability balance$15,251 As of December 31, 2023, we have entered into leases that have not yet commenced with short-term and long-term future lease payments of $657 million and $3.3 billion that are not yet recorded on our Consolidated Balance Sheets. These leases will commence between 2024 and 2026 with non-cancelable lease terms between one and 25 years.Note 5. Variable Interest Entities Consolidated Variable Interest EntitiesWe consolidate VIEs in which we hold a variable interest and are the primary beneficiary. The results of operations and financial position of these VIEs are included in our consolidated financial statements. For certain consolidated VIEs, their assets are not available to us and their creditors do not have recourse to us. As of December 31, 2022 and 2023, assets that can only be used to settle obligations of these VIEs were $4.1 billion and $4.9 billion, respectively, and the liabilities for which creditors only have recourse to the VIEs were $2.6 billion and $2.5 billion, respectively. We may continue to fund ongoing operations of certain VIEs that are included within Other Bets. Total noncontrolling interests (NCI) in our consolidated subsidiaries were $3.8 billion and $3.4 billion as of December 31, 2022 and 2023, respectively, of which $1.1 billion is redeemable noncontrolling interest (RNCI) for both periods. NCI and RNCI are included within additional paid-in capital. Net loss attributable to noncontrolling interests was not material for any period presented and is included within the "other" component of OI&E. See Note 7 for further details on OI&E.Unconsolidated Variable Interest EntitiesWe have investments in VIEs in which we are not the primary beneficiary. These VIEs include private companies that are primarily early stage companies and certain renewable energy entities in which activities involve power generation using renewable sources.We have determined that the governance structures of these entities do not allow us to direct the activities that would significantly affect their economic performance. Therefore, we are not the primary beneficiary, and the results of operations and financial position of these VIEs are not included in our consolidated financial statements. We account for these investments primarily as non-marketable equity securities or equity method investments.The maximum exposure of these unconsolidated VIEs is generally based on the current carrying value of the investments and any future funding commitments. The maximum exposure and carrying value of these unconsolidated VIEs were $2.8 billion and $2.7 billion, respectively, as of December 31, 2022 and $5.7 billion and $4.0 billion, respectively, as of December 31, 2023. The difference between the maximum exposure and the carrying value relates primarily to future funding commitments.Note 6. Debt Short-Term DebtWe have a debt financing program of up to $10.0 billion through the issuance of commercial paper. Net proceeds from this program are used for general corporate purposes. We had no commercial paper outstanding as of December 31, 2022 and 2023. Our short-term debt balance also includes the current portion of certain long-term debt.72. Table of ContentsAlphabet Inc.Long-Term DebtTotal outstanding debt is summarized below (in millions, except percentages):Effective Interest RateAs of December 31,MaturityCoupon Rate20222023Debt2014-2020 Notes issuances2024 - 20600.45% - 3.38%0.57% - 3.38%$13,000 $13,000 Future finance lease payments, net and other (1)2,142 1,746 Total debt15,142 14,746 Unamortized discount and debt issuance costs(143)(130)Less: Current portion of long-term notes(2)0 (1,000)Less: Current portion of future finance lease payments, net and other current debt(1)(2)(298)(363) Total long-term debt$14,701 $13,253 (1)Future finance lease payments are net of imputed interest.(2)Total current portion of long-term debt is included within other accrued expenses and current liabilities. See Note 7 for further details.The notes in the table above are fixed-rate senior unsecured obligations and generally rank equally with each other. We may redeem the notes at any time in whole or in part at specified redemption prices. The effective interest rates are based on proceeds received with interest payable semi-annually.The total estimated fair value of the outstanding notes was approximately $9.9 billion and $10.3 billion as of December 31, 2022 and December 31, 2023, respectively. The fair value was determined based on observable market prices of identical instruments in less active markets and is categorized accordingly as Level 2 in the fair value hierarchy.As of December 31, 2023, the aggregate future principal payments for long-term debt, including finance lease liabilities, for each of the next five years and thereafter were as follows (in millions):2024$1,299 20251,16320262,16520271,1432028132Thereafter8,960Total$14,862 Credit FacilityAs of December 31, 2023, we had $10.0 billion of revolving credit facilities, of which $4.0 billion expires in April 2024 and $6.0 billion expires in April 2028. The interest rates for all credit facilities are determined based on a formula using certain market rates, as well as our progress toward the achievement of certain sustainability goals. No amounts were outstanding under the credit facilities as of December 31, 2022 and 2023.Note 7. Supplemental Financial Statement Information Accounts ReceivableThe allowance for credit losses on accounts receivable was $754 million and $771 million as of December 31, 2022 and 2023, respectively.73. Table of ContentsAlphabet Inc.Property and Equipment, NetProperty and equipment, net, consisted of the following (in millions):As of December 31,20222023Land and buildings$66,897 $74,083 Information technology assets66,267 80,594 Construction in progress27,657 35,229 Leasehold improvements10,575 11,425 Furniture and fixtures314 472 Property and equipment, gross171,710 201,803 Less: accumulated depreciation(59,042)(67,458)Property and equipment, net$112,668 $134,345 Our technical infrastructure is comprised of information technology assets, including servers and networking equipment, and data center land and buildings.Accrued Expenses and Other Current LiabilitiesAccrued expenses and other current liabilities consisted of the following (in millions):As of December 31,20222023European Commission fines(1)$9,106 $9,525 Accrued purchases of property and equipment3,019 4,679 Accrued customer liabilities3,619 4,140 Current operating lease liabilities2,477 2,791 Income taxes payable, net1,632 2,748 Other accrued expenses and current liabilities18,013 22,285 Accrued expenses and other current liabilities$37,866 $46,168 (1) While each EC decision is under appeal, the fines are included in accrued expenses and other current liabilities on our Consolidated Balance Sheets, as we provided bank guarantees (in lieu of a cash payment) for the fines. Amounts include the effects of foreign exchange and interest. See Note 10 for further details.74. Table of ContentsAlphabet Inc.Accumulated Other Comprehensive Income (Loss)Components of AOCI, net of income tax, were as follows (in millions):Foreign Currency Translation AdjustmentsUnrealized Gains (Losses) on Available-for-Sale InvestmentsUnrealized Gains (Losses) on Cash Flow HedgesTotalBalance as of December 31, 2020$(864)$1,612 $(115)$633 Other comprehensive income (loss) before reclassifications(1,442)(1,312)668 (2,086)Amounts excluded from the assessment of hedge effectiveness recorded in AOCI0 0 48 48 Amounts reclassified from AOCI0 (64)(154)(218)Other comprehensive income (loss)(1,442)(1,376)562 (2,256)Balance as of December 31, 2021(2,306)236 447 (1,623)Other comprehensive income (loss) before reclassifications(1,836)(4,720)1,463 (5,093)Amounts excluded from the assessment of hedge effectiveness recorded in AOCI0 0 (188)(188)Amounts reclassified from AOCI0 1,007 (1,706)(699)Other comprehensive income (loss)(1,836)(3,713)(431)(5,980)Balance as of December 31, 2022(4,142)(3,477)16 (7,603)Other comprehensive income (loss) before reclassifications735 1,344 84 2,163 Amounts excluded from the assessment of hedge effectiveness recorded in AOCI0 0 84 84 Amounts reclassified from AOCI0 1,168 (214)954 Other comprehensive income (loss)735 2,512 (46)3,201 Balance as of December 31, 2023$(3,407)$(965)$(30)$(4,402)The effects on net income of amounts reclassified from AOCI were as follows (in millions):Gains (Losses) Reclassified from AOCI to the Consolidated Statements of IncomeYear Ended December 31, AOCI ComponentsLocation202120222023Unrealized gains (losses) on available-for-sale investmentsOther income (expense), net$82 $(1,291)$(1,497)Benefit (provision) for income taxes(18)284 329 Net of income tax64 (1,007)(1,168)Unrealized gains (losses) on cash flow hedgesForeign exchange contractsRevenue165 2,046 213 Interest rate contractsOther income (expense), net6 6 6 Benefit (provision) for income taxes(17)(346)(5)Net of income tax154 1,706 214 Total amount reclassified, net of income tax$218 $699 $(954)75. Table of ContentsAlphabet Inc.Other Income (Expense), Net Components of OI&E were as follows (in millions): Year Ended December 31, 202120222023Interest income$1,499 $2,174 $3,865 Interest expense(1)(346)(357)(308)Foreign currency exchange gain (loss), net(240)(654)(1,238)Gain (loss) on debt securities, net(110)(2,064)(1,215)Gain (loss) on equity securities, net12,380 (3,455)392 Performance fees(1,908)798 257 Income (loss) and impairment from equity method investments, net334 (337)(628)Other411 381 299 Other income (expense), net$12,020 $(3,514)$1,424 (1) Interest expense is net of interest capitalized of $163 million, $128 million, and $181 million for the years ended December 31, 2021, 2022, and 2023, respectively.Note 8. Workforce Reduction and Other Initiatives We have a company-wide effort underway to re-engineer our cost base. As part of this program, in January 2023, we announced a reduction of our workforce. As a result, total employee severance and related charges recorded during the year ended December 31, 2023 were $2.1 billion. Substantially all of the employees affected were no longer included in our headcount as of December 31, 2023.In addition, we are taking actions to optimize our global office space. As a result, exit charges recorded during the year ended December 31, 2023, were $1.8 billion as reflected in the table below. In addition to these exit charges, for the year ended December 31, 2023, we incurred $269 million in accelerated rent and accelerated depreciation, which are not included in the table below.Severance and office space exit charges are included within our consolidated statements of income as follows (in millions):Year Ended December 31, 2023Severance and Related (1)Office SpaceTotalCost of revenues$479 $481 $960 Research and development848870 1,718 Sales and marketing497257 754 General and administrative264237 501 Total charges$2,088 $1,845 $3,933 (1)Severance includes amounts to be settled in cash, accounted for as one-time involuntary employee termination benefits, and SBC.For segment reporting, the substantial majority of these charges are included within Alphabet-level activities in our segment results.For the year ended December 31, 2023, changes in liabilities resulting from the severance charges and related accruals were as follows (in millions):Severance and RelatedBalance as of December 31, 2022$0 Charges(1)1,656 Cash payments(1,579)Balance as of December 31, 2023(2)$77 (1)Excludes non-cash SBC of $432 million.(2)Included in accrued compensation and benefits on the Consolidated Balance Sheets.76. Table of ContentsAlphabet Inc.Note 9. GoodwillChanges in the carrying amount of goodwill for the years ended December 31, 2022 and 2023 were as follows (in millions):Google ServicesGoogle CloudOther BetsTotalBalance as of December 31, 2021$19,826 $2,337 $793 $22,956 Acquisitions1,176 4,876 119 6,171 Foreign currency translation and other adjustments(155)(8)(4)(167)Balance as of December 31, 202220,847 7,205 908 28,960 Acquisitions240 3 0 243 Foreign currency translation and other adjustments31 (9)(27)(5)Balance as of December 31, 2023$21,118 $7,199 $881 $29,198 Note 10. Commitments and Contingencies CommitmentsWe have content licensing agreements with future fixed or minimum guaranteed commitments of $10.6 billion as of December 31, 2023, of which the majority is paid over seven years ending in the first quarter of 2030.IndemnificationsIn the normal course of business, including to facilitate transactions in our services and products and corporate activities, we indemnify certain parties, including advertisers, Google Network partners, distribution partners, customers of Google Cloud offerings, lessors, and service providers with respect to certain matters. We have agreed to defend and/or hold certain parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. Several of these agreements limit the time within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our officers and directors, and our bylaws contain similar indemnification obligations to our agents.It is not possible to make a reasonable estimate of the maximum potential amount under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement. Additionally, the payments we have made under such agreements have not had a material adverse effect on our results of operations, cash flows, or financial position. However, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our results of operations or cash flows in a particular period. As of December 31, 2023, we did not have any material indemnification claims that were probable or reasonably possible.Legal MattersWe record a liability when we believe that it is probable that a loss has been incurred, and the amount can be reasonably estimated. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the reasonably possible loss. We evaluate developments in our legal matters that could affect the amount of liability that has been previously accrued, and the matters and related reasonably possible losses disclosed, and make adjustments as appropriate.Certain outstanding matters seek speculative, substantial or indeterminate monetary amounts, substantial changes to our business practices and products, or structural remedies. Significant judgment is required to determine both the likelihood of there being a loss and the estimated amount of a loss related to such matters, and we may be unable to estimate the reasonably possible loss or range of losses. The outcomes of outstanding legal matters are inherently unpredictable and subject to significant uncertainties, and could, either individually or in aggregate, have a material adverse effect.We expense legal fees in the period in which they are incurred.77. Table of ContentsAlphabet Inc.Antitrust InvestigationsOn November 30, 2010, the EC's Directorate General for Competition opened an investigation into various antitrust-related complaints against us.On June 27, 2017, the EC announced its decision that certain actions taken by Google regarding its display and ranking of shopping search results and ads infringed European competition law. The EC decision imposed a €2.4 billion ($2.7 billion as of June 27, 2017) fine. On September 11, 2017, we appealed the EC decision to the General Court, and on September 27, 2017, we implemented product changes to bring shopping ads into compliance with the EC's decision. We recognized a charge of $2.7 billion for the fine in the second quarter of 2017. On November 10, 2021, the General Court rejected our appeal, and we subsequently filed an appeal with the European Court of Justice on January 20, 2022.On July 18, 2018, the EC announced its decision that certain provisions in Google’s Android-related distribution agreements infringed European competition law. The EC decision imposed a €4.3 billion ($5.1 billion as of June 30, 2018) fine and directed the termination of the conduct at issue. On October 9, 2018, we appealed the EC decision, and on October 29, 2018, we implemented changes to certain of our Android distribution practices. On September 14, 2022, the General Court reduced the fine from €4.3 billion to €4.1 billion. We subsequently filed an appeal with the European Court of Justice. In 2018, we recognized a charge of $5.1 billion for the fine, which we reduced by $217 million in 2022.On March 20, 2019, the EC announced its decision that certain contractual provisions in agreements that Google had with AdSense for Search partners infringed European competition law. The EC decision imposed a fine of €1.5 billion ($1.7 billion as of March 20, 2019) and directed actions related to AdSense for Search partners' agreements, which we implemented prior to the decision. On June 4, 2019, we appealed the EC decision. We recognized a charge of $1.7 billion for the fine in the first quarter of 2019.From time to time we are subject to formal and informal inquiries and investigations on various competition matters by regulatory authorities in the U.S., Europe, and other jurisdictions globally. Examples, for which given their nature we cannot estimate a possible loss, include:•In August 2019, we began receiving civil investigative demands from the U.S. Department of Justice (DOJ) requesting information and documents relating to our prior antitrust investigations and certain aspects of our business. The DOJ and a number of state Attorneys General filed a lawsuit in the U.S. District Court for the District of Columbia on October 20, 2020 alleging that Google violated U.S. antitrust laws relating to Search and Search advertising. The trial ended on November 16, 2023, and we expect a decision in 2024. Further, in June 2022, the Australian Competition and Consumer Commission (ACCC) and the United Kingdom's Competition and Markets Authority (CMA) each opened an investigation into Search distribution practices.•On December 16, 2020, a number of state Attorneys General filed an antitrust complaint in the U.S. District Court for the Eastern District of Texas, alleging that Google violated U.S. antitrust laws as well as state deceptive trade laws relating to its advertising technology, and a trial is scheduled for March 2025. Additionally, on January 24, 2023, the DOJ, along with a number of state Attorneys General, filed an antitrust complaint in the U.S. District Court for the Eastern District of Virginia alleging that Google’s digital advertising technology products violate U.S. antitrust laws, and on April 17, 2023, a number of additional state Attorneys General joined the complaint. The EC, the CMA, and the ACCC each opened a formal investigation into Google's advertising technology business practices on June 22, 2021, May 25, 2022, and June 29, 2022, respectively. On June 14, 2023, the EC issued a Statement of Objections (SO) informing Google of its preliminary view that Google violated European antitrust laws relating to its advertising technology. We responded to the SO on December 1, 2023.•On July 7, 2021, a number of state Attorneys General filed an antitrust complaint in the U.S. District Court for the Northern District of California, alleging that Google’s operation of Android and Google Play violated U.S. antitrust laws and state antitrust and consumer protection laws. In September 2023, we reached a settlement in principle with 50 state Attorneys General and three territories. The U.S. District Court subsequently vacated the trial date with the states, and any final approval of the settlement is expected to occur in 2024. In May 2022, the EC and the CMA each opened investigations into Google Play’s business practices. Korean regulators are investigating Google Play's billing practices, including a formal review in May 2022 of Google's compliance with the new app store billing regulations. We believe we have strong arguments against these claims and will defend ourselves vigorously. We continue to cooperate with federal and state regulators in the U.S., the EC, and other regulators around the world.78. Table of ContentsAlphabet Inc.Privacy Matters We are subject to a number of privacy-related laws and regulations, and we currently are party to a number of privacy investigations and lawsuits ongoing in multiple jurisdictions. For example, there are ongoing investigations and litigation in the U.S. and the EU, including those relating to our collection and use of location information and advertising practices, which could result in significant fines, judgments, and product changes. Patent and Intellectual Property ClaimsWe have had patent, copyright, trade secret, and trademark infringement lawsuits filed against us claiming that certain of our products, services, and technologies infringe others' intellectual property rights. Adverse results in these lawsuits may include awards of substantial monetary damages, costly royalty or licensing agreements, or orders preventing us from offering certain features, functionalities, products, or services. As a result, we may have to change our business practices and develop non-infringing products or technologies, which could result in a loss of revenues for us and otherwise harm our business. In addition, the U.S. International Trade Commission (ITC) has increasingly become an important forum to litigate intellectual property disputes because an ultimate loss in an ITC action can result in a prohibition on importing infringing products into the U.S. Because the U.S. is an important market, a prohibition on importation could have an adverse effect on us, including preventing us from importing many important products into the U.S. or necessitating workarounds that may limit certain features of our products.Furthermore, many of our agreements with our customers and partners require us to indemnify them against certain intellectual property infringement claims, which would increase our costs as a result of defending such claims, and may require that we pay significant damages if there were an adverse ruling in any such claims. In addition, our customers and partners may discontinue the use of our products, services, and technologies, as a result of injunctions or otherwise, which could result in loss of revenues and adversely affect our business.OtherWe are subject to claims, lawsuits, regulatory and government investigations, other proceedings, and consent orders involving competition, intellectual property, data security, tax and related compliance, labor and employment, commercial disputes, content generated by our users, goods and services offered by advertisers or publishers using our platforms, personal injury, consumer protection, and other matters. For example, in December 2023, a California jury delivered a verdict in Epic Games v. Google finding that Google violated antitrust laws related to Google Play's business. The presiding judge will determine remedies in 2024, and the range of potential remedies vary widely. We plan to appeal. We also periodically have data incidents that we report to relevant regulators as required by law. These claims, consent orders, lawsuits, regulatory and government investigations, and other proceedings could result in substantial fines and penalties, injunctive relief, ongoing monitoring and auditing obligations, changes to our products and services, alterations to our business models and operations, and collateral related civil litigation or other adverse consequences, all of which could harm our business, reputation, financial condition, and operating results.We have ongoing legal matters relating to Russia. For example, civil judgments that include compounding penalties have been imposed upon us in connection with disputes regarding the termination of accounts, including those of sanctioned parties. We do not believe these ongoing legal matters will have a material adverse effect.Non-Income TaxesWe are under audit by various domestic and foreign tax authorities with regards to non-income tax matters. The subject matter of non-income tax audits primarily arises from disputes on the tax treatment and tax rate applied to the sale of our products and services in these jurisdictions and the tax treatment of certain employee benefits. We accrue non-income taxes that may result from examinations by, or any negotiated agreements with, these tax authorities when a loss is probable and reasonably estimable. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the reasonably possible loss. Due to the inherent complexity and uncertainty of these matters and judicial process in certain jurisdictions, the final outcome may be materially different from our expectations.See, Note 14 for information regarding income tax contingencies.79. Table of ContentsAlphabet Inc.Note 11. Stockholders' Equity Class A and Class B Common Stock and Class C Capital StockOur Board of Directors has authorized three classes of stock, Class A and Class B common stock, and Class C capital stock. The rights of the holders of each class of our common and capital stock are identical, except with respect to voting. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to 10 votes per share. Class C capital stock has no voting rights, except as required by applicable law. Shares of Class B common stock may be converted at any time at the option of the stockholder and automatically convert upon sale or transfer to Class A common stock.Share RepurchasesIn the years ended December 31, 2021, 2022, and 2023, we repurchased $50.3 billion, $59.3 billion, and $62.2 billion, respectively, of Alphabet's Class A and Class C shares.In April 2023, the Board of Directors of Alphabet authorized the company to repurchase up to an additional $70.0 billion of its Class A and Class C shares. As of December 31, 2023, $36.3 billion remains available for Class A and Class C share repurchases. The following table presents Class A and Class C shares repurchased and subsequently retired (in millions):Year Ended December 31, 2022Year Ended December 31, 2023SharesAmountSharesAmountClass A share repurchases61$6,719 78$9,316 Class C share repurchases46952,577 45052,868 Total share repurchases(1)530$59,296 528$62,184 (1) Shares repurchased include unsettled repurchases as of December 31, 2023.Class A and Class C shares are repurchased in a manner deemed in the best interest of the company and its stockholders, taking into account the economic cost and prevailing market conditions, including the relative trading prices and volumes of the Class A and Class C shares. Repurchases are executed from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated transactions, including through Rule 10b5-1 plans. The repurchase program does not have an expiration date.Note 12. Net Income Per Share We compute net income per share of Class A, Class B, and Class C stock using the two-class method. Basic net income per share is computed using the weighted-average number of shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of shares and the effect of potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of RSUs and other contingently issuable shares. The dilutive effect of outstanding RSUs and other contingently issuable shares is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net income per share of Class A stock assumes the conversion of Class B stock, while the diluted net income per share of Class B stock does not assume the conversion of those shares.The rights, including the liquidation and dividend rights, of the holders of our Class A, Class B, and Class C stock are identical, except with respect to voting. Furthermore, there are a number of safeguards built into our certificate of incorporation, as well as Delaware law, which preclude our Board of Directors from declaring or paying unequal per share dividends on our Class A, Class B, and Class C stock. Specifically, Delaware law provides that amendments to our certificate of incorporation which would have the effect of adversely altering the rights, powers, or preferences of a given class of stock must be approved by the class of stock adversely affected by the proposed amendment. In addition, our certificate of incorporation provides that before any such amendment may be put to a stockholder vote, it must be approved by the unanimous consent of our Board of Directors. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A, Class B, and Class C stock as if the earnings for the year had been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. In the years ended December 31, 2021, 2022, and 2023, the net income per share amounts are the same for Class A, Class B, and Class C stock because the holders of each class are entitled to equal per share dividends or distributions in liquidation in accordance with the Amended and Restated Certificate of Incorporation of Alphabet Inc.80. Table of ContentsAlphabet Inc.The following table sets forth the computation of basic and diluted net income per share of Class A, Class B, and Class C stock (in millions, except per share amounts): Year Ended December 31, 2021 Class AClass BClass CBasic net income per share:NumeratorAllocation of undistributed earnings $34,200 $5,174 $36,659 DenominatorNumber of shares used in per share computation6,006 909 6,438 Basic net income per share$5.69 $5.69 $5.69 Diluted net income per share:NumeratorAllocation of undistributed earnings for basic computation $34,200 $5,174 $36,659 Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares5,174 0 0 Reallocation of undistributed earnings(581)(77)581 Allocation of undistributed earnings$38,793 $5,097 $37,240 DenominatorNumber of shares used in basic computation6,006 909 6,438 Weighted-average effect of dilutive securitiesAdd:Conversion of Class B to Class A shares outstanding909 0 0 Restricted stock units and other contingently issuable shares0 0 200 Number of shares used in per share computation6,915 909 6,638 Diluted net income per share$5.61 $5.61 $5.61 Year Ended December 31, 2022 Class AClass BClass CBasic net income per share:NumeratorAllocation of undistributed earnings$27,518 $4,072 $28,382 DenominatorNumber of shares used in per share computation5,994 887 6,182 Basic net income per share$4.59 $4.59 $4.59 Diluted net income per share:NumeratorAllocation of undistributed earnings for basic computation $27,518 $4,072 $28,382 Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares4,072 0 0 Reallocation of undistributed earnings(230)(30)230 Allocation of undistributed earnings$31,360 $4,042 $28,612 DenominatorNumber of shares used in basic computation5,994 887 6,182 Weighted-average effect of dilutive securitiesAdd:Conversion of Class B to Class A shares outstanding887 0 0 Restricted stock units and other contingently issuable shares0 0 96 Number of shares used in per share computation6,881 887 6,278 Diluted net income per share$4.56 $4.56 $4.56 81. Table of ContentsAlphabet Inc. Year Ended December 31, 2023 Class AClass BClass CBasic net income per share:NumeratorAllocation of undistributed earnings$34,601 $5,124 $34,070 DenominatorNumber of shares used in per share computation5,922 877 5,831 Basic net income per share$5.84 $5.84 $5.84 Diluted net income per share:NumeratorAllocation of undistributed earnings for basic computation $34,601 $5,124 $34,070 Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares5,124 0 0 Reallocation of undistributed earnings(287)(37)287 Allocation of undistributed earnings$39,438 $5,087 $34,357 DenominatorNumber of shares used in basic computation5,922 877 5,831 Weighted-average effect of dilutive securitiesAdd:Conversion of Class B to Class A shares outstanding877 0 0 Restricted stock units and other contingently issuable shares0 0 92 Number of shares used in per share computation6,799 877 5,923 Diluted net income per share$5.80 $5.80 $5.80 Note 13. Compensation Plans Stock PlansOur stock plans include the Alphabet Amended and Restated 2021 Stock Plan ("Alphabet 2021 Stock Plan") and Other Bets stock-based plans. Under our stock plans, RSUs and other types of awards may be granted. Under the Alphabet 2021 Stock Plan, an RSU award is an agreement to issue shares of our Class C stock at the time the award vests. RSUs generally vest over four years contingent upon employment on the vesting date.As of December 31, 2023, there were 723 million shares of Class C stock reserved for future issuance under the Alphabet 2021 Stock Plan.Stock-Based CompensationFor the years ended December 31, 2021, 2022, and 2023, total SBC expense was $15.7 billion, $19.5 billion, and $22.1 billion, including amounts associated with awards we expect to settle in Alphabet stock of $15.0 billion, $18.8 billion, and $21.7 billion, respectively.During the year ended December 31, 2023, total SBC expense includes $432 million associated with workforce reduction costs. See Note 8 for further details.For the years ended December 31, 2021, 2022, and 2023, we recognized tax benefits on total SBC expense, which are reflected in the provision for income taxes in the Consolidated Statements of Income, of $3.1 billion, $3.9 billion, and $4.5 billion, respectively.For the years ended December 31, 2021, 2022, and 2023, tax benefit realized related to awards vested or exercised during the period was $5.9 billion, $4.7 billion, and $5.6 billion, respectively. These amounts do not include the indirect effects of stock-based awards, which primarily relate to the R&D tax credit.Stock-Based Award Activities82. Table of ContentsAlphabet Inc.The following table summarizes the activities for unvested Alphabet RSUs for the year ended December 31, 2023 (in millions, except per share amounts):Unvested Restricted Stock Units Number of SharesWeighted-AverageGrant-DateFair ValueUnvested as of December 31, 2022324 $107.98 Granted263 $97.59 Vested(217)$100.36 Forfeited/canceled(32)$106.56 Unvested as of December 31, 2023338 $104.93 The weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2021 and 2022 was $97.46 and $127.22, respectively. Total fair value of RSUs, as of their respective vesting dates, during the years ended December 31, 2021, 2022, and 2023, were $28.8 billion, $23.9 billion, and $26.6 billion, respectively.As of December 31, 2023, there was $33.5 billion of unrecognized compensation cost related to unvested RSUs. This amount is expected to be recognized over a weighted-average period of 2.5 years. Note 14. Income Taxes Income from continuing operations before income taxes consisted of the following (in millions):Year Ended December 31, 202120222023Domestic operations$77,016 $61,307 $73,600 Foreign operations13,718 10,021 12,117 Total$90,734 $71,328 $85,717 Provision for income taxes consisted of the following (in millions):Year Ended December 31, 202120222023Current:Federal and state$10,126 $17,120 $17,125 Foreign2,692 2,434 2,526 Total12,818 19,554 19,651 Deferred:Federal and state2,018 (8,052)(7,482)Foreign(135)(146)(247)Total1,883 (8,198)(7,729)Provision for income taxes$14,701 $11,356 $11,922 83. Table of ContentsAlphabet Inc.The reconciliation of federal statutory income tax rate to our effective income tax rate was as follows:Year Ended December 31, 202120222023U.S. federal statutory tax rate21.0 %21.0 %21.0 %Foreign income taxed at different rates0.2 3.0 0.3 Foreign-derived intangible income deduction(2.5)(5.4)(4.6)Stock-based compensation expense(2.5)(1.2)(0.8)Federal research credit(1.6)(2.2)(1.8)Deferred tax asset valuation allowance0.6 0.9 0.6 State and local income taxes1.0 0.8 1.0 Effect of tax law change0.0 0.0 (1.4)Other0.0 (1.0)(0.4)Effective tax rate16.2 %15.9 %13.9 %In 2022, there was an increase in the U.S. Foreign Derived Intangible Income tax deduction from the effects of capitalization and amortization of R&D expenses starting in 2022 as required by the 2017 Tax Cuts and Jobs Act.In 2023, the IRS issued a rule change allowing taxpayers to temporarily apply the regulations in effect prior to 2022 related to U.S. federal foreign tax credits as well as a separate rule change with interim guidance on the capitalization and amortization of R&D expenses. A cumulative one-time adjustment applicable to the prior period for these tax rule changes was recorded in 2023.Deferred Income TaxesDeferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities were as follows (in millions):As of December 31,20222023Deferred tax assets:Accrued employee benefits$955 $1,855 Accruals and reserves not currently deductible1,956 2,481 Tax credits6,002 6,609 Net operating losses2,557 2,965 Operating leases2,711 3,526 Capitalized research and development(1)10,381 17,757 Other2,289 1,951 Total deferred tax assets26,851 37,144 Valuation allowance(9,553)(10,999)Total deferred tax assets net of valuation allowance17,298 26,145 Deferred tax liabilities:Property and equipment, net(6,607)(8,189)Net investment gains(2,361)(2,405)Operating leases(2,491)(2,965)Other(1,092)(902)Total deferred tax liabilities(12,551)(14,461)Net deferred tax assets (liabilities)$4,747 $11,684 (1)As required by the 2017 Tax Cuts and Jobs Act, effective January 1, 2022, our research and development expenditures were capitalized and amortized which resulted in substantially higher cash taxes starting in 2022 with an equal amount of deferred tax benefit. As of December 31, 2023, our federal, state, and foreign net operating loss carryforwards for income tax purposes were approximately $7.1 billion, $18.6 billion, and $1.8 billion respectively. If not utilized, the federal net 84. Table of ContentsAlphabet Inc.operating loss carryforwards will begin to expire in 2024, foreign net operating loss carryforwards will begin to expire in 2025 and the state net operating loss carryforwards will begin to expire in 2029. It is more likely than not that the majority of the net operating loss carryforwards will not be realized; therefore, we have recorded a valuation allowance against them. The net operating loss carryforwards are subject to various annual limitations under the tax laws of the different jurisdictions.As of December 31, 2023, our Federal and California research and development credit carryforwards for income tax purposes were approximately $600 million and $6.3 billion, respectively. If not utilized, the Federal R&D credit will begin to expire in 2037 and the California R&D credit can be carried over indefinitely. We believe the majority of the federal tax credit and state tax credit is not likely to be realized.As of December 31, 2023, our investment tax credit carryforwards for state income tax purposes were approximately $1.0 billion and will begin to expire in 2029. We use the flow-through method of accounting for investment tax credits. We believe this tax credit is not likely to be realized.As of December 31, 2023, we maintained a valuation allowance with respect to California deferred tax assets, certain federal net operating losses, certain state net operating losses and tax credits, net deferred tax assets relating to Other Bet companies, and certain foreign net operating losses that we believe are not likely to be realized. We continue to reassess the remaining valuation allowance quarterly, and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly. Uncertain Tax PositionsThe following table summarizes the activity related to our gross unrecognized tax benefits (in millions):Year Ended December 31, 202120222023Beginning gross unrecognized tax benefits$3,837 $5,158 $7,055 Increases related to prior year tax positions529 253 740 Decreases related to prior year tax positions(263)(437)(682)Decreases related to settlement with tax authorities(329)(140)(21)Increases related to current year tax positions1,384 2,221 2,346 Ending gross unrecognized tax benefits$5,158 $7,055 $9,438 We are subject to income taxes in the U.S. and foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. The total amount of gross unrecognized tax benefits was $5.2 billion, $7.1 billion, and $9.4 billion as of December 31, 2021, 2022, and 2023, respectively, of which $3.7 billion, $5.3 billion, and $7.4 billion, if recognized, would affect our effective tax rate, respectively. As of December 31, 2022 and 2023, we accrued $346 million and $622 million in interest and penalties in provision for income taxes, respectively.We file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. Our two major tax jurisdictions are the U.S. federal and Ireland. We are subject to the continuous examination of our income tax returns by the IRS and other tax authorities. The IRS is currently examining our 2016 through 2021 tax returns. We have also received tax assessments in multiple foreign jurisdictions asserting transfer pricing adjustments or permanent establishment. We continue to defend such claims as presented.The tax years 2016 through 2022 remain subject to examination by the appropriate governmental agencies for Irish tax purposes. There are other ongoing audits in various other jurisdictions that are not material to our financial statements.We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. We continue to monitor the progress of ongoing discussions with tax authorities and the effect, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions.We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with management's expectations, we could be required to adjust our provision for income taxes in the period such resolutions occur. Although the timing of resolution, settlement, and closure of audits is not certain, it is reasonably possible that our unrecognized tax benefits from certain U.S. federal, state, and non U.S. tax positions could decrease by approximately $700 million in the next 12 months. Positions that may be resolved include various U.S. and non-U.S. matters.85. Table of ContentsAlphabet Inc.Note 15. Information about Segments and Geographic Areas We report our segment results as Google Services, Google Cloud, and Other Bets:•Google Services includes products and services such as ads, Android, Chrome, devices, Google Maps, Google Play, Search, and YouTube. Google Services generates revenues primarily from advertising; fees received for consumer subscription-based products such as YouTube TV, YouTube Music and Premium, and NFL Sunday Ticket; the sale of apps and in-app purchases and devices.•Google Cloud includes infrastructure and platform services, collaboration tools, and other services for enterprise customers. Google Cloud generates revenues primarily from consumption-based fees and subscriptions received for Google Cloud Platform services, Google Workspace communication and collaboration tools, and other enterprise services.•Other Bets is a combination of multiple operating segments that are not individually material. Revenues from Other Bets are generated primarily from the sale of healthcare-related services and internet services.Revenues, certain costs, such as costs associated with content and traffic acquisition, certain engineering activities, and devices, as well as certain operating expenses are directly attributable to our segments. Due to the integrated nature of Alphabet, other costs and expenses, such as technical infrastructure and office facilities, are managed centrally at a consolidated level. These costs, including the associated depreciation and impairment, are allocated to operating segments as a service cost generally based on usage, headcount, or revenue.Reflecting DeepMind's increasing collaboration with Google Services, Google Cloud, and Other Bets, beginning in the first quarter of 2023 DeepMind is reported as part of Alphabet-level activities instead of within Other Bets. Additionally, beginning in the first quarter of 2023, we updated and simplified our cost allocation methodologies to provide our business leaders with increased transparency for decision-making. Prior periods have been recast to conform to the current presentation.As announced on April 20, 2023, we brought together part of Google Research (the Brain team) and DeepMind to significantly accelerate our progress in artificial intelligence (AI). The group, called Google DeepMind, is reported within Alphabet-level activities prospectively beginning in the second quarter of 2023. Previously, the Brain team was included within Google Services.Certain costs are not allocated to our segments because they represent Alphabet-level activities. These costs primarily include AI-focused shared R&D activities, including development costs of our general AI models; corporate initiatives such as our philanthropic activities; corporate shared costs such as certain finance, human resource, and legal costs, including certain fines and settlements. Charges associated with reductions in our workforce and office space during 2023 were not allocated to our segments. Additionally, hedging gains (losses) related to revenue are not allocated to our segments.Our operating segments are not evaluated using asset information.The following table presents information about our segments (in millions):Year Ended December 31,202120222023Revenues:Google Services$237,529 $253,528 $272,543 Google Cloud19,206 26,280 33,088 Other Bets753 1,068 1,527 Hedging gains (losses)149 1,960 236 Total revenues$257,637 $282,836 $307,394 Operating income (loss):Google Services$88,132 $82,699 $95,858 Google Cloud(2,282)(1,922)1,716 Other Bets(4,051)(4,636)(4,095)Alphabet-level activities(3,085)(1,299)(9,186)Total income from operations$78,714 $74,842 $84,293 See Note 2 for information relating to revenues by geography.86. Table of ContentsAlphabet Inc.The following table presents long-lived assets by geographic area, which includes property and equipment, net and operating lease assets (in millions):As of December 31, 20222023Long-lived assets:United States$93,565 $110,053 International33,484 38,383 Total long-lived assets$127,049 $148,436 87. Table of ContentsAlphabet Inc.ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A.CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K.Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2023, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2023. Management reviewed the results of its assessment with our Audit and Compliance Committee. The effectiveness of our internal control over financial reporting as of December 31, 2023 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report which is included in Item 8 of this Annual Report on Form 10-K.Limitations on Effectiveness of Controls and ProceduresIn designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.88. Table of ContentsAlphabet Inc.ITEM 9B.OTHER INFORMATION10b5-1 Trading PlansDuring the fiscal quarter ended December 31, 2023, the following Section 16 officer and directors adopted, modified or terminated a “Rule 10b5-1 trading arrangement” (as defined in Item 408 of Regulation S-K of the Exchange Act):•John Hennessy, Chair of the Board of Directors, through the John L. Hennessy & Andrea J. Hennessy Revocable Trust, adopted a new trading plan on November 1, 2023 (with the first trade under the new plan scheduled for February 12, 2024). The trading plan will be effective until March 12, 2025 to sell 6,664 shares of Class C Capital Stock and 11,336 shares of Class A Common Stock.•Ann Mather, former member of the Board of Directors, terminated her trading plan on October 30, 2023, effective with her resignation from the Board of Directors. The trading plan previously permitted the sale of 12,580 shares of Class C Capital Stock and would have been effective until June 2, 2024.•Ruth M. Porat, President and Chief Investment Officer; Chief Financial Officer, adopted a new trading plan on November 30, 2023 (with the first trade under the new plan scheduled for March 8, 2024). The trading plan will be effective until March 8, 2025 to sell all of the (net) shares of up to 82,900 (gross) Class C Capital Stock issued upon the vesting of her Alphabet 2021 Performance Stock Units, as adjusted based on performance (net shares are net of tax withholding).There were no “non-Rule 10b5-1 trading arrangements” (as defined in Item 408 of Regulation S-K of the Exchange Act) adopted, modified or terminated during the fiscal quarter ended December 31, 2023 by our directors and Section 16 officers. Each of the Rule 10b5-1 trading arrangements are in accordance with our Policy Against Insider Trading and actual sale transactions made pursuant to such trading arrangements will be disclosed publicly in Section 16 filings with the SEC in accordance with applicable securities laws, rules and regulations.Required Disclosure Pursuant to Section 13(r) of the Exchange ActAs previously disclosed, Google LLC, a subsidiary of Alphabet, filed notifications with the Russian Federal Security Service pursuant to Russian encryption control requirements, which must be complied with prior to the import of covered items. The information provided pursuant to Section 13(r) of the Exchange Act in Part II, Item 5 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 is incorporated herein by reference.ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONSNot applicable.89. Table of ContentsAlphabet Inc.PART IIIITEM 10.DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCEThe information required by this item will be included under the caption “Directors, Executive Officers, and Corporate Governance” in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2023 (2024 Proxy Statement) and is incorporated herein by reference. The information required by this item regarding delinquent filers pursuant to Item 405 of Regulation S-K will be included under the caption “Delinquent Section 16(a) Reports” in the 2024 Proxy Statement and is incorporated herein by reference.ITEM 11.EXECUTIVE COMPENSATIONThe information required by this item will be included under the captions “Director Compensation,” “Executive Compensation” and “Directors, Executive Officers, and Corporate Governance—Corporate Governance and Board Matters—Compensation Committee Interlocks and Insider Participation” in the 2024 Proxy Statement and is incorporated herein by reference, except as to information disclosed therein pursuant to Item 402(v) of Regulation S-K relating to pay versus performance.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by this item will be included under the captions “Common Stock Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the 2024 Proxy Statement and is incorporated herein by reference.ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item will be included under the captions “Certain Relationships and Related Transactions” and “Directors, Executive Officers, and Corporate Governance—Corporate Governance and Board Matters—Director Independence” in the 2024 Proxy Statement and is incorporated herein by reference.ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item will be included under the caption “Independent Registered Public Accounting Firm” in the 2024 Proxy Statement and is incorporated herein by reference.90. Table of ContentsAlphabet Inc.PART IVITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULESWe have filed the following documents as part of this Annual Report on Form 10-K:1. Consolidated Financial StatementsReports of Independent Registered Public Accounting Firm48Financial Statements:Consolidated Balance Sheets51Consolidated Statements of Income52Consolidated Statements of Comprehensive Income53Consolidated Statements of Stockholders’ Equity54Consolidated Statements of Cash Flows55Notes to Consolidated Financial Statements562. Financial Statement SchedulesSchedule II: Valuation and Qualifying AccountsThe table below details the activity of the allowance for credit losses and sales credits for the years ended December 31, 2021, 2022, and 2023 (in millions):Balance atBeginning of YearAdditionsUsageBalance atEnd of YearYear ended December 31, 2021$1,344 $2,092 $(2,047)$1,389 Year ended December 31, 2022$1,389 $2,125 $(2,301)$1,213 Year ended December 31, 2023$1,213 $3,115 $(2,737)$1,591 Note:Additions to the allowance for credit losses are charged to expense. Additions to the allowance for sales credits are charged against revenues.All other schedules have been omitted because they are not required, not applicable, or the required information is otherwise included.3. ExhibitsExhibitNumberDescriptionIncorporated by reference hereinFormDate2.01Agreement and Plan of Merger, dated October 2, 2015, by and among Google Inc., the Registrant and Maple Technologies Inc.Current Report on Form 8-K (File No. 001-37580) October 2, 20153.01Amended and Restated Certificate of Incorporation of the RegistrantCurrent Report on Form 8-K (File No. 001-37580) June 3, 20223.02Amended and Restated Bylaws of the Registrant, dated October 19, 2022Current Report on Form 8-K (File No. 001-37580)October 25, 20224.01Specimen Class A Common Stock certificateCurrent Report on Form 8-K (File No. 001-37580)October 2, 20154.02Specimen Class C Capital Stock certificateCurrent Report on Form 8-K (File No. 001-37580)October 2, 20154.03Alphabet Inc. Deferred Compensation PlanCurrent Report on Form 8-K (File No. 001-37580)October 2, 20154.04Transfer Restriction Agreement, dated October 2, 2015, between the Registrant and Larry Page and certain of his affiliates Current Report on Form 8-K (File No. 001-37580)October 2, 20154.05Transfer Restriction Agreement, dated October 2, 2015, between the Registrant and Sergey Brin and certain of his affiliates Current Report on Form 8-K (File No. 001-37580)October 2, 20154.06Joinder Agreement, dated December 31, 2021, among the Registrant, Sergey Brin and certain of his affiliates Annual Report on Form 10-K (File No. 001-37580)February 2, 202291. Table of ContentsAlphabet Inc.ExhibitNumberDescriptionIncorporated by reference hereinFormDate4.07Transfer Restriction Agreement, dated October 2, 2015, between the Registrant and Eric E. Schmidt and certain of its affiliatesCurrent Report on Form 8-K (File No. 001-37580)October 2, 20154.08Class C Undertaking, dated October 2, 2015, executed by the RegistrantCurrent Report on Form 8-K (File No. 001-37580)October 2, 20154.09Indenture, dated February 12, 2016, between the Registrant and The Bank of New York Mellon Trust Company, N.A., as TrusteeRegistration Statement on Form S-3 (File No. 333-209510)February 12, 20164.10Registrant Registration Rights Agreement dated December 14, 2015Registration Statement on Form S-3 (File No. 333-209518)February 12, 20164.11First Supplemental Indenture, dated April 27, 2016, between the Registrant and The Bank of New York Mellon Trust Company, N.A., as trusteeCurrent Report on Form 8-K(File No. 001-37580)April 27, 20164.12Form of the Registrant’s 3.375% Notes due 2024 (included in Exhibit 4.11)4.13Form of the Registrant’s 1.998% Note due 2026Current Report on Form 8-K (File No. 001-37580)August 9, 20164.14Form of Global Note representing the Registrant’s 0.450% notes due 2025Current Report on Form 8-K (File No. 001-37580)August 5, 20204.15Form of Global Note representing the Registrant’s 0.800% notes due 2027Current Report on Form 8-K (File No. 001-37580)August 5, 20204.16Form of Global Note representing the Registrant’s 1.100% notes due 2030Current Report on Form 8-K (File No. 001-37580)August 5, 20204.17Form of Global Note representing the Registrant’s 1.900% notes due 2040Current Report on Form 8-K (File No. 001-37580)August 5, 20204.18Form of Global Note representing the Registrant’s 2.050% notes due 2050Current Report on Form 8-K (File No. 001-37580)August 5, 20204.19Form of Global Note representing the Registrant’s 2.250% notes due 2060Current Report on Form 8-K (File No. 001-37580)August 5, 20204.20Description of Registrant’s SecuritiesAnnual Report on Form 10-K (File No. 001-37580)February 3, 202310.01uForm of Indemnification Agreement entered into between the Registrant, its affiliates and its directors and officers Current Report on Form 8-K (File No. 001-37580)October 2, 201510.02u*Form of Offer Letter for Directors10.03uOffer Letter, dated March 20, 2015, between Ruth Porat and Google Inc., as assumed by the Registrant on October 2, 2015Current Report on Form 8-K (File No. 001-36380)March 26, 201510.04uCompensation Plan Agreement, dated October 2, 2015, between Google Inc. and the RegistrantCurrent Report on Form 8-K (File No. 001-37580)October 2, 201510.05uDirector Arrangements Agreement, dated October 2, 2015, between Google Inc. and the RegistrantCurrent Report on Form 8-K (File No. 001-37580)October 2, 201510.06uAlphabet Inc. Deferred Compensation PlanCurrent Report on Form 8-K (File No. 001-37580)October 2, 201510.07uAlphabet Inc. Amended and Restated 2012 Stock PlanCurrent Report on Form 8-K(File No. 001-37580)June 5, 202010.07.1uAlphabet Inc. Amended and Restated 2012 Stock Plan - Form of Alphabet Restricted Stock Unit AgreementAnnual Report on Form 10-K(File No. 001-37580)February 4, 202010.07.2uAlphabet Inc. 2012 Stock Plan - Form of Alphabet Restricted Stock Unit AgreementQuarterly Report on Form 10-Q (File No. 001-37580)November 3, 201692. Table of ContentsAlphabet Inc.ExhibitNumberDescriptionIncorporated by reference hereinFormDate10.08uAlphabet Inc. Amended and Restated 2021 Stock PlanCurrent Report on Form 8-K (file No. 001-37580)June 3, 202210.08.1uAlphabet Inc. Amended and Restated 2021 Stock Plan - Form of Alphabet Restricted Stock Unit AgreementQuarterly Report on Form 10-Q (file No. 001-37580)July 28, 202110.08.2uAlphabet Inc. Amended and Restated 2021 Stock Plan - Form of Alphabet Restricted Stock Unit AgreementQuarterly Report on Form 10-Q (File No. 001-37580)July 26, 202310.08.3uAlphabet Inc. Amended and Restated 2021 Stock Plan - Form of Alphabet 2022 CEO Performance Stock Unit AgreementAnnual Report on Form 10-K (File No. 001-37580) February 3, 202310.08.4uAlphabet Inc. Amended and Restated 2021 Stock Plan - Form of Alphabet 2022 Non-CEO Performance Stock Unit AgreementAnnual Report on Form 10-K(File No. 001-37580)February 4, 202010.08.5uAlphabet Inc. Amended and Restated 2021 Stock Plan - Form of Alphabet 2023 Non-CEO Performance Stock Unit AgreementQuarterly Report on Form 10-Q (File No. 001-37580)July 26, 202310.09uAlphabet Inc. Company Bonus Plan, as amendedAnnual Report on Form 10-K(File No. 001-37350)February 2, 202321.01*Subsidiaries of the Registrant23.01*Consent of Independent Registered Public Accounting Firm24.01*Power of Attorney (incorporated by reference to the signature page of this Annual Report on Form 10-K)31.01*Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.02*Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.01‡Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200297.01*Clawback Policy101.INS*Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document101.SCH*Inline XBRL Taxonomy Extension Schema Document101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document101.DEF*Inline XBRL Taxonomy Extension Definition Linkbase Document101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document93. Table of ContentsAlphabet Inc.ExhibitNumberDescriptionIncorporated by reference hereinFormDate101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document104Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)_________________uIndicates management compensatory plan, contract, or arrangement.*Filed herewith.‡Furnished herewith.ITEM 16.FORM 10-K SUMMARYNone.94. Table of ContentsAlphabet Inc.SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.Date: January 30, 2024 ALPHABET INC.By:/S/ SUNDAR PICHAI Sundar PichaiChief Executive Officer(Principal Executive Officer of the Registrant)POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Sundar Pichai and Ruth M. Porat, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. 95. Table of ContentsAlphabet Inc.SignatureTitleDate/S/ SUNDAR PICHAIChief Executive Officer and Director (Principal Executive Officer)January 30, 2024Sundar Pichai/S/ RUTH M. PORAT President and Chief Investment Officer; Chief Financial Officer (Principal Financial Officer)January 30, 2024Ruth M. Porat/S/ AMIE THUENER O'TOOLE Vice President, Corporate Controller and Principal Accounting OfficerJanuary 30, 2024Amie Thuener O'Toole/S/ FRANCES H. ARNOLD DirectorJanuary 30, 2024Frances H. Arnold/S/ SERGEY BRIN Co-Founder and DirectorJanuary 30, 2024Sergey Brin/S/ R. MARTIN CHAVEZ DirectorJanuary 30, 2024R. Martin Chávez/S/ L. JOHN DOERR DirectorJanuary 30, 2024L. John Doerr/S/ ROGER W. FERGUSON JR. DirectorJanuary 30, 2024Roger W. Ferguson Jr./S/ JOHN L. HENNESSY Director, ChairJanuary 30, 2024John L. Hennessy/S/ LARRY PAGE Co-Founder and DirectorJanuary 30, 2024Larry Page/S/ K. RAM SHRIRAM DirectorJanuary 30, 2024K. Ram Shriram/S/ ROBIN L. WASHINGTON DirectorJanuary 30, 2024Robin L. Washington96.
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truetruetruetruetruetruetruetruetrueNASDAQNASDAQNASDAQNASDAQNASDAQNASDAQNASDAQNASDAQNASDAQNASDAQfalse000032019300003201932023-05-082023-05-080000320193aapl:A0.500Notesdue2031Member2023-05-082023-05-080000320193aapl:A1.375NotesDue2029Member2023-05-082023-05-080000320193aapl:A3.050NotesDue2029Member2023-05-082023-05-080000320193aapl:A0.875NotesDue2025Member2023-05-082023-05-080000320193aapl:A3.600NotesDue2042Member2023-05-082023-05-080000320193us-gaap:CommonStockMember2023-05-082023-05-080000320193aapl:A1.625NotesDue2026Member2023-05-082023-05-080000320193aapl:A1.375NotesDue2024Member2023-05-082023-05-080000320193aapl:A2.000NotesDue2027Member2023-05-082023-05-080000320193aapl:A0.000Notesdue2025Member2023-05-082023-05-08
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d)
of The Securities Exchange Act of 1934
May 8, 2023
Date of Report (Date of earliest event reported)
Apple Inc.
(Exact name of Registrant as specified in its charter)
California
001-36743
94-2404110
(State or other jurisdiction of incorporation)
(Commission File Number)
(I.R.S. Employer Identification No.)
One Apple Park Way
Cupertino, California 95014
(Address of principal executive offices) (Zip Code)
(408) 996-1010
(Registrant’s telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
symbol(s)
Name of each exchange
on which registered
Common Stock, $0.00001 par value per share
AAPL
The Nasdaq Stock Market LLC
1.375% Notes due 2024
—
The Nasdaq Stock Market LLC
0.000% Notes due 2025
—
—
—
—
—
The Nasdaq Stock Market LLC
0.875% Notes due 2025
The Nasdaq Stock Market LLC
1.625% Notes due 2026
The Nasdaq Stock Market LLC
2.000% Notes due 2027
The Nasdaq Stock Market LLC
1.375% Notes due 2029
The Nasdaq Stock Market LLC
3.050% Notes due 2029
—
—
—
The Nasdaq Stock Market LLC
0.500% Notes due 2031
The Nasdaq Stock Market LLC
3.600% Notes due 2042
The Nasdaq Stock Market LLC
Indicate by check mark whether the Registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the
Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ☐
Item 8.01
Other Events.
On May 10, 2023, Apple Inc. (“Apple”) consummated the issuance and sale of $1,000,000,000 aggregate principal amount of its 4.421% Notes due 2026 (the “2026
Notes”), $1,500,000,000 aggregate principal amount of its 4.000% Notes due 2028 (the “2028 Notes”), $500,000,000 aggregate principal amount of its 4.150% Notes due 2030 (the “2030 Notes”), $1,000,000,000 aggregate principal amount of its 4.300%
Notes due 2033 (the “2033 Notes”) and $1,250,000,000 aggregate principal amount of its 4.850% Notes due 2053 (the “2053 Notes” and, together with the 2026 Notes, the 2028 Notes, the 2030 Notes and the 2033 Notes, the “Notes”), pursuant to an
underwriting agreement (the “Underwriting Agreement”) dated May 8, 2023 among Apple and Goldman Sachs & Co. LLC, Barclays Capital Inc. and J.P. Morgan Securities LLC, as representatives of the several underwriters named therein.
The Notes are being issued pursuant to an indenture, dated as of October 28, 2021 (the “Indenture”), between Apple and The Bank of New York Mellon Trust
Company, N.A., as trustee, together with the officer’s certificate, dated May 10, 2023 (the “Officer’s Certificate”), issued pursuant to the Indenture establishing the terms of each series of Notes.
The Notes are being issued pursuant to Apple’s Registration Statement on Form S-3 filed with the Securities and Exchange Commission and dated October 28,
2021 (Reg. No. 333-260578) (the “Registration Statement”).
Interest on the 2026 Notes will be paid semi-annually in arrears on May 8 and November 8 of each year, beginning on November 8, 2023. Interest on the 2028
Notes, the 2030 Notes, the 2033 Notes and the 2053 Notes will be paid semi-annually in arrears on May 10 and November 10 of each year, beginning on November 10, 2023.
The 2026 Notes will mature on May 8, 2026. The 2028 Notes will mature on May 10, 2028. The 2030 Notes will mature on May 10, 2030. The 2033 Notes will
mature on May 10, 2033. The 2053 Notes will mature on May 10, 2053.
The Notes will be Apple’s senior unsecured obligations and will rank equally with Apple’s other unsecured and unsubordinated debt from time to time
outstanding.
The foregoing description of the Notes and related agreements is qualified in its entirety by the terms of the Underwriting Agreement, the Indenture and the
Officer’s Certificate (including the forms of the Notes). Apple is furnishing the Underwriting Agreement and the Officer’s Certificate (including the forms of the Notes) attached hereto as Exhibits 1.1 and 4.1 through 4.6, respectively, and they
are incorporated herein by reference. The Indenture is filed as Exhibit 4.1 to the Registration Statement. An opinion regarding the legality of the Notes is filed as Exhibit 5.1, and is incorporated by reference into the Registration Statement;
and a consent relating to the incorporation of such opinion is incorporated by reference into the Registration Statement and is filed as Exhibit 23.1 by reference to its inclusion within Exhibit 5.1.
Item 9.01
Financial Statements and Exhibits.
(d)
Exhibits.
Exhibit
Number
Exhibit Description
1.1
Underwriting Agreement,
dated May 8, 2023, among Apple Inc. and Goldman Sachs & Co. LLC, Barclays Capital Inc. and J.P. Morgan Securities LLC, as representatives of the several underwriters named therein
4.1
Officer’s Certificate of
Apple Inc., dated May 10, 2023
4.2
Form of Global Note
representing the 2026 Notes (included in Exhibit 4.1)
4.3
Form of Global Note
representing the 2028 Notes (included in Exhibit 4.1)
4.4
Form of Global Note
representing the 2030 Notes (included in Exhibit 4.1)
4.5
Form of Global Note
representing the 2033 Notes (included in Exhibit 4.1)
4.6
Form of Global Note
representing the 2053 Notes (included in Exhibit 4.1)
5.1
Opinion of Latham &
Watkins LLP
23.1
Consent of Latham &
Watkins LLP (included in the opinion filed as Exhibit 5.1)
104
Inline XBRL for the cover page of this Current Report on Form 8‑K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: May 10, 2023
Apple Inc.
By:
/s/ Luca Maestri
Luca Maestri
Senior Vice President,
Chief Financial Officer
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8-K_1045810_0001045810-20-000181.htm
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nvda-202011090001045810false00010458102020-07-132020-07-13UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549______________FORM 8-K CURRENT REPORTPURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934Date of Report (Date of earliest event reported): November 9, 2020 NVIDIA CORPORATION(Exact name of registrant as specified in its charter)Delaware0-2398594-3177549(State or other jurisdiction(Commission(IRS Employerof incorporation)File Number)Identification No.) 2788 San Tomas Expressway, Santa Clara, CA 95051 (Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (408) 486-2000 Not Applicable(Former name or former address, if changed since last report)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock, $0.001 par value per shareNVDAThe Nasdaq Global Select MarketIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.(d) On November 9, 2020, Aarti Shah was appointed to the Board of Directors of NVIDIA Corporation (the “Board”). In connection with her appointment to the Board, Ms. Shah was granted pursuant to our 2007 Amended and Restated Equity Incentive Plan (the “2007 Plan”): (a) an initial equity grant of 426 restricted stock units, vesting approximately semi-annually over three years commencing November 9, 2020, and (b) a pro-rated annual equity grant of 401 restricted stock units, which will vest in full on May 19, 2021. Additionally, she was granted a pro-rated annual cash retainer of $42,300, payable starting on November 9, 2020. The 2007 Plan is filed as Exhibit 10.1 to our Current Report on Form 8-K (File No. 0-23985) filed with the Securities and Exchange Commission on June 15, 2020. In addition, we have entered into an indemnity agreement with Ms. Shah in connection with her service as a member of the Board. The form of indemnity agreement is filed as Exhibit 10.1 to our Current Report on Form 8-K (File No. 0-23985) filed with the Securities and Exchange Commission on March 7, 2006.SIGNATUREPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NVIDIA CorporationDate: November 9, 2020By: /s/ Rebecca Peters Rebecca PetersVice President, Deputy General Counsel and Assistant Secretary
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8-K_1730168_0001193125-22-105918.htm
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Form 8-K
false 0001730168 0001730168 2022-04-14 2022-04-14 0001730168 us-gaap:CommonStockMember 2022-04-14 2022-04-14 0001730168 us-gaap:SeriesAPreferredStockMember 2022-04-14 2022-04-14 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): April 14, 2022 BROADCOM INC. (Exact Name of Registrant as Specified in Charter)
Delaware
001-38449
35-2617337
(State or other jurisdiction of incorporation)
(CommissionFile Number)
(IRS EmployerIdentification No.)
1320 Ridder Park Drive, San Jose, California
95131
(Address of principal executive offices)
(Zip Code) (408) 433-8000 (Registrant’s telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
AVGO
The NASDAQ Global Select Market
8.00% Mandatory Convertible Preferred Stock, Series A, $0.001 par value
AVGOP
The NASDAQ Global Select Market Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). 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. ☐
Item 1.01
Entry into Definitive Material Agreement. On April 14, 2022, Broadcom Inc. (“Broadcom” or the “Company”), completed its issuance and sale of $1,950 million in aggregate principal amount of senior unsecured notes (the “Offering”) comprised of $750 million aggregate principal amount of 4.00% senior notes due 2029 (the “2029 Notes”) and $1,200 million aggregate principal amount of 4.15% senior notes due 2032 (the “2032 Notes” and, together with the 2029 Notes, the “Notes”). Broadcom intends to use the net proceeds from the Offering, together with cash on hand, to redeem all of its outstanding 4.700% Senior Notes due 2025 and 4.250% Senior Notes due 2026, and to pay fees and expenses in connection therewith. Indenture The Notes were issued pursuant to an Indenture, dated April 14, 2022, between the Company and Wilmington Trust, National Association, as trustee (the “Indenture”). Each series of Notes pays interest semi-annually in arrears on April 15 and October 15 of each year, commencing October 15, 2022. The Notes were offered in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside of the United States in reliance on Regulation S under the Securities Act. Optional Redemption Provisions and Change of Control Purchase Right The Company may, at its option, redeem or purchase, in whole or in part, the 2029 Notes and the 2032 Notes at any time prior to February 15, 2029 (two months prior to maturity) and January 15, 2032 (three months prior to maturity), respectively, at a price equal to 100% of the principal amount of the applicable Notes being redeemed, plus a corresponding “make-whole” premium as set forth in the Indenture, plus accrued and unpaid interest thereon to, but excluding, the redemption date. In addition, the Company may, at its option, redeem or purchase, in whole or in part, the 2029 Notes and the 2032 Notes on or after February 15, 2029 (two months prior to maturity) and January 15, 2032 (three months prior to maturity), respectively, at a redemption price equal to 100% of the principal amount of the applicable Notes being redeemed, plus accrued and unpaid interest thereon, if any, to, but excluding, the redemption date.
In the event that certain changes in the tax law of any relevant jurisdiction would impose withholding taxes on payments on the Notes, the Company may redeem a series of Notes in whole, but not in part, at any time, at a redemption price of 100% of the principal amount, plus accrued and unpaid interest thereon, if any, and Additional Amounts (as defined in the Indenture), if any, to, but excluding, the redemption date. The holders of the Notes will also have the right to require the Company to purchase their Notes upon the occurrence of a Change of Control Triggering Event, as defined in the Indenture, at an offer price equal to 101% of the aggregate principal amount of the Notes purchased plus accrued and unpaid interest thereon to, but excluding, the date of purchase. Ranking Under the terms of the Indenture, the Notes are the Company’s senior unsecured obligations and (i) rank equal in right of payment with all of the Company’s existing and future senior unsecured indebtedness, (ii) rank senior in right of payment to the Company’s existing and future subordinated indebtedness, (iii) are effectively subordinated in right of payment to the Company’s existing and future secured obligations, to the extent of the assets securing such obligations and (iv) are structurally subordinated in right of payment to any existing and future indebtedness or other liabilities, including trade payables, of the Company’s subsidiaries. Restrictive Covenants The Indenture contains covenants that, subject to certain qualifications and exceptions, limit the ability of the Company and its subsidiaries to, among other things, (i) incur certain secured debt; (ii) enter into certain sale and lease-back transactions and (iii) consolidate, merge, sell or otherwise dispose of all or substantially all of their assets. Events of Default Upon the occurrence of an event of default under the Indenture with respect to the Notes, which includes payment defaults, defaults in the performance of certain covenants and bankruptcy and insolvency related defaults, the Company’s obligations under the Notes may be accelerated, in which case the entire principal amount of the Notes would be immediately due and payable. The foregoing description of the Indenture does not purport to be complete and is qualified in its entirety by reference to the full text of the Indenture. A copy of the Indenture is attached as Exhibit 4.1 to this Current Report on Form 8-K, and is incorporated by reference herein. Registration Rights Agreement On April 14, 2022, the Company and BofA Securities, Inc., HSBC Securities (USA) Inc., and RBC Capital Markets, LLC, as representatives of the several initial purchasers of the Notes, entered into a registration rights agreement with respect to the Notes (the “Registration Rights Agreement”). The Company agreed under the Registration Rights Agreement to use commercially reasonable efforts to (i) file a registration statement on an appropriate registration form with respect to a registered offer to exchange each series of the Notes for new notes, with terms substantially identical in all material respects to such series of Notes and (ii) cause the registration statement to be declared effective under the Securities Act. If the exchange offer is not completed on or before April 14, 2027, the Company will use commercially reasonable efforts to file and to have declared effective a shelf registration statement relating to resales of the Notes and keep such shelf registration statement effective until the date that the Notes cease to be Transfer Restricted Securities (as defined in the Registration Rights Agreement). If the Company fails to satisfy this obligation with respect to a series of the Notes (a “registration default”) under the Registration Rights Agreement, then additional interest will accrue on the principal amount of the Notes of such series at an annual rate of 0.250%. The annual interest rate on such series of the Notes will increase by an additional 0.250% for each subsequent 90-day period during which the registration default continues, up to a maximum of 1.000%. The additional interest will accrue to and including the date such registration default ends, at which time the interest rate on the applicable series of Notes will revert to the original level. A registration default ends with respect to any Notes when such Notes cease to be Transfer Restricted Securities.
If the Company is required to pay additional interest due to a registration default, the Company will pay such additional interest to the holders of the Notes in cash on the same dates that the Company makes other interest payments on the Notes, until the applicable registration default is cured. The foregoing description of the Registration Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Registration Rights Agreement. A copy of the Registration Rights Agreement is attached as Exhibit 4.4 to this Current Report on Form 8-K, and is incorporated by reference herein.
Item 8.01
Other Events. Early Participation Results, and Early Settlement Election of Private Exchange Offers of Certain Outstanding Notes for New Notes In a press release issued on April 14, 2022, Broadcom Inc. (“Broadcom”) announced (i) the early participation results of its private offers to exchange certain series of its outstanding notes maturing between 2027 and 2032 for new senior notes maturing in 2037 (the “Exchange Notes”) and (ii) its election to have an early settlement. The foregoing description is qualified in its entirety by reference to the press release dated April 14, 2022, a copy of which is attached hereto as Exhibit 99.1. Pricing of Private Exchange Offers of Certain Outstanding Notes for New Notes Following the announcement of the early participation results of the Exchange Offers, in a press release issued on April 14, 2022, Broadcom announced the pricing terms of the Exchange Offers. The Exchange Notes are being sold in a private placement to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to non-U.S. persons outside the United States under Regulation S under the Securities Act. The foregoing description is qualified in its entirety by reference to the press release dated April 14, 2022, a copy of which is attached hereto as Exhibit 99.2. This Current Report on Form 8-K is not an offer to purchase or sell or a solicitation of an offer to purchase or sell, with respect to any securities. Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements (including within the meaning of Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended) concerning Broadcom. These statements include, but are not limited to, statements that address our expected future business and financial performance, and other statements identified by words such as “will,” “expect,” “believe,” “anticipate,” “estimate,” “should,” “intend,” “plan,” “potential,” “predict,” “project,” “aim,” and similar words, phrases or expressions. These forward-looking statements are based on current expectations and beliefs of the management of Broadcom, as well as assumptions made by, and information currently available to, such management, current market trends and market conditions and involve risks and uncertainties, many of which are outside the Company’s and management’s control, and which may cause actual results to differ materially from those contained in forward-looking statements. Accordingly, you should not place undue reliance on such statements. Particular uncertainties that could materially affect future results include risks associated with: the COVID-19 pandemic, which has disrupted, and will likely continue to disrupt, normal business activity, and which may have an adverse effect on our results of operations; any loss of our significant customers and fluctuations in the timing and volume of significant customer demand; our dependence on contract manufacturing and outsourced supply chain;
our dependency on a limited number of suppliers; government regulations and administrative proceedings, trade restrictions and trade tensions; global economic conditions and concerns; cyclicality in the semiconductor industry or in our target markets; global political and economic conditions; our significant indebtedness and the need to generate sufficient cash flows to service and repay such debt; the amount and frequency of our share repurchase program; dependence on and risks associated with distributors and resellers of our products; dependence on senior management and our ability to attract and retain qualified personnel; any acquisitions we may make, such as delays, challenges and expenses associated with receiving governmental and regulatory approvals and satisfying other closing conditions, and with integrating acquired businesses with our existing businesses and our ability to achieve the benefits, growth prospects and synergies expected by such acquisitions; involvement in legal proceedings; quarterly and annual fluctuations in operating results; our ability to accurately estimate customers’ demand and adjust our manufacturing and supply chain accordingly; our competitive performance and ability to continue achieving design wins with our customers, as well as the timing of any design wins; prolonged disruptions of our or our contract manufacturers’ manufacturing facilities, warehouses or other significant operations; our ability to improve our manufacturing efficiency and quality; our dependence on outsourced service providers for certain key business services and their ability to execute to our requirements; our ability to maintain or improve gross margin; our ability to protect our intellectual property and the unpredictability of any associated litigation expenses; compatibility of our software products with operating environments, platforms or third-party products; our ability to enter into satisfactory software license agreements; availability of third party software used in our products; use of open source code sources in our products; any expenses or reputational damage associated with resolving customer product warranty and indemnification claims; market acceptance of the end products into which our products are designed; our ability to sell to new types of customers and to keep pace with technological advances; our compliance with privacy and data security laws; our ability to protect against a breach of security systems; fluctuations in foreign exchange rates; our provision for income taxes and overall cash tax costs, legislation that may impact our overall cash tax costs and our ability to maintain tax concessions in certain jurisdictions; and other events and trends on a national, regional and global scale, including those of a political, economic, business, competitive and regulatory nature. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. Our filings with the Securities and Exchange Commission (“SEC”), which you may obtain for free at the SEC’s website at http://www.sec.gov, discuss some of the important risk factors that may affect our business, results of operations and financial condition. Actual results may vary from the estimates provided. We undertake no intent or obligation to publicly update or revise any of the estimates and other forward-looking statements made in this announcement, whether as a result of new information, future events or otherwise, except as required by law.
Item 9.01
Financial Statements and Exhibits.
ExhibitNo.
Description
4.1
Indenture, dated April 14, 2022, between the Company and Wilmington Trust, National Association, as trustee.
4.2
Form of 4.00% Senior Notes due 2029 (included in Exhibit 4.1).
4.3
Form of 4.15% Senior Notes due 2032 (included in Exhibit 4.1).
4.4
Registration Rights Agreement, dated as of April 14, 2022, between the Company and BofA Securities, Inc., HSBC Securities (USA) Inc., and RBC Capital Markets, LLC, as representatives of the several initial purchasers of the Notes.
99.1
Press release, dated April 14, 2022, entitled “Broadcom Inc. Announces Early Participation Results, and Early Settlement Election of its Private Exchange Offers of Certain Outstanding Notes for New Notes”
99.2
Press release, dated April 14, 2022, entitled “Broadcom Inc. Announces Pricing Terms of its Private Exchange Offers of Certain Outstanding Notes for New Notes”
104
Cover Page Interactive Data File (formatted as Inline XBRL).
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
BROADCOM INC.
Date: April 14, 2022
By:
/s/ Kirsten Spears
Name:
Kirsten Spears
Title:
Chief Financial Officer
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8-K_1730168_0001193125-20-004721.htm
|
8-K
false 0001730168 0001730168 2020-01-09 2020-01-09 0001730168 us-gaap:CommonStockMember 2020-01-09 2020-01-09 0001730168 us-gaap:SeriesAPreferredStockMember 2020-01-09 2020-01-09 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): January 9, 2020 BROADCOM INC. (Exact Name of Registrant as Specified in Charter)
Delaware
001-38449
35-2617337
(State or other jurisdiction of incorporation)
(Commission File Number)
(IRS Employer Identification No.)
1320 Ridder Park Drive, San Jose, California
95131
(Address of principal executive offices)
(Zip Code) (408) 433-8000 (Registrant’s telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value
AVGO
The Nasdaq Global Select Market
Mandatory Convertible Preferred Stock, Series A, $0.01 par value
AVGOP
The Nasdaq Global Select Market Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). 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. ☐
Item 8.01.
Other Events. In September 2013 and January 2014, Hock Tan, President and Chief Executive Officer of Broadcom Inc. (the “Company”), was granted options to purchase an aggregate of 2.5 million shares of Company common stock (the “Options”), which have fully vested and which expire in September 2020 and January 2021, respectively. As a result, on October 1, 2019, Mr. Tan adopted a pre-arranged stock trading plan (“10b5-1 Plan”) to exercise the balance of these expiring Options and to automatically sell the resulting shares. Under the 10b5-1 Plan, Mr. Tan is expected to sell an aggregate of 1.9 million shares in multiple pre-scheduled sales, over a period of 12 months starting in January 2020. Mr. Tan continues to hold a long-term, multi-year performance stock unit award, granted in June 2017, under which he may earn a maximum of 756,000 shares of Company common stock (the “2017 Award”). The 2017 Award may be earned, if at all, over two overlapping performance periods of three and four years, ending in June 2020 (“Period 1”) and June 2021 (“Period 2”), based on the Company’s total stockholder return performance as compared to the S&P 500 over such periods (“Relative TSR”). Mr. Tan may earn shares under the 2017 Award, as follows: up to 252,000 shares with respect to each of Period 1 and Period 2 if the Company’s Relative TSR is at the 75th percentile of the S&P 500 Index companies and up to an aggregate of 756,000 shares (inclusive of shares earned in both performance periods) if the Company’s Relative TSR is at or above the 90th percentile of the S&P 500 Index companies for Period 2. The 2017 Award is subject to the terms and conditions of a Performance Share Unit Award Agreement, dated June 15, 2017, between the Company and Mr. Tan (the “PSU Agreement”) and the Avago Technologies Limited 2009 Equity Incentive Award Plan (the “2009 Plan”), and the foregoing description of the 2017 Award is qualified in its entirety by reference to the PSU Agreement, a copy of which is filed was previously filed with the Securities and Exchange Commission (the “SEC”) (see Exhibit 10.1 to Broadcom Limited’s Current Report on Form 8-K filed with the SEC on June 19, 2017), and to the 2009 Plan, a copy of which was previously filed with the SEC (see Exhibit 10.18 to Avago Technologies Limited’s Registration Statement on Form S-1/A previously filed with the SEC on July 27, 2009).
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
BROADCOM INC.
Date: January 9, 2020
By:
/s/ Thomas H. Krause, Jr.
Name:
Thomas H. Krause, Jr.
Title:
Chief Financial Officer
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8-K_1045810_0001045810-19-000007.htm
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8-K
1
form8-kq4fy19.htm
FORM 8-K
Document
UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549______________FORM 8-KCURRENT REPORTPURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934Date of Report (Date of earliest event reported): February 14, 2019 NVIDIA CORPORATION(Exact name of registrant as specified in its charter)Delaware0-2398594-3177549(State or other jurisdiction(Commission(IRS Employerof incorporation)File Number)Identification No.) 2788 San Tomas Expressway, Santa Clara, CA95051 (Address of principal executive offices)(Zip Code)Registrant’s telephone number, including area code: (408) 486-2000 Not Applicable(Former name or former address, if changed since last report)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). Emerging Growth Company oIf 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. oItem 2.02 Results of Operations and Financial Condition.On February 14, 2019, NVIDIA Corporation, or the Company, issued a press release announcing its results for the quarter and fiscal year ended January 27, 2019. The press release is attached as Exhibit 99.1 and is incorporated herein by reference.Attached hereto as Exhibit 99.2 and incorporated by reference herein is financial information and commentary by Colette M. Kress, Executive Vice President and Chief Financial Officer of the Company, regarding results of the quarter and fiscal year ended January 27, 2019, or the CFO Commentary. The CFO Commentary will be posted to http://investor.nvidia.com immediately after the filing of this Current Report.The press release and CFO Commentary are furnished and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or subject to the liabilities of that Section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended. The information in this Current Report shall not be incorporated by reference in any filing with the U.S. Securities and Exchange Commission made by the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.Item 9.01 Financial Statements and Exhibits.(d) Exhibits Exhibit Description99.1 Press Release, dated February 14, 2019, entitled "NVIDIA Announces Financial Results for Fourth Quarter and Fiscal 2019"99.2 CFO Commentary on Fourth Quarter and Fiscal 2019 ResultsSIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NVIDIA CorporationDate: February 14, 2019 By: /s/ Colette M. Kress Colette M. Kress Executive Vice President and Chief Financial Officer
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8-K_1045810_0001045810-23-000164.htm
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nvda-202307240001045810false00010458102023-07-242023-07-24UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549______________FORM 8-K CURRENT REPORTPURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934Date of Report (Date of earliest event reported): July 24, 2023 NVIDIA CORPORATION(Exact name of registrant as specified in its charter)Delaware0-2398594-3177549(State or other jurisdiction(Commission(IRS Employerof incorporation)File Number)Identification No.)2788 San Tomas Expressway, Santa Clara, CA 95051 (Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (408) 486-2000 Not Applicable(Former name or former address, if changed since last report)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock, $0.001 par value per shareNVDAThe Nasdaq Global Select MarketIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. (d)On July 24, 2023, the Board of Directors, or the Board, of NVIDIA Corporation appointed Melissa Lora as a member of the Board and the number of directors constituting the full Board was increased from thirteen to fourteen. Ms. Lora was also appointed to serve as a member of the Audit Committee of the Board.In connection with her appointment to the Board, Ms. Lora was granted pursuant to our Amended and Restated 2007 Equity Incentive Plan, or the 2007 Plan: (a) an initial equity grant of 587 restricted stock units, vesting approximately semi-annually over three years commencing July 24, 2023, and (b) a pro-rated annual equity grant of 590 restricted stock units, of which 265 will vest on November 15, 2023 and 325 will vest on May 15, 2024. Additionally, she was granted a pro-rated annual cash retainer of $77,250, payable starting on July 24, 2023. The 2007 Plan is filed as Exhibit 10.2 to our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on February 24, 2023.In addition, we have entered into an indemnity agreement with Ms. Lora in connection with her service as a member of the Board. The form of indemnity agreement is filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on March 7, 2006.SIGNATUREPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NVIDIA CorporationDate: July 24, 2023By: /s/ Rebecca Peters Rebecca PetersVice President, Deputy General Counsel and Assistant Secretary
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8-K_320193_0001193125-16-488223.htm
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8-K
1
d150918d8k.htm
FORM 8-K
Form 8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT Pursuant to Section 13 OR
15(d) of The Securities Exchange Act of 1934 February 26, 2016
Date of Report (Date of earliest event reported)
Apple Inc.
(Exact name of Registrant as specified in its charter)
California
001-36743
94-2404110
(State or other jurisdiction
of incorporation)
(Commission File
Number)
(IRS. Employer
Identification No.)
1 Infinite Loop
Cupertino, California 95014 (Address of principal
executive offices) (Zip Code) (408) 996-1010
(Registrants telephone number, including area code)
Not applicable (Former name or former address,
if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of
the Registrant under any of the following provisions:
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 5.02
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
(e)
The Board of Directors of Apple Inc.
previously adopted, subject to shareholder approval, an amendment and restatement of Apples 2014 Employee Stock Plan (the 2014 Plan). Apples shareholders approved the amended and restated 2014 Plan at the Annual Meeting of
Shareholders held on February 26, 2016 (the Annual Meeting). The amended and restated 2014 Plan, which became effective upon shareholder approval, increased the maximum amount payable as a cash bonus award that may qualify as
performance-based compensation under Section 162(m) of the Internal Revenue Code to $30 million per person, per fiscal year. The foregoing brief
description is qualified in its entirety by the text of the 2014 Plan, a copy of which is filed as Exhibit 10.1 hereto and incorporated herein by reference.
Item 5.07 Submission of Matters to a Vote of Security Holders.
At the Annual Meeting, Apples shareholders voted on the following eight proposals and cast their votes as described below.
1.
The individuals listed below were elected at the Annual Meeting to serve as directors of Apple until the next annual meeting of shareholders and until their
successors are duly elected and qualified:
For
Against
Abstained
Broker Non-Vote
James Bell
3,083,679,346
24,740,974
5,663,021
1,559,945,580
Tim Cook
3,095,246,110
11,472,231
7,365,000
1,559,945,580
Al Gore
3,012,555,419
93,815,156
7,712,766
1,559,945,580
Bob Iger
3,082,336,074
26,966,576
4,780,691
1,559,945,580
Andrea Jung
2,909,845,673
198,749,767
5,487,901
1,559,945,580
Art Levinson
3,062,321,116
45,447,845
6,314,380
1,559,945,580
Ron Sugar
3,072,297,672
35,589,720
6,195,949
1,559,945,580
Sue Wagner
3,100,054,215
8,423,480
5,605,646
1,559,945,580
2.
A management proposal to ratify the appointment of Ernst & Young LLP as Apples independent registered public accounting firm for 2016, as described
in the proxy materials. This proposal was approved.
For
Against
Abstained
Broker Non-Vote
4,635,508,314
23,344,080
15,176,527
0
3.
An advisory resolution to approve executive compensation, as described in the proxy materials. This proposal was approved.
For
Against
Abstained
Broker Non-Vote
2,947,141,264
149,713,014
17,229,063
1,559,945,580
4.
A management proposal to approve the amended and restated 2014 Plan to increase the maximum amount payable as a cash bonus award that may qualify as
performance-based compensation under Section 162(m) of the Internal Revenue Code, as described in the proxy materials. This proposal was approved.
For
Against
Abstained
Broker Non-Vote
2,948,340,725
154,658,701
11,083,915
1,559,945,580
5.
A shareholder proposal entitled Net-Zero Greenhouse Gas Emissions by 2030, as described in the proxy materials. This proposal was not approved.
For
Against
Abstained
Broker Non-Vote
201,192,777
2,619,314,920
293,575,644
1,559,945,580
6.
A shareholder proposal regarding diversity among Apples board of directors and senior management, as described in the proxy materials. This proposal was
not approved.
For
Against
Abstained
Broker Non-Vote
153,235,024
2,831,506,200
129,342,117
1,559,945,580
7.
A shareholder proposal entitled Human Rights Review High-Risk Regions, as described in the proxy materials. This proposal was not approved.
For
Against
Abstained
Broker Non-Vote
49,043,357
2,744,937,657
320,102,327
1,559,945,580
8.
A shareholder proposal entitled Shareholder Proxy Access, as described in the proxy materials. This proposal was not approved.
For
Against
Abstained
Broker Non-Vote
1,011,922,207
2,083,600,907
18,560,227
1,559,945,580
Item 9.01
Financial Statements and Exhibits.
(d)
Exhibits.
Exhibit
Number
Exhibit Description
10.1
Apple Inc. 2014 Employee Stock Plan, as amended and restated as of February 26, 2016.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: March 1, 2016
Apple Inc.
By:
/s/ D. Bruce Sewell
D. Bruce Sewell
Senior Vice President,
General Counsel and Secretary
Exhibit Index
Exhibit
Number
Exhibit Description
10.1
Apple Inc. 2014 Employee Stock Plan, as amended and restated as of February 26, 2016.
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8-K_1067983_0001193125-22-079550.htm
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Form 8-K
BERKSHIRE HATHAWAY INC DE false 0001067983 0001067983 2022-03-18 2022-03-18 0001067983 brka:ClassACommonStock2Member 2022-03-18 2022-03-18 0001067983 brka:ClassBCommonStock1Member 2022-03-18 2022-03-18 0001067983 brka:M0.750SeniorNotesDue20234Member 2022-03-18 2022-03-18 0001067983 brka:M1.125SeniorNotesDue2027Member12Member 2022-03-18 2022-03-18 0001067983 brka:M1.625SeniorNotesDue20355Member 2022-03-18 2022-03-18 0001067983 brka:M1.300SeniorNotesDue20246Member 2022-03-18 2022-03-18 0001067983 brka:M2.150SeniorNotesDue20287Member 2022-03-18 2022-03-18 0001067983 brka:M0.625SeniorNotesDue20233Member 2022-03-18 2022-03-18 0001067983 brka:M2.375SeniorNotesDue20398Member 2022-03-18 2022-03-18 0001067983 brka:M2.625SeniorNotesDue20599Member 2022-03-18 2022-03-18 0001067983 brka:M0.000SeniorNotesDue202510Member 2022-03-18 2022-03-18 0001067983 brka:M0.500SeniorNotesDue204111Member 2022-03-18 2022-03-18 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) March 18, 2022 BERKSHIRE HATHAWAY INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
001-14905
47-0813844
(STATE OR OTHER JURISDICTION OF INCORPORATION)
(COMMISSION FILE NUMBER)
(I.R.S. EMPLOYER IDENTIFICATION NO.)
3555 Farnam Street Omaha, Nebraska
68131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE) (402) 346-1400 REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
TradingSymbols
Name of each exchange on which registered
Class A Common Stock
BRK.A
New York Stock Exchange
Class B Common Stock
BRK.B
New York Stock Exchange
0.750% Senior Notes due 2023
BRK23
New York Stock Exchange
1.125% Senior Notes due 2027
BRK27
New York Stock Exchange
1.625% Senior Notes due 2035
BRK35
New York Stock Exchange
1.300% Senior Notes due 2024
BRK24
New York Stock Exchange
2.150% Senior Notes due 2028
BRK28
New York Stock Exchange
0.625% Senior Notes due 2023
BRK23A
New York Stock Exchange
2.375% Senior Notes due 2039
BRK39
New York Stock Exchange
2.625% Senior Notes due 2059
BRK59
New York Stock Exchange
0.000% Senior Notes due 2025
BRK25
New York Stock Exchange
0.500% Senior Notes due 2041
BRK41
New York Stock Exchange Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
Item 8.01
Other Events. On March 18, 2022, Berkshire Hathaway Finance Corporation (“BHFC”) issued (i) €500,000,000 aggregate principal amount of its 1.500% Senior Notes due 2030 and (ii) €750,000,000 aggregate principal amount of its 2.000% Senior Notes due 2034 ((i) and (ii), together, the “Notes”) under a registration statement on Form S-3 under the Securities Act of 1933, as amended (the “Securities Act”), filed with the Securities and Exchange Commission (the “Commission”) on January 28, 2022 (Registration Nos. 333-262384 and 333-262384-01) (the “Registration Statement”). The Notes, which are fully and unconditionally guaranteed by Berkshire Hathaway Inc. (“Berkshire”), were sold pursuant to an underwriting agreement entered into on March 8, 2022, by and between (a) BHFC and Berkshire and (b) J.P. Morgan Securities plc and Merrill Lynch International. The Notes were issued under an Indenture, dated as of January 28, 2022, by and among BHFC, Berkshire, and The Bank of New York Mellon Trust Company, N.A. (the “Indenture”) and (i) an officers’ certificate dated as of March 18, 2022 by BHFC with respect to its 1.500% Senior Notes due 2030 (the “2030 Notes Officers’ Certificate”) and (ii) an officers’ certificate dated as of March 18, 2022 by BHFC with respect to its 2.000% Senior Notes due 2034 (the “2034 Notes Officers’ Certificate” and, together with the 2030 Notes Officers’ Certificate, the “Officers’ Certificates”). The relevant terms of the Notes and the Indenture are further described under the caption “Description of the Notes and Guarantees” in the prospectus supplement relating to the Notes, dated March 8, 2022, filed with the Commission by Berkshire and BHFC on March 10, 2022, pursuant to Rule 424(b)(5) under the Securities Act and in the section entitled “Description of the Debt Securities” in the base prospectus relating to debt securities of BHFC, dated January 28, 2022, included in the Registration Statement, which descriptions are incorporated herein by reference. A copy of the Indenture is set forth in Exhibit 4.1 of the Registration Statement and is incorporated herein by reference. A copy of the 2030 Notes Officers’ Certificate is attached hereto as Exhibit 4.2 and is incorporated herein by reference. A copy of the 2034 Notes Officers’ Certificate is attached hereto as Exhibit 4.3 and is incorporated herein by reference. The descriptions of the Indenture, the Officers’ Certificates and the Notes in this report are summaries and are qualified in their entirety by the terms of the Indenture, the Officers’ Certificates and the Notes, respectively.
Item 9.01
Financial Statements and Exhibits. (d) Exhibits
1.1
Underwriting Agreement, dated March 8, 2022, by and among (a) Berkshire Hathaway Finance Corporation and Berkshire Hathaway Inc. and (b) J.P. Morgan Securities plc and Merrill Lynch International.
4.1
Indenture, dated as of January 28, 2022, by and among Berkshire Hathaway Inc., Berkshire Hathaway Finance Corporation and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.1 of Berkshire Hathaway Inc.’s and Berkshire Hathaway Finance Corporation’s Registration Statement on Form S-3 (Registration Nos. 333-262384 and 333-262384-01) filed with the Commission on January 28, 2022).
4.2
Officers’ Certificate of Berkshire Hathaway Finance Corporation, dated as of March 18, 2022, including the form of Berkshire Hathaway Finance Corporation’s 1.500% Senior Notes due 2030.
4.3
Officers’ Certificate of Berkshire Hathaway Finance Corporation, dated as of March 18, 2022, including the form of Berkshire Hathaway Finance Corporation’s 2.000% Senior Notes due 2034.
5.1
Opinion of Munger, Tolles & Olson LLP, dated March 18, 2022, with respect to the Notes.
23.1
Consent of Munger, Tolles & Olson LLP (included in Exhibit 5.1).
104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
March 18, 2022
BERKSHIRE HATHAWAY INC.
/s/ Marc D. Hamburg
By: Marc D. Hamburg
Senior Vice President and Chief Financial Officer
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8-K_1018724_0001193125-23-000849.htm
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8-K
false 0001018724 0001018724 2023-01-03 2023-01-03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 January 3, 2023 Date of Report (Date of earliest event reported) AMAZON.COM, INC. (Exact name of registrant as specified in its charter)
Delaware
000-22513
91-1646860
(State or other jurisdiction of incorporation)
(Commission File Number)
(IRS Employer Identification No.) 410 Terry Avenue North, Seattle, Washington 98109-5210 (Address of principal executive offices, including Zip Code) (206) 266-1000 (Registrant’s telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
AMZN
Nasdaq Global Select Market Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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.
☐
TABLE OF CONTENTS
ITEM 1.01. ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
3
ITEM 2.03. CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT.
3
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
3
SIGNATURES
4
EXHIBIT 10.1
ITEM 1.01.
ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT. On January 3, 2023, Amazon.com, Inc. (the “Company”), Toronto Dominion (Texas) LLC, as administrative agent, and the other lenders party thereto entered into a credit agreement (the “Term Loan Agreement”). The Term Loan Agreement provides the Company with an unsecured $8.0 billion term loan (the “Term Loan”) that will mature in 364 days, but may be extended for an additional period of 364 days. The initial interest rate applicable to the Term Loan is the Secured Overnight Financing Rate plus 0.75%. If the Company exercises its option to extend the Term Loan’s maturity for an additional 364 days, the interest rate spread will increase from 0.75% to 1.05%. Upon funding, proceeds of the Term Loan will be used for general corporate purposes. The Term Loan Agreement contains customary representations and warranties, covenants, and events of default, but does not contain financial covenants. Upon an event of default that is not cured within applicable grace periods or waived, any unpaid amounts under the Term Loan may be declared immediately due and payable and the commitments may be terminated. The financial institutions party to the Term Loan Agreement and their respective affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage, and other financial and non-financial activities and services. Certain of these financial institutions and their respective affiliates have provided, and may in the future provide, a variety of these services to the Company and to persons and entities with relationships with the Company, for which they received or will receive customary fees and expenses. The foregoing description of the Term Loan Agreement is qualified in its entirety by the terms of such agreement, which is filed hereto as Exhibit 10.1 and incorporated herein by reference.
ITEM 2.03.
CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT. The information set forth in Item 1.01 of this Current Report on Form 8-K is hereby incorporated by reference into this Item 2.03.
ITEM 9.01.
FINANCIAL STATEMENTS AND EXHIBITS. (d) Exhibits.
Exhibit Number
Description
10.1
Term Loan Agreement, dated as of January 3, 2023, among Amazon.com, Inc., Toronto Dominion (Texas) LLC, as administrative agent, and the other lenders party thereto.
104
The cover page from this Current Report on Form 8-K, formatted in Inline XBRL (included as Exhibit 101).
3
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
AMAZON.COM, INC. (REGISTRANT)
By:
/s/ Antonio Masone
Dated: January 3, 2023
Antonio Masone
Vice President and Treasurer
4
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8-K_1730168_0001140361-24-006724.htm
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false000173016800017301682024-02-052024-02-05
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 5, 2024
Broadcom Inc.
(Exact Name of Registrant as Specified in Charter)
Delaware
001-38449
35-2617337
(State or other jurisdiction of incorporation)
(Commission File Number)
(I.R.S. Employer Identification No.)
3421 Hillview Avenue
Palo Alto, California 94304
(Address of principal executive offices including zip code)
(650) 427-6000
(Registrant’s telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value
AVGO
The Nasdaq Global Select Market
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of
the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ☐
Item 5.02
Departure of Directors of Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
Appointment of New Director
On and effective February 5, 2024, the Board of Directors (the “Board”) of Broadcom Inc. (“Broadcom”) increased the size of the Board to ten members and appointed Kenneth
Y. Hao, Chairman and Managing Partner of Silver Lake, as an independent member of the Board. Mr. Hao has not been appointed to any Board committees at this time.
The compensation of Mr. Hao will be consistent with Broadcom’s compensation of its other non-employee directors in effect and as described in Broadcom’s
definitive proxy statement filed with the Securities and Exchange Commission on February 17, 2023. Mr. Hao was granted an initial restricted stock unit (“RSU”) award with a value of $53,279 on February 5, 2024, which will vest in full on the earlier
of (i) the first anniversary of the grant date or (ii) the date on which Broadcom’s annual meeting of stockholders immediately following the grant date is held, subject to his continued service on the Board. The number of shares of Broadcom common
stock subject to this RSU award was determined by dividing the value of the RSU award by the average closing price of Broadcom common stock quoted on the Nasdaq Global Select Market over 30 calendar days immediately preceding the grant date.
Mr. Hao will also enter into the standard form of Indemnification and Advancement Agreement with Broadcom, pursuant to which Broadcom agrees to indemnify
its Board members to the fullest extent permitted by applicable law and subject to the terms in such agreement.
Retirement of Director
Raul Fernandez notified the Board that he does not intend to stand for re-election at Broadcom’s 2024 annual meeting of stockholders (the “2024 Annual Meeting”), effective
February 5, 2024. Mr. Fernandez intends to continue to serve as a member of the Board, the Audit Committee and the Nominating, Environmental, Social and Governance Committee until his current term expires at the 2024 Annual Meeting. Mr. Fernandez’s
decision not to stand for re-election is not due to any disagreement with Broadcom. The Board appreciates and thanks Mr. Fernandez for his invaluable contribution to Broadcom through his service as a member of the Board.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: February 9, 2024
Broadcom Inc.
By:
/s/ Kirsten M. Spears
Name: Kirsten M. Spears
Title: Chief Financial Officer and Chief
Accounting Officer
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8-K_1326801_0001326801-22-000006.htm
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fb-202201100001326801false00013268012022-01-102022-01-10UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Date of Report (Date of earliest event reported): January 10, 2022Meta Platforms, Inc.(Exact name of registrant as specified in its charter)Delaware001-3555120-1665019(State or Other Jurisdiction of Incorporation)(Commission File Number)(IRS Employer Identification No.)1601 Willow Road, Menlo Park, California 94025 (Address of principal executive offices and Zip Code)(650) 543-4800 (Registrant’s telephone number, including area code)N/A(Former name or former address, if changed since last report)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredClass A Common Stock, $0.000006 par valueFBThe Nasdaq Stock Market LLCIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.On January 10, 2022, the Board of Directors (the "Board") of Meta Platforms, Inc. (the "Company") elected Tony Xu as a member of the Board, effective January 11, 2022. A copy of the press release announcing the election is attached as Exhibit 99.1 to this report. The Board has determined that Mr. Xu qualifies as an independent director under the corporate governance standards of the Nasdaq Stock Market LLC. As of the time of this filing, the Board has not made a final determination regarding the committees of the Board, if any, to which Mr. Xu will be appointed. Mr. Xu will receive compensation for his service as a non-employee member of the Board as set forth in the Company's Director Compensation Policy.There are no arrangements or understandings between Mr. Xu and any other person pursuant to which Mr. Xu was selected as a director, and there are no transactions in which the Company is a party and in which Mr. Xu has a material interest subject to disclosure under Item 404(a) of Regulation S-K. Item 9.01 Financial Statements and Exhibits.(d) Exhibits Exhibit NumberExhibit Title or Description99.1Press Release dated January 11, 2022104Cover Page Interactive Data File (the cover page XBRL tags are embedded within the inline XBRL document)SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.META PLATFORMS, INC.Date: January 11, 2022By:/s/ Katherine R. KellyName: Katherine R. KellyTitle: Vice President, Deputy General Counsel and Secretary
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8-K_1018724_0001104659-23-113444.htm
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0001018724
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AMAZON COM INC
0001018724
2023-11-01
2023-11-01
iso4217:USD
xbrli:shares
iso4217:USD
xbrli:shares
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
November 1, 2023
Date of Report
(Date of earliest
event reported)
AMAZON.COM, INC.
(Exact name of
registrant as specified in its charter)
Delaware
000-22513
91-1646860
(State
or other jurisdiction of
incorporation)
(Commission
File Number)
(IRS
Employer Identification No.)
410 Terry Avenue North, Seattle, Washington
98109-5210
(Address of principal
executive offices, including Zip Code)
(206)
266-1000
(Registrant’s
telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended
to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of
the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
AMZN
Nasdaq Global Select Market
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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.
¨
TABLE OF CONTENTS
ITEM 1.01. ENTRY INTO A MATERIAL DEFINITIVE
AGREEMENT.
3
ITEM
1.02. Termination of a Material Definitive Agreement.
3
ITEM 2.03. CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION
UNDER AN OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT.
3
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
4
SIGNATURES
5
EXHIBIT 10.1
EXHIBIT 10.2
2
ITEM 1.01.
ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
On November 1, 2023, Amazon.com, Inc. (the “Company”),
Citibank N.A., as administrative agent, and the lenders party thereto entered into a five-year revolving credit agreement (the “Credit
Agreement”). The Credit Agreement replaces the prior $10.0 billion amended and restated credit agreement entered into by the Company,
JPMorgan Chase Bank, N.A., and other lenders on March 29, 2022, which was terminated on November 1, 2023. The Credit Agreement provides
the Company with an unsecured revolving credit facility with a borrowing capacity of up to $15.0 billion. The term of the Credit Agreement
is five years, but it may be extended on one or more occasions for additional one-year terms if approved by the lenders.
In addition, on November 1, 2023, the Company,
Citibank N.A., as administrative agent, and the lenders party thereto entered into a 364-day revolving credit agreement (the “Short-Term
Credit Agreement”). The Short-Term Credit Agreement replaces the prior $10.0 billion 364-day revolving credit agreement entered
into by the Company, JPMorgan Chase Bank, N.A., and other lenders on November 18, 2022, which was terminated on November 1, 2023. The
Short-Term Credit Agreement provides the Company with an unsecured revolving credit facility with a borrowing capacity of up to $5.0 billion.
The term of the Short-Term Credit Agreement is 364 days, but it may be extended for an additional period of 364 days if approved by the
lenders.
The interest rate applicable to outstanding
balances under the Credit Agreement and the Short-Term Credit Agreement is the applicable benchmark rate specified in the agreement plus 0.45%, with a commitment fee of 0.03% on the
undrawn portion of the credit facility.
Borrowings under the Credit Agreement and the Short-Term
Credit Agreement will be used for general corporate purposes, including backstopping any notes that the Company may issue under its commercial
paper program.
The Credit Agreement and the Short-Term Credit
Agreement contain customary representations and warranties, covenants, and events of default, but do not contain financial covenants.
Upon an event of default that is not cured within applicable grace periods or waived, any unpaid amounts under the Credit Agreement or
the Short-Term Credit Agreement may be declared immediately due and payable and the commitments may be terminated.
The financial institutions party to the Credit
Agreement and the Short-Term Credit Agreement and their respective affiliates are full service financial institutions engaged in various
activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research,
principal investment, hedging, market making, brokerage, and other financial and non-financial activities and services. Certain of these
financial institutions and their respective affiliates have provided, and may in the future provide, a variety of these services to the
Company and to persons and entities with relationships with the Company, for which they received or will receive customary fees and expenses.
The foregoing descriptions of the Credit Agreement
and Short-Term Credit Agreement are qualified in their entirety by the terms of such agreements, which are filed hereto as Exhibit 10.1
and Exhibit 10.2, respectively, and incorporated herein by reference.
ITEM 1.02.
Termination of a Material Definitive Agreement.
The information set forth in Item 1.01 of this
Current Report on Form 8-K is hereby incorporated by reference into this Item 1.02.
ITEM 2.03.
CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT.
The information set forth in Item 1.01 of this
Current Report on Form 8-K is hereby incorporated by reference into this Item 2.03.
3
ITEM 9.01.
FINANCIAL STATEMENTS AND EXHIBITS.
(d) Exhibits.
Exhibit
Number
Description
10.1
Five-Year Revolving Credit Agreement, dated as of November 1, 2023, among
Amazon.com, Inc., Citibank N.A., as administrative agent, and the lenders party thereto.
10.2
364-Day Revolving Credit Agreement, dated as of November 1, 2023, among
Amazon.com, Inc., Citibank N.A., as administrative agent, and the lenders party thereto.
104
The cover page from this Current Report on Form 8-K, formatted in Inline
XBRL (included as Exhibit 101).
4
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
AMAZON.COM, INC. (REGISTRANT)
By:
/s/ Antonio Masone
Dated: November 1, 2023
Antonio Masone
Vice President and Treasurer
5
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8-K_59478_0000059478-22-000143.htm
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lly-202205020000059478false00000594782022-05-022022-05-020000059478us-gaap:CommonClassAMember2022-05-022022-05-020000059478lly:A718NotesDueJune12025Member2022-05-022022-05-020000059478lly:A1.625NotesDueJune22026Member2022-05-022022-05-020000059478lly:A2.125NotesDueJune32030Member2022-05-022022-05-020000059478lly:A625Notesdue2031Member2022-05-022022-05-020000059478lly:A500NotesDue2033Member2022-05-022022-05-020000059478lly:A6.77NotesDueJanuary12036Member2022-05-022022-05-020000059478lly:A1625NotesDue2043Member2022-05-022022-05-020000059478lly:A1.700Notesdue2049Member2022-05-022022-05-020000059478lly:A1125NotesDue2051Member2022-05-022022-05-020000059478lly:A1375NotesDue2061Member2022-05-022022-05-02 UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 8-K CURRENT REPORTPursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934Date of Report (Date of Earliest Event Reported): May 2, 2022ELI LILLY AND COMPANY (Exact Name of Registrant as Specified in its Charter) Indiana 001-06351 35-0470950(State or Other Jurisdictionof Incorporation) (CommissionFile Number) (I.R.S. EmployerIdentification No.) Lilly Corporate Center Indianapolis,Indiana46285(Address of Principal Executive Offices)(Zip Code) Registrant’s Telephone Number, Including Area Code: (317) 276-2000 Not Applicable (Former Name or Former Address, if Changed Since Last Report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2.):☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act: Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock (no par value)LLYNew York Stock Exchange7 1/8% Notes due 2025LLY25New York Stock Exchange1.625% Notes due 2026LLY26New York Stock Exchange2.125% Notes due 2030LLY30New York Stock Exchange0.625% Notes due 2031LLY31New York Stock Exchange0.500% Notes due 2033LLY33New York Stock Exchange6.77% Notes due 2036LLY36New York Stock Exchange1.625% Notes due 2043LLY43New York Stock Exchange1.700% Notes due 2049LLY49ANew York Stock Exchange1.125% Notes due 2051LLY51New York Stock Exchange1.375% Notes due 2061LLY61New York Stock ExchangeIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).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. ☐Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.On May 2, 2022, the Board of Directors (the “Board”) of Eli Lilly and Company (the “Company”) elected Dr. Mary Lynne Hedley as a new member of the class of 2025, effective May 15, 2022. Dr. Hedley, age 59, has been a Senior Scientific Fellow at the Broad Institute of MIT and Harvard since January of 2021. Prior to that, she served as Director, President and Chief Operating Officer at TESARO, Inc., a biotechnology company she co-founded in 2010, focused on the development and global commercialization of oncology therapeutics. TESARO was acquired by GlaxoSmithKline plc in 2019.Prior to founding TESARO, Dr. Hedley was Executive Vice President and Chief Science Officer of the biotechnology company, Abraxis Bioscience, Inc., responsible for research and development, operations, medical affairs and business development. Dr. Hedley received her bachelor’s degree in Microbiology from Purdue University and her Ph.D. in Molecular and Cellular Immunology from UT Southwestern Medical Center. Dr. Hedley carried out her postdoctoral training at Harvard University in the areas of immunology and gene regulation.Dr. Hedley will serve on the Ethics and Compliance Committee and the Science and Technology Committee of the Board. The Board of Directors has determined that Dr. Hedley is independent under applicable standards of the New York Stock Exchange and the Company’s director independence guidelines.There are no arrangements or understandings between Dr. Hedley and any person pursuant to which she was selected as a director. Dr. Hedley is not a party to any transaction subject to Section 404(a) of Regulation S-K involving the Company or any of its subsidiaries. She will participate in the Company’s standard director compensation program as described in the Company’s Definitive Proxy Statement, which was filed with the U.S. Securities and Exchange Commission on March 18, 2022.On May 6, 2022, the Company issued a press release announcing Dr. Hedley’s appointment to the Board of Directors. A copy of the release is attached as Exhibit 99.1 to this Current Report on Form 8-K.Item 9.01. Financial Statements and Exhibits.(d) ExhibitsExhibit No.Description99.1Press Release of Eli Lilly and Company, dated May 6, 2022.104Cover Page Interactive Data File (embedded within the Inline XBRL document).SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.ELI LILLY AND COMPANY(Registrant)By:/s/ Anat HakimName:Anat HakimTitle:Senior Vice President, General Counsel andSecretaryDate: May 6, 2022
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8-K
1
d589424d8k.htm
FORM 8-K
Form 8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT
REPORT Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 7, 2018
Broadcom Inc. (Exact
name of registrant as specified in its charter)
Delaware
001-38449
35-2617337
(State or other jurisdiction
of incorporation)
(Commission
File Number)
(IRS Employer
Identification No.)
1320 Ridder Park Drive
San Jose, California
95131
(Address of principal executive offices)
(Zip Code)
Registrants telephone number, including area code: (408)
433-8000
Check the appropriate box below
if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c)) Indicate by check mark whether the registrant is an emerging growth company as defined
in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ☐
Item 2.02
Results of Operations and Financial Condition. On June 7, 2018, Broadcom Inc.
(Broadcom or the Company) issued a press release announcing its unaudited financial results for the second fiscal quarter ended May 6, 2018. The Company will host an investor conference call on June 7, 2018 at 2:00
p.m. Pacific Time to discuss these results. The foregoing description is qualified in its entirety by reference to the press release
dated June 7, 2018, a copy of which is attached hereto as Exhibit 99.1.
Item 8.01
Other Events. On June 7, 2018, the Company announced that its Board of Directors
has approved a quarterly cash dividend of $1.75 per share. The dividend is payable on June 29, 2018 to stockholders of record at the close of business (5:00 p.m.), Eastern Time, on June 20, 2018.
Item 9.01.
Financial Statements and Exhibits. (d) Exhibits.
Exhibit No.
Description
99.1
Press release, dated June 7, 2018.
The information contained in Items 2.02 of this report, including Exhibit 99.1, shall not be incorporated by
reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing, unless expressly incorporated by specific reference to such filing. The information in this
report, including the exhibit hereto, shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section.
Cautionary Note Regarding Forward-Looking Statements
This announcement contains forward-looking statements (including within the meaning of Section 21E of the United States Securities
Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended) concerning Broadcom. These statements include, but are not limited to, statements that address our expected future business and financial
performance and other statements identified by words such as will, expect, believe, anticipate, estimate, should, intend, plan, potential,
predict project, aim, and similar words, phrases or expressions. These forward-looking statements are based on current expectations and beliefs of the management of Broadcom, as well as assumptions made by, and
information currently available to, such management, current market trends and market conditions and involve risks and uncertainties, many of which are outside the Companys and managements control, and which may cause actual results to
differ materially from those contained in forward-looking statements. Accordingly, you should not place undue reliance on such statements.
Particular uncertainties that could materially affect future results include risks associated with: any loss of our significant customers
and fluctuations in the timing and volume of significant customer demand; our dependence on contract manufacturing and outsourced supply chain; our dependency on a limited number of suppliers; any acquisitions we may make, such as delays, challenges
and expenses associated with receiving governmental and regulatory approvals and satisfying other closing conditions, and with integrating acquired companies with our existing businesses and our ability to achieve the benefits, growth prospects and
synergies expected by such acquisitions; our ability to accurately estimate customers demand and adjust our manufacturing and supply chain accordingly; our significant indebtedness, including the need to generate sufficient cash flows to
service and repay such debt; dependence on a small number of markets and the rate of growth in these markets; dependence on and risks associated with distributors of our products; dependence on senior management; quarterly and annual fluctuations in
operating results; global economic conditions and concerns; the amount and frequency of our stock repurchases; cyclicality in the semiconductor industry or in our target markets; our competitive performance and ability to continue achieving design
wins with our customers, as well as the timing of any design wins; prolonged disruptions of our or our contract manufacturers manufacturing facilities or other significant operations; our ability to improve our manufacturing efficiency and
quality; our dependence on outsourced service providers for certain key business services and their ability to execute to our requirements; our ability to maintain or improve gross margin; our ability to protect our intellectual property and the
unpredictability of any associated litigation expenses; any expenses or reputational damage associated with resolving customer product warranty and indemnification claims; our ability to sell to new types of customers and to keep pace with
technological advances; market acceptance of the end products into which our products are designed; our overall cash tax costs, legislation that may impact our overall cash tax costs and our ability to maintain tax concessions in certain
jurisdictions; and other events and trends on a national, regional and global scale, including those of a political, economic, business, competitive and regulatory nature.
Our filings with the Securities and Exchange Commission (SEC), which you may obtain for free at the SECs website at
http://www.sec.gov, discuss some of the important risk factors that may affect our business, results of operations and financial condition. Actual results may vary from the estimates provided. We undertake no intent or obligation to publicly update
or revise any of the estimates and other forward-looking statements made in this announcement, whether as a result of new information, future events or otherwise, except as required by law.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized. Date: June 7, 2018
Broadcom Inc.
By:
/s/ Thomas H. Krause, Jr.
Name: Title:
Thomas H. Krause, Jr. Chief Financial
Officer
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8-K_320193_0000320193-21-000104.htm
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aapl-20211028false000032019300003201932021-10-282021-10-280000320193us-gaap:CommonStockMember2021-10-282021-10-280000320193aapl:A1.000NotesDue2022Member2021-10-282021-10-280000320193aapl:A1.375NotesDue2024Member2021-10-282021-10-280000320193aapl:A0.000Notesdue2025Member2021-10-282021-10-280000320193aapl:A0.875NotesDue2025Member2021-10-282021-10-280000320193aapl:A1.625NotesDue2026Member2021-10-282021-10-280000320193aapl:A2.000NotesDue2027Member2021-10-282021-10-280000320193aapl:A1.375NotesDue2029Member2021-10-282021-10-280000320193aapl:A3.050NotesDue2029Member2021-10-282021-10-280000320193aapl:A0.500Notesdue2031Member2021-10-282021-10-280000320193aapl:A3.600NotesDue2042Member2021-10-282021-10-28UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 8-KCURRENT REPORTPursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934October 28, 2021Date of Report (Date of earliest event reported)Apple Inc.(Exact name of Registrant as specified in its charter)California 001-36743 94-2404110(State or other jurisdictionof incorporation) (CommissionFile Number) (I.R.S. EmployerIdentification No.)One Apple Park Way Cupertino, California 95014 (Address of principal executive offices) (Zip Code)(408) 996-1010 (Registrant’s telephone number, including area code)Not applicable(Former name or former address, if changed since last report.)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading symbol(s)Name of each exchange on which registeredCommon Stock, $0.00001 par value per shareAAPLThe Nasdaq Stock Market LLC1.000% Notes due 2022—The Nasdaq Stock Market LLC1.375% Notes due 2024—The Nasdaq Stock Market LLC0.000% Notes due 2025—The Nasdaq Stock Market LLC0.875% Notes due 2025—The Nasdaq Stock Market LLC1.625% Notes due 2026—The Nasdaq Stock Market LLC2.000% Notes due 2027—The Nasdaq Stock Market LLC1.375% Notes due 2029—The Nasdaq Stock Market LLC3.050% Notes due 2029—The Nasdaq Stock Market LLC0.500% Notes due 2031—The Nasdaq Stock Market LLC3.600% Notes due 2042—The Nasdaq Stock Market LLCIndicate by check mark whether the Registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).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. ☐Item 2.02 Results of Operations and Financial Condition.On October 28, 2021, Apple Inc. (“Apple”) issued a press release regarding Apple’s financial results for its fourth fiscal quarter ended September 25, 2021. A copy of Apple’s press release is attached hereto as Exhibit 99.1.The information contained in this Current Report shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. Item 9.01 Financial Statements and Exhibits.(d)Exhibits.ExhibitNumberExhibit Description99.1Press release issued by Apple Inc. on October 28, 2021.104Inline XBRL for the cover page of this Current Report on Form 8-K.SIGNATUREPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.Date:October 28, 2021Apple Inc.By:/s/ Luca MaestriLuca MaestriSenior Vice President,Chief Financial Officer
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10-K
1
a10-k20189292018.htm
10-K
Document
UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended September 29, 2018or☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number: 001-36743 Apple Inc.(Exact name of Registrant as specified in its charter) California 94-2404110(State or other jurisdictionof incorporation or organization) (I.R.S. Employer Identification No.) One Apple Park WayCupertino, California 95014(Address of principal executive offices) (Zip Code)(408) 996-1010(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:Common Stock, $0.00001 par value per share1.000% Notes due 20221.375% Notes due 20240.875% Notes due 20251.625% Notes due 20262.000% Notes due 20271.375% Notes due 20293.050% Notes due 20293.600% Notes due 2042 The Nasdaq Stock Market LLCNew York Stock Exchange LLCNew York Stock Exchange LLCNew York Stock Exchange LLCNew York Stock Exchange LLCNew York Stock Exchange LLCNew York Stock Exchange LLCNew York Stock Exchange LLCNew York Stock Exchange LLC(Title of each class) (Name of each exchange on which registered)Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes ☒ No ☐Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes ☐ No ☒Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes ☒ No ☐Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Large accelerated filer ☒ Accelerated filer ☐Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes ☐ No ☒The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, as of March 30, 2018, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $828,880,000,000. Solely for purposes of this disclosure, shares of common stock held by executive officers and directors of the Registrant as of such date have been excluded because such persons may be deemed to be affiliates. This determination of executive officers and directors as affiliates is not necessarily a conclusive determination for any other purposes.4,745,398,000 shares of common stock were issued and outstanding as of October 26, 2018.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s definitive proxy statement relating to its 2019 annual meeting of shareholders (the “2019 Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 2019 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates. Apple Inc.Form 10-KFor the Fiscal Year Ended September 29, 2018TABLE OF CONTENTS PagePart IItem 1.Business1Item 1A.Risk Factors8Item 1B.Unresolved Staff Comments17Item 2.Properties18Item 3.Legal Proceedings18Item 4.Mine Safety Disclosures18Part IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities19Item 6.Selected Financial Data21Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations22Item 7A.Quantitative and Qualitative Disclosures About Market Risk35Item 8.Financial Statements and Supplementary Data37Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure67Item 9A.Controls and Procedures67Item 9B.Other Information67Part IIIItem 10.Directors, Executive Officers and Corporate Governance68Item 11.Executive Compensation68Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters68Item 13.Certain Relationships and Related Transactions, and Director Independence68Item 14.Principal Accounting Fees and Services68Part IVItem 15.Exhibits, Financial Statement Schedules69Item 16.Form 10-K Summary71This Annual Report on Form 10-K (“Form 10-K”) contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Many of the forward-looking statements are located in Part II, Item 7 of this Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K under the heading “Risk Factors,” which are incorporated herein by reference. All information presented herein is based on the Company’s fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company” and “Apple” as used herein refers collectively to Apple Inc. and its wholly-owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.PART IItem 1.BusinessCompany BackgroundThe Company designs, manufactures and markets mobile communication and media devices and personal computers, and sells a variety of related software, services, accessories and third-party digital content and applications. The Company’s products and services include iPhone®, iPad®, Mac®, Apple Watch®, AirPods®, Apple TV®, HomePod™, a portfolio of consumer and professional software applications, iOS, macOS®, watchOS® and tvOS™ operating systems, iCloud®, Apple Pay® and a variety of other accessory, service and support offerings. The Company sells and delivers digital content and applications through the iTunes Store®, App Store®, Mac App Store, TV App Store, Book Store and Apple Music® (collectively “Digital Content and Services”). The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and resellers. In addition, the Company sells a variety of third-party Apple-compatible products, including application software and various accessories, through its retail and online stores. The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers. The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. The Company is a California corporation established in 1977.Business StrategyThe Company is committed to bringing the best user experience to its customers through its innovative hardware, software and services. The Company’s business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software and services to provide its customers products and solutions with innovative design, superior ease-of-use and seamless integration. As part of its strategy, the Company continues to expand its platform for the discovery and delivery of digital content and applications through its Digital Content and Services, which allows customers to discover and download or stream digital content, iOS, Mac, Apple Watch and Apple TV applications, and books through either a Mac or Windows personal computer or through iPhone, iPad and iPod touch® devices (“iOS devices”), Apple TV, Apple Watch and HomePod. The Company also supports a community for the development of third-party software and hardware products and digital content that complement the Company’s offerings. The Company believes a high-quality buying experience with knowledgeable salespersons who can convey the value of the Company’s products and services greatly enhances its ability to attract and retain customers. Therefore, the Company’s strategy also includes building and expanding its own retail and online stores and its third-party distribution network to effectively reach more customers and provide them with a high-quality sales and post-sales support experience. The Company believes ongoing investment in research and development (“R&D”), marketing and advertising is critical to the development and sale of innovative products, services and technologies.ProductsiPhoneiPhone is the Company’s line of smartphones based on its iOS operating system. iPhone includes Siri®, an intelligent assistant, and Apple Pay, Touch ID® and Face ID® on qualifying devices. In September 2018, the Company introduced three new iPhones. iPhone Xs and Xs Max feature a Super Retina™ OLED display, an all-screen stainless steel and glass design, faster processors and enhanced cameras, and were available beginning in September 2018. iPhone XR features a Liquid Retina™ LCD display in an all-screen aluminum and glass design, and was available beginning in October 2018. The Company’s line of smartphones also includes iPhone 8, 8 Plus, 7 and 7 Plus models. iPhone works with the iTunes Store, App Store, Book Store and Apple Music for purchasing, organizing and playing digital content and apps.Apple Inc. | 2018 Form 10-K | 1iPadiPad is the Company’s line of multi-purpose tablets based on its iOS operating system, which includes iPad Pro®, iPad and iPad mini®. iPad includes Siri, Apple Pay and Touch ID. In March 2018, the Company released a new 9.7-inch iPad with Apple Pencil® compatibility. In October 2018, the Company introduced a new version of iPad Pro as well as a new Apple Pencil and Smart Keyboard Folio™. The new 11-inch and 12.9-inch iPad Pro models feature a Liquid Retina LCD display in an all-screen aluminum and glass design and integrate Face ID. iPad works with the iTunes Store, App Store, Book Store and Apple Music for purchasing, organizing and playing digital content and apps.MacMac is the Company’s line of desktop and portable personal computers based on its macOS operating system. Mac includes Siri and supports Apple Pay, and also includes Touch ID on qualifying devices. The Company’s desktop computers include iMac® 21.5-inch, iMac 21.5-inch with Retina® 4K display, iMac 27-inch with Retina 5K display, iMac Pro®, Mac Pro® and Mac mini®. The Company’s portable computers include MacBook®, MacBook Air®, MacBook Pro® and MacBook Pro with Touch Bar™. In October 2018, the Company introduced a new MacBook Air featuring a Retina display and Touch ID, and a new Mac mini with upgraded performance.Operating SystemsiOSiOS is the Company’s mobile operating system that serves as the foundation for iOS devices. Devices running iOS are compatible with both Mac and Windows personal computers and Apple’s iCloud services. In September 2018, the Company released iOS 12, which includes improved performance and responsiveness, new augmented reality capabilities and expressive communication features, and introduces Siri Shortcuts, enabling Siri to intelligently pair with third-party apps.macOSmacOS is the Company’s desktop operating system and is built on an open-source UNIX-based foundation and provides an intuitive and integrated computer experience. Support for iCloud is built into macOS so users can access content and information from Mac, iOS devices and other supported devices and access downloaded content and apps from the iTunes Store. macOS Mojave, released in September 2018, is the 15th major release of macOS and makes apps such as News, Stocks, Voice Memos and Home available on the Mac for the first time. macOS Mojave also adds desktop and Finder® enhancements, such as Dark Mode, and introduces a full redesign of the Mac App Store.watchOSwatchOS is the Company’s operating system for Apple Watch. In September 2018, the Company released watchOS 5, which helps users stay healthy and connected with new features including Activity Sharing competitions, auto-workout detection, advanced running features, Walkie-Talkie, Apple Podcasts and third-party apps on the Siri watch face.tvOStvOS is the Company’s operating system for Apple TV. The tvOS operating system is based on the Company’s iOS platform and enables developers to create new apps and games specifically for Apple TV and deliver them to customers through the Apple TV App Store. tvOS incorporates Siri capabilities that allow searching across apps and services. In September 2018, the Company released tvOS 12, which supports enhanced sound quality and provides additional 4K high dynamic range (“HDR”) content.ServicesDigital Content and ServicesThe iTunes Store, available for iOS devices, Mac and Windows personal computers and Apple TV, allows customers to purchase and download or stream music and TV shows, rent or purchase movies and download free podcasts. The App Store, available for iOS devices, allows customers to discover and download apps and purchase in-app content. The Mac App Store, available for Mac computers, allows customers to discover, download and install Mac applications. The TV App Store allows customers access to apps and games specifically for Apple TV. The Book Store, available for iOS devices and Mac computers, features e-books from major and independent publishers. Apple Music offers users a curated listening experience with on-demand radio stations that evolve based on a user’s play or download activity and a subscription-based internet streaming service that also provides unlimited access to the Apple Music library.Apple Inc. | 2018 Form 10-K | 2iCloudiCloud is the Company’s cloud service which stores music, photos, contacts, calendars, mail, documents and more, keeping them up-to-date and available across multiple iOS devices, Mac and Windows personal computers and Apple TV. iCloud services include iCloud Drive®, iCloud Photos, Family Sharing, Find My iPhone, iPad or Mac, Find My Friends, Notes, iCloud Keychain® and iCloud Backup for iOS devices.AppleCareThe Company offers a range of support options for its customers. These include assistance that is built into software products, electronic product manuals, online support including comprehensive product information as well as technical assistance, AppleCare + (“AC+”) and the AppleCare® Protection Plan (“APP”). AC+ and APP are fee-based services that extend the coverage of phone support eligibility and hardware repairs. AC+ offers additional coverage for instances of accidental damage and is available in certain countries for certain products. Additionally, AC+ with theft and loss protection is available for iPhone in the U.S.Apple PayApple Pay is the Company’s cashless payment service available in certain countries that offers an easy, secure and private way to pay. Apple Pay allows users to pay for purchases in participating stores accepting contactless payments and to pay for purchases within participating apps on qualifying devices. Apple Pay accepts credit and debit cards across major card networks and also supports reward programs and store-issued credit and debit cards. In December 2017, the Company released an update to iOS 11 and watchOS 4 introducing Apple Pay Cash in the U.S., allowing peer-to-peer payments using Apple Pay.Other ProductsApple TVApple TV connects to consumers’ TVs and enables them to access digital content directly for streaming video, playing music and games, and viewing photos. Content from Apple Music and other media services is also available on Apple TV. Apple TV allows streaming digital content from Mac and Windows personal computers through Home Sharing and from compatible Mac and iOS devices through AirPlay®. Apple TV runs on the Company’s tvOS operating system and is based on apps built for the television. Additionally, the Apple TV remote features Siri, allowing users to search and access content with their voice. The Company offers Apple TV and Apple TV 4K®, which supports 4K and HDR content.Apple WatchApple Watch is a personal electronic device that combines the watchOS user interface and technologies created specifically for a smaller device, including the Digital Crown®, a unique navigation tool that allows users to seamlessly scroll, zoom and navigate, and Force Touch, a technology that senses the difference between a tap and a press and allows users to access controls within apps. Apple Watch enables users to communicate from their wrist, track their health and fitness through activity and workout apps, and includes Siri and Apple Pay. In September 2018, the Company introduced Apple Watch Series 4, with a new design including a larger display and thinner case, and featuring new health monitoring capabilities.OtherThe Company also sells AirPods, Beats® products, HomePod, iPod touch and other Apple-branded and third-party accessories. AirPods are the Company’s wireless headphones that interact with Siri. In February 2018, the Company released HomePod, a high-fidelity wireless smart speaker that interacts with Siri and Apple Music.Developer ProgramsThe Company’s developer programs support app developers with building, testing and distributing apps for iOS, macOS, watchOS and tvOS. Developer program membership provides access to beta software and advanced app capabilities (e.g., CloudKit®, HealthKit™ and Apple Pay), the ability to test apps using TestFlight®, distribution on the App Store, access to App Analytics and code-level technical support. Developer programs also exist for businesses creating apps for internal use (the Apple Developer Enterprise Program) and developers creating accessories for Apple devices (the MFi Program). All developers, even those who are not developer program members, can sign in with their Apple ID to post on the Apple Developer Forums and use Xcode®, the Company’s integrated development environment for creating apps for Apple platforms. Xcode includes project management tools; analysis tools to collect, display and compare app performance data; simulation tools to locally run, test and debug apps; and tools to simplify the design and development of user interfaces. All developers also have access to extensive technical documentation and sample code.Apple Inc. | 2018 Form 10-K | 3Markets and DistributionThe Company’s customers are primarily in the consumer, small and mid-sized business, education, enterprise and government markets. The Company sells its products and resells third-party products in most of its major markets directly to consumers and small and mid-sized businesses through its retail and online stores and its direct sales force. The Company also employs a variety of indirect distribution channels, such as third-party cellular network carriers, wholesalers, retailers and resellers. During 2018, the Company’s net sales through its direct and indirect distribution channels accounted for 29% and 71%, respectively, of total net sales.The Company believes that sales of its innovative and differentiated products and services are enhanced by knowledgeable salespersons who can convey the value of the hardware and software integration and demonstrate the unique solutions that are available on its products. The Company further believes providing direct contact with its targeted customers is an effective way to demonstrate the advantages of its products over those of its competitors and providing a high-quality sales and after-sales support experience is critical to attracting new and retaining existing customers.To ensure a high-quality buying experience for its products in which service and education are emphasized, the Company continues to build and improve its distribution capabilities by expanding the number of its own retail stores worldwide. The Company’s retail stores are typically located at high-traffic locations in quality shopping malls and urban shopping districts. By operating its own stores and locating them in desirable high-traffic locations the Company is better positioned to ensure a high-quality customer buying experience and attract new customers. The stores are designed to simplify and enhance the presentation and marketing of the Company’s products and related solutions. The retail stores employ experienced and knowledgeable personnel who provide product advice, service and training, and offer a wide selection of third-party hardware, software and other accessories that complement the Company’s products.The Company has also invested in programs to enhance reseller sales by placing high-quality Apple fixtures, merchandising materials and other resources within selected third-party reseller locations. Through the Apple Premium Reseller Program, certain third-party resellers focus on the Apple platform by providing a high level of product expertise, integration and support services.The Company is committed to delivering solutions to help educators teach and students learn. The Company believes effective integration of technology into classroom instruction can result in higher levels of student achievement and has designed a range of products, services and programs to address the needs of education customers. The Company also supports mobile learning and real-time distribution of, and access to, education-related materials through iTunes U®, a platform that allows students and teachers to share and distribute educational media online. The Company sells its products to the education market through its direct sales force, select third-party resellers and its retail and online stores.The Company also sells its hardware and software products to enterprise and government customers in each of its reportable segments. The Company’s products are deployed in these markets because of their performance, productivity, ease-of-use and seamless integration into information technology environments. The Company’s products are compatible with thousands of third-party business applications and services, and its tools enable the development and secure deployment of custom applications as well as remote device administration.No single customer accounted for more than 10% of net sales in 2018, 2017 and 2016.CompetitionThe markets for the Company’s products and services are highly competitive and the Company is confronted by aggressive competition in all areas of its business. These markets are characterized by frequent product introductions and rapid technological advances that have substantially increased the capabilities and use of mobile communication and media devices, personal computers and other digital electronic devices. Many of the Company’s competitors that sell mobile devices and personal computers based on other operating systems seek to compete primarily through aggressive pricing and very low cost structures. The Company’s financial condition and operating results can be adversely affected by these and other industry-wide downward pressures on gross margins. Principal competitive factors important to the Company include price, product and service features (including security features), relative price and performance, product and service quality and reliability, design innovation, a strong third-party software and accessories ecosystem, marketing and distribution capability, service and support and corporate reputation.The Company is focused on expanding its market opportunities related to personal computers and mobile communication and media devices. These markets are highly competitive and include many large, well-funded and experienced participants. The Company expects competition in these markets to intensify significantly as competitors attempt to imitate some of the features of the Company’s products and applications within their own products or, alternatively, collaborate with each other to offer solutions that are more competitive than those they currently offer. These markets are characterized by aggressive price competition, frequent product introductions, evolving design approaches and technologies, rapid adoption of technological advancements by competitors and price sensitivity on the part of consumers and businesses.Apple Inc. | 2018 Form 10-K | 4The Company’s services also face substantial competition, including from companies that have significant resources and experience and have established service offerings with large customer bases. The Company competes with business models that provide content to users for free. The Company also competes with illegitimate means to obtain third-party digital content and applications.The Company’s future financial condition and operating results depend on the Company’s ability to continue to develop and offer new innovative products and services in each of the markets in which it competes. The Company believes it offers superior innovation and integration of the entire solution including the hardware (iOS devices, Mac, Apple Watch and Apple TV), software (iOS, macOS, watchOS and tvOS), online services and distribution of digital content and applications (Digital Content and Services). Some of the Company’s current and potential competitors have substantial resources and may be able to provide such products and services at little or no profit or even at a loss to compete with the Company’s offerings.Supply of ComponentsAlthough most components essential to the Company’s business are generally available from multiple sources, certain components are currently obtained from single or limited sources. In addition, the Company competes for various components with other participants in the markets for mobile communication and media devices and personal computers. Therefore, many components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant commodity pricing fluctuations that could materially adversely affect the Company’s financial condition and operating results.The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or manufacturing capacity has increased. If the Company’s supply of components for a new or existing product were delayed or constrained, or if an outsourcing partner delayed shipments of completed products to the Company, the Company’s financial condition and operating results could be materially adversely affected. The Company’s business and financial performance could also be materially adversely affected depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source. Continued availability of these components at acceptable prices, or at all, may be affected if suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements.The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all. Therefore, the Company remains subject to significant risks of supply shortages and price increases that could materially adversely affect its financial condition and operating results.Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers manufactured in the U.S. and Ireland. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. Certain of these outsourcing partners are single-sourced suppliers of components and manufacturers for many of the Company’s products. Although the Company works closely with its outsourcing partners on manufacturing schedules, the Company’s financial condition and operating results could be materially adversely affected if its outsourcing partners were unable to meet their production commitments. The Company’s manufacturing purchase obligations typically cover its requirements for periods up to 150 days.Research and DevelopmentBecause the industries in which the Company competes are characterized by rapid technological advances, the Company’s ability to compete successfully depends heavily upon its ability to ensure a continual and timely flow of competitive products, services and technologies to the marketplace. The Company continues to develop new technologies to enhance existing products and services, and to expand the range of its offerings through R&D, licensing of intellectual property and acquisition of third-party businesses and technology.Intellectual PropertyThe Company currently holds a broad collection of intellectual property rights relating to certain aspects of its hardware devices, accessories, software and services. This includes patents, copyrights, trademarks, service marks, trade dress and other forms of intellectual property rights in the U.S. and a number of foreign countries. Although the Company believes the ownership of such intellectual property rights is an important factor in its business and that its success does depend in part on such ownership, the Company relies primarily on the innovative skills, technical competence and marketing abilities of its personnel.Apple Inc. | 2018 Form 10-K | 5The Company regularly files patent applications to protect innovations arising from its research, development and design, and is currently pursuing thousands of patent applications around the world. Over time, the Company has accumulated a large portfolio of issued patents, including utility patents, design patents and others. The Company also holds copyrights relating to certain aspects of its products and services. No single intellectual property right is solely responsible for protecting the Company’s products. The Company believes the duration of its intellectual property rights is adequate relative to the expected lives of its products.Many of the Company’s products are designed to include intellectual property obtained from third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of the Company’s products, processes and services. While the Company has generally been able to obtain such licenses on commercially reasonable terms in the past, there is no guarantee that such licenses could be obtained in the future on reasonable terms or at all. Because of technological changes in the industries in which the Company competes, current extensive patent coverage and the rapid rate of issuance of new patents, it is possible that certain components of the Company’s products, processes and services may unknowingly infringe existing patents or intellectual property rights of others. From time to time, the Company has been notified that it may be infringing certain patents or other intellectual property rights of third parties.Foreign and Domestic Operations and Geographic DataDuring 2018, the Company’s domestic and international net sales accounted for 37% and 63%, respectively, of total net sales. Gross margins on the Company’s products in foreign countries and on products that include components obtained from foreign suppliers, can be adversely affected by foreign currency exchange rate fluctuations and by international trade regulations, including duties, tariffs and antidumping penalties.Business Seasonality and Product IntroductionsThe Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part to seasonal holiday demand. Additionally, new product introductions can significantly impact net sales, product costs and operating expenses. Product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are filled with new product inventory following a product introduction, and channel inventory of a particular product often declines as the next related major product launch approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction. However, neither historical seasonal patterns nor historical patterns of product introductions should be considered reliable indicators of the Company’s future pattern of product introductions, future net sales or financial performance.WarrantyThe Company offers a limited parts and labor warranty on its hardware products. The basic warranty period is typically one year from the date of purchase by the original end user. The Company also offers a 90-day limited warranty on the service parts used to repair the Company’s hardware products. In certain jurisdictions, local law requires that manufacturers guarantee their products for a period prescribed by statute, typically at least two years. In addition, where available, consumers may purchase APP or AC+, which extends service coverage on many of the Company’s hardware products.BacklogIn the Company’s experience, the actual amount of product backlog at any particular time is not a meaningful indication of its future business prospects. In particular, backlog often increases immediately following new product introductions as customers anticipate shortages. Backlog is often reduced once customers believe they can obtain sufficient supply. Because of the foregoing, backlog should not be considered a reliable indicator of the Company’s ability to achieve any particular level of revenue or financial performance.EmployeesAs of September 29, 2018, the Company had approximately 132,000 full-time equivalent employees.Apple Inc. | 2018 Form 10-K | 6Available InformationThe Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the Securities and Exchange Commission (the “SEC”). The Company is subject to the informational requirements of the Exchange Act and files or furnishes reports, proxy statements and other information with the SEC. Such reports and other information filed by the Company with the SEC are available free of charge at investor.apple.com/investor-relations/sec-filings/default.aspx when such reports are available on the SEC’s website. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Company periodically provides other information for investors on its corporate website, www.apple.com, and its investor relations website, investor.apple.com. This includes press releases and other information about financial performance, information on corporate governance and details related to the Company’s annual meeting of shareholders. The information contained on the websites referenced in this Form 10-K is not incorporated by reference into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references only.Apple Inc. | 2018 Form 10-K | 7Item 1A.Risk FactorsThe following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Form 10-K. The following information should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.Global and regional economic conditions could materially adversely affect the Company’s business, results of operations, financial condition and growth.The Company has international operations with sales outside the U.S. representing a majority of the Company’s total net sales. In addition, a majority of the Company’s supply chain, and its manufacturing and assembly activities, are located outside the U.S. As a result, the Company’s operations and performance depend significantly on global and regional economic conditions.Adverse macroeconomic conditions, including inflation, slower growth or recession, new or increased tariffs, changes to fiscal and monetary policy, tighter credit, higher interest rates, high unemployment and currency fluctuations could materially adversely affect demand for the Company’s products and services. In addition, consumer confidence and spending could be adversely affected in response to financial market volatility, negative financial news, conditions in the real estate and mortgage markets, declines in income or asset values, changes to fuel and other energy costs, labor and healthcare costs and other economic factors. In addition to an adverse impact on demand for the Company’s products, uncertainty about, or a decline in, global or regional economic conditions could have a significant impact on the Company’s suppliers, contract manufacturers, logistics providers, distributors, cellular network carriers and other channel partners. Potential effects include financial instability; inability to obtain credit to finance operations and purchases of the Company’s products; and insolvency.A downturn in the economic environment could also lead to increased credit and collectibility risk on the Company’s trade receivables; the failure of derivative counterparties and other financial institutions; limitations on the Company’s ability to issue new debt; reduced liquidity; and declines in the fair value of the Company’s financial instruments. These and other economic factors could materially adversely affect the Company’s business, results of operations, financial condition and growth.Global markets for the Company’s products and services are highly competitive and subject to rapid technological change, and the Company may be unable to compete effectively in these markets.The Company’s products and services are offered in highly competitive global markets characterized by aggressive price competition and resulting downward pressure on gross margins, frequent introduction of new products and services, short product life cycles, evolving industry standards, continual improvement in product price/performance characteristics, rapid adoption of technological advancements by competitors and price sensitivity on the part of consumers and businesses.The Company’s ability to compete successfully depends heavily on its ability to ensure a continuing and timely introduction of innovative new products, services and technologies to the marketplace. The Company believes it is unique in that it designs and develops nearly the entire solution for its products, including the hardware, operating system, numerous software applications and related services. As a result, the Company must make significant investments in R&D. There can be no assurance that these investments will achieve expected returns, and the Company may not be able to develop and market new products and services successfully.The Company currently holds a significant number of patents and copyrights and has registered, and applied to register, numerous patents, trademarks and service marks. In contrast, many of the Company’s competitors seek to compete primarily through aggressive pricing and very low cost structures, and emulating the Company’s products and infringing on its intellectual property. If the Company is unable to continue to develop and sell innovative new products with attractive margins or if competitors infringe on the Company’s intellectual property, the Company’s ability to maintain a competitive advantage could be adversely affected.Apple Inc. | 2018 Form 10-K | 8The Company has a minority market share in the global smartphone, tablet and personal computer markets. The Company faces substantial competition in these markets from companies that have significant technical, marketing, distribution and other resources, as well as established hardware, software and digital content supplier relationships. In addition, some of the Company’s competitors have broader product lines, lower-priced products and a larger installed base of active devices. Competition has been particularly intense as competitors have aggressively cut prices and lowered product margins. Certain competitors may have the resources, experience or cost structures to provide products at little or no profit or even at a loss.Additionally, the Company faces significant competition as competitors attempt to imitate the Company’s product features and applications within their own products or, alternatively, collaborate with each other to offer solutions that are more competitive than those they currently offer. The Company also expects competition to intensify as competitors attempt to imitate the Company’s approach to providing components seamlessly within their individual offerings or work collaboratively to offer integrated solutions.Some of the markets in which the Company competes, including the market for personal computers, have from time to time experienced little to no growth or contracted. In addition, an increasing number of internet-enabled devices that include software applications and are smaller, simpler and cheaper than traditional personal computers compete with some of the Company’s existing products.The Company’s services also face substantial competition, including from companies that have significant resources and experience and have established service offerings with large customer bases. The Company competes with business models that provide content to users for free. The Company also competes with illegitimate means to obtain third-party digital content and applications.The Company’s financial condition and operating results depend substantially on the Company’s ability to continually improve its products and services in order to maintain their functional and design advantages. There can be no assurance the Company will be able to continue to provide products and services that compete effectively.To remain competitive and stimulate customer demand, the Company must successfully manage frequent introductions and transitions of products and services.Due to the highly volatile and competitive nature of the industries in which the Company competes, the Company must continually introduce new products, services and technologies, enhance existing products and services, effectively stimulate customer demand for new and upgraded products and services and successfully manage the transition to these new and upgraded products and services. The success of new product and service introductions depends on a number of factors including, but not limited to, timely and successful development, market acceptance, the Company’s ability to manage the risks associated with new product production ramp-up issues, the availability of application software for new products, the effective management of purchase commitments and inventory levels in line with anticipated product demand, the availability of products in appropriate quantities and at expected costs to meet anticipated demand and the risk that new products and services may have quality or other defects or deficiencies. Accordingly, the Company cannot determine in advance the ultimate effect of new product and service introductions and transitions.The Company depends on the performance of carriers, wholesalers, retailers and other resellers.The Company distributes its products through cellular network carriers, wholesalers, retailers and resellers, many of whom distribute products from competing manufacturers. The Company also sells its products and third-party products in most of its major markets directly to education, enterprise and government customers and consumers and small and mid-sized businesses through its retail and online stores.Some carriers providing cellular network service for iPhone offer financing, installment payment plans or subsidies for users’ purchases of the device. There is no assurance that such offers will be continued at all or in the same amounts upon renewal of the Company’s agreements with these carriers or in agreements the Company enters into with new carriers.The Company has invested and will continue to invest in programs to enhance reseller sales, including staffing selected resellers’ stores with Company employees and contractors, and improving product placement displays. These programs could require a substantial investment while providing no assurance of return or incremental revenue. The financial condition of these resellers could weaken, these resellers could stop distributing the Company’s products, or uncertainty regarding demand for some or all of the Company’s products could cause resellers to reduce their ordering and marketing of the Company’s products.Apple Inc. | 2018 Form 10-K | 9The Company faces substantial inventory and other asset risk in addition to purchase commitment cancellation risk.The Company records a write-down for product and component inventories that have become obsolete or exceed anticipated demand, or for which cost exceeds net realizable value. The Company also accrues necessary cancellation fee reserves for orders of excess products and components. The Company reviews long-lived assets, including capital assets held at its suppliers’ facilities and inventory prepayments, for impairment whenever events or circumstances indicate the assets may not be recoverable. If the Company determines that an impairment has occurred, it records a write-down equal to the amount by which the carrying value of the asset exceeds its fair value. Although the Company believes its inventory, capital assets, inventory prepayments and other assets and purchase commitments are currently recoverable, no assurance can be given that the Company will not incur write-downs, fees, impairments and other charges given the rapid and unpredictable pace of product obsolescence in the industries in which the Company competes.The Company orders components for its products and builds inventory in advance of product announcements and shipments. Manufacturing purchase obligations cover the Company’s forecasted component and manufacturing requirements, typically for periods up to 150 days. Because the Company’s markets are volatile, competitive and subject to rapid technology and price changes, there is a risk the Company will forecast incorrectly and order or produce excess or insufficient amounts of components or products, or not fully utilize firm purchase commitments.Future operating results depend upon the Company’s ability to obtain components in sufficient quantities on commercially reasonable terms.Because the Company currently obtains certain components from single or limited sources, the Company is subject to significant supply and pricing risks. Many components, including those that are available from multiple sources, are at times subject to industry-wide shortages and significant commodity pricing fluctuations that could materially adversely affect the Company’s financial condition and operating results. While the Company has entered into agreements for the supply of many components, there can be no assurance that the Company will be able to extend or renew these agreements on similar terms, or at all. Component suppliers may suffer from poor financial conditions, which can lead to business failure for the supplier or consolidation within a particular industry, further limiting the Company’s ability to obtain sufficient quantities of components on commercially reasonable terms. The effects of global or regional economic conditions on the Company’s suppliers, described in “Global and regional economic conditions could materially adversely affect the Company’s business, results of operations, financial condition and growth” above, also could affect the Company’s ability to obtain components. Therefore, the Company remains subject to significant risks of supply shortages and price increases that could materially adversely affect its financial condition and operating results.The Company’s new products often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or manufacturing capacity has increased. Continued availability of these components at acceptable prices, or at all, may be affected for any number of reasons, including if suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements. If the Company’s supply of components for a new or existing product were delayed or constrained, or if an outsourcing partner delayed shipments of completed products to the Company, the Company’s financial condition and operating results could be materially adversely affected. The Company’s business and financial performance could also be materially adversely affected depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source.The Company depends on component and product manufacturing and logistical services provided by outsourcing partners, many of which are located outside of the U.S.Substantially all of the Company’s manufacturing is performed in whole or in part by outsourcing partners located primarily in Asia. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. The Company has also outsourced much of its transportation and logistics management. While these arrangements may lower operating costs, they also reduce the Company’s direct control over production and distribution. Such diminished control may have an adverse effect on the quality or quantity of products or services, or the Company’s flexibility to respond to changing conditions. Although arrangements with these partners may contain provisions for warranty expense reimbursement, the Company may remain responsible to the consumer for warranty service in the event of product defects and could experience an unanticipated product defect or warranty liability. While the Company relies on its partners to adhere to its supplier code of conduct, material violations of the supplier code of conduct could occur.The Company relies on single-sourced outsourcing partners in the U.S., Asia and Europe to supply and manufacture many components, and on outsourcing partners primarily located in Asia, for final assembly of substantially all of the Company’s hardware products. Any failure of these partners to perform may have a negative impact on the Company’s cost or supply of components or finished goods. In addition, manufacturing or logistics in these locations or transit to final destinations may be disrupted for a variety of reasons including, but not limited to, natural and man-made disasters, information technology system failures, commercial disputes, military actions, economic, business, labor, environmental, public health or political issues, or international trade disputes.Apple Inc. | 2018 Form 10-K | 10The Company has invested in manufacturing process equipment, much of which is held at certain of its outsourcing partners, and has made prepayments to certain of its suppliers associated with long-term supply agreements. While these arrangements help ensure the supply of components and finished goods, if these outsourcing partners or suppliers experience severe financial problems or other disruptions in their business, such continued supply could be reduced or terminated and the recoverability of manufacturing process equipment or prepayments could be negatively impacted.The Company’s products and services may be affected from time to time by design and manufacturing defects that could materially adversely affect the Company’s business and result in harm to the Company’s reputation.The Company offers complex hardware and software products and services that can be affected by design and manufacturing defects. Sophisticated operating system software and applications, such as those offered by the Company, often have issues that can unexpectedly interfere with the intended operation of hardware or software products. Defects may also exist in components and products the Company purchases from third parties. Component defects could make the Company’s products unsafe and create a risk of environmental or property damage and personal injury. These risks may increase as the Company’s products are introduced into specialized applications, including healthcare. In addition, the Company’s service offerings may have quality issues and from time to time experience outages, service slowdowns or errors. As a result, the Company’s services may not perform as anticipated and may not meet customer expectations. There can be no assurance the Company will be able to detect and fix all issues and defects in the hardware, software and services it offers. Failure to do so could result in widespread technical and performance issues affecting the Company’s products and services. In addition, the Company may be exposed to product liability claims, recalls, product replacements or modifications, write-offs of inventory, property, plant and equipment, and/or intangible assets, and significant warranty and other expenses, including litigation costs and regulatory fines. Quality problems could also adversely affect the experience for users of the Company’s products and services, and result in harm to the Company’s reputation, loss of competitive advantage, poor market acceptance, reduced demand for products and services, delay in new product and services introductions and lost revenue.The Company relies on access to third-party digital content, which may not be available to the Company on commercially reasonable terms or at all.The Company contracts with numerous third parties to offer their digital content to customers. This includes the right to sell currently available music, movies, TV shows and books. The licensing or other distribution arrangements with these third parties are for relatively short terms and do not guarantee the continuation or renewal of these arrangements on reasonable terms, if at all. Some third-party content providers and distributors currently or in the future may offer competing products and services, and could take action to make it more difficult or impossible for the Company to license or otherwise distribute their content in the future. Other content owners, providers or distributors may seek to limit the Company’s access to, or increase the cost of, such content. The Company may be unable to continue to offer a wide variety of content at reasonable prices with acceptable usage rules, or continue to expand its geographic reach. Failure to obtain the right to make third-party digital content available, or to make such content available on commercially reasonable terms, could have a material adverse impact on the Company’s financial condition and operating results.Some third-party digital content providers require the Company to provide digital rights management and other security solutions. If requirements change, the Company may have to develop or license new technology to provide these solutions. There is no assurance the Company will be able to develop or license such solutions at a reasonable cost and in a timely manner. In addition, certain countries have passed or may propose and adopt legislation that would force the Company to license its digital rights management, which could lessen the protection of content and subject it to piracy and also could negatively affect arrangements with the Company’s content providers.The Company’s future performance depends in part on support from third-party software developers.The Company believes decisions by customers to purchase its hardware products depend in part on the availability of third-party software applications and services. There is no assurance that third-party developers will continue to develop and maintain software applications and services for the Company’s products. If third-party software applications and services cease to be developed and maintained for the Company’s products, customers may choose not to buy the Company’s products.The Company believes the availability of third-party software applications and services for its products depends in part on the developers’ perception and analysis of the relative benefits of developing, maintaining and upgrading such software and services for the Company’s products compared to competitors’ platforms, such as Android for smartphones and tablets and Windows for personal computers. This analysis may be based on factors such as the market position of the Company and its products, the anticipated revenue that may be generated, expected future growth of product sales and the costs of developing such applications and services.Apple Inc. | 2018 Form 10-K | 11The Company’s minority market share in the global smartphone, tablet and personal computer markets could make developers less inclined to develop or upgrade software for the Company’s products and more inclined to devote their resources to developing and upgrading software for competitors’ products with larger market share. If developers focus their efforts on these competing platforms, the availability and quality of applications for the Company’s devices may suffer.The Company relies on the continued availability and development of compelling and innovative software applications for its products. The Company’s products and operating systems are subject to rapid technological change, and if third-party developers are unable to or choose not to keep up with this pace of change, third-party applications might not take advantage of these changes to deliver improved customer experiences or might not operate correctly and may result in dissatisfied customers.The Company sells and delivers third-party applications for its products through the App Store, Mac App Store and TV App Store. The Company retains a commission from sales through these platforms. If developers reduce their use of these platforms to distribute their applications and offer in-app purchases to customers, then the volume of sales, and the commission that the Company earns on those sales, would decrease.The Company relies on access to third-party intellectual property, which may not be available to the Company on commercially reasonable terms or at all.Many of the Company’s products include third-party intellectual property, which requires licenses from those third parties. Based on past experience and industry practice, the Company believes such licenses generally can be obtained on reasonable terms. There is, however, no assurance that the necessary licenses can be obtained on acceptable terms or at all. Failure to obtain the right to use third-party intellectual property, or to use such intellectual property on commercially reasonable terms, could preclude the Company from selling certain products or services, or otherwise have a material adverse impact on the Company’s financial condition and operating results.The Company could be impacted by unfavorable results of legal proceedings, such as being found to have infringed on intellectual property rights.The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and have not yet been fully resolved, and new claims may arise in the future. In addition, agreements entered into by the Company sometimes include indemnification provisions which may subject the Company to costs and damages in the event of a claim against an indemnified third party.Claims against the Company based on allegations of patent infringement or other violations of intellectual property rights have generally increased over time and may continue to increase. In particular, the Company has historically faced a significant number of patent claims relating to its cellular-enabled products, and new claims may arise in the future. For example, technology and other patent-holding companies frequently assert their patents and seek royalties and often enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. The Company is vigorously defending infringement actions in courts in a number of U.S. jurisdictions and before the U.S. International Trade Commission, as well as internationally in various countries. The plaintiffs in these actions frequently seek injunctions and substantial damages.Regardless of the merit of particular claims, litigation may be expensive, time consuming, disruptive to the Company’s operations and distracting to management. In recognition of these considerations, the Company may enter into licensing agreements or other arrangements to settle litigation and resolve such disputes. No assurance can be given that such agreements can be obtained on acceptable terms or that litigation will not occur. These agreements may also significantly increase the Company’s operating expenses.Except as described in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 9, “Commitments and Contingencies” under the heading “Contingencies,” in the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims, including matters related to infringement of intellectual property rights.The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company or an indemnified third party in a reporting period for amounts in excess of management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected. Further, such an outcome could result in significant compensatory, punitive or trebled monetary damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief against the Company that could materially adversely affect its financial condition and operating results.While the Company maintains insurance coverage for certain types of claims, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise.Apple Inc. | 2018 Form 10-K | 12The Company is subject to laws and regulations worldwide, changes to which could increase the Company’s costs and individually or in the aggregate adversely affect the Company’s business.The Company is subject to laws and regulations affecting its domestic and international operations in a number of areas. These U.S. and foreign laws and regulations affect the Company’s activities in areas including, but not limited to, labor, advertising, digital content, consumer protection, real estate, billing, e-commerce, promotions, quality of services, telecommunications, mobile communications and media, television, intellectual property ownership and infringement, tax, import and export requirements, anti-corruption, foreign exchange controls and cash repatriation restrictions, data privacy and data localization requirements, anti-competition, environmental, health and safety.By way of example, laws and regulations related to mobile communications and media devices in the many jurisdictions in which the Company operates are extensive and subject to change. Such changes could include, among others, restrictions on the production, manufacture, distribution and use of devices, locking devices to a carrier’s network, or mandating the use of devices on more than one carrier’s network. These devices are also subject to certification and regulation by governmental and standardization bodies, as well as by cellular network carriers for use on their networks. These certification processes are extensive and time consuming, and could result in additional testing requirements, product modifications, or delays in product shipment dates, or could preclude the Company from selling certain products.Compliance with these laws, regulations and similar requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance and doing business. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation, could individually or in the aggregate make the Company’s products and services less attractive to the Company’s customers, delay the introduction of new products in one or more regions, or cause the Company to change or limit its business practices. The Company has implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that the Company’s employees, contractors, or agents will not violate such laws and regulations or the Company’s policies and procedures.The Company’s business is subject to the risks of international operations.The Company derives a majority of its revenue and earnings from its international operations. Compliance with applicable U.S. and foreign laws and regulations, such as import and export requirements, anti-corruption laws, tax laws, foreign exchange controls and cash repatriation restrictions, data privacy and data localization requirements, environmental laws, labor laws and anti-competition regulations, increases the costs of doing business in foreign jurisdictions. Although the Company has implemented policies and procedures to comply with these laws and regulations, a violation by the Company’s employees, contractors or agents could nevertheless occur. In some cases, compliance with the laws and regulations of one country could violate the laws and regulations of another country. Violations of these laws and regulations could materially adversely affect the Company’s brand, international growth efforts and business.The Company also could be significantly affected by other risks associated with international activities including, but not limited to, economic and labor conditions, increased duties, taxes and other costs, political instability and international trade disputes. Gross margins on the Company’s products in foreign countries, and on products that include components obtained from foreign suppliers, could be materially adversely affected by international trade regulations, including duties, tariffs and antidumping penalties. The Company is also exposed to credit and collectibility risk on its trade receivables with customers in certain international markets. There can be no assurance the Company can effectively limit its credit risk and avoid losses.The Company’s retail stores have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties.The Company’s retail stores have required substantial investment in equipment and leasehold improvements, information systems, inventory and personnel. The Company also has entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness. Because of their unique design elements, locations and size, these stores require substantially more investment than the Company’s more typical retail stores. Due to the high cost structure associated with the Company’s retail stores, a decline in sales or the closure or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and severance costs.The Company’s retail operations are subject to many factors that pose risks and uncertainties and could adversely impact the Company’s financial condition and operating results, including macro-economic factors that could have an adverse effect on general retail activity. Other factors include, but are not limited to, the Company’s ability to manage costs associated with retail store construction and operation; manage relationships with existing retail partners; manage costs associated with fluctuations in the value of retail inventory; and obtain and renew leases in quality retail locations at a reasonable cost.Apple Inc. | 2018 Form 10-K | 13Investment in new business strategies and acquisitions could disrupt the Company’s ongoing business and present risks not originally contemplated.The Company has invested, and in the future may invest, in new business strategies or acquisitions. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, greater than expected liabilities and expenses, inadequate return of capital and unidentified issues not discovered in the Company’s due diligence. These new ventures are inherently risky and may not be successful.The Company’s business and reputation may be impacted by information technology system failures or network disruptions.The Company may be subject to information technology system failures or network disruptions caused by natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, or other events or disruptions. System redundancy and other continuity measures may be ineffective or inadequate, and the Company’s business continuity and disaster recovery planning may not be sufficient for all eventualities. Such failures or disruptions could adversely impact the Company’s business by, among other things, preventing access to the Company’s online services, interfering with customer transactions or impeding the manufacturing and shipping of the Company’s products. These events could materially adversely affect the Company’s reputation, financial condition and operating results.There may be losses or unauthorized access to or releases of confidential information, including personally identifiable information, that could subject the Company to significant reputational, financial, legal and operational consequences.The Company’s business requires it to use and store confidential information including, among other things, personally identifiable information (“PII”) with respect to the Company’s customers and employees. The Company devotes significant resources to network and data security, including through the use of encryption and other security measures intended to protect its systems and data. But these measures cannot provide absolute security, and losses or unauthorized access to or releases of confidential information occur and could materially adversely affect the Company’s reputation, financial condition and operating results.The Company’s business also requires it to share confidential information with suppliers and other third parties. Although the Company takes steps to secure confidential information that is provided to third parties, such measures are not always effective and losses or unauthorized access to or releases of confidential information occur and could materially adversely affect the Company’s reputation, financial condition and operating results.For example, the Company may experience a security breach impacting the Company’s information technology systems that compromises the confidentiality, integrity or availability of confidential information. Such an incident could, among other things, impair the Company’s ability to attract and retain customers for its products and services, impact the Company’s stock price, materially damage supplier relationships, and expose the Company to litigation or government investigations, which could result in penalties, fines or judgments against the Company.Although malicious attacks perpetrated to gain access to confidential information, including PII, affect many companies across various industries, the Company is at a relatively greater risk of being targeted because of its high profile and the value of the confidential information it creates, owns, manages, stores and processes.The Company has implemented systems and processes intended to secure its information technology systems and prevent unauthorized access to or loss of sensitive data, including through the use of encryption and authentication technologies. As with all companies, these security measures may not be sufficient for all eventualities and may be vulnerable to hacking, employee error, malfeasance, system error, faulty password management or other irregularities. For example, third parties attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be used to access the Company’s information technology systems. To help protect customers and the Company, the Company monitors its services and systems for unusual activity and may freeze accounts under suspicious circumstances, which, among other things, may result in the delay or loss of customer orders or impede customer access to the Company’s products and services.In addition to the risks relating to general confidential information described above, the Company may also be subject to specific obligations relating to health data and payment card data. Health data may be subject to additional privacy, security and breach notification requirements, and the Company may be subject to audit by governmental authorities regarding the Company’s compliance with these obligations. If the Company fails to adequately comply with these rules and requirements, or if health data is handled in a manner not permitted by law or under the Company’s agreements with healthcare institutions, the Company could be subject to litigation or government investigations, may be liable for associated investigatory expenses, and could also incur significant fees or fines.Apple Inc. | 2018 Form 10-K | 14Under payment card rules and obligations, if cardholder information is potentially compromised, the Company could be liable for associated investigatory expenses and could also incur significant fees or fines if the Company fails to follow payment card industry data security standards. The Company could also experience a significant increase in payment card transaction costs or lose the ability to process payment cards if it fails to follow payment card industry data security standards, which would materially adversely affect the Company’s reputation, financial condition and operating results.While the Company maintains insurance coverage that is intended to address certain aspects of data security risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise.The Company’s business is subject to a variety of U.S. and international laws, rules, policies and other obligations regarding data protection.The Company is subject to federal, state and international laws relating to the collection, use, retention, security and transfer of PII. In many cases, these laws apply not only to third-party transactions, but also may restrict transfers of PII among the Company and its international subsidiaries. Several jurisdictions have passed laws in this area, and other jurisdictions are considering imposing additional restrictions. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing international requirements may cause the Company to incur substantial costs or require the Company to change its business practices. Noncompliance could result in significant penalties or legal liability.The Company makes statements about its use and disclosure of PII through its privacy policy, information provided on its website and press statements. Any failure by the Company to comply with these public statements or with other federal, state or international privacy-related or data protection laws and regulations could result in proceedings against the Company by governmental entities or others. In addition to reputational impacts, penalties could include ongoing audit requirements and significant legal liability.The Company’s success depends largely on the continued service and availability of key personnel.Much of the Company’s future success depends on the continued availability and service of key personnel, including its Chief Executive Officer, executive team and other highly skilled employees. Experienced personnel in the technology industry are in high demand and competition for their talents is intense, especially in Silicon Valley, where most of the Company’s key personnel are located.The Company’s business may be impacted by political events, international trade disputes, war, terrorism, natural disasters, public health issues, industrial accidents and other business interruptions.Political events, international trade disputes, war, terrorism, natural disasters, public health issues, industrial accidents and other business interruptions could harm or disrupt international commerce and the global economy, and could have a material adverse effect on the Company and its customers, suppliers, contract manufacturers, logistics providers, distributors, cellular network carriers and other channel partners.International trade disputes could result in tariffs and other protectionist measures that could adversely affect the Company’s business. Tariffs could increase the cost of the Company’s products and the components and raw materials that go into making them. These increased costs could adversely impact the gross margin that the Company earns on its products. Tariffs could also make the Company’s products more expensive for customers, which could make the Company’s products less competitive and reduce consumer demand. Countries may also adopt other protectionist measures that could limit the Company’s ability to offer its products and services. Political uncertainty surrounding international trade disputes and protectionist measures could also have a negative effect on consumer confidence and spending, which could adversely affect the Company’s business.Many of the Company’s operations and facilities as well as critical business operations of the Company’s suppliers and contract manufacturers are in locations that are prone to earthquakes and other natural disasters. In addition, such operations and facilities are subject to the risk of interruption by fire, power shortages, nuclear power plant accidents and other industrial accidents, terrorist attacks and other hostile acts, labor disputes, public health issues and other events beyond the Company’s control. Global climate change could result in certain types of natural disasters occurring more frequently or with more intense effects. Such events could make it difficult or impossible for the Company to manufacture and deliver products to its customers, create delays and inefficiencies in the Company’s supply and manufacturing chain, and result in slowdowns and outages to the Company’s service offerings. Following an interruption to its business, the Company could require substantial recovery time, experience significant expenditures in order to resume operations, and lose significant revenue. Because the Company relies on single or limited sources for the supply and manufacture of many critical components, a business interruption affecting such sources would exacerbate any negative consequences to the Company.Apple Inc. | 2018 Form 10-K | 15The Company’s operations are also subject to the risks of industrial accidents at its suppliers and contract manufacturers. While the Company’s suppliers are required to maintain safe working environments and operations, an industrial accident could occur and could result in disruption to the Company’s business and harm to the Company’s reputation. Should major public health issues, including pandemics, arise, the Company could be adversely affected by more stringent employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between regions, delays in production ramps of new products and disruptions in the operations of the Company’s suppliers and contract manufacturers.The Company expects its quarterly revenue and operating results to fluctuate.The Company’s profit margins vary across its products, services, geographic segments and distribution channels. For example, gross margins on the Company’s hardware products vary across product lines and can change over time as a result of product transitions, pricing and configuration changes, and component, warranty and other cost fluctuations. The Company’s financial results may be materially adversely impacted as a result of shifts in the mix of products and services that the Company sells; shifts in the geographic, currency or channel mix of the Company’s sales; component cost increases; price competition; or the introduction of new products, including new products with higher cost structures.The Company has typically experienced higher net sales in its first quarter compared to other quarters due in part to seasonal holiday demand. Additionally, new product introductions can significantly impact net sales, product costs and operating expenses. Further, the Company generates a majority of its net sales from a single product and a decline in demand for that product could significantly impact quarterly net sales. The Company could also be subject to unexpected developments, such as lower-than-anticipated demand for the Company’s products, issues with new product introductions, information technology system failures or network disruptions, or failure of one of the Company’s logistics, components supply, or manufacturing partners.The Company’s stock price is subject to volatility.The Company’s stock price has experienced substantial price volatility in the past and may continue to do so in the future. Additionally, the Company, the technology industry and the stock market as a whole have experienced extreme stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to these companies’ operating performance. Price volatility over a given period may cause the average price at which the Company repurchases its own stock to exceed the stock’s price at a given point in time. The Company believes its stock price should reflect expectations of future growth and profitability. The Company also believes its stock price should reflect expectations that its cash dividend will continue at current levels or grow and that its current share repurchase program will be fully consummated. Future dividends are subject to declaration by the Company’s Board of Directors, and the Company’s share repurchase program does not obligate it to acquire any specific number of shares. If the Company fails to meet expectations related to future growth, profitability, dividends, share repurchases or other market expectations, its stock price may decline significantly, which could have a material adverse impact on investor confidence and employee retention.The Company’s financial performance is subject to risks associated with changes in the value of the U.S. dollar relative to local currencies.The Company’s primary exposure to movements in foreign currency exchange rates relates to non–U.S. dollar–denominated sales and operating expenses worldwide. Gross margins on the Company’s products in foreign countries and on products that include components obtained from foreign suppliers could be materially adversely affected by foreign currency exchange rate fluctuations.Weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of the Company’s foreign currency–denominated sales and earnings, and generally leads the Company to raise international pricing, potentially reducing demand for the Company’s products. In some circumstances, for competitive or other reasons, the Company may decide not to raise international pricing to offset the U.S. dollar’s strengthening, which would adversely affect the U.S. dollar value of the gross margins the Company earns on foreign currency–denominated sales.Conversely, a strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to the Company’s foreign currency–denominated sales and earnings, could cause the Company to reduce international pricing and incur losses on its foreign currency derivative instruments, thereby limiting the benefit. Additionally, strengthening of foreign currencies may increase the Company’s cost of product components denominated in those currencies, thus adversely affecting gross margins.The Company uses derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not be effective to offset any, or more than a portion, of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place.Apple Inc. | 2018 Form 10-K | 16The Company is exposed to credit risk and fluctuations in the market values of its investment portfolio.The Company’s investments can be negatively affected by liquidity, credit deterioration, financial results, market and economic conditions, political risk, sovereign risk, interest rate fluctuations or other factors. As a result, the value and liquidity of the Company’s cash, cash equivalents and marketable securities may fluctuate substantially. Therefore, although the Company has not realized any significant losses on its cash, cash equivalents and marketable securities, future fluctuations in their value could result in significant realized losses and could have a material adverse impact on the Company’s financial condition and operating results.The Company is exposed to credit risk on its trade accounts receivable, vendor non-trade receivables and prepayments related to long-term supply agreements, and this risk is heightened during periods when economic conditions worsen.The Company distributes its products through third-party cellular network carriers, wholesalers, retailers and resellers. The Company also sells its products directly to small and mid-sized businesses and education, enterprise and government customers. A substantial majority of the Company’s outstanding trade receivables are not covered by collateral, third-party bank support or financing arrangements, or credit insurance. The Company’s exposure to credit and collectibility risk on its trade receivables is higher in certain international markets and its ability to mitigate such risks may be limited. The Company also has unsecured vendor non-trade receivables resulting from purchases of components by outsourcing partners and other vendors that manufacture sub-assemblies or assemble final products for the Company. In addition, the Company has made prepayments associated with long-term supply agreements to secure supply of inventory components. As of September 29, 2018, a significant portion of the Company’s trade receivables was concentrated within cellular network carriers, and its vendor non-trade receivables and prepayments related to long-term supply agreements were concentrated among a few individual vendors located primarily in Asia. While the Company has procedures to monitor and limit exposure to credit risk on its trade and vendor non-trade receivables, as well as long-term prepayments, there can be no assurance such procedures will effectively limit its credit risk and avoid losses.The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities.The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland.The Company is also subject to the examination of its tax returns and other tax matters by the U.S. Internal Revenue Service (the “IRS”) and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s financial condition, operating results and cash flows could be materially adversely affected.Item 1B.Unresolved Staff CommentsNone.Apple Inc. | 2018 Form 10-K | 17Item 2.PropertiesThe Company’s headquarters are located in Cupertino, California. As of September 29, 2018, the Company owned 16.5 million square feet and leased 24.3 million square feet of building space, primarily in the U.S. Additionally, the Company owned a total of 7,376 acres of land, primarily in the U.S.As of September 29, 2018, the Company owned facilities and land for corporate functions, R&D and data centers at various locations throughout the U.S. Outside the U.S., the Company owned additional facilities and land for various purposes.The Company believes its existing facilities and equipment, which are used by all reportable segments, are in good operating condition and are suitable for the conduct of its business. The Company has invested in internal capacity and strategic relationships with outside manufacturing vendors and continues to make investments in capital equipment as needed to meet anticipated demand for its products and services.Item 3.Legal ProceedingsThe Company is subject to legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. Except as described in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 9, “Commitments and Contingencies” under the heading “Contingencies,” in the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims.The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected. Refer to the risk factor “The Company could be impacted by unfavorable results of legal proceedings, such as being found to have infringed on intellectual property rights” in Part I, Item 1A of this Form 10-K under the heading “Risk Factors.” The Company settled certain matters during the fourth quarter of 2018 that did not individually or in the aggregate have a material impact on the Company’s financial condition or operating results.Item 4.Mine Safety DisclosuresNot applicable.Apple Inc. | 2018 Form 10-K | 18PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesThe Company’s common stock is traded on The Nasdaq Stock Market LLC (“Nasdaq”) under the symbol AAPL.HoldersAs of October 26, 2018, there were 23,712 shareholders of record.Purchases of Equity Securities by the Issuer and Affiliated PurchasersShare repurchase activity during the three months ended September 29, 2018 was as follows (in millions, except number of shares, which are reflected in thousands, and per share amounts):Periods Total Number of Shares Purchased AveragePricePaid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1)July 1, 2018 to August 4, 2018: Open market and privately negotiated purchases 26,859 $192.50 26,859 August 5, 2018 to September 1, 2018: Open market and privately negotiated purchases 36,575 $214.07 36,575 September 2, 2018 to September 29, 2018: Open market and privately negotiated purchases 29,029 $222.07 29,029 Total 92,463 $70,970 (1)On May 1, 2018, the Company announced the Board of Directors had authorized a program to repurchase up to $100 billion of the Company’s common stock, of which $29.0 billion had been utilized as of September 29, 2018. The remaining $71.0 billion in the table represents the amount available to repurchase shares under the authorized repurchase program as of September 29, 2018. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.Apple Inc. | 2018 Form 10-K | 19Company Stock PerformanceThe following graph shows a comparison of cumulative total shareholder return, calculated on a dividend-reinvested basis, for the Company, the S&P 500 Index, the S&P Information Technology Index and the Dow Jones U.S. Technology Supersector Index for the five years ended September 29, 2018. The graph assumes $100 was invested in each of the Company’s common stock, the S&P 500 Index, the S&P Information Technology Index and the Dow Jones U.S. Technology Supersector Index as of the market close on September 27, 2013. Note that historic stock price performance is not necessarily indicative of future stock price performance.*$100 invested on September 27, 2013 in stock or index, including reinvestment of dividends. Data points are the last day of each fiscal year for the Company’s common stock and September 30th for indexes.Copyright© 2018 Standard & Poor’s, a division of S&P Global. All rights reserved.Copyright© 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. September 2013 September 2014 September 2015 September 2016 September 2017 September 2018Apple Inc. $100 $149 $173 $174 $242 $359S&P 500 Index $100 $120 $119 $137 $163 $192S&P Information Technology Index $100 $129 $132 $162 $209 $275Dow Jones U.S. Technology Supersector Index $100 $130 $130 $159 $203 $266Apple Inc. | 2018 Form 10-K | 20Item 6.Selected Financial DataThe information set forth below for the five years ended September 29, 2018, is not necessarily indicative of results of future operations, and should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included in Part II, Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below (in millions, except number of shares, which are reflected in thousands, and per share amounts). 2018 2017 2016 2015 2014Net sales$265,595 $229,234 $215,639 $233,715 $182,795Net income$59,531 $48,351 $45,687 $53,394 $39,510 Earnings per share: Basic$12.01 $9.27 $8.35 $9.28 $6.49Diluted$11.91 $9.21 $8.31 $9.22 $6.45 Cash dividends declared per share$2.72 $2.40 $2.18 $1.98 $1.82 Shares used in computing earnings per share: Basic4,955,377 5,217,242 5,470,820 5,753,421 6,085,572Diluted5,000,109 5,251,692 5,500,281 5,793,069 6,122,663 Total cash, cash equivalents and marketable securities$237,100 $268,895 $237,585 $205,666 $155,239Total assets$365,725 $375,319 $321,686 $290,345 $231,839Non-current portion of term debt$93,735 $97,207 $75,427 $53,329 $28,987Other non-current liabilities$45,180 $40,415 $36,074 $33,427 $24,826Apple Inc. | 2018 Form 10-K | 21Item 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsThis section and other parts of this Annual Report on Form 10-K (“Form 10-K”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8 of this Form 10-K. All information presented herein is based on the Company’s fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company” and “Apple” as used herein refers collectively to Apple Inc. and its wholly-owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.Overview and HighlightsThe Company designs, manufactures and markets mobile communication and media devices and personal computers, and sells a variety of related software, services, accessories and third-party digital content and applications. The Company’s products and services include iPhone, iPad, Mac, Apple Watch, AirPods, Apple TV, HomePod, a portfolio of consumer and professional software applications, iOS, macOS, watchOS and tvOS operating systems, iCloud, Apple Pay and a variety of other accessory, service and support offerings. The Company sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, Book Store and Apple Music (collectively “Digital Content and Services”). The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and resellers. In addition, the Company sells a variety of third-party Apple-compatible products, including application software and various accessories, through its retail and online stores. The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers.Fiscal PeriodThe Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. The Company’s fiscal years 2018 and 2016 spanned 52 weeks each, whereas fiscal year 2017 included 53 weeks. A 14th week was included in the first quarter of 2017, as is done every five or six years, to realign the Company’s fiscal quarters with calendar quarters.Fiscal 2018 HighlightsNet sales increased 16% or $36.4 billion during 2018 compared to 2017, driven by higher net sales of iPhone, Services and Other Products. Net sales increased year-over-year in each of the geographic reportable segments. In May 2018, the Company announced a new capital return program of $100 billion and raised its quarterly dividend from $0.63 to $0.73 per share beginning in May 2018. During 2018, the Company spent $73.1 billion to repurchase shares of its common stock and paid dividends and dividend equivalents of $13.7 billion.Fiscal 2017 HighlightsNet sales increased 6% or $13.6 billion during 2017 compared to 2016, primarily driven by growth in Services, iPhone and Mac. The year-over-year increase in net sales reflected growth in each of the geographic reportable segments, with the exception of Greater China. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on net sales during 2017.In May 2017, the Company announced an increase to its capital return program by raising the total size of the program from $250 billion to $300 billion. This included increasing its share repurchase authorization from $175 billion to $210 billion and raising its quarterly dividend from $0.57 to $0.63 per share beginning in May 2017. During 2017, the Company spent $33.0 billion to repurchase shares of its common stock and paid dividends and dividend equivalents of $12.8 billion. The $210 billion share repurchase program was completed in the third quarter of 2018.The Company issued $24.0 billion of U.S. dollar–denominated term debt, €2.5 billion of euro-denominated term debt and C$2.5 billion of Canadian dollar–denominated term debt during 2017.Apple Inc. | 2018 Form 10-K | 22Sales DataThe following table shows net sales by reportable segment and net sales and unit sales by product for 2018, 2017 and 2016 (dollars in millions and units in thousands): 2018 Change 2017 Change 2016Net Sales by Reportable Segment: Americas$112,093 16 % $96,600 12 % $86,613Europe62,420 14 % 54,938 10 % 49,952Greater China51,942 16 % 44,764 (8)% 48,492Japan21,733 23 % 17,733 5 % 16,928Rest of Asia Pacific17,407 15 % 15,199 11 % 13,654Total net sales$265,595 16 % $229,234 6 % $215,639 Net Sales by Product: iPhone (1)$166,699 18 % $141,319 3 % $136,700iPad (1)18,805 (2)% 19,222 (7)% 20,628Mac (1)25,484 (1)% 25,850 13 % 22,831Services (2)37,190 24 % 29,980 23 % 24,348Other Products (1)(3)17,417 35 % 12,863 16 % 11,132Total net sales$265,595 16 % $229,234 6 % $215,639 Unit Sales by Product: iPhone217,722 — % 216,756 2 % 211,884iPad43,535 — % 43,753 (4)% 45,590Mac18,209 (5)% 19,251 4 % 18,484 (1)Includes deferrals and amortization of related software upgrade rights and non-software services.(2)Includes revenue from Digital Content and Services, AppleCare, Apple Pay, licensing and other services. Services net sales in 2018 included a favorable one-time item of $236 million in connection with the final resolution of various lawsuits. Services net sales in 2017 included a favorable one-time adjustment of $640 million due to a change in estimate based on the availability of additional supporting information.(3)Includes sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and other Apple-branded and third-party accessories.Apple Inc. | 2018 Form 10-K | 23Product PerformanceiPhoneThe following table presents iPhone net sales and unit sales information for 2018, 2017 and 2016 (dollars in millions and units in thousands): 2018 Change 2017 Change 2016Net sales$166,699 18% $141,319 3% $136,700Percentage of total net sales63% 62% 63%Unit sales217,722 —% 216,756 2% 211,884iPhone net sales increased during 2018 compared to 2017 due primarily to a different mix of iPhones resulting in higher average selling prices.iPhone net sales increased during 2017 compared to 2016 due to higher iPhone unit sales and a different mix of iPhones with higher average selling prices. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on iPhone net sales during 2017.iPadThe following table presents iPad net sales and unit sales information for 2018, 2017 and 2016 (dollars in millions and units in thousands): 2018 Change 2017 Change 2016Net sales$18,805 (2)% $19,222 (7)% $20,628Percentage of total net sales7% 8% 10%Unit sales43,535 — % 43,753 (4)% 45,590iPad net sales decreased during 2018 compared to 2017 due primarily to a different mix of iPads resulting in lower average selling prices. The strength in foreign currencies relative to the U.S. dollar had a favorable impact on iPad net sales during 2018.iPad net sales decreased during 2017 compared to 2016 due to lower iPad unit sales and a different mix of iPads with lower average selling prices. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on iPad net sales during 2017.MacThe following table presents Mac net sales and unit sales information for 2018, 2017 and 2016 (dollars in millions and units in thousands): 2018 Change 2017 Change 2016Net sales$25,484 (1)% $25,850 13% $22,831Percentage of total net sales10% 11% 11%Unit sales18,209 (5)% 19,251 4% 18,484Mac net sales decreased during 2018 compared to 2017 due primarily to lower Mac unit sales, partially offset by a different mix of Macs with higher average selling prices. The strength in foreign currencies relative to the U.S. dollar had a favorable impact on Mac net sales during 2018.Mac net sales increased during 2017 compared to 2016 due primarily to a different mix of Macs with higher average selling prices and higher Mac unit sales. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Mac net sales during 2017.Apple Inc. | 2018 Form 10-K | 24ServicesThe following table presents Services net sales information for 2018, 2017 and 2016 (dollars in millions): 2018 Change 2017 Change 2016Net sales$37,190 24% $29,980 23% $24,348Percentage of total net sales14% 13% 11%The year-over-year growth in Services net sales in 2018 was due primarily to licensing, App Store and AppleCare. During 2018, the Company recognized a favorable one-time item of $236 million in connection with the final resolution of various lawsuits.The year-over-year growth in Services net sales in 2017 was due primarily to increases in App Store and licensing sales. Services net sales in 2017 included a favorable one-time adjustment of $640 million due to a change in estimate based on the availability of additional supporting information.Segment Operating PerformanceThe Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and Africa. Greater China includes China, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the reportable segments provide similar hardware and software products and similar services, each one is managed separately to better align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic region. Further information regarding the Company’s reportable segments can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 10, “Segment Information and Geographic Data.”AmericasThe following table presents Americas net sales information for 2018, 2017 and 2016 (dollars in millions): 2018 Change 2017 Change 2016Net sales$112,093 16% $96,600 12% $86,613Percentage of total net sales42% 42% 40%Americas net sales increased during 2018 compared to 2017 due to higher net sales of iPhone, Services and Other Products. Americas net sales increased during 2017 compared to 2016 due primarily to higher net sales of iPhone, Services and Mac.EuropeThe following table presents Europe net sales information for 2018, 2017 and 2016 (dollars in millions): 2018 Change 2017 Change 2016Net sales$62,420 14% $54,938 10% $49,952Percentage of total net sales24% 24% 23%Europe net sales increased during 2018 compared to 2017 due primarily to higher net sales of iPhone and Services. The strength in foreign currencies relative to the U.S. dollar had a favorable impact on Europe net sales during 2018. Europe net sales increased during 2017 compared to 2016 due primarily to higher net sales of iPhone and Services. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Europe net sales during 2017.Apple Inc. | 2018 Form 10-K | 25Greater ChinaThe following table presents Greater China net sales information for 2018, 2017 and 2016 (dollars in millions): 2018 Change 2017 Change 2016Net sales$51,942 16% $44,764 (8)% $48,492Percentage of total net sales20% 20% 22%Greater China net sales increased during 2018 compared to 2017 due primarily to higher net sales of iPhone and Services. The strength in foreign currencies relative to the U.S. dollar had a favorable impact on Greater China net sales during 2018. Greater China net sales decreased during 2017 compared to 2016 due primarily to lower net sales of iPhone, partially offset by higher net sales of Services. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Greater China net sales during 2017.JapanThe following table presents Japan net sales information for 2018, 2017 and 2016 (dollars in millions): 2018 Change 2017 Change 2016Net sales$21,733 23% $17,733 5% $16,928Percentage of total net sales8% 8% 8%Japan net sales increased during 2018 compared to 2017 due primarily to higher net sales of iPhone and Services. The year-over-year increase in Japan net sales in 2017 was due to higher net sales of Services and the strength in the Japanese yen relative to the U.S. dollar.Rest of Asia PacificThe following table presents Rest of Asia Pacific net sales information for 2018, 2017 and 2016 (dollars in millions): 2018 Change 2017 Change 2016Net sales$17,407 15% $15,199 11% $13,654Percentage of total net sales7% 7% 6%Rest of Asia Pacific net sales increased during 2018 compared to 2017 due primarily to higher net sales of iPhone and Services. The strength in foreign currencies relative to the U.S. dollar had a favorable impact on Rest of Asia Pacific net sales during 2018.Rest of Asia Pacific net sales increased during 2017 compared to 2016 due primarily to higher net sales of iPhone, Services and Mac. The strength in foreign currencies relative to the U.S. dollar had a favorable impact on Rest of Asia Pacific net sales during 2017.Gross MarginGross margin for 2018, 2017 and 2016 was as follows (dollars in millions): 2018 2017 2016Net sales$265,595 $229,234 $215,639Cost of sales163,756 141,048 131,376Gross margin$101,839 $88,186 $84,263Gross margin percentage38.3% 38.5% 39.1%Gross margin increased in 2018 compared to 2017 due primarily to a favorable shift in mix of iPhones with higher average selling prices and higher Services net sales, partially offset by higher product cost structures. Gross margin percentage decreased year-over-year due primarily to higher product cost structures, partially offset by higher Services net sales. The strength in foreign currencies relative to the U.S. dollar had a favorable impact on gross margin and gross margin percentage during 2018.Apple Inc. | 2018 Form 10-K | 26Gross margin increased in 2017 compared to 2016 due primarily to a shift in mix to Services and an overall increase in product volumes. Gross margin percentage decreased year-over-year due primarily to higher product costs, partially offset by a favorable shift in mix to Services. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on gross margin and gross margin percentage during 2017.The Company anticipates gross margin percentage during the first quarter of 2019 to be between 38.0% and 38.5%. The foregoing statement regarding the Company’s expected gross margin percentage in the first quarter of 2019 is forward-looking and could differ from actual results. The Company’s future gross margins can be impacted by multiple factors including, but not limited to, those set forth in Part I, Item 1A of this Form 10-K under the heading “Risk Factors” and those described in this paragraph. In general, the Company believes gross margins will be subject to volatility and remain under downward pressure due to a variety of factors, including: continued industry-wide global product pricing pressures and product pricing actions that the Company may take in response to such pressures; increased competition; the Company’s ability to effectively stimulate demand for certain of its products; compressed product life cycles; potential increases in the cost of components and outside manufacturing services; the Company’s ability to manage product quality and warranty costs effectively; shifts in the mix of products and services, or in the geographic, currency or channel mix; fluctuations in exchange rates; and costs associated with the Company’s frequent introductions and transitions of products and services.Operating ExpensesOperating expenses for 2018, 2017 and 2016 were as follows (dollars in millions): 2018 Change 2017 Change 2016Research and development$14,236 23% $11,581 15% $10,045Percentage of total net sales5% 5% 5%Selling, general and administrative$16,705 9% $15,261 8% $14,194Percentage of total net sales6% 7% 7%Total operating expenses$30,941 15% $26,842 11% $24,239Percentage of total net sales12% 12% 11%Research and DevelopmentThe year-over-year growth in R&D expense in 2018 was driven primarily by increases in headcount-related expenses, infrastructure-related costs and material costs to support expanded R&D activities. R&D expense increased during 2017 compared to 2016 due primarily to increases in headcount-related expenses and material costs to support expanded R&D activities. The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace, and to the development of new and updated products and services that are central to the Company’s core business strategy.Selling, General and AdministrativeThe year-over-year growth in selling, general and administrative expense in 2018 was driven primarily by increases in in headcount-related expenses, professional services and infrastructure-related costs. The increase in selling, general and administrative expense in 2017 compared to 2016 was driven primarily by an increase in headcount-related expenses, variable selling expenses and infrastructure-related costs.Other Income/(Expense), NetOther income/(expense), net for 2018, 2017 and 2016 was as follows (dollars in millions): 2018 Change 2017 Change 2016Interest and dividend income$5,686 $5,201 $3,999Interest expense(3,240) (2,323) (1,456)Other expense, net(441) (133) (1,195)Total other income/(expense), net$2,005 (27)% $2,745 104% $1,348The year-over-year decrease in other income/(expense), net during 2018 was due primarily to higher interest expense on debt and the impact of foreign exchange–related items, partially offset by higher interest income. The year-over-year increase in other income/(expense), net during 2017 was due primarily to higher interest income and the favorable impact of foreign exchange–related items, partially offset by higher interest expense on debt. The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 2.16%, 1.99% and 1.73% in 2018, 2017 and 2016, respectively.Apple Inc. | 2018 Form 10-K | 27Provision for Income TaxesProvision for income taxes and effective tax rates for 2018, 2017 and 2016 were as follows (dollars in millions): 2018 2017 2016Provision for income taxes$13,372 $15,738 $15,685Effective tax rate18.3% 24.6% 25.6%On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. By operation of law, the Company applied a blended U.S. statutory federal income tax rate of 24.5% for 2018 (the “2018 blended U.S. tax rate”). The Act also created a new minimum tax on certain future foreign earnings.The Company’s effective tax rate for 2018 was lower than the 2018 blended U.S. tax rate due primarily to the lower tax rate on foreign earnings, partially offset by the remeasurement of deferred tax assets and liabilities as a result of the Act.The Company’s effective tax rates for 2017 and 2016 were lower than the historical statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings, a substantial portion of which was generated by subsidiaries organized in Ireland, for which no U.S. taxes were provided when such earnings were intended to be indefinitely reinvested outside the U.S.The lower effective tax rate in 2018 compared to 2017 was due primarily to the lower 2018 blended U.S. tax rate, partially offset by the remeasurement of deferred tax assets and liabilities as a result of the Act. The lower effective tax rate in 2017 compared to 2016 was due to a different geographic mix of earnings and higher U.S. R&D tax credits.As a result of adopting Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), in 2018, the Company records any excess tax benefits or deficiencies from its equity awards as part of the provision for income taxes. The Company anticipates that these excess tax benefits or deficiencies will have the greatest impact on its effective tax rates in the first and third quarters, as the majority of the Company’s equity awards vest in those quarters.As of September 29, 2018, the Company had deferred tax assets arising from deductible temporary differences, tax losses and tax credits of $6.3 billion and deferred tax liabilities of $426 million. Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to recover the deferred tax assets. The Company will continue to evaluate the realizability of deferred tax assets quarterly by assessing the need for and the amount of a valuation allowance.On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the “State Aid Decision”). The State Aid Decision ordered Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. The recovery amount was calculated to be €13.1 billion, plus interest of €1.2 billion. Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward. The Company believes the State Aid Decision to be without merit and appealed to the General Court of the Court of Justice of the European Union. Ireland has also appealed the State Aid Decision. The Company believes that any incremental Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes, subject to any foreign tax credit limitations in the Act. As of September 29, 2018, the entire recovery amount plus interest was funded into escrow, where it will remain restricted from general use pending conclusion of all appeals.On July 24, 2018, the U.S. Ninth Circuit Court of Appeals reversed the U.S. Tax Court's decision in Altera Corp v. Commissioner, regarding the inclusion of share-based compensation in cost-sharing arrangements with foreign subsidiaries. The reversal was subsequently withdrawn, and the Company believes adequate provision has been made for any adjustments that may result from the final resolution of the case.Recent Accounting PronouncementsHedgingIn August 2017, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 expands component and fair value hedging, specifies the presentation of the effects of hedging instruments, and eliminates the separate measurement and presentation of hedge ineffectiveness. The Company will adopt ASU 2017-12 in its first quarter of 2020 utilizing the modified retrospective transition method and is currently evaluating the impact of adoption on its consolidated financial statements.Apple Inc. | 2018 Form 10-K | 28Income TaxesIn October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company will adopt ASU 2016-16 in its first quarter of 2019 utilizing the modified retrospective transition method. Currently, the Company estimates recording $3 billion of net deferred tax assets on its Condensed Consolidated Balance Sheets upon adoption. However, the ultimate impact of adopting ASU 2016-16 will depend on the balance of intellectual property transferred between its subsidiaries as of the adoption date, as well as the deferred tax impact of the new minimum tax on certain future foreign earnings. The Company will recognize incremental deferred income tax expense thereafter as these net deferred tax assets are utilized.Leases In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The Company will adopt ASU 2016-02 utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of its first quarter of 2020. While the Company is currently evaluating the impact of adopting ASU 2016-02, based on the lease portfolio as of September 29, 2018, the Company anticipates recording lease assets and liabilities of approximately $8.9 billion on its Condensed Consolidated Balance Sheets, with no material impact to its Condensed Consolidated Statements of Operations. However, the ultimate impact of adopting ASU 2016-02 will depend on the Company’s lease portfolio as of the adoption date.Financial Instruments In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The Company will adopt ASU 2016-01 in its first quarter of 2019 utilizing the modified retrospective transition method. Based on the composition of the Company’s investment portfolio, the adoption of ASU 2016-01 is not expected to have a material impact on its consolidated financial statements.In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments. The Company will adopt ASU 2016-13 in its first quarter of 2021 utilizing the modified retrospective transition method. Based on the composition of the Company’s investment portfolio, current market conditions, and historical credit loss activity, the adoption of ASU 2016-13 is not expected to have a material impact on its consolidated financial statements.Revenue Recognition In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers.Subsequently, the FASB issued additional ASUs to clarify the guidance in ASU 2014-09. ASU 2014-09 and its related ASUs are collectively referred to herein as the “new revenue standard.” The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company will adopt the new revenue standard in its first quarter of 2019 utilizing the full retrospective transition method. The new revenue standard will not have a material impact on the amount and timing of revenue recognized in the Company’s consolidated financial statements.Apple Inc. | 2018 Form 10-K | 29Liquidity and Capital ResourcesThe following table presents selected financial information and statistics as of and for the years ended September 29, 2018, September 30, 2017 and September 24, 2016 (in millions): 2018 2017 2016Cash, cash equivalents and marketable securities (1)$237,100 $268,895 $237,585Property, plant and equipment, net$41,304 $33,783 $27,010Commercial paper$11,964 $11,977 $8,105Total term debt$102,519 $103,703 $78,927Working capital$14,473 $27,831 $27,863Cash generated by operating activities (2)$77,434 $64,225 $66,231Cash generated by/(used in) investing activities$16,066 $(46,446) $(45,977)Cash used in financing activities (2)$(87,876) $(17,974) $(20,890)(1)As of September 29, 2018, total cash, cash equivalents and marketable securities included $20.3 billion that was restricted from general use, related to the State Aid Decision and other agreements.(2)Refer to Note 1, “Summary of Significant Accounting Polices” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for more information on the prior period reclassification related to the Company’s adoption of ASU 2016-09.The Company believes its existing balances of cash, cash equivalents and marketable securities will be sufficient to satisfy its working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with its existing operations over the next 12 months. The Company currently anticipates the cash used for future dividends, the share repurchase program and debt repayments will come from its current cash and cash generated from ongoing operating activities.In connection with the State Aid Decision, as of September 29, 2018, the entire recovery amount of €13.1 billion plus interest of €1.2 billion was funded into escrow, where it will remain restricted from general use pending conclusion of all appeals.The Company’s marketable securities investment portfolio is primarily invested in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. During 2018, cash generated by operating activities of $77.4 billion was a result of $59.5 billion of net income and an increase in the net change in operating assets and liabilities of $34.7 billion, partially offset by non-cash adjustments to net income of $16.8 billion. Cash generated by investing activities of $16.1 billion during 2018 consisted primarily of proceeds from maturities and sales of marketable securities, net of purchases, of $32.4 billion, partially offset by cash used to acquire property, plant and equipment of $13.3 billion. Cash used in financing activities of $87.9 billion during 2018 consisted primarily of cash used to repurchase common stock of $72.7 billion, cash used to pay dividends and dividend equivalents of $13.7 billion and cash used to repay term debt of $6.5 billion, partially offset by proceeds from the issuance of term debt, net of $7.0 billion.During 2017, cash generated by operating activities of $64.2 billion was a result of $48.4 billion of net income, non-cash adjustments to net income of $20.8 billion and a decrease in the net change in operating assets and liabilities of $4.9 billion, which included a one-time payment of $1.9 billion related to a multi-year license agreement. Cash used in investing activities of $46.4 billion during 2017 consisted primarily of cash used for purchases of marketable securities, net of sales and maturities, of $33.1 billion and cash used to acquire property, plant and equipment of $12.5 billion. Cash used in financing activities of $18.0 billion during 2017 consisted primarily of cash used to repurchase common stock of $32.9 billion, cash used to pay dividends and dividend equivalents of $12.8 billion and cash used to repay term debt of $3.5 billion, partially offset by proceeds from the issuance of term debt, net of $28.7 billion and proceeds from commercial paper, net of $3.9 billion.Capital AssetsThe Company’s capital expenditures were $16.7 billion during 2018. The Company anticipates utilizing approximately $14.0 billion for capital expenditures during 2019, which includes product tooling and manufacturing process equipment; data centers; corporate facilities and infrastructure, including information systems hardware, software and enhancements; and retail store facilities.DebtThe Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses the net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of September 29, 2018, the Company had $12.0 billion of Commercial Paper outstanding, with a weighted-average interest rate of 2.18% and maturities generally less than nine months.Apple Inc. | 2018 Form 10-K | 30As of September 29, 2018, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $104.2 billion (collectively the “Notes”). During 2018, the Company issued $7.0 billion and repaid $6.5 billion of Notes. The Company has entered, and in the future may enter, into interest rate swaps to manage interest rate risk on the Notes. In addition, the Company has entered, and in the future may enter, into foreign currency swaps to manage foreign currency risk on the Notes.Further information regarding the Company’s debt issuances and related hedging activity can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 2, “Financial Instruments” and Note 5, “Debt.”Capital Return ProgramDuring 2018, the Company repurchased 405.5 million shares of its common stock for $73.1 billion in connection with two separate share repurchase programs. Of the $73.1 billion, $44.0 billion was repurchased under the Company’s previous share repurchase program of up to $210 billion, thereby completing that program. On May 1, 2018, the Company announced the Board of Directors had authorized a new program to repurchase up to $100 billion of the Company’s common stock. The remaining $29.0 billion repurchased during 2018 was in connection with the new share repurchase program. The Company’s new share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.On May 1, 2018, the Company also announced the Board of Directors raised the Company’s quarterly cash dividend from $0.63 to $0.73 per share, beginning with the dividend paid during the third quarter of 2018. The Company intends to increase its dividend on an annual basis, subject to declaration by the Board of Directors. The Company plans to use current cash and cash generated from ongoing operating activities to fund its share repurchase program and quarterly cash dividend.Contractual ObligationsThe following table presents certain payments due by the Company as of September 29, 2018, and excludes amounts already recorded on the Consolidated Balance Sheet, except for term debt and the deemed repatriation tax payable (in millions): Payments Due in 2019 Payments Duein 2020–2021 Payments Duein 2022–2023 Payments DueAfter 2023 TotalTerm debt$8,797 $18,933 $17,978 $58,485 $104,193Operating leases1,298 2,507 1,838 3,984 9,627Manufacturing purchase obligations (1)41,548 2,469 1,183 — 45,200Other purchase obligations3,784 2,482 681 66 7,013Deemed repatriation tax payable— 5,366 5,942 22,281 33,589Total$55,427 $31,757 $27,622 $84,816 $199,622(1)Represents amount expected to be paid under manufacturing-related supplier arrangements, substantially all of which is noncancelable.Operating LeasesThe Company’s retail store and other facility leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options.Manufacturing Purchase ObligationsThe Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company’s products and to perform final assembly and testing of finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers.Other Purchase ObligationsThe Company’s other purchase obligations consist of noncancelable obligations to acquire capital assets, including product tooling and manufacturing process equipment, and noncancelable obligations related to advertising, licensing, R&D, internet and telecommunications services, content creation and other activities.Apple Inc. | 2018 Form 10-K | 31Deemed Repatriation Tax PayableAs of September 29, 2018, a significant portion of the other non-current liabilities in the Company’s Consolidated Balance Sheet consisted of the deemed repatriation tax payable imposed by the Act. The Company plans to pay the deemed repatriation tax payable in installments in accordance with the Act.Other Non-Current LiabilitiesThe Company’s remaining other non-current liabilities primarily consist of items for which the Company is unable to make a reasonably reliable estimate of the timing of payments; therefore, such amounts are not included in the above contractual obligation table.IndemnificationAgreements entered into by the Company may include indemnification provisions which may subject the Company to costs and damages in the event of a claim against an indemnified third party. Except as disclosed in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 9, “Commitments and Contingencies” under the heading “Contingencies,” in the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to indemnification of third parties.The Company offers an iPhone Upgrade Program, which is available to customers who purchase a qualifying iPhone in the U.S., the U.K. and mainland China. The iPhone Upgrade Program provides customers the right to trade in that iPhone for a specified amount when purchasing a new iPhone, provided certain conditions are met. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such right, with subsequent changes to the guarantee liability recognized within revenue.The Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers of the Company, and to advance expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim. While the Company maintains directors and officers liability insurance coverage, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise.Critical Accounting Policies and EstimatesThe preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.Management believes the Company’s critical accounting policies and estimates are those related to revenue recognition, valuation and impairment of marketable securities, inventory valuation, valuation of manufacturing-related assets and estimation of purchase commitment cancellation fees, warranty costs, income taxes, and legal and other contingencies. Management considers these policies critical because they are both important to the portrayal of the Company’s financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. The Company’s senior management has reviewed these critical accounting policies and related disclosures with the Audit and Finance Committee of the Company’s Board of Directors.Apple Inc. | 2018 Form 10-K | 32Revenue RecognitionNet sales consist primarily of revenue from the sale of hardware, software, digital content and applications, accessories, and service and support contracts. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is probable. Product is considered delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit. For payment terms in excess of the Company’s standard payment terms, revenue is recognized as payments become due unless the Company has positive evidence that the sales price is fixed or determinable, such as a successful history of collection, without concession, on comparable arrangements. The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is essential to the functionality of the hardware and third-party digital content sold on the iTunes Store in accordance with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry-specific software accounting guidance for the following types of sales transactions: (i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.For multi-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered software elements that relate to the hardware product’s essential software and/or undelivered non-software services, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of selling price (“ESP”). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis.For sales of iPhone, iPad, Mac and certain other products, the Company has indicated it may from time to time provide future unspecified software upgrades to the device’s essential software and/or non-software services free of charge. Because the Company has neither VSOE nor TPE for the unspecified software upgrade rights or the non-software services, revenue is allocated to these rights and services based on the Company’s ESPs. Revenue allocated to the unspecified software upgrade rights and non-software services based on the Company’s ESPs is deferred and recognized on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided.The Company’s process for determining ESPs involves management’s judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable. Should future facts and circumstances change, the Company’s ESPs and the future rate of related amortization for unspecified software upgrades and non-software services related to future sales of these devices could change. Factors subject to change include the unspecified software upgrade rights and non-software services offered, the estimated value of unspecified software upgrade rights and non-software services and the estimated period unspecified software upgrades and non-software services are expected to be provided.The Company records reductions to revenue for estimated commitments related to price protection and other customer incentive programs. For transactions involving price protection, the Company recognizes revenue net of the estimated amount to be refunded, provided the refund amount can be reasonably and reliably estimated and the other conditions for revenue recognition have been met. The Company’s policy requires that, if refunds cannot be reliably estimated, revenue is not recognized until reliable estimates can be made or the price protection lapses. For the Company’s other customer incentive programs, the estimated cost is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. The Company also records reductions to revenue for expected future product returns based on the Company’s historical experience. Future market conditions and product transitions may require the Company to increase customer incentive programs that could result in reductions to future revenue. Additionally, certain customer incentive programs require management to estimate the number of customers who will actually redeem the incentive. Management’s estimates are based on historical experience and the specific terms and conditions of particular incentive programs. If a greater than estimated proportion of customers redeems such incentives, the Company would be required to record additional reductions to revenue, which would have an adverse impact on the Company’s operating results.Apple Inc. | 2018 Form 10-K | 33Valuation and Impairment of Marketable SecuritiesThe Company’s investments in available-for-sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair value of securities are generally recognized in accumulated other comprehensive income, net of tax, in the Company’s Consolidated Balance Sheets. Changes in the fair value of available-for-sale securities impact the Company’s net income only when such securities are sold or an other-than-temporary impairment is recognized. Realized gains and losses on the sale of securities are determined by specific identification of each security’s cost basis. The Company regularly reviews its investment portfolio to determine if any security is other-than-temporarily impaired, which would require the Company to record an impairment charge in the period any such determination is made. In making this determination, the Company evaluates, among other things, the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer and any changes thereto; and the Company’s intent to sell, or whether it will more likely than not be required to sell, the security before recovery of its amortized cost basis. The Company’s assessment of whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security, which would have an adverse impact on the Company’s financial condition and operating results.Inventory Valuation, Valuation of Manufacturing-Related Assets and Estimation of Purchase Commitment Cancellation FeesThe Company purchases components and builds inventory in advance of product shipments and invests in manufacturing-related assets, including capital assets held at its suppliers’ facilities. In addition, the Company makes prepayments to certain of its suppliers associated with long-term supply agreements to secure supply of inventory. The Company performs a regular review of inventory that considers multiple factors including demand forecasts, product life cycle status, product development plans, current sales levels and component cost trends. If the Company determines inventories of components and products, including third-party products held for resale, have become obsolete or are in excess of anticipated demand or net realizable value, it records a write-down of the inventories. The Company also reviews its manufacturing-related capital assets and inventory prepayments for impairment whenever events or circumstances indicate the carrying amount of such assets may not be recoverable. If the Company determines that an asset is not recoverable, it records an impairment loss equal to the amount by which the carrying value of such an asset exceeds its fair value. Any write-downs and/or impairments the Company may be required to record would adversely affect the Company’s financial condition and operating results.The Company accrues for estimated purchase commitment cancellation fees related to inventory orders that have been canceled or are expected to be canceled. Manufacturing purchase obligations cover the Company’s forecasted component and manufacturing requirements, typically for periods up to 150 days. If there is an abrupt and substantial decline in demand for one or more of the Company’s products, a change in the Company’s product development plans, or an unanticipated change in technological requirements for any of the Company’s products, the Company may be required to record accruals for cancellation fees that would adversely affect its operating results.Warranty CostsThe Company accrues the estimated cost of warranties in the period the related revenue is recognized based on historical and projected warranty claim rates, historical and projected cost per claim and knowledge of specific product failures outside of the Company’s typical experience. The Company regularly reviews these estimates and adjusts the amounts as necessary. If actual product failure rates or repair costs differ from estimates, revisions to the estimated warranty liabilities would be required and could materially affect the Company’s financial condition and operating results.Income TaxesThe Company records a tax provision for the anticipated tax consequences of its reported operating results. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that will be in effect for the years in which those tax assets and liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.Apple Inc. | 2018 Form 10-K | 34Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to recover the Company’s deferred tax assets. In the event that the Company determines all or part of its net deferred tax assets are not realizable in the future, the Company will record an adjustment to the valuation allowance and a corresponding charge to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results.On December 22, 2017, the U.S. enacted the Act, which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings. The impact of the Act increased the Company’s provision for income taxes by $1.5 billion during 2018. This increase was composed of $2.0 billion related to the remeasurement of net deferred tax assets and liabilities and $1.2 billion associated with the deemed repatriation tax, partially offset by a $1.7 billion impact the deemed repatriation tax had on the Company’s unrecognized tax benefits. Certain amounts reported by the Company related to the Act are provisional estimates in accordance with the SEC Staff Accounting Bulletin No. 118. Resolution of the Act’s effects different from the assumptions made by the Company could have a material impact on the Company’s financial condition and operating results.Legal and Other ContingenciesAs discussed in Part I, Item 3 of this Form 10-K under the heading “Legal Proceedings” and in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 9, “Commitments and Contingencies,” the Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable, the determination of which requires significant judgment. Except as described in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 9, “Commitments and Contingencies” under the heading “Contingencies,” in the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims.The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected.Item 7A.Quantitative and Qualitative Disclosures About Market RiskInterest Rate and Foreign Currency Risk ManagementThe Company regularly reviews its foreign exchange forward and option positions and interest rate swaps, both on a stand-alone basis and in conjunction with its underlying foreign currency and interest rate exposures. Given the effective horizons of the Company’s risk management activities and the anticipatory nature of the exposures, there can be no assurance these positions will offset more than a portion of the financial impact resulting from movements in either foreign exchange or interest rates. Further, the recognition of the gains and losses related to these instruments may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Company’s financial condition and operating results.Interest Rate RiskThe Company’s exposure to changes in interest rates relates primarily to the Company’s investment portfolio and outstanding debt. While the Company is exposed to global interest rate fluctuations, the Company’s interest income and expense are most sensitive to fluctuations in U.S. interest rates. Changes in U.S. interest rates affect the interest earned on the Company’s cash, cash equivalents and marketable securities and the fair value of those securities, as well as costs associated with hedging and interest paid on the Company’s debt.The Company’s investment policy and strategy are focused on preservation of capital and supporting the Company’s liquidity requirements. The Company uses a combination of internal and external management to execute its investment strategy and achieve its investment objectives. The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. To provide a meaningful assessment of the interest rate risk associated with the Company’s investment portfolio, the Company performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment portfolio assuming a 100 basis point parallel shift in the yield curve. Based on investment positions as of September 29, 2018 and September 30, 2017, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $4.9 billion and $6.0 billion incremental decline in the fair market value of the portfolio, respectively. Such losses would only be realized if the Company sold the investments prior to maturity.Apple Inc. | 2018 Form 10-K | 35As of September 29, 2018 and September 30, 2017, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate carrying amount of $102.5 billion and $103.7 billion, respectively. The Company has entered, and in the future may enter, into interest rate swaps to manage interest rate risk on its outstanding term debt. Interest rate swaps allow the Company to effectively convert fixed-rate payments into floating-rate payments or floating-rate payments into fixed-rate payments. Gains and losses on term debt are generally offset by the corresponding losses and gains on the related hedging instrument. A 100 basis point increase in market interest rates would cause interest expense on the Company’s debt as of September 29, 2018 and September 30, 2017 to increase by $399 million and $376 million on an annualized basis, respectively.Further details regarding the Company’s debt is provided in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 5, “Debt.”Foreign Currency RiskIn general, the Company is a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, will negatively affect the Company’s net sales and gross margins as expressed in U.S. dollars. There is a risk that the Company will have to adjust local currency product pricing due to competitive pressures when there has been significant volatility in foreign currency exchange rates.The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. In addition, the Company has entered, and in the future may enter, into foreign currency contracts to partially offset the foreign currency exchange gains and losses on its foreign currency–denominated debt issuances. The Company generally hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months. However, the Company may choose not to hedge certain foreign exchange exposures for a variety of reasons including, but not limited to, accounting considerations or the prohibitive economic cost of hedging particular exposures.To provide a meaningful assessment of the foreign currency risk associated with certain of the Company’s foreign currency derivative positions, the Company performed a sensitivity analysis using a value-at-risk (“VAR”) model to assess the potential impact of fluctuations in exchange rates. The VAR model consisted of using a Monte Carlo simulation to generate thousands of random market price paths assuming normal market conditions. The VAR is the maximum expected loss in fair value, for a given confidence interval, to the Company’s foreign currency derivative positions due to adverse movements in rates. The VAR model is not intended to represent actual losses but is used as a risk estimation and management tool. Forecasted transactions, firm commitments and assets and liabilities denominated in foreign currencies were excluded from the model. Based on the results of the model, the Company estimates with 95% confidence, a maximum one-day loss in fair value of $592 million as of September 29, 2018 compared to a maximum one-day loss in fair value of $485 million as of September 30, 2017. Because the Company uses foreign currency instruments for hedging purposes, the losses in fair value incurred on those instruments are generally offset by increases in the fair value of the underlying exposures.Actual future gains and losses associated with the Company’s investment portfolio, debt and derivative positions may differ materially from the sensitivity analyses performed as of September 29, 2018 due to the inherent limitations associated with predicting the timing and amount of changes in interest rates, foreign currency exchange rates and the Company’s actual exposures and positions.Apple Inc. | 2018 Form 10-K | 36Item 8.Financial Statements and Supplementary DataIndex to Consolidated Financial Statements PageConsolidated Statements of Operations for the years ended September 29, 2018, September 30, 2017 and September 24, 2016 38Consolidated Statements of Comprehensive Income for the years ended September 29, 2018, September 30, 2017 and September 24, 2016 39Consolidated Balance Sheets as of September 29, 2018 and September 30, 2017 40Consolidated Statements of Shareholders’ Equity for the years ended September 29, 2018, September 30, 2017 and September 24, 2016 41Consolidated Statements of Cash Flows for the years ended September 29, 2018, September 30, 2017 and September 24, 2016 42Notes to Consolidated Financial Statements 43Selected Quarterly Financial Information (Unaudited) 64Reports of Independent Registered Public Accounting Firm 65All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.Apple Inc. | 2018 Form 10-K | 37Apple Inc.CONSOLIDATED STATEMENTS OF OPERATIONS(In millions, except number of shares which are reflected in thousands and per share amounts) Years ended September 29, 2018 September 30, 2017 September 24, 2016Net sales$265,595 $229,234 $215,639Cost of sales163,756 141,048 131,376Gross margin101,83988,18684,263 Operating expenses: Research and development14,236 11,581 10,045Selling, general and administrative16,705 15,261 14,194Total operating expenses30,94126,84224,239 Operating income70,898 61,344 60,024Other income/(expense), net2,005 2,745 1,348Income before provision for income taxes72,90364,08961,372Provision for income taxes13,372 15,738 15,685Net income$59,531$48,351$45,687 Earnings per share: Basic$12.01 $9.27 $8.35Diluted$11.91 $9.21 $8.31 Shares used in computing earnings per share: Basic4,955,377 5,217,242 5,470,820Diluted5,000,109 5,251,692 5,500,281See accompanying Notes to Consolidated Financial Statements.Apple Inc. | 2018 Form 10-K | 38Apple Inc.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In millions) Years ended September 29, 2018 September 30, 2017 September 24, 2016Net income$59,531 $48,351 $45,687Other comprehensive income/(loss): Change in foreign currency translation, net of tax effects of $(1), $(77) and $8, respectively(525) 224 75 Change in unrealized gains/losses on derivative instruments: Change in fair value of derivatives, net of tax benefit/(expense) of $(149), $(478) and $(7), respectively523 1,315 7Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $(104), $475 and $131, respectively382 (1,477) (741)Total change in unrealized gains/losses on derivative instruments, net of tax905(162)(734) Change in unrealized gains/losses on marketable securities: Change in fair value of marketable securities, net of tax benefit/(expense) of $1,156, $425 and $(863), respectively(3,407) (782) 1,582Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $21, $35 and $(31), respectively1 (64) 56Total change in unrealized gains/losses on marketable securities, net of tax(3,406)(846)1,638 Total other comprehensive income/(loss)(3,026)(784)979Total comprehensive income$56,505$47,567$46,666See accompanying Notes to Consolidated Financial Statements.Apple Inc. | 2018 Form 10-K | 39Apple Inc.CONSOLIDATED BALANCE SHEETS(In millions, except number of shares which are reflected in thousands and par value) September 29, 2018 September 30, 2017ASSETS:Current assets: Cash and cash equivalents$25,913 $20,289Marketable securities40,388 53,892Accounts receivable, net23,186 17,874Inventories3,956 4,855Vendor non-trade receivables25,809 17,799Other current assets12,087 13,936Total current assets131,339 128,645 Non-current assets: Marketable securities170,799 194,714Property, plant and equipment, net41,304 33,783Other non-current assets22,283 18,177Total non-current assets234,386 246,674Total assets$365,725 $375,319 LIABILITIES AND SHAREHOLDERS’ EQUITY:Current liabilities: Accounts payable$55,888 $44,242Other current liabilities32,687 30,551Deferred revenue7,543 7,548Commercial paper11,964 11,977Term debt8,784 6,496Total current liabilities116,866 100,814 Non-current liabilities: Deferred revenue2,797 2,836Term debt93,735 97,207Other non-current liabilities45,180 40,415Total non-current liabilities141,712 140,458Total liabilities258,578 241,272 Commitments and contingencies Shareholders’ equity: Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 4,754,986 and 5,126,201 shares issued and outstanding, respectively40,201 35,867Retained earnings70,400 98,330Accumulated other comprehensive income/(loss)(3,454) (150)Total shareholders’ equity107,147 134,047Total liabilities and shareholders’ equity$365,725$375,319See accompanying Notes to Consolidated Financial Statements.Apple Inc. | 2018 Form 10-K | 40Apple Inc.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(In millions, except number of shares which are reflected in thousands and per share amounts) Common Stock andAdditional Paid-In Capital Retained Earnings Accumulated OtherComprehensive Income/(Loss) Total Shareholders’ Equity Shares Amount Balances as of September 26, 20155,578,753 $27,416 $92,284 $(345) $119,355Net income— — 45,687 — 45,687Other comprehensive income/(loss)— — — 979 979Dividends and dividend equivalents declared at $2.18 per share or RSU— — (12,188) — (12,188)Repurchase of common stock(279,609) — (29,000) — (29,000)Share-based compensation— 4,262 — — 4,262Common stock issued, net of shares withheld for employee taxes37,022 (806) (419) — (1,225)Tax benefit from equity awards, including transfer pricing adjustments— 379 — — 379Balances as of September 24, 20165,336,166 31,251 96,364 634 128,249Net income— — 48,351 — 48,351Other comprehensive income/(loss)— — — (784) (784)Dividends and dividend equivalents declared at $2.40 per share or RSU— — (12,803) — (12,803)Repurchase of common stock(246,496) — (33,001) — (33,001)Share-based compensation— 4,909 — — 4,909Common stock issued, net of shares withheld for employee taxes36,531 (913) (581) — (1,494)Tax benefit from equity awards, including transfer pricing adjustments— 620 — — 620Balances as of September 30, 20175,126,201 35,867 98,330 (150) 134,047Cumulative effect of change in accounting principle— — 278 (278) —Net income— — 59,531 — 59,531Other comprehensive income/(loss)— — — (3,026) (3,026)Dividends and dividend equivalents declared at $2.72 per share or RSU— — (13,735) — (13,735)Repurchase of common stock(405,549) — (73,056) — (73,056)Share-based compensation— 5,443 — — 5,443Common stock issued, net of shares withheld for employee taxes34,334 (1,109) (948) — (2,057)Balances as of September 29, 20184,754,986 $40,201 $70,400 $(3,454) $107,147See accompanying Notes to Consolidated Financial Statements.Apple Inc. | 2018 Form 10-K | 41Apple Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS(In millions) Years ended September 29, 2018 September 30, 2017 September 24, 2016Cash and cash equivalents, beginning of the year$20,289 $20,484 $21,120Operating activities: Net income59,531 48,351 45,687Adjustments to reconcile net income to cash generated by operating activities: Depreciation and amortization10,903 10,157 10,505Share-based compensation expense5,340 4,840 4,210Deferred income tax expense/(benefit)(32,590) 5,966 4,938Other(444) (166) 486Changes in operating assets and liabilities: Accounts receivable, net(5,322) (2,093) 527Inventories828 (2,723) 217Vendor non-trade receivables(8,010) (4,254) (51)Other current and non-current assets(423) (5,318) 1,055Accounts payable9,175 8,966 2,117Deferred revenue(44) (626) (1,554)Other current and non-current liabilities38,490 1,125 (1,906)Cash generated by operating activities77,43464,22566,231Investing activities: Purchases of marketable securities(71,356) (159,486) (142,428)Proceeds from maturities of marketable securities55,881 31,775 21,258Proceeds from sales of marketable securities47,838 94,564 90,536Payments for acquisition of property, plant and equipment(13,313) (12,451) (12,734)Payments made in connection with business acquisitions, net(721) (329) (297)Purchases of non-marketable securities(1,871) (521) (1,388)Proceeds from non-marketable securities353 126 —Other(745) (124) (924)Cash generated by/(used in) investing activities16,066(46,446)(45,977)Financing activities: Proceeds from issuance of common stock669 555 495Payments for taxes related to net share settlement of equity awards(2,527) (1,874) (1,570)Payments for dividends and dividend equivalents(13,712) (12,769) (12,150)Repurchases of common stock(72,738) (32,900) (29,722)Proceeds from issuance of term debt, net6,969 28,662 24,954Repayments of term debt(6,500) (3,500) (2,500)Change in commercial paper, net(37) 3,852 (397)Cash used in financing activities(87,876)(17,974)(20,890)Increase/(Decrease) in cash and cash equivalents5,624 (195) (636)Cash and cash equivalents, end of the year$25,913$20,289$20,484Supplemental cash flow disclosure: Cash paid for income taxes, net$10,417 $11,591 $10,444Cash paid for interest$3,022 $2,092 $1,316See accompanying Notes to Consolidated Financial Statements.Apple Inc. | 2018 Form 10-K | 42Apple Inc.Notes to Consolidated Financial StatementsNote 1 – Summary of Significant Accounting PoliciesApple Inc. and its wholly-owned subsidiaries (collectively “Apple” or the “Company”) designs, manufactures and markets mobile communication and media devices and personal computers, and sells a variety of related software, services, accessories and third-party digital content and applications. The Company’s products and services include iPhone, iPad, Mac, Apple Watch, AirPods, Apple TV, HomePod, a portfolio of consumer and professional software applications, iOS, macOS, watchOS and tvOS operating systems, iCloud, Apple Pay and a variety of other accessory, service and support offerings. The Company sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, Book Store and Apple Music (collectively “Digital Content and Services”). The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and resellers. In addition, the Company sells a variety of third-party Apple-compatible products, including application software and various accessories, through its retail and online stores. The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers.Basis of Presentation and PreparationThe accompanying consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. In the opinion of the Company’s management, the consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. Certain prior period amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation.The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. The Company’s fiscal years 2018 and 2016 spanned 52 weeks each, whereas fiscal year 2017 included 53 weeks. A 14th week was included in the first fiscal quarter of 2017, as is done every five or six years, to realign the Company’s fiscal quarters with calendar quarters. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years.Revenue RecognitionNet sales consist primarily of revenue from the sale of hardware, software, digital content and applications, accessories, and service and support contracts. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is probable. Product is considered delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit. For payment terms in excess of the Company’s standard payment terms, revenue is recognized as payments become due unless the Company has positive evidence that the sales price is fixed or determinable, such as a successful history of collection, without concession, on comparable arrangements. The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is essential to the functionality of the hardware and third-party digital content sold on the iTunes Store in accordance with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry-specific software accounting guidance for the following types of sales transactions: (i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.For the sale of most third-party products, the Company recognizes revenue based on the gross amount billed to customers because the Company establishes its own pricing for such products, retains related inventory risk for physical products, is the primary obligor to the customer and assumes the credit risk for amounts billed to its customers. For third-party applications sold through the App Store and Mac App Store and certain digital content sold through the iTunes Store, the Company does not determine the selling price of the products and is not the primary obligor to the customer. Therefore, the Company accounts for such sales on a net basis by recognizing in net sales only the commission it retains from each sale. The portion of the gross amount billed to customers that is remitted by the Company to third-party app developers and certain digital content owners is not reflected in the Company’s Consolidated Statements of Operations.Apple Inc. | 2018 Form 10-K | 43The Company records deferred revenue when it receives payments in advance of the delivery of products or the performance of services. This includes amounts that have been deferred for unspecified and specified software upgrade rights and non-software services that are attached to hardware and software products. The Company sells gift cards redeemable at its retail and online stores, and also sells gift cards redeemable on iTunes Store, App Store, Mac App Store, TV App Store and Book Store for the purchase of digital content and software. The Company records deferred revenue upon the sale of the card, which is relieved upon redemption of the card by the customer. Revenue from AppleCare service and support contracts is deferred and recognized over the service coverage periods. AppleCare service and support contracts typically include extended phone support, repair services, web-based support resources and diagnostic tools offered under the Company’s standard limited warranty.The Company records reductions to revenue for estimated commitments related to price protection and other customer incentive programs. For transactions involving price protection, the Company recognizes revenue net of the estimated amount to be refunded. For the Company’s other customer incentive programs, the estimated cost of these programs is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. The Company also records reductions to revenue for expected future product returns based on the Company’s historical experience. Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.Revenue Recognition for Arrangements with Multiple DeliverablesFor multi-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered software elements that relate to the hardware product’s essential software, and undelivered non-software services, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of selling price (“ESP”). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. For multi-element arrangements accounted for in accordance with industry-specific software accounting guidance, the Company allocates revenue to all deliverables based on the VSOE of each element, and if VSOE does not exist revenue is recognized when elements lacking VSOE are delivered.For sales of iPhone, iPad, Mac and certain other products, the Company has indicated it may from time to time provide future unspecified software upgrades to the device’s essential software and/or non-software services free of charge. The Company has identified up to three deliverables regularly included in arrangements involving the sale of these devices. The first deliverable, which represents the substantial portion of the allocated sales price, is the hardware and software essential to the functionality of the hardware device delivered at the time of sale. The second deliverable is the embedded right included with qualifying devices to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the product’s essential software. The third deliverable is the non-software services to be provided to qualifying devices. The Company allocates revenue between these deliverables using the relative selling price method. Because the Company has neither VSOE nor TPE for these deliverables, the allocation of revenue is based on the Company’s ESPs. Revenue allocated to the delivered hardware and the related essential software is recognized at the time of sale, provided the other conditions for revenue recognition have been met. Revenue allocated to the embedded unspecified software upgrade rights and the non-software services is deferred and recognized on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided. Cost of sales related to delivered hardware and related essential software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide non-software services are recognized as cost of sales as incurred, and engineering and sales and marketing costs are recognized as operating expenses as incurred.The Company’s process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable including, where applicable, prices charged by the Company and market trends in the pricing for similar offerings, product-specific business objectives, estimated cost to provide the non-software services and the relative ESP of the upgrade rights and non-software services as compared to the total selling price of the product.Shipping CostsAmounts billed to customers related to shipping and handling are classified as revenue, and the Company’s shipping and handling costs are classified as cost of sales.Advertising CostsAdvertising costs are expensed as incurred and included in selling, general and administrative expenses.Apple Inc. | 2018 Form 10-K | 44Share-Based CompensationThe Company generally measures share-based compensation based on the closing price of the Company’s common stock on the date of grant, and recognizes expense on a straight-line basis for its estimate of equity awards that will ultimately vest. Further information regarding share-based compensation can be found in Note 8, “Benefit Plans.”During the first quarter of 2018, the Company adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which modified certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification in the statement of cash flows. Historically, excess tax benefits or deficiencies from the Company’s equity awards were recorded as additional paid-in capital in its Consolidated Balance Sheets and were classified as a financing activity in its Consolidated Statements of Cash Flows. Beginning in 2018, the Company records any excess tax benefits or deficiencies from its equity awards as part of the provision for income taxes in its Consolidated Statements of Operations in the reporting periods in which equity vesting occurs. The Company elected to apply the cash flow classification requirements related to excess tax benefits retrospectively to all periods presented, which resulted in an increase to cash generated by operating activities in the Consolidated Statements of Cash Flows of $627 million and $407 million for 2017 and 2016, respectively.Earnings Per ShareThe following table shows the computation of basic and diluted earnings per share for 2018, 2017 and 2016 (net income in millions and shares in thousands): 2018 2017 2016Numerator: Net income$59,531 $48,351 $45,687 Denominator: Weighted-average basic shares outstanding4,955,377 5,217,242 5,470,820Effect of dilutive securities44,732 34,450 29,461Weighted-average diluted shares5,000,109 5,251,6925,500,281 Basic earnings per share$12.01 $9.27 $8.35Diluted earnings per share$11.91 $9.21 $8.31Cash Equivalents and Marketable SecuritiesAll highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. The Company’s marketable debt and equity securities have been classified and accounted for as available-for-sale. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable equity securities, including mutual funds, are classified as short-term based on the nature of the securities and their availability for use in current operations. The cost of securities sold is determined using the specific identification method.InventoriesInventories are computed using the first-in, first-out method.Property, Plant and EquipmentDepreciation on property, plant and equipment is recognized on a straight-line basis over the estimated useful lives of the assets, which for buildings is the lesser of 30 years or the remaining life of the underlying building; between one and five years for machinery and equipment, including product tooling and manufacturing process equipment; and the shorter of lease term or useful life for leasehold improvements. Capitalized costs related to internal-use software are amortized on a straight-line basis over the estimated useful lives of the assets, which range from three to five years. Depreciation and amortization expense on property and equipment was $9.3 billion, $8.2 billion and $8.3 billion during 2018, 2017 and 2016, respectively.During 2018, non-cash investing activities involving property, plant and equipment resulted in a net increase to accounts payable and other current liabilities of $3.4 billion.Apple Inc. | 2018 Form 10-K | 45Fair Value MeasurementsThe Company’s valuation techniques used to measure the fair value of money market funds and certain marketable equity securities are derived from quoted prices in active markets for identical assets or liabilities. The valuation techniques used to measure the fair value of the Company’s debt instruments and all other financial instruments, which generally have counterparties with high credit ratings, are based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data.Note 2 – Financial InstrumentsCash, Cash Equivalents and Marketable SecuritiesThe following tables show the Company’s cash and available-for-sale securities by significant investment category as of September 29, 2018 and September 30, 2017 (in millions): 2018 AdjustedCost UnrealizedGains UnrealizedLosses FairValue Cash andCashEquivalents Short-TermMarketableSecurities Long-TermMarketableSecuritiesCash$11,575 $— $— $11,575 $11,575 $— $— Level 1 (1): Money market funds8,083 — — 8,083 8,083 — —Mutual funds799 — (116) 683 — 683 —Subtotal8,882 — (116) 8,766 8,083 683 — Level 2 (2): U.S. Treasury securities47,296 — (1,202) 46,094 1,613 7,606 36,875U.S. agency securities4,127 — (48) 4,079 1,732 360 1,987Non-U.S. government securities21,601 49 (250) 21,400 — 3,355 18,045Certificates of deposit and time deposits3,074 — — 3,074 1,247 1,330 497Commercial paper2,573 — — 2,573 1,663 910 —Corporate securities123,001 152 (2,038) 121,115 — 25,162 95,953Municipal securities946 — (12) 934 — 178 756Mortgage- and asset-backed securities18,105 8 (623) 17,490 — 804 16,686Subtotal220,723 209 (4,173) 216,759 6,255 39,705 170,799 Total (3)$241,180 $209 $(4,289) $237,100 $25,913 $40,388 $170,799Apple Inc. | 2018 Form 10-K | 46 2017 AdjustedCost UnrealizedGains UnrealizedLosses FairValue Cash andCashEquivalents Short-TermMarketableSecurities Long-TermMarketableSecuritiesCash$7,982 $— $— $7,982 $7,982 $— $— Level 1 (1): Money market funds6,534 — — 6,534 6,534 — —Mutual funds799 — (88) 711 — 711 —Subtotal7,333 — (88) 7,245 6,534 711 — Level 2 (2): U.S. Treasury securities55,254 58 (230) 55,082 865 17,228 36,989U.S. agency securities5,162 2 (9) 5,155 1,439 2,057 1,659Non-U.S. government securities7,827 210 (37) 8,000 9 123 7,868Certificates of deposit and time deposits5,832 — — 5,832 1,142 3,918 772Commercial paper3,640 — — 3,640 2,146 1,494 —Corporate securities152,724 969 (242) 153,451 172 27,591 125,688Municipal securities961 4 (1) 964 — 114 850Mortgage- and asset-backed securities21,684 35 (175) 21,544 — 656 20,888Subtotal253,084 1,278 (694) 253,668 5,773 53,181 194,714 Total$268,399 $1,278 $(782) $268,895 $20,289 $53,892 $194,714(1)Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.(2)Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.(3)As of September 29, 2018, total cash, cash equivalents and marketable securities included $20.3 billion that was restricted from general use, related to the State Aid Decision (refer to Note 4, “Income Taxes”) and other agreements.The Company may sell certain of its marketable securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation. The maturities of the Company’s long-term marketable securities generally range from one to five years.The following tables show information about the Company’s marketable securities that had been in a continuous unrealized loss position for less than 12 months and for 12 months or greater as of September 29, 2018 and September 30, 2017 (in millions): 2018 Continuous Unrealized Losses Less than 12 Months 12 Months or Greater TotalFair value of marketable securities$126,238 $60,599 $186,837Unrealized losses$(2,400) $(1,889) $(4,289) 2017 Continuous Unrealized Losses Less than 12 Months 12 Months or Greater TotalFair value of marketable securities$101,986 $8,290 $110,276Unrealized losses$(596) $(186) $(782)Apple Inc. | 2018 Form 10-K | 47The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis. As of September 29, 2018, the Company does not consider any of its investments to be other-than-temporarily impaired.Derivative Financial InstrumentsThe Company may use derivatives to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, net investments in certain foreign subsidiaries, and certain existing assets and liabilities. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations or the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates.To protect gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries whose functional currency is the U.S. dollar may hedge a portion of forecasted foreign currency revenue, and subsidiaries whose functional currency is not the U.S. dollar may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries’ functional currencies. The Company may enter into forward contracts, option contracts or other instruments to manage this risk and may designate these instruments as cash flow hedges. The Company generally hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.To protect the net investment in a foreign operation from fluctuations in foreign currency exchange rates, the Company may enter into foreign currency forward and option contracts to offset a portion of the changes in the carrying amounts of these investments due to fluctuations in foreign currency exchange rates. In addition, the Company may use non-derivative financial instruments, such as its foreign currency–denominated debt, as hedges of its net investments in certain foreign subsidiaries. In both of these cases, the Company designates these instruments as net investment hedges.To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, cross-currency swaps or other instruments. These instruments may offset a portion of the foreign currency remeasurement gains or losses, or changes in fair value. The Company may designate these instruments as either cash flow or fair value hedges. As of September 29, 2018, the Company’s hedged term debt– and marketable securities–related foreign currency transactions are expected to be recognized within 24 years.The Company may also enter into non-designated foreign currency contracts to offset a portion of the foreign currency exchange gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies.To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in interest rates, the Company may enter into interest rate swaps, options or other instruments. These instruments may offset a portion of the changes in interest income or expense, or changes in fair value. The Company designates these instruments as either cash flow or fair value hedges. As of September 29, 2018, the Company’s hedged interest rate transactions are expected to be recognized within 9 years.Cash Flow HedgesThe effective portions of cash flow hedges are recorded in accumulated other comprehensive income/(loss) (“AOCI”) until the hedged item is recognized in earnings. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of net sales in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of inventory purchases are recognized as a component of cost of sales in the same period as the related costs are recognized. Deferred gains and losses associated with cash flow hedges of interest income or expense are recognized in other income/(expense), net in the same period as the related income or expense is recognized. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. The ineffective portions and amounts excluded from the effectiveness testing of cash flow hedges are recognized in other income/(expense), net.Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified into other income/(expense), net in the period of de-designation. Any subsequent changes in fair value of such derivative instruments are reflected in other income/(expense), net unless they are re-designated as hedges of other transactions.Apple Inc. | 2018 Form 10-K | 48Net Investment HedgesThe effective portions of net investment hedges are recorded in other comprehensive income/(loss) (“OCI”) as a part of the cumulative translation adjustment. The ineffective portions and amounts excluded from the effectiveness testing of net investment hedges are recognized in other income/(expense), net. For forward exchange contracts designated as net investment hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its definition of effectiveness. Accordingly, any gains or losses related to this forward carry component are recognized in earnings in the current period.Fair Value HedgesGains and losses related to changes in fair value hedges are recognized in earnings along with a corresponding loss or gain related to the change in value of the underlying hedged item in the same line in the Consolidated Statements of Operations.Non-Designated DerivativesDerivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates. As a result, during 2018, the Company recognized a gain of $20 million in net sales, a gain of $85 million in cost of sales and a loss of $198 million in other income/(expense), net. During 2017, the Company recognized a gain of $20 million in net sales, a loss of $40 million in cost of sales and a gain of $606 million in other income/(expense), net.The Company records all derivatives in the Consolidated Balance Sheets at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables show the Company’s derivative instruments at gross fair value as of September 29, 2018 and September 30, 2017 (in millions): 2018 Fair Value ofDerivatives Designatedas Hedge Instruments Fair Value ofDerivatives Not Designatedas Hedge Instruments TotalFair ValueDerivative assets (1): Foreign exchange contracts$1,015 $259 $1,274 Derivative liabilities (2): Foreign exchange contracts$543 $137 $680Interest rate contracts$1,456 $— $1,456 2017 Fair Value ofDerivatives Designatedas Hedge Instruments Fair Value ofDerivatives Not Designatedas Hedge Instruments TotalFair ValueDerivative assets (1): Foreign exchange contracts$1,049 $363 $1,412Interest rate contracts$218 $— $218 Derivative liabilities (2): Foreign exchange contracts$759 $501 $1,260Interest rate contracts$303 $— $303 (1)The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets and other non-current assets in the Consolidated Balance Sheets.(2)The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as other current liabilities and other non-current liabilities in the Consolidated Balance Sheets.The Company classifies cash flows related to derivative financial instruments as operating activities in its Consolidated Statements of Cash Flows.Apple Inc. | 2018 Form 10-K | 49The following table shows the pre-tax gains and losses of the Company’s derivative and non-derivative instruments designated as cash flow, net investment and fair value hedges in OCI and the Consolidated Statements of Operations for 2018, 2017 and 2016 (in millions): 2018 2017 2016Gains/(Losses) recognized in OCI – effective portion: Cash flow hedges: Foreign exchange contracts$682 $1,797 $109Interest rate contracts1 7 (57)Total$683$1,804$52 Net investment hedges: Foreign currency debt$4 $67 $(258) Gains/(Losses) reclassified from AOCI into net income – effective portion: Cash flow hedges: Foreign exchange contracts$(482) $1,958 $885Interest rate contracts1 (2) (11)Total$(481)$1,956$874 Gains/(Losses) on derivative instruments: Fair value hedges: Foreign exchange contracts$(168) $— $—Interest rate contracts(1,363) (810) 341Total$(1,531) $(810) $341 Gains/(Losses) related to hedged items: Fair value hedges: Marketable securities$167 $— $—Fixed-rate debt1,363 810 (341)Total$1,530 $810 $(341)The following table shows the notional amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of September 29, 2018 and September 30, 2017 (in millions): 2018 2017 NotionalAmount Credit RiskAmount NotionalAmount Credit RiskAmountInstruments designated as accounting hedges: Foreign exchange contracts$65,368 $1,015 $56,156 $1,049Interest rate contracts$33,250 $— $33,000 $218 Instruments not designated as accounting hedges: Foreign exchange contracts$63,062 $259 $69,774 $363The notional amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency or interest rates at each respective date. The Company’s exposure to credit loss and market risk will vary over time as currency and interest rates change. Although the table above reflects the notional and credit risk amounts of the Company’s derivative instruments, it does not reflect the gains or losses associated with the exposures and transactions that the instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.Apple Inc. | 2018 Form 10-K | 50The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The Company presents its derivative assets and derivative liabilities at their gross fair values in its Consolidated Balance Sheets. As of September 29, 2018, the net cash collateral posted by the Company related to derivative instruments under its collateral security arrangements was $1.0 billion, which was recorded as other current assets in the Condensed Consolidated Balance Sheet. As of September 30, 2017, the net cash collateral received by the Company related to derivative instruments under its collateral security arrangements was $35 million, which was recorded as other current liabilities in the Consolidated Balance Sheet.Under master netting arrangements with the respective counterparties to the Company’s derivative contracts, the Company is allowed to net settle transactions with a single net amount payable by one party to the other. As of September 29, 2018 and September 30, 2017, the potential effects of these rights of set-off associated with the Company’s derivative contracts, including the effects of collateral, would be a reduction to both derivative assets and derivative liabilities of $2.1 billion and $1.4 billion, respectively, resulting in net derivative assets of $138 million and $32 million, respectively.Accounts ReceivableTrade ReceivablesThe Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, resellers, small and mid-sized businesses and education, enterprise and government customers. The Company generally does not require collateral from its customers; however, the Company will require collateral or third-party credit support in certain instances to limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements.As of September 29, 2018, the Company had one customer that represented 10% or more of total trade receivables, which accounted for 10%. As of September 30, 2017, the Company had two customers that individually represented 10% or more of total trade receivables, each of which accounted for 10%. The Company’s cellular network carriers accounted for 59% of total trade receivables as of both September 29, 2018 and September 30, 2017.Vendor Non-Trade ReceivablesThe Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacture sub-assemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. As of September 29, 2018, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 62% and 12%. As of September 30, 2017, the Company had three vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 42%, 19% and 10%.Note 3 – Consolidated Financial Statement DetailsThe following tables show the Company’s consolidated financial statement details as of September 29, 2018 and September 30, 2017 (in millions):Property, Plant and Equipment, Net 2018 2017Land and buildings$16,216 $13,587Machinery, equipment and internal-use software65,982 54,210Leasehold improvements8,205 7,279Gross property, plant and equipment90,403 75,076Accumulated depreciation and amortization(49,099) (41,293)Total property, plant and equipment, net$41,304 $33,783Apple Inc. | 2018 Form 10-K | 51Other Non-Current Liabilities 2018 2017Long-term taxes payable$33,589 $257Deferred tax liabilities426 31,504Other non-current liabilities11,165 8,654Total other non-current liabilities$45,180 $40,415Other Income/(Expense), NetThe following table shows the detail of other income/(expense), net for 2018, 2017 and 2016 (in millions): 2018 2017 2016Interest and dividend income$5,686 $5,201 $3,999Interest expense(3,240) (2,323) (1,456)Other expense, net(441) (133) (1,195)Total other income/(expense), net$2,005 $2,745 $1,348Note 4 – Income TaxesU.S. Tax Cuts and Jobs ActOn December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings. The impact of the Act increased the Company’s provision for income taxes by $1.5 billion during 2018. This increase was composed of $2.0 billion related to the remeasurement of net deferred tax assets and liabilities and $1.2 billion associated with the deemed repatriation tax, partially offset by a $1.7 billion impact the deemed repatriation tax had on the Company’s unrecognized tax benefits.Deferred Tax BalancesAs a result of the Act, the Company remeasured certain deferred tax assets and liabilities based on the revised rates at which they are expected to reverse, including items for which the related income tax effects were originally recognized in OCI. In addition, the Company elected to record certain deferred tax assets and liabilities related to the new minimum tax on certain future foreign earnings. Of the $2.0 billion recognized related to the remeasurement of net deferred tax assets and liabilities, $1.2 billion is a provisional estimate that incorporates assumptions based upon the most recent interpretations of the Act and may change as the Company continues to analyze the impact of additional implementation guidance. The Company’s provisional estimates are in accordance with the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118.Deemed Repatriation TaxAs of September 30, 2017, the Company had a U.S. deferred tax liability of $36.4 billion for deferred foreign income. During 2018, the Company replaced $36.1 billion of its U.S. deferred tax liability with a deemed repatriation tax payable of $37.3 billion, which was based on the Company’s cumulative post-1986 deferred foreign income. The deemed repatriation tax payable is a provisional estimate that may change as the Company continues to analyze the impact of additional implementation guidance. The Company plans to pay the tax in installments in accordance with the Act.Adoption of ASU No. 2018-02During the second quarter of 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02 allows an entity to elect to reclassify the income tax effects of the Act on items within AOCI to retained earnings. The Company elected to apply the provision of ASU 2018-02 in 2018 with a reclassification of net tax benefits related to cumulative foreign currency translation and unrealized gains/losses on derivative instruments and marketable securities, resulting in a $278 million decrease in AOCI and a corresponding increase in retained earnings in the Consolidated Balance Sheet and Consolidated Statement of Shareholders’ Equity.Apple Inc. | 2018 Form 10-K | 52Provision for Income Taxes and Effective Tax RateThe provision for income taxes for 2018, 2017 and 2016, consisted of the following (in millions): 2018 2017 2016Federal: Current$41,425 $7,842 $7,652Deferred(33,819) 5,980 5,043Total7,60613,82212,695State: Current551 259 990Deferred48 2 (138)Total599261852Foreign: Current3,986 1,671 2,105Deferred1,181 (16) 33Total5,1671,6552,138Provision for income taxes$13,372$15,738$15,685The foreign provision for income taxes is based on foreign pre-tax earnings of $48.0 billion, $44.7 billion and $41.1 billion in 2018, 2017 and 2016, respectively.A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (24.5% in 2018; 35% in 2017 and 2016) to income before provision for income taxes for 2018, 2017 and 2016, is as follows (dollars in millions): 2018 2017 2016Computed expected tax$17,890 $22,431 $21,480State taxes, net of federal effect271 185 553Impacts of the Act1,515 — —Earnings of foreign subsidiaries(5,606) (6,135) (5,582)Domestic production activities deduction(195) (209) (382)Research and development credit, net(560) (678) (371)Other57 144 (13)Provision for income taxes$13,372$15,738$15,685Effective tax rate18.3% 24.6% 25.6%The Company’s income taxes payable have been reduced by the tax benefits from employee stock plan awards. For restricted stock units (“RSUs”), the Company receives an income tax benefit upon the award’s vesting equal to the tax effect of the underlying stock’s fair market value. Prior to adopting ASU 2016-09 in the first quarter of 2018, the Company reflected net excess tax benefits from equity awards as increases to additional paid-in capital, which amounted to $620 million and $379 million in 2017 and 2016, respectively. Refer to Note 1, “Summary of Significant Accounting Policies” for more information.Apple Inc. | 2018 Form 10-K | 53Deferred Tax Assets and LiabilitiesAs of September 29, 2018 and September 30, 2017, the significant components of the Company’s deferred tax assets and liabilities were (in millions): 2018 2017Deferred tax assets: Accrued liabilities and other reserves$3,151 $4,019Basis of capital assets 137 1,230Deferred revenue1,141 1,521Deferred cost sharing— 667Share-based compensation513 703Unrealized losses871 —Other797 834Total deferred tax assets6,610 8,974Deferred tax liabilities: Earnings of foreign subsidiaries275 36,355Other501 207Total deferred tax liabilities776 36,562Net deferred tax assets/(liabilities)$5,834$(27,588)Deferred tax assets and liabilities reflect the effects of tax losses, credits and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.Uncertain Tax PositionsAs of September 29, 2018, the total amount of gross unrecognized tax benefits was $9.7 billion, of which $7.4 billion, if recognized, would impact the Company’s effective tax rate. As of September 30, 2017, the total amount of gross unrecognized tax benefits was $8.4 billion, of which $2.5 billion, if recognized, would have impacted the Company’s effective tax rate.The aggregate changes in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for 2018, 2017 and 2016, is as follows (in millions): 2018 2017 2016Beginning balances$8,407 $7,724 $6,900Increases related to tax positions taken during a prior year2,431 333 1,121Decreases related to tax positions taken during a prior year(2,212) (952) (257)Increases related to tax positions taken during the current year1,824 1,880 1,578Decreases related to settlements with taxing authorities(756) (539) (1,618)Decreases related to expiration of statute of limitations— (39) —Ending balances$9,694 $8,407 $7,724The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of September 29, 2018 and September 30, 2017, the total amount of gross interest and penalties accrued was $1.4 billion and $1.2 billion, respectively. Both the unrecognized tax benefits and the associated interest and penalties that are not expected to result in payment or receipt of cash within one year are classified as other non-current liabilities in the Consolidated Balance Sheets. In connection with tax matters, the Company recognized interest and penalty expense in 2018, 2017 and 2016 of $236 million, $165 million and $295 million, respectively.Apple Inc. | 2018 Form 10-K | 54The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The U.S. Internal Revenue Service (the “IRS”) concluded its review of the years 2013 through 2015 in 2018, and all years prior to 2016 are closed. Tax years subsequent to 2006 in certain major U.S. states and subsequent to 2007 in certain major foreign jurisdictions remain open, and could be subject to examination by the taxing authorities. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease (either by payment, release or a combination of both) in the next 12 months by as much as $800 million.European Commission State Aid DecisionOn August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the “State Aid Decision”). The State Aid Decision ordered Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. The recovery amount was calculated to be €13.1 billion, plus interest of €1.2 billion. Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward. The Company believes the State Aid Decision to be without merit and appealed to the General Court of the Court of Justice of the European Union. Ireland has also appealed the State Aid Decision. The Company believes that any incremental Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes, subject to any foreign tax credit limitations in the Act. As of September 29, 2018, the entire recovery amount plus interest was funded into escrow, where it will remain restricted from general use pending conclusion of all appeals. Refer to Note 2, “Financial Instruments” for more information.Note 5 – DebtCommercial PaperThe Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of both September 29, 2018 and September 30, 2017, the Company had $12.0 billion of Commercial Paper outstanding with maturities generally less than nine months. The weighted-average interest rate of the Company’s Commercial Paper was 2.18% as of September 29, 2018 and 1.20% as of September 30, 2017. The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for 2018, 2017 and 2016 (in millions): 2018 2017 2016Maturities 90 days or less: Proceeds from/(Repayments of) commercial paper, net$1,044 $(1,782) $(869) Maturities greater than 90 days: Proceeds from commercial paper14,555 17,932 3,632Repayments of commercial paper(15,636) (12,298) (3,160)Proceeds from/(Repayments of) commercial paper, net(1,081)5,634 472 Total change in commercial paper, net$(37)$3,852 $(397)Apple Inc. | 2018 Form 10-K | 55Term DebtAs of September 29, 2018, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $104.2 billion (collectively the “Notes”). The Notes are senior unsecured obligations, and interest is payable in arrears, quarterly for the U.S. dollar–denominated and Australian dollar–denominated floating-rate notes, semi-annually for the U.S. dollar–denominated, Australian dollar–denominated, British pound–denominated, Japanese yen–denominated and Canadian dollar–denominated fixed-rate notes and annually for the euro-denominated and Swiss franc–denominated fixed-rate notes. The following table provides a summary of the Company’s term debt as of September 29, 2018 and September 30, 2017: Maturities(calendar year) 2018 2017 Amount(in millions) EffectiveInterest Rate Amount(in millions) EffectiveInterest Rate2013 debt issuance of $17.0 billion: Floating-rate notes — $— —% $2,000 1.10%Fixed-rate 2.400% – 3.850% notes2023–2043 8,500 2.44%–3.91% 12,500 1.08%–3.91% 2014 debt issuance of $12.0 billion: Floating-rate notes 2019 1,000 2.64% 1,000 1.61%Fixed-rate 2.100% – 4.450% notes2019–2044 8,500 2.64%–4.48% 8,500 1.61%–4.48% 2015 debt issuances of $27.3 billion: Floating-rate notes2019–2020 1,507 1.87%–2.64% 1,549 1.56%–1.87%Fixed-rate 0.350% – 4.375% notes2019–2045 24,410 0.28%–4.51% 24,522 0.28%–4.51% 2016 debt issuances of $24.9 billion: Floating-rate notes2019–2021 1,350 2.48%–3.44% 1,350 1.45%–2.44%Fixed-rate 1.100% – 4.650% notes2019–2046 23,059 1.13%–4.78% 23,645 1.13%–4.78% 2017 debt issuances of $28.7 billion: Floating-rate notes2019–2022 3,250 2.41%–2.84% 3,250 1.38%–1.81%Fixed-rate 0.875% – 4.300% notes2019–2047 25,617 1.54%–4.30% 25,705 1.51%–4.30% First quarter 2018 debt issuance of $7.0 billion: Fixed-rate 1.800% notes 2019 1,000 1.83% — —%Fixed-rate 2.000% notes 2020 1,000 2.03% — —%Fixed-rate 2.400% notes 2023 750 2.66% — —%Fixed-rate 2.750% notes 2025 1,500 2.77% — —%Fixed-rate 3.000% notes 2027 1,500 3.05% — —%Fixed-rate 3.750% notes 2047 1,250 3.80% — —%Total term debt 104,193 104,021 Unamortized premium/(discount) and issuance costs, net (218) (225) Hedge accounting fair value adjustments (1,456) (93) Less: Current portion of term debt (8,784) (6,496) Total non-current portion of term debt $93,735 $97,207 To manage interest rate risk on certain of its U.S. dollar–denominated fixed- or floating-rate notes, the Company has entered into interest rate swaps to effectively convert the fixed interest rates to floating interest rates or the floating interest rates to fixed interest rates on a portion of these notes. Additionally, to manage foreign currency risk on certain of its foreign currency–denominated notes, the Company has entered into foreign currency swaps to effectively convert these notes to U.S. dollar–denominated notes.A portion of the Company’s Japanese yen–denominated notes is designated as a hedge of the foreign currency exposure of the Company’s net investment in a foreign operation. As of September 29, 2018 and September 30, 2017, the carrying value of the debt designated as a net investment hedge was $811 million and $1.6 billion, respectively. For further discussion regarding the Company’s use of derivative instruments, refer to the Derivative Financial Instruments section of Note 2, “Financial Instruments.”The effective interest rates for the Notes include the interest on the Notes, amortization of the discount or premium and, if applicable, adjustments related to hedging. The Company recognized $3.0 billion, $2.2 billion and $1.4 billion of interest expense on its term debt for 2018, 2017 and 2016, respectively.Apple Inc. | 2018 Form 10-K | 56The future principal payments for the Company’s Notes as of September 29, 2018 are as follows (in millions):2019$8,797202010,18320218,75020228,58320239,395Thereafter58,485Total term debt$104,193As of September 29, 2018 and September 30, 2017, the fair value of the Company’s Notes, based on Level 2 inputs, was $103.2 billion and $106.1 billion, respectively.Note 6 – Shareholders’ EquityShare Repurchase ProgramDuring 2018, the Company repurchased 405.5 million shares of its common stock for $73.1 billion in connection with two separate share repurchase programs. Of the $73.1 billion, $44.0 billion was repurchased under the Company’s previous share repurchase program of up to $210 billion, thereby completing that program. On May 1, 2018, the Company announced the Board of Directors had authorized a new program to repurchase up to $100 billion of the Company’s common stock. The remaining $29.0 billion repurchased during 2018 was in connection with the new share repurchase program. The Company’s new share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).Note 7 – Comprehensive IncomeThe Company’s OCI consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges and unrealized gains and losses on marketable securities classified as available-for-sale.The following table shows the pre-tax amounts reclassified from AOCI into the Consolidated Statements of Operations, and the associated financial statement line item, for 2018 and 2017 (in millions):Comprehensive Income Components Financial Statement Line Item 2018 2017Unrealized (gains)/losses on derivative instruments: Foreign exchange contracts Net sales $214 $(662) Cost of sales (70) (654) Other income/(expense), net 344 (638)Interest rate contracts Other income/(expense), net (2) 2 486 (1,952)Unrealized (gains)/losses on marketable securities Other income/(expense), net (20) (99)Total amounts reclassified from AOCI $466 $(2,051)Apple Inc. | 2018 Form 10-K | 57The following table shows the changes in AOCI by component for 2018 and 2017 (in millions): Cumulative ForeignCurrency Translation Unrealized Gains/Losseson Derivative Instruments Unrealized Gains/Losseson Marketable Securities TotalBalances as of September 24, 2016$(578) $38 $1,174 $634Other comprehensive income/(loss) before reclassifications301 1,793 (1,207) 887Amounts reclassified from AOCI— (1,952) (99) (2,051)Tax effect(77) (3) 460 380Other comprehensive income/(loss)224(162)(846)(784)Balances as of September 30, 2017(354) (124) 328 (150)Other comprehensive income/(loss) before reclassifications(524) 672 (4,563) (4,415)Amounts reclassified from AOCI— 486 (20) 466Tax effect(1) (253) 1,177 923Other comprehensive income/(loss)(525)905(3,406)(3,026)Cumulative effect of change in accounting principle (1)(176) 29 (131) (278)Balances as of September 29, 2018$(1,055)$810$(3,209)$(3,454)(1)Refer to Note 4, “Income Taxes” for more information on the Company’s adoption of ASU 2018-02 in 2018.Note 8 – Benefit Plans2014 Employee Stock PlanIn the second quarter of 2014, shareholders approved the 2014 Employee Stock Plan (the “2014 Plan”) and terminated the Company’s authority to grant new awards under the 2003 Employee Stock Plan (the “2003 Plan”). The 2014 Plan provides for broad-based equity grants to employees, including executive officers, and permits the granting of RSUs, stock grants, performance-based awards, stock options and stock appreciation rights, as well as cash bonus awards. RSUs granted under the 2014 Plan generally vest over four years, based on continued employment, and are settled upon vesting in shares of the Company’s common stock on a one-for-one basis. Each share issued with respect to RSUs granted under the 2014 Plan reduces the number of shares available for grant under the plan by two shares. RSUs canceled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under the 2014 Plan utilizing a factor of two times the number of RSUs canceled or shares withheld. Currently, all RSUs granted under the 2014 Plan have dividend equivalent rights (“DERs”), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. Upon approval of the 2014 Plan, the Company reserved 385 million shares plus the number of shares remaining that were reserved but not issued under the 2003 Plan. Shares subject to outstanding awards under the 2003 Plan that expire, are canceled or otherwise terminate, or are withheld to satisfy tax withholding obligations with respect to RSUs, will also be available for awards under the 2014 Plan. As of September 29, 2018, approximately 280.2 million shares were reserved for future issuance under the 2014 Plan.Apple Inc. Non-Employee Director Stock PlanThe Apple Inc. Non-Employee Director Stock Plan (the “Director Plan”) is a shareholder-approved plan that (i) permits the Company to grant awards of RSUs or stock options to the Company’s non-employee directors, (ii) provides for automatic initial grants of RSUs upon a non-employee director joining the Board of Directors and automatic annual grants of RSUs at each annual meeting of shareholders, and (iii) permits the Board of Directors to prospectively change the value and relative mixture of stock options and RSUs for the initial and annual award grants and the methodology for determining the number of shares of the Company’s common stock subject to these grants, in each case within the limits set forth in the Director Plan and without further shareholder approval. Each share issued with respect to RSUs granted under the Director Plan reduces the number of shares available for grant under the plan by two shares. The Director Plan expires November 12, 2027. All RSUs granted under the Director Plan are entitled to DERs. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. As of September 29, 2018, approximately 1.1 million shares were reserved for future issuance under the Director Plan.Apple Inc. | 2018 Form 10-K | 58Rule 10b5-1 Trading PlansDuring the three months ended September 29, 2018, Section 16 officers Angela Ahrendts, Timothy D. Cook, Chris Kondo, Luca Maestri, Daniel Riccio, Philip Schiller and Jeffrey Williams had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act. An equity trading plan is a written document that pre-establishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including shares acquired pursuant to the Company’s employee and director equity plans.Employee Stock Purchase PlanThe Employee Stock Purchase Plan (the “Purchase Plan”) is a shareholder-approved plan under which substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee’s payroll deductions under the Purchase Plan are limited to 10% of the employee’s compensation and employees may not purchase more than $25,000 of stock during any calendar year. As of September 29, 2018, approximately 36.5 million shares were reserved for future issuance under the Purchase Plan.401(k) PlanThe Company’s 401(k) Plan is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating U.S. employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution limit ($18,500 for calendar year 2018). The Company matches 50% to 100% of each employee’s contributions, depending on length of service, up to a maximum 6% of the employee’s eligible earnings.Restricted Stock UnitsA summary of the Company’s RSU activity and related information for 2018, 2017 and 2016, is as follows: Number ofRSUs(in thousands) Weighted-AverageGrant Date FairValue Per RSU Aggregate Fair Value(in millions)Balance as of September 26, 2015101,467 $85.77 RSUs granted49,468 $109.28 RSUs vested(46,313) $84.44 RSUs canceled(5,533) $96.48 Balance as of September 24, 201699,089 $97.54 RSUs granted50,112 $121.65 RSUs vested(45,735) $95.48 RSUs canceled(5,895) $106.87 Balance as of September 30, 201797,571 $110.33 RSUs granted45,351 $162.86 RSUs vested(44,718) $111.24 RSUs canceled(6,049) $127.82 Balance as of September 29, 201892,155 $134.60 $20,803The fair value as of the respective vesting dates of RSUs was $7.6 billion, $6.1 billion and $5.1 billion for 2018, 2017 and 2016, respectively. The majority of RSUs that vested in 2018, 2017 and 2016 were net share settled such that the Company withheld shares with value equivalent to the employees’ obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately 16.0 million, 15.4 million and 15.9 million for 2018, 2017 and 2016, respectively, and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to taxing authorities were $2.7 billion, $2.0 billion and $1.7 billion in 2018, 2017 and 2016, respectively, and are reflected as a financing activity within the Consolidated Statements of Cash Flows. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.Apple Inc. | 2018 Form 10-K | 59Share-Based CompensationThe following table shows a summary of the share-based compensation expense included in the Consolidated Statements of Operations for 2018, 2017 and 2016 (in millions): 2018 2017 2016Cost of sales$1,010 $877 $769Research and development2,668 2,299 1,889Selling, general and administrative1,662 1,664 1,552Total share-based compensation expense$5,340$4,840$4,210The income tax benefit related to share-based compensation expense was $1.9 billion, $1.6 billion and $1.4 billion for 2018, 2017 and 2016, respectively. As of September 29, 2018, the total unrecognized compensation cost related to outstanding RSUs and stock options was $9.4 billion, which the Company expects to recognize over a weighted-average period of 2.5 years.Note 9 – Commitments and ContingenciesAccrued Warranty and IndemnificationThe following table shows changes in the Company’s accrued warranties and related costs for 2018, 2017 and 2016 (in millions): 2018 2017 2016Beginning accrued warranty and related costs$3,834 $3,702 $4,780Cost of warranty claims(4,115) (4,322) (4,663)Accruals for product warranty3,973 4,454 3,585Ending accrued warranty and related costs$3,692$3,834$3,702Agreements entered into by the Company may include indemnification provisions which may subject the Company to costs and damages in the event of a claim against an indemnified third party. Except as disclosed under the heading “Contingencies” below, in the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to indemnification of third parties.The Company offers an iPhone Upgrade Program, which is available to customers who purchase a qualifying iPhone in the U.S., the U.K. and mainland China. The iPhone Upgrade Program provides customers the right to trade in that iPhone for a specified amount when purchasing a new iPhone, provided certain conditions are met. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such right, with subsequent changes to the guarantee liability recognized within revenue.The Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers of the Company, and to advance expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim. While the Company maintains directors and officers liability insurance coverage, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise.Concentrations in the Available Sources of Supply of Materials and ProductAlthough most components essential to the Company’s business are generally available from multiple sources, certain components are currently obtained from single or limited sources. In addition, the Company competes for various components with other participants in the markets for mobile communication and media devices and personal computers. Therefore, many components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant commodity pricing fluctuations that could materially adversely affect the Company’s financial condition and operating results.Apple Inc. | 2018 Form 10-K | 60The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or manufacturing capacity has increased. If the Company’s supply of components for a new or existing product were delayed or constrained, or if an outsourcing partner delayed shipments of completed products to the Company, the Company’s financial condition and operating results could be materially adversely affected. The Company’s business and financial performance could also be materially adversely affected depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source. Continued availability of these components at acceptable prices, or at all, may be affected if suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements.The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all. Therefore, the Company remains subject to significant risks of supply shortages and price increases that could materially adversely affect its financial condition and operating results.Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers manufactured in the U.S. and Ireland. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. Certain of these outsourcing partners are single-sourced suppliers of components and manufacturers for many of the Company’s products. Although the Company works closely with its outsourcing partners on manufacturing schedules, the Company’s financial condition and operating results could be materially adversely affected if its outsourcing partners were unable to meet their production commitments. The Company’s manufacturing purchase obligations typically cover its requirements for periods up to 150 days.Other Off–Balance Sheet CommitmentsOperating LeasesThe Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements. The Company does not currently utilize any other off–balance sheet financing arrangements. As of September 29, 2018, the Company’s total future minimum lease payments under noncancelable operating leases were $9.6 billion. The Company’s retail store and other facility leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options.Rent expense under all operating leases, including both cancelable and noncancelable leases, was $1.2 billion, $1.1 billion and $939 million in 2018, 2017 and 2016, respectively. Future minimum lease payments under noncancelable operating leases having initial or remaining terms in excess of one year as of September 29, 2018, are as follows (in millions):2019$1,29820201,28920211,21820221,0382023800Thereafter3,984Total$9,627Unconditional Purchase ObligationsThe Company has entered into certain off–balance sheet arrangements which require the future purchase of goods or services (“unconditional purchase obligations”). The Company’s unconditional purchase obligations primarily consist of payments for supplier arrangements, internet and telecommunication services and intellectual property licenses. Future payments under noncancelable unconditional purchase obligations having a remaining term in excess of one year as of September 29, 2018, are as follows (in millions):2019$2,44720203,20220211,74920221,5962023268Thereafter66Total$9,328Apple Inc. | 2018 Form 10-K | 61ContingenciesThe Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully adjudicated, as further discussed in Part I, Item 1A of this Form 10-K under the heading “Risk Factors” and in Part I, Item 3 of this Form 10-K under the heading “Legal Proceedings.” The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims, except for the following matters:VirnetXVirnetX, Inc. filed two lawsuits in the U.S. District Court for the Eastern District of Texas (the “Eastern Texas District Court”) against the Company alleging that certain Company products infringe four patents (the “VirnetX Patents”) relating to network communications technology (“VirnetX I” and “VirnetX II”). On September 30, 2016, a jury returned a verdict in VirnetX I against the Company and awarded damages of $302 million, which later increased to $440 million in post-trial proceedings. VirnetX I is currently on appeal at the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”). On April 11, 2018, a jury returned a verdict in VirnetX II against the Company and awarded damages of $503 million. VirnetX II is currently on appeal. The Company has challenged the validity of the VirnetX Patents at the U.S. Patent and Trademark Office (the “PTO”). In response, the PTO has declared the VirnetX Patents invalid. VirnetX has appealed, and those appeals are currently pending at the Federal Circuit. The Federal Circuit has consolidated the Company’s appeal of the Eastern Texas District Court VirnetX I verdict and VirnetX’s appeals from the PTO invalidity proceedings. The Company believes it will prevail on the merits.QualcommOn January 20, 2017, the Company filed a lawsuit against Qualcomm Incorporated and affiliated parties (“Qualcomm”) in the U.S. District Court for the Southern District of California seeking, among other things, to enjoin Qualcomm from requiring the Company to pay royalties at the rate demanded by Qualcomm. As the Company does not believe the demanded royalty it has historically paid contract manufacturers for each applicable device is fair, reasonable and non-discriminatory, and believes it to be invalid and/or overstated in other respects as well, no Qualcomm-related royalty payments have been remitted by the Company to its contract manufacturers since the beginning of the second quarter of 2017. The Company believes it will prevail on the merits of the case and has accrued its best estimate for the ultimate resolution of this matter.Note 10 – Segment Information and Geographic DataThe Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and Africa. Greater China includes China, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the reportable segments provide similar hardware and software products and similar services, each one is managed separately to better align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic region. The accounting policies of the various segments are the same as those described in Note 1, “Summary of Significant Accounting Policies.”The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are generally based on the location of customers and sales through the Company’s retail stores located in those geographic locations. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Advertising expenses are generally included in the geographic segment in which the expenditures are incurred. Operating income for each segment excludes other income and expense and certain expenses managed outside the reportable segments. Costs excluded from segment operating income include various corporate expenses such as research and development, corporate marketing expenses, certain share-based compensation expenses, income taxes, various nonrecurring charges and other separately managed general and administrative costs. The Company does not include intercompany transfers between segments for management reporting purposes.Apple Inc. | 2018 Form 10-K | 62The following table shows information by reportable segment for 2018, 2017 and 2016 (in millions): 2018 2017 2016Americas: Net sales$112,093 $96,600 $86,613Operating income$34,864 $30,684 $28,172 Europe: Net sales$62,420 $54,938 $49,952Operating income$19,955 $16,514 $15,348 Greater China: Net sales$51,942 $44,764 $48,492Operating income$19,742 $17,032 $18,835 Japan: Net sales$21,733 $17,733 $16,928Operating income$9,500 $8,097 $7,165 Rest of Asia Pacific: Net sales$17,407 $15,199 $13,654Operating income$6,181 $5,304 $4,781A reconciliation of the Company’s segment operating income to the Consolidated Statements of Operations for 2018, 2017 and 2016 is as follows (in millions): 2018 2017 2016Segment operating income$90,242 $77,631 $74,301Research and development expense(14,236) (11,581) (10,045)Other corporate expenses, net(5,108) (4,706) (4,232)Total operating income$70,898 $61,344 $60,024The U.S. and China were the only countries that accounted for more than 10% of the Company’s net sales in 2018, 2017 and 2016. There was no single customer that accounted for more than 10% of net sales in 2018, 2017 and 2016. Net sales for 2018, 2017 and 2016 and long-lived assets as of September 29, 2018 and September 30, 2017 were as follows (in millions): 2018 2017 2016Net sales: U.S.$98,061 $84,339 $75,667China (1)51,942 44,764 48,492Other countries115,592 100,131 91,480Total net sales$265,595$229,234$215,639 2018 2017Long-lived assets: U.S.$23,963 $20,637China (1)13,268 10,211Other countries4,073 2,935Total long-lived assets$41,304 $33,783(1)China includes Hong Kong and Taiwan. Long-lived assets located in China consist primarily of product tooling and manufacturing process equipment and assets related to retail stores and related infrastructure.Apple Inc. | 2018 Form 10-K | 63Net sales by product for 2018, 2017 and 2016 were as follows (in millions): 2018 2017 2016iPhone (1)$166,699 $141,319 $136,700iPad (1)18,805 19,222 20,628Mac (1)25,484 25,850 22,831Services (2)37,190 29,980 24,348Other Products (1)(3)17,417 12,863 11,132Total net sales$265,595$229,234$215,639 (1)Includes deferrals and amortization of related software upgrade rights and non-software services.(2)Includes revenue from Digital Content and Services, AppleCare, Apple Pay, licensing and other services. Services net sales in 2018 included a favorable one-time item of $236 million in connection with the final resolution of various lawsuits. Services net sales in 2017 included a favorable one-time adjustment of $640 million due to a change in estimate based on the availability of additional supporting information.(3)Includes sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and other Apple-branded and third-party accessories.Note 11 – Selected Quarterly Financial Information (Unaudited)The following tables show a summary of the Company’s quarterly financial information for each of the four quarters of 2018 and 2017 (in millions, except per share amounts): Fourth Quarter Third Quarter Second Quarter First Quarter2018: Net sales$62,900 $53,265 $61,137 $88,293Gross margin$24,084 $20,421 $23,422 $33,912Net income$14,125 $11,519 $13,822 $20,065 Earnings per share (1): Basic$2.94 $2.36 $2.75 $3.92Diluted$2.91 $2.34 $2.73 $3.89 Fourth Quarter Third Quarter Second Quarter First Quarter2017: Net sales$52,579 $45,408 $52,896 $78,351Gross margin$19,931 $17,488 $20,591 $30,176Net income$10,714 $8,717 $11,029 $17,891 Earnings per share (1): Basic$2.08 $1.68 $2.11 $3.38Diluted$2.07 $1.67 $2.10 $3.36 (1)Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.Apple Inc. | 2018 Form 10-K | 64Report of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of Apple Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Apple Inc. as of September 29, 2018 and September 30, 2017, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 29, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Apple Inc. at September 29, 2018 and September 30, 2017, and the results of its operations and its cash flows for each of the three years in the period ended September 29, 2018, in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), Apple Inc.’s internal control over financial reporting as of September 29, 2018, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 5, 2018 expressed an unqualified opinion thereon.Basis for OpinionThese financial statements are the responsibility of Apple Inc.’s management. Our responsibility is to express an opinion on Apple Inc.’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion./s/ Ernst & Young LLPWe have served as Apple Inc.’s auditor since 2009.San Jose, CaliforniaNovember 5, 2018Apple Inc. | 2018 Form 10-K | 65Report of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of Apple Inc.Opinion on Internal Control over Financial ReportingWe have audited Apple Inc.’s internal control over financial reporting as of September 29, 2018, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, Apple Inc. maintained, in all material respects, effective internal control over financial reporting as of September 29, 2018, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the consolidated balance sheets of Apple Inc. as of September 29, 2018 and September 30, 2017, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 29, 2018, and the related notes and our report dated November 5, 2018 expressed an unqualified opinion thereon.Basis for OpinionApple Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Apple Inc.’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ Ernst & Young LLPSan Jose, CaliforniaNovember 5, 2018Apple Inc. | 2018 Form 10-K | 66Item 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A.Controls and ProceduresEvaluation of Disclosure Controls and ProceduresBased on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of September 29, 2018 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.Inherent Limitations Over Internal ControlsThe Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). The Company’s internal control over financial reporting includes those policies and procedures that: (i)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;(ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and(iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.Management’s Annual Report on Internal Control Over Financial ReportingThe Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the Company’s assessment, management has concluded that its internal control over financial reporting was effective as of September 29, 2018 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the Company’s internal control over financial reporting, which appears in Part II, Item 8 of this Form 10-K.Changes in Internal Control Over Financial ReportingThere were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2018, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.Item 9B.Other InformationNone.Apple Inc. | 2018 Form 10-K | 67PART IIIItem 10.Directors, Executive Officers and Corporate GovernanceThe information required by this Item is set forth under the headings “Corporate Governance,” “Directors,” “Executive Officers” and “Other Information—Security Ownership of Certain Beneficial Owners and Management” in the Company’s 2019 Proxy Statement to be filed with the SEC within 120 days after September 29, 2018 in connection with the solicitation of proxies for the Company’s 2019 annual meeting of shareholders and is incorporated herein by reference.The Company has a code of ethics, “Business Conduct: The way we do business worldwide,” that applies to all employees, including the Company’s principal executive officer, principal financial officer, and principal accounting officer, as well as to the members of the Board of Directors of the Company. The code is available at investor.apple.com/investor-relations/leadership-and-governance/. The Company intends to disclose any changes in, or waivers from, this code by posting such information on the same website or by filing a Form 8-K, in each case to the extent such disclosure is required by rules of the SEC or Nasdaq.Item 11.Executive CompensationThe information required by this Item is set forth under the heading “Executive Compensation,” under the subheadings “Board Oversight of Risk Management” and “Compensation Committee Interlocks and Insider Participation” under the heading “Corporate Governance” and under the subheadings “Compensation of Directors” and “Director Compensation—2018” under the heading “Directors” in the Company’s 2019 Proxy Statement to be filed with the SEC within 120 days after September 29, 2018 and is incorporated herein by reference.Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this Item is set forth under the headings “Other Information—Security Ownership of Certain Beneficial Owners and Management” and “Other Information—Equity Compensation Plan Information” in the Company’s 2019 Proxy Statement to be filed with the SEC within 120 days after September 29, 2018 and is incorporated herein by reference.Item 13.Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item is set forth under the subheadings “Board Committees”, “Review, Approval, or Ratification of Transactions with Related Persons” and “Transactions with Related Persons” under the heading “Corporate Governance” in the Company’s 2019 Proxy Statement to be filed with the SEC within 120 days after September 29, 2018 and is incorporated herein by reference.Item 14.Principal Accounting Fees and ServicesThe information required by this Item is set forth under the subheadings “Fees Paid to Auditors” and “Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services Performed by the Independent Registered Public Accounting Firm” under the proposal “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Company’s 2019 Proxy Statement to be filed with the SEC within 120 days after September 29, 2018 and is incorporated herein by reference.Apple Inc. | 2018 Form 10-K | 68PART IVItem 15.Exhibits, Financial Statement Schedules(a)Documents filed as part of this report(1)All financial statementsIndex to Consolidated Financial Statements PageConsolidated Statements of Operations for the years ended September 29, 2018, September 30, 2017 and September 24, 2016 38Consolidated Statements of Comprehensive Income for the years ended September 29, 2018, September 30, 2017 and September 24, 2016 39Consolidated Balance Sheets as of September 29, 2018 and September 30, 2017 40Consolidated Statements of Shareholders’ Equity for the years ended September 29, 2018, September 30, 2017 and September 24, 2016 41Consolidated Statements of Cash Flows for the years ended September 29, 2018, September 30, 2017 and September 24, 2016 42Notes to Consolidated Financial Statements 43Selected Quarterly Financial Information (Unaudited) 64Reports of Independent Registered Public Accounting Firm 65(2)Financial Statement SchedulesAll financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto included in this Form 10-K.(3)Exhibits required by Item 601 of Regulation S-K (1) Incorporated by ReferenceExhibit Number Exhibit Description Form Exhibit Filing Date/Period End Date3.1 Restated Articles of Incorporation of the Registrant effective as of June 6, 2014. 8-K 3.1 6/6/143.2 Amended and Restated Bylaws of the Registrant effective as of December 13, 2016. 8-K 3.2 12/15/164.1 Form of Common Stock Certificate of the Registrant. 10-Q 4.1 12/30/064.2 Indenture, dated as of April 29, 2013, between the Registrant and The Bank of New York Mellon Trust Company, N.A., as Trustee. S-3 4.1 4/29/134.3 Officer’s Certificate of the Registrant, dated as of May 3, 2013, including forms of global notes representing the Floating Rate Notes due 2016, Floating Rate Notes due 2018, 0.45% Notes due 2016, 1.00% Notes due 2018, 2.40% Notes due 2023 and 3.85% Notes due 2043. 8-K 4.1 5/3/134.4 Officer’s Certificate of the Registrant, dated as of May 6, 2014, including forms of global notes representing the Floating Rate Notes due 2017, Floating Rate Notes due 2019, 1.05% Notes due 2017, 2.10% Notes due 2019, 2.85% Notes due 2021, 3.45% Notes due 2024 and 4.45% Notes due 2044. 8-K 4.1 5/6/144.5 Officer’s Certificate of the Registrant, dated as of November 10, 2014, including forms of global notes representing the 1.000% Notes due 2022 and 1.625% Notes due 2026. 8-K 4.1 11/10/144.6 Officer’s Certificate of the Registrant, dated as of February 9, 2015, including forms of global notes representing the Floating Rate Notes due 2020, 1.55% Notes due 2020, 2.15% Notes due 2022, 2.50% Notes due 2025 and 3.45% Notes due 2045. 8-K 4.1 2/9/154.7 Officer’s Certificate of the Registrant, dated as of May 13, 2015, including forms of global notes representing the Floating Rate Notes due 2017, Floating Rate Notes due 2020, 0.900% Notes due 2017, 2.000% Notes due 2020, 2.700% Notes due 2022, 3.200% Notes due 2025, and 4.375% Notes due 2045. 8-K 4.1 5/13/154.8 Officer’s Certificate of the Registrant, dated as of June 10, 2015, including forms of global notes representing the 0.350% Notes due 2020. 8-K 4.1 6/10/15Apple Inc. | 2018 Form 10-K | 69 Incorporated by ReferenceExhibit Number Exhibit Description Form Exhibit Filing Date/Period End Date4.9 Officer’s Certificate of the Registrant, dated as of July 31, 2015, including forms of global notes representing the 3.05% Notes due 2029 and 3.60% Notes due 2042. 8-K 4.1 7/31/154.10 Officer’s Certificate of the Registrant, dated as of September 17, 2015, including forms of global notes representing the 1.375% Notes due 2024 and 2.000% Notes due 2027. 8-K 4.1 9/17/154.11 Officer’s Certificate of the Registrant, dated as of February 23, 2016, including forms of global notes representing the Floating Rate Notes due 2019, Floating Rate Notes due 2021, 1.300% Notes due 2018, 1.700% Notes due 2019, 2.250% Notes due 2021, 2.850% Notes due 2023, 3.250% Notes due 2026, 4.500% Notes due 2036 and 4.650% Notes due 2046. 8-K 4.1 2/23/164.12 Supplement No. 1 to the Officer’s Certificate of the Registrant, dated as of March 24, 2016. 8-K 4.1 3/24/164.13 Officer’s Certificate of the Registrant, dated as of June 22, 2016, including form of global note representing 4.15% Notes due 2046. 8-K 4.1 6/22/164.14 Officer’s Certificate of the Registrant, dated as of August 4, 2016, including forms of global notes representing the Floating Rate Notes due 2019, 1.100% Notes due 2019, 1.550% Notes due 2021, 2.450% Notes due 2026 and 3.850% Notes due 2046. 8-K 4.1 8/4/164.15 Officer’s Certificate of the Registrant, dated as of February 9, 2017, including forms of global notes representing the Floating Rate Notes due 2019, Floating Rate Notes due 2020, Floating Rate Notes due 2022, 1.550% Notes due 2019, 1.900% Notes due 2020, 2.500% Notes due 2022, 3.000% Notes due 2024, 3.350% Notes due 2027 and 4.250% Notes due 2047. 8-K 4.1 2/9/174.16 Officer’s Certificate of the Registrant, dated as of March 3, 2017, including form of global note representing 4.300% Notes due 2047. 8-K 4.1 3/3/174.17 Officer’s Certificate of the Registrant, dated as of May 11, 2017, including forms of global notes representing the Floating Rate Notes due 2020, Floating Rate Notes due 2022, 1.800% Notes due 2020, 2.300% Notes due 2022, 2.850% Notes due 2024 and 3.200% Notes due 2027. 8-K 4.1 5/11/174.18 Officer’s Certificate of the Registrant, dated as of May 24, 2017, including forms of global notes representing the 0.875% Notes due 2025 and 1.375% Notes due 2029. 8-K 4.1 5/24/174.19 Officer’s Certificate of the Registrant, dated as of June 20, 2017, including form of global note representing the 3.000% Notes due 2027. 8-K 4.1 6/20/174.20 Officer’s Certificate of the Registrant, dated as of August 18, 2017, including form of global note representing the 2.513% Notes due 2024. 8-K 4.1 8/18/174.21 Officer’s Certificate of the Registrant, dated as of September 12, 2017, including forms of global notes representing the 1.500% Notes due 2019, 2.100% Notes due 2022, 2.900% Notes due 2027 and 3.750% Notes due 2047. 8-K 4.1 9/12/174.22 Officer’s Certificate of the Registrant, dated as of November 13, 2017, including forms of global notes representing the 1.800% Notes due 2019, 2.000% Notes due 2020, 2.400% Notes due 2023, 2.750% Notes due 2025, 3.000% Notes due 2027 and 3.750% Notes due 2047. 8-K 4.1 11/13/174.23* Apple Inc. Deferred Compensation Plan. S-8 4.1 8/23/1810.1* Employee Stock Purchase Plan, as amended and restated as of March 10, 2015. 8-K 10.1 3/13/1510.2* Form of Indemnification Agreement between the Registrant and each director and executive officer of the Registrant. 10-Q 10.2 6/27/0910.3* Apple Inc. Non-Employee Director Stock Plan, as amended and restated as of February 13, 2018. 8-K 10.1 2/14/1810.4* 2003 Employee Stock Plan, as amended through February 25, 2010. 8-K 10.1 3/1/1010.5* Form of Restricted Stock Unit Award Agreement under 2003 Employee Stock Plan effective as of November 16, 2010. 10-Q 10.10 12/25/1010.6* 2014 Employee Stock Plan, as amended and restated as of October 1, 2017. 10-K 10.8 9/30/1710.7* Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of August 26, 2014. 10-K 10.11 9/27/1410.8* Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of August 26, 2014. 10-K 10.12 9/27/14Apple Inc. | 2018 Form 10-K | 70 Incorporated by ReferenceExhibit Number Exhibit Description Form Exhibit Filing Date/Period End Date10.9* Form of Amendment, effective as of August 26, 2014, to Restricted Stock Unit Award Agreements and Performance Award Agreements outstanding as of August 26, 2014. 10-K 10.13 9/27/1410.10* Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of October 5, 2015. 10-Q 10.16 3/26/1610.11* Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of October 5, 2015. 10-Q 10.17 3/26/1610.12* Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of October 14, 2016. 10-K 10.18 9/24/1610.13* Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of October 14, 2016. 10-K 10.19 9/24/1610.14* Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of September 26, 2017. 10-K 10.20 9/30/1710.15* Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of September 26, 2017. 10-K 10.21 9/30/1710.16* Form of Restricted Stock Unit Award Agreement under Non-Employee Director Stock Plan effective as of February 13, 2018. 10-Q 10.2 3/31/1810.17*, ** Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of August 21, 2018. 10.18*, ** Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of August 21, 2018. 21.1** Subsidiaries of the Registrant. 23.1** Consent of Independent Registered Public Accounting Firm. 24.1** Power of Attorney (included on the Signatures page of this Annual Report on Form 10-K). 31.1** Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer. 31.2** Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer. 32.1*** Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. 101.INS** XBRL Instance Document. 101.SCH** XBRL Taxonomy Extension Schema Document. 101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF** XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB** XBRL Taxonomy Extension Label Linkbase Document. 101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document. *Indicates management contract or compensatory plan or arrangement.**Filed herewith.***Furnished herewith.(1)Certain instruments defining the rights of holders of long-term debt securities of the Registrant are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.Item 16.Form 10-K SummaryNone.Apple Inc. | 2018 Form 10-K | 71SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.Date: November 5, 2018 Apple Inc. By: /s/ Luca Maestri Luca Maestri Senior Vice President,Chief Financial OfficerPower of AttorneyKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Timothy D. Cook and Luca Maestri, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:Name Title Date /s/ Timothy D. Cook Chief Executive Officer and Director(Principal Executive Officer) November 5, 2018TIMOTHY D. COOK /s/ Luca Maestri Senior Vice President, Chief Financial Officer(Principal Financial Officer) November 5, 2018LUCA MAESTRI /s/ Chris Kondo Senior Director of Corporate Accounting(Principal Accounting Officer) November 5, 2018CHRIS KONDO /s/ James A. Bell Director November 5, 2018JAMES A. BELL /s/ Al Gore Director November 5, 2018AL GORE /s/ Robert A. Iger Director November 5, 2018ROBERT A. IGER /s/ Andrea Jung Director November 5, 2018ANDREA JUNG /s/ Arthur D. Levinson Director November 5, 2018ARTHUR D. LEVINSON /s/ Ronald D. Sugar Director November 5, 2018RONALD D. SUGAR /s/ Susan L. Wagner Director November 5, 2018SUSAN L. WAGNER Apple Inc. | 2018 Form 10-K | 72
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8-K
BERKSHIRE HATHAWAY INC DE false 0001067983 0001067983 2021-08-07 2021-08-07 0001067983 us-gaap:CommonClassAMember 2021-08-07 2021-08-07 0001067983 us-gaap:CommonClassBMember 2021-08-07 2021-08-07 0001067983 brka:M0.750SeniorNotesDue202310Member 2021-08-07 2021-08-07 0001067983 brka:M1.125SeniorNotesDue20271Member 2021-08-07 2021-08-07 0001067983 brka:M1.625SeniorNotesDue20352Member 2021-08-07 2021-08-07 0001067983 brka:M1.300SeniorNotesDue20243Member 2021-08-07 2021-08-07 0001067983 brka:M2.150SeniorNotesDue20284Member 2021-08-07 2021-08-07 0001067983 brka:M0.625SeniorNotesDue20235Member 2021-08-07 2021-08-07 0001067983 brka:M0.000SeniorNotesDue20256Member 2021-08-07 2021-08-07 0001067983 brka:M2.375SeniorNotesDue20397Member 2021-08-07 2021-08-07 0001067983 brka:M0.500SeniorNotesDue20418Member 2021-08-07 2021-08-07 0001067983 brka:M2.625SeniorNotesDue20599Member 2021-08-07 2021-08-07 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) August 7, 2021 BERKSHIRE HATHAWAY INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
001-14905
47-0813844
(STATE OR OTHER JURISDICTION OF INCORPORATION)
(COMMISSION FILE NUMBER)
(I.R.S. EMPLOYER IDENTIFICATION NO.)
3555 Farnam Street
Omaha, Nebraska
68131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE) (402) 346-1400 REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbols
Name of each exchange on which registered
Class A Common Stock
BRK.A
New York Stock Exchange
Class B Common Stock
BRK.B
New York Stock Exchange
0.750% Senior Notes due 2023
BRK23
New York Stock Exchange
1.125% Senior Notes due 2027
BRK27
New York Stock Exchange
1.625% Senior Notes due 2035
BRK35
New York Stock Exchange
1.300% Senior Notes due 2024
BRK24
New York Stock Exchange
2.150% Senior Notes due 2028
BRK28
New York Stock Exchange
0.625% Senior Notes due 2023
BRK23A
New York Stock Exchange
0.000% Senior Notes due 2025
BRK25
New York Stock Exchange
2.375% Senior Notes due 2039
BRK39
New York Stock Exchange
0.500% Senior Notes due 2041
BRK41
New York Stock Exchange
2.625% Senior Notes due 2059
BRK59
New York Stock Exchange Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
ITEM 2.02
Results of Operations and Financial Condition. On August 7, 2021, Berkshire Hathaway Inc. issued a press release announcing the Company’s earnings for the second quarter and first six months ended June 30, 2021. A copy of this press release is furnished with this report as an exhibit to this Form 8-K.
ITEM 9.01
Financial Statements and Exhibits
Exhibit 99.1
Berkshire Hathaway Inc. Earnings Release Dated August 7, 2021.
Exhibit 104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
August 9, 2021
BERKSHIRE HATHAWAY INC.
/s/ Marc D. Hamburg
By: Marc D. Hamburg
Senior Vice President and Chief Financial Officer
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8-K
MICROSOFT CORP false 0000789019 0000789019 2021-01-26 2021-01-26 0000789019 us-gaap:CommonStockMember 2021-01-26 2021-01-26 0000789019 msft:M2.125NotesDue20213Member 2021-01-26 2021-01-26 0000789019 msft:M3.125NotesDue20281Member 2021-01-26 2021-01-26 0000789019 msft:M2.625NotesDue20332Member 2021-01-26 2021-01-26 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) January 26, 2021 Microsoft Corporation (Exact name of registrant as specified in its charter)
Washington
001-37845
91-1144442
(State or Other Jurisdiction of Incorporation)
(Commission File Number)
(IRS Employer Identification No.)
One Microsoft Way, Redmond, Washington
98052-6399 (address) (425) 882-8080 www.microsoft.com/investor Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common stock, $0.00000625 par value per share
MSFT
NASDAQ
2.125% Notes due 2021
MSFT
NASDAQ
3.125% Notes due 2028
MSFT
NASDAQ
2.625% Notes due 2033
MSFT
NASDAQ Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
Item 2.02. Results of Operations and Financial Condition On January 26, 2021, Microsoft Corporation issued a press release announcing its financial results for the fiscal quarter ended December 31, 2020. A copy of the press release is furnished as Exhibit 99.1 to this report. In accordance with General Instruction B.2 of Form 8-K, the information in this Current Report on Form 8-K, including Exhibit 99.1, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. Item 9.01. Financial Statements and Exhibits (d) Exhibits:
99.1
Press release, dated January 26, 2021, issued by Microsoft Corporation
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
MICROSOFT CORPORATION
(Registrant)
Date: January 26, 2021
/s/ Alice L. Jolla
Alice L. Jolla
Corporate Vice President and Chief Accounting Officer
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8-K_59478_0000059478-22-000194.htm
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lly-202208040000059478false00000594782022-08-042022-08-040000059478us-gaap:CommonClassAMember2022-08-042022-08-040000059478lly:A718NotesDueJune12025Member2022-08-042022-08-040000059478lly:A1.625NotesDueJune22026Member2022-08-042022-08-040000059478lly:A2.125NotesDueJune32030Member2022-08-042022-08-040000059478lly:A625Notesdue2031Member2022-08-042022-08-040000059478lly:A500NotesDue2033Member2022-08-042022-08-040000059478lly:A6.77NotesDueJanuary12036Member2022-08-042022-08-040000059478lly:A1625NotesDue2043Member2022-08-042022-08-040000059478lly:A1.700Notesdue2049Member2022-08-042022-08-040000059478lly:A1125NotesDue2051Member2022-08-042022-08-040000059478lly:A1375NotesDue2061Member2022-08-042022-08-04 UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 8-K CURRENT REPORTPursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934Date of Report (Date of Earliest Event Reported): August 4, 2022ELI LILLY AND COMPANY (Exact Name of Registrant as Specified in its Charter) Indiana 001-06351 35-0470950(State or Other Jurisdictionof Incorporation) (CommissionFile Number) (I.R.S. EmployerIdentification No.) Lilly Corporate CenterIndianapolis,Indiana46285(Address of Principal Executive Offices)(Zip Code) Registrant’s Telephone Number, Including Area Code: (317) 276-2000 Not Applicable (Former Name or Former Address, if Changed Since Last Report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2.):☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act: Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock (no par value)LLYNew York Stock Exchange7 1/8% Notes due 2025LLY25New York Stock Exchange1.625% Notes due 2026LLY26New York Stock Exchange2.125% Notes due 2030LLY30New York Stock Exchange0.625% Notes due 2031LLY31New York Stock Exchange0.500% Notes due 2033LLY33New York Stock Exchange6.77% Notes due 2036LLY36New York Stock Exchange1.625% Notes due 2043LLY43New York Stock Exchange1.700% Notes due 2049LLY49ANew York Stock Exchange1.125% Notes due 2051LLY51New York Stock Exchange1.375% Notes due 2061LLY61New York Stock ExchangeIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).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. ☐Item 2.02. Results of Operations and Financial ConditionThe information in this Item 2.02, including Exhibit 99.1 attached hereto, is being furnished and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that Section and shall not be incorporated by reference into any registration statement or other document filed pursuant to the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise expressly stated in such filing.Attached hereto as Exhibit 99.1 and incorporated by reference into this Item 2.02 is a copy of the press release, dated August 4, 2022, announcing the financial results of Eli Lilly and Company for the quarter ended June 30, 2022.Item 9.01. Financial Statements and Exhibits.Exhibit No.Description99.1Press Release of Eli Lilly and Company, dated August 4, 2022.104Cover Page Interactive Data File (embedded within the Inline XBRL document). SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.ELI LILLY AND COMPANY(Registrant)By:/s/ Donald A. ZakrowskiName:Donald A. ZakrowskiTitle:Vice President, Finance, and Chief Accounting OfficerDate: August 4, 2022
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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 8-KCURRENT REPORTPursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934January 28, 2020Date of Report (Date of earliest event reported) Apple Inc.(Exact name of Registrant as specified in its charter)California 001-36743 94-2404110(State or other jurisdictionof incorporation) (CommissionFile Number) (I.R.S. EmployerIdentification No.)One Apple Park Way Cupertino, California 95014 (Address of principal executive offices) (Zip Code)(408) 996-1010 (Registrant’s telephone number, including area code)Not applicable(Former name or former address, if changed since last report.)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading symbol(s)Name of each exchange on which registeredCommon Stock, $0.00001 par value per shareAAPLThe Nasdaq Stock Market LLC1.000% Notes due 2022—The Nasdaq Stock Market LLC1.375% Notes due 2024—The Nasdaq Stock Market LLC0.000% Notes due 2025—The Nasdaq Stock Market LLC0.875% Notes due 2025—The Nasdaq Stock Market LLC1.625% Notes due 2026—The Nasdaq Stock Market LLC2.000% Notes due 2027—The Nasdaq Stock Market LLC1.375% Notes due 2029—The Nasdaq Stock Market LLC3.050% Notes due 2029—The Nasdaq Stock Market LLC0.500% Notes due 2031—The Nasdaq Stock Market LLC3.600% Notes due 2042—The Nasdaq Stock Market LLC Indicate by check mark whether the Registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).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. ☐ Item 2.02 Results of Operations and Financial Condition.On January 28, 2020, Apple Inc. (“Apple”) issued a press release regarding Apple’s financial results for its first fiscal quarter ended December 28, 2019. A copy of Apple’s press release is attached hereto as Exhibit 99.1.The information contained in this Current Report shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. Item 9.01 Financial Statements and Exhibits.(d)Exhibits.ExhibitNumber Exhibit Description 99.1 Press release issued by Apple Inc. on January 28, 2020.104 Inline XBRL for the cover page of this Current Report on Form 8-K.SIGNATUREPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.Date:January 28, 2020 Apple Inc. By: /s/ Luca Maestri Luca Maestri Senior Vice President,Chief Financial Officer
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
May 3, 2024
Date of Report (Date of earliest event reported)
Apple Inc.
(Exact name of Registrant as specified in its charter)
California
001-36743
94-2404110
(State or other jurisdiction
of incorporation)
(Commission
File Number)
(I.R.S. Employer
Identification No.)
One Apple Park Way
Cupertino, California 95014
(Address of principal executive offices) (Zip Code)
(408) 996-1010
(Registrant’s telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:
☐ Written communications pursuant to Rule 425 under the Securities
Act (17 CFR 230.425)
☐ Soliciting material pursuant to Rule 14a-12 under the Exchange
Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under
the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under
the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
symbol(s)
Name of each exchange on which registered
Common Stock, $0.00001 par value per share
AAPL
The Nasdaq Stock Market LLC
0.000% Notes due 2025
—
The Nasdaq Stock Market LLC
0.875% Notes due 2025
—
The Nasdaq Stock Market LLC
1.625% Notes due 2026
—
The Nasdaq Stock Market LLC
2.000% Notes due 2027
—
The Nasdaq Stock Market LLC
1.375% Notes due 2029
—
The Nasdaq Stock Market LLC
3.050% Notes due 2029
—
The Nasdaq Stock Market LLC
0.500% Notes due 2031
—
The Nasdaq Stock Market LLC
3.600% Notes due 2042
—
The Nasdaq Stock Market LLC
Indicate by check mark whether the Registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the
Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ☐
Item 7.01
Regulation FD Disclosure.
On April 23, 2024, the U.S. District Court for the Northern District of California (the “District Court”) issued an order granting preliminary approval of the proposed settlement of
the consolidated derivative lawsuits captioned In re Apple Inc. Stockholder Derivative Litigation, Case No. 4:19-cv-05153-YGR (N.D. Cal.) and In re Apple Inc. Stockholder Derivative Litigation, Lead Case No. 19CV355213 (Cal. Super. Ct., Santa Clara County), and other potential related derivative claims.
As required by the District Court’s order, copies of (i) the Notice of Pendency and Proposed Settlement of Shareholder Derivative Actions, and (ii) the Amended Stipulation and
Agreement of Compromise, Settlement, and Release (and the exhibits attached thereto) are attached hereto as Exhibits 99.1 and 99.2, respectively. The information contained in this Current Report, including Exhibits 99.1 and 99.2, shall not be
deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be
expressly set forth by specific reference in such a filing.
Item 9.01
Financial Statements and Exhibits.
(d) Exhibits.
Exhibit
Number
Exhibit Description
99.1
Notice of Pendency and Proposed
Settlement of Shareholder Derivative Actions.
99.2
Amended Stipulation and Agreement of Compromise, Settlement, and
Release.
104
Inline XBRL for the cover page of this Current Report on Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly
authorized.
Date:
May 3, 2024
Apple Inc.
By:
/s/ Katherine Adams
Katherine Adams
Senior Vice President,
General Counsel and Secretary
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8-K
MICROSOFT CORP false 0000789019 0000789019 2020-05-29 2020-05-29 0000789019 us-gaap:CommonStockMember 2020-05-29 2020-05-29 0000789019 msft:NotesTwoPointOneTwoFivePercentDueDecemberSixTwentyTwentyOneMember 2020-05-29 2020-05-29 0000789019 msft:NotesThreePointOneTwoFivePercentDueDecemberSixTwentyTwentyEightMember 2020-05-29 2020-05-29 0000789019 msft:NotesTwoPointSixTwoFivePercentDueMayTwoTwentyThirtyThreeMember 2020-05-29 2020-05-29 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) June 1, 2020 (May 29, 2020) Microsoft Corporation (Exact name of registrant as specified in its charter)
Washington
001-37845
91-1144442
(State or other jurisdiction of incorporation)
(Commission File Number)
(IRS Employer Identification No.)
One Microsoft Way, Redmond, Washington
98052-6399
(Address of Principal Executive Offices)
(Zip Code) Registrant’s telephone number, including area code: (425) 882-8080 www.microsoft.com/investor Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.00000625 par value per share
MSFT
NASDAQ
2.125% Notes due 2021
MSFT
NASDAQ
3.125% Notes due 2028
MSFT
NASDAQ
2.625% Notes due 2033
MSFT
NASDAQ
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
Item 8.01 Other Events. On May 29, 2020, Microsoft Corporation (the “Company”) issued a press release announcing the expiration of its previously announced exchange offers for certain of its outstanding debt securities that were validly tendered (and not validly withdrawn) by holders at or prior to such expiration at 11:59 p.m., New York City time, on May 28, 2020 (the “Exchange Offers”). The press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference. On June 1, 2020, in connection with the settlement of the Exchange Offers, the Company issued $6,249,997,000 aggregate principal amount of its 2.525% Notes due 2050 (the “2050 Notes”) and $3,750,000,000 aggregate principal amount of its 2.675% Notes due 2060 (the “2060 Notes”) (collectively, the “New Notes”). The New Notes were exchanged in the Exchange Offers pursuant to the terms and conditions set forth in the Company’s prospectus, dated May 19, 2020 (the “Prospectus”), filed with the Securities and Exchange Commission on May 19, 2020. The New Notes were issued pursuant to an indenture, dated as of May 18, 2009 (the “Base Indenture”), between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee, as amended and supplemented by the Thirteenth Supplemental Indenture thereto, dated as of June 1, 2020 (the “Thirteenth Supplemental Indenture”), between the Company and U.S. Bank National Association, as trustee. The Base Indenture is set forth as Exhibit 4.1 to the Company’s Registration Statement on Form S-4 (File No. 333-237925), as amended by Amendment No. 1 thereto. Interest on the New Notes will be payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2020, to holders of record on the preceding May 15 or the November 15, as the case may be. The 2050 Notes will mature on June 1, 2050 and the 2060 Notes will mature on June 1, 2060. The Company will have the option to redeem the New Notes in certain circumstances described in the Prospectus. The New Notes will be the Company’s senior unsecured obligations and will rank equally with the Company’s other unsecured and unsubordinated debt from time to time outstanding. The foregoing descriptions of the Thirteenth Supplemental Indenture (including the forms of the New Notes) are qualified in their entirety by the terms of such agreement. Please refer to such agreement, which is incorporated herein by reference and attached hereto as Exhibit 4.1.
Item 9.01 Financial Statements and Exhibits. (d) Exhibits.
4.1
Thirteenth Supplemental Indenture, dated June 1, 2020, between Microsoft Corporation and U.S. Bank National Association, as trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee.
4.2
Form of Global Note representing the 2.525% Notes due 2050 (included in Exhibit 4.1).
4.3
Form of Global Note representing the 2.675% Notes due 2060 (included in Exhibit 4.1).
99.1
Press Release, dated May 29, 2020, issued by Microsoft Corporation.
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
MICROSOFT CORPORATION
(Registrant)
Date: June 1, 2020
/s/ Frank H. Brod
Frank H. Brod
Corporate Vice President, Finance and Administration; Chief Accounting Officer
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8-K_1045810_0001045810-22-000136.htm
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nvda-202208240001045810false00010458102022-08-242022-08-24UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549______________FORM 8-K CURRENT REPORTPURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934Date of Report (Date of earliest event reported): August 24, 2022 NVIDIA CORPORATION(Exact name of registrant as specified in its charter)Delaware0-2398594-3177549(State or other jurisdiction(Commission(IRS Employerof incorporation)File Number)Identification No.) 2788 San Tomas Expressway, Santa Clara, CA 95051 (Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (408) 486-2000 Not Applicable(Former name or former address, if changed since last report)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock, $0.001 par value per shareNVDAThe Nasdaq Global Select MarketIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐Item 2.02 Results of Operations and Financial Condition.On August 24, 2022, NVIDIA Corporation, or the Company, issued a press release announcing its results for the quarter ended July 31, 2022. The press release is attached as Exhibit 99.1 and is incorporated herein by reference.Attached hereto as Exhibit 99.2 and incorporated by reference herein is financial information and commentary by Colette M. Kress, Executive Vice President and Chief Financial Officer of the Company, regarding results of the quarter ended July 31, 2022, or the CFO Commentary. The CFO Commentary will be posted to http://investor.nvidia.com immediately after the filing of this Current Report.The press release and CFO Commentary are furnished and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or subject to the liabilities of that Section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended. The information in this Current Report shall not be incorporated by reference in any filing with the U.S. Securities and Exchange Commission made by the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.Item 9.01. Financial Statements and Exhibits.(d) Exhibits Exhibit Description99.1 Press Release, dated August 24, 2022, entitled "NVIDIA Announces Financial Results for Second Quarter Fiscal 2023"99.2 CFO Commentary on Second Quarter Fiscal 2023 Results104The cover page of this Current Report on Form 8-K, formatted in inline XBRL (included as Exhibit 101)SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NVIDIA CorporationDate: August 24, 2022By: /s/ Colette M. Kress Colette M. Kress Executive Vice President and Chief Financial Officer
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8-K_1018724_0001018724-23-000014.htm
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amzn-202309130001018724false00010187242023-09-132023-09-13Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 _________________________ FORM 8-K _________________________ CURRENT REPORTPursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934September 13, 2023 Date of Report(Date of earliest event reported) _________________________AMAZON.COM, INC. (Exact name of registrant as specified in its charter)_________________________ Delaware000-2251391-1646860(State or other jurisdiction ofincorporation)(Commission File Number)(IRS Employer Identification No.)410 Terry Avenue North, Seattle, Washington 98109-5210 (Address of principal executive offices, including Zip Code)(206) 266-1000 (Registrant’s telephone number, including area code)_________________________ Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which RegisteredCommon Stock, par value $.01 per shareAMZNNasdaq Global Select MarketIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).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.☐Table of ContentsTABLE OF CONTENTS ITEM 5.02. DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS.3SIGNATURES4Table of ContentsITEM 5.02. DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS.On September 13, 2023, the Board of Directors of Amazon.com, Inc. (the “Company”) elected Brad D. Smith as a director of the Company, and also appointed him to the Audit Committee of the Board. Mr. Smith has served as President of Marshall University since January 2022. Mr. Smith served as Executive Chair of Intuit Inc., a business software company, from January 2019 to January 2022, President and Chief Executive Officer of Intuit from January 2008 to January 2019, and Chair of the board of directors of Intuit from January 2016 to January 2019. Mr. Smith has served as a director of Humana Inc. since September 2022. In connection with his election, Mr. Smith was granted a restricted stock unit award under the Company’s 1997 Stock Incentive Plan for 7,815 shares of common stock of the Company, to vest in three equal annual installments beginning on November 15, 2024, assuming continued service as a director. Mr. Smith also entered into an indemnification agreement with the Company in the same form as its other directors have entered, which is filed as an exhibit to Amendment No. 1, filed April 21, 1997, to the Company’s Registration Statement on Form S-1 (Registration No. 333-23795).3Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AMAZON.COM, INC. (REGISTRANT)By:/s/ David A. ZapolskyDavid A. ZapolskySenior Vice PresidentDated: September 13, 2023 4
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8-K
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Apple Inc. (Exact name of Registrant as specified in its charter)
California
001-36743
94-2404110
(State or other jurisdictionof incorporation)
(CommissionFile Number)
(I.R.S. EmployerIdentification No.) One Apple Park Way Cupertino, California 95014 (Address of principal executive offices) (Zip Code) (408) 996-1010 (Registrant’s telephone number, including area code) Not applicable (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Tradingsymbol(s)
Name of each exchangeon which registered
Common Stock, $0.00001 par value per share
AAPL
The Nasdaq Stock Market LLC
1.000% Notes due 2022
—
The Nasdaq Stock Market LLC
1.375% Notes due 2024
—
The Nasdaq Stock Market LLC
0.000% Notes due 2025
—
The Nasdaq Stock Market LLC
0.875% Notes due 2025
—
The Nasdaq Stock Market LLC
1.625% Notes due 2026
—
The Nasdaq Stock Market LLC
2.000% Notes due 2027
—
The Nasdaq Stock Market LLC
1.375% Notes due 2029
—
The Nasdaq Stock Market LLC
3.050% Notes due 2029
—
The Nasdaq Stock Market LLC
0.500% Notes due 2031
—
The Nasdaq Stock Market LLC
3.600% Notes due 2042
—
The Nasdaq Stock Market LLC Indicate by check mark whether the Registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
Item 5.02
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. On November 9, 2021, the Board of Directors (the “Board”) of Apple Inc. appointed Mr. Alex Gorsky to Apple’s Board. Mr. Gorsky will serve on the Nominating and Corporate Governance Committee of the Board. As a non-employee director, Mr. Gorsky will receive a $100,000 annual retainer for his service on the Board, paid in quarterly installments, and participate in the Apple Inc. Non-Employee Director Stock Plan (the “Non-Employee Director Plan”). Upon his appointment, Mr. Gorsky received an automatic initial grant of 486 restricted stock units under the Non-Employee Director Plan. In connection with his appointment, Apple and Mr. Gorsky will enter into Apple’s standard indemnification agreement for directors. There are no transactions between Apple and Mr. Gorsky that would be required to be reported under Item 404(a) of Regulation S-K.
Item 5.03
Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year. On November 9, 2021, the Board adopted an amendment, effective as of the same date, to Apple’s Amended and Restated Bylaws (as so amended, the “Bylaws”) to increase the size of the Board to nine (9) members. Prior to this amendment, the Bylaws provided for eight (8) directors. The foregoing description is qualified in its entirety by reference to the full text of the Bylaws, a copy of which is attached hereto as Exhibit 3.2 and is incorporated herein by reference.
Item 9.01
Financial Statements and Exhibits.
(d)
Exhibits.
Exhibit Number
Exhibit Description
3.2
Amended and Restated Bylaws of Apple Inc., effective as of November 9, 2021.
104
Inline XBRL for the cover page of this Current Report on Form 8-K. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: November 12, 2021
Apple Inc.
By:
/s/ Katherine Adams
Katherine Adams
Senior Vice President, General Counsel and Secretary
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8-K_1018724_0001018724-20-000026.htm
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amzn-202009090001018724false00010187242020-09-092020-09-09Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 _________________________ FORM 8-K _________________________ CURRENT REPORTPursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934September 9, 2020 Date of Report(Date of earliest event reported) _________________________AMAZON.COM, INC. (Exact name of registrant as specified in its charter)_________________________ Delaware000-2251391-1646860(State or other jurisdiction ofincorporation)(Commission File Number)(IRS Employer Identification No.)410 Terry Avenue North, Seattle, Washington 98109-5210 (Address of principal executive offices, including Zip Code)(206) 266-1000 (Registrant’s telephone number, including area code)_________________________ Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which RegisteredCommon Stock, par value $.01 per shareAMZNNasdaq Global Select MarketIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).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.¨Table of ContentsTABLE OF CONTENTS ITEM 5.02. DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS.3SIGNATURES4Table of ContentsITEM 5.02. DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS.On September 9, 2020, the Board of Directors of Amazon.com, Inc. (the “Company”) elected General (Ret.) Keith B. Alexander as a director of the Company, and also appointed him to the Audit Committee of the Board. Gen. Alexander is Co-Chief Executive Officer, President, and Chairman of IronNet Cybersecurity, Inc., a cybersecurity technology company he founded in 2014. Gen. Alexander served as the Commander of U.S. Cyber Command from May 2010 to March 2014 and was Director of the National Security Agency and Chief of the Central Security Service from August 2005 to March 2014. Gen. Alexander served as a director of CSRA, Inc., an information technology provider to the U.S. government, from November 2015 to April 2018. In connection with his election, Gen. Alexander was granted a restricted stock unit award under the Company’s 1997 Stock Incentive Plan for 288 shares of common stock of the Company, to vest in three equal annual installments beginning on November 15, 2021, assuming continued service as a director. Gen. Alexander also entered into an indemnification agreement with the Company in the same form as its other directors have entered, which is filed as an exhibit to Amendment No. 1, filed April 21, 1997, to the Company’s Registration Statement on Form S-1 (Registration No. 333-23795).3Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AMAZON.COM, INC. (REGISTRANT)By:/s/ David A. ZapolskyDavid A. ZapolskySenior Vice PresidentDated: September 9, 2020 4
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8-K_1652044_0001193125-21-182989.htm
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8-K
NASDAQ NASDAQ false 0001652044 0001652044 2021-06-02 2021-06-02 0001652044 us-gaap:CommonClassAMember 2021-06-02 2021-06-02 0001652044 us-gaap:CapitalUnitClassAMember 2021-06-02 2021-06-02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) June 2, 2021 ALPHABET INC. (Exact name of registrant as specified in its charter)
Delaware
001-37580
61-1767919
(State or other jurisdictionof incorporation)
(CommissionFile Number)
(IRS EmployerIdentification No.) 1600 Amphitheatre Parkway Mountain View, CA 94043 (Address of principal executive offices, including zip code) (650) 253-0000 (Registrant’s telephone number, including area code) Not Applicable (Former name or former address, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
TradingSymbol(s)
Name of each exchangeon which registered
Class A Common Stock, $0.001 par value
GOOGL
Nasdaq Stock Market LLC
(Nasdaq Global Select Market)
Class C Capital Stock, $0.001 par value
GOOG
Nasdaq Stock Market LLC
none
none
(Nasdaq Global Select Market) Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
Item 5.02.
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. Alphabet Inc. 2021 Stock Plan At the Annual Meeting of Stockholders of Alphabet Inc. (“Alphabet”) held on June 2, 2021 (the “2021 Annual Meeting”), Alphabet’s stockholders approved the Alphabet Inc. 2021 Stock Plan (the “2021 Stock Plan”). A description of the 2021 Stock Plan and related matters was set forth in Alphabet’s definitive proxy statement on Form 14A filed with the U.S. Securities and Exchange Commission on April 23, 2021 (the “2021 Proxy Statement”) and is qualified in its entirety by reference to the full text of the 2021 Stock Plan, a copy of which is being filed as Exhibit 10.01 to this Form 8-K.
Item 5.07.
Submission of Matters to a Vote of Security Holders. At the 2021 Annual Meeting, Alphabet’s stockholders voted on eleven proposals as set forth below, all of which are described in detail in the 2021 Proxy Statement. Holders of the shares of Class A common stock were entitled to one vote per share held as of the close of business on April 6, 2021 (the “Record Date”) and holders of the shares of Class B common stock were entitled to ten votes per share held as of the Record Date. Holders of the shares of Class A common stock and holders of the shares of Class B common stock voted together as a single class on all matters (including the election of directors) submitted to a vote of stockholders at the 2021 Annual Meeting. The number of votes cast for and against and the number of abstentions and broker non-votes with respect to each matter voted upon are set forth below. 1. The individuals listed below were elected at the 2021 Annual Meeting to serve as directors of Alphabet until the next annual meeting of stockholders or until their respective successors have been duly elected and qualified:
Director Nominee
For
Against
Abstentions
BrokerNon-Votes
Larry Page
608,535,148
7,751,352
425,450
27,746,606
Sergey Brin
607,853,726
8,432,758
425,466
27,746,606
Sundar Pichai
609,760,386
6,519,285
432,279
27,746,606
John L. Hennessy
581,948,375
34,252,772
510,803
27,746,606
Frances H. Arnold
605,217,216
11,036,543
458,191
27,746,606
L. John Doerr
491,614,116
124,255,318
842,516
27,746,606
Roger W. Ferguson, Jr.
611,387,216
4,781,895
542,839
27,746,606
Ann Mather
484,058,192
132,136,357
517,401
27,746,606
Alan R. Mulally
610,717,672
5,539,456
454,822
27,746,606
K. Ram Shriram
544,638,920
71,296,586
776,444
27,746,606
Robin L. Washington
547,764,694
68,047,749
899,507
27,746,606
2. The ratification of the appointment of Ernst & Young LLP as Alphabet’s independent registered public accounting firm for the fiscal year ending December 31, 2021. There were no broker non-votes on this matter. This proposal was approved as set forth below:
For
Against
Abstentions
632,785,899
11,111,117
561,540
3. The approval of Alphabet’s 2021 Stock Plan. This proposal was approved as set forth below:
For
Against
Abstentions
Broker Non-Votes
516,810,091
99,292,623
609,236
27,746,606
4. A stockholder proposal regarding equal shareholder voting. This proposal was not approved as set forth below:
For
Against
Abstentions
Broker Non-Votes
193,599,041
422,370,943
741,966
27,746,606
5. A stockholder proposal regarding the nomination of human rights and/or civil rights expert to the board. This proposal was not approved as set forth below:
For
Against
Abstentions
Broker Non-Votes
63,390,940
551,796,241
1,524,769
27,746,606
6. A stockholder proposal regarding a report on sustainability metrics. This proposal was not approved as set forth below:
For
Against
Abstentions
Broker Non-Votes
75,316,803
540,215,188
1,179,959
27,746,606
7. A stockholder proposal regarding a report on takedown requests. This proposal was not approved as set forth below:
For
Against
Abstentions
Broker Non-Votes
81,852,985
532,910,113
1,948,852
27,746,606
8. A stockholder proposal regarding a report on whistleblower policies and practices. This proposal was not approved as set forth below:
For
Against
Abstentions
Broker Non-Votes
63,800,336
551,052,472
1,859,142
27,746,606
9. A stockholder proposal regarding a report on charitable contributions. This proposal was not approved as set forth below:
For
Against
Abstentions
Broker Non-Votes
3,437,527
611,936,833
1,337,590
27,746,606
10. A stockholder proposal regarding a report on risks related to anticompetitive practices. This is proposal was not approved as set forth below:
For
Against
Abstentions
Broker Non-Votes
76,185,971
538,724,880
1,801,099
27,746,606
11. A stockholder proposal regarding a transition to a public benefit corporation. This proposal was not approved as set forth below:
For
Against
Abstentions
Broker Non-Votes
7,167,274
607,775,347
1,769,329
27,746,606
Item 9.01.
Financial Statements and Exhibits. (d) Exhibits.
Exhibit No.
Description
10.01
Alphabet Inc. 2021 Stock Plan
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
ALPHABET INC.
Date: June 4, 2021
/s/ KATHRYN W. HALL
Kathryn W. Hall Assistant Secretary
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8-K_320193_0001193125-15-322466.htm
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8-K
1
d31615d8k.htm
8-K
8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT Pursuant to Section 13
OR 15(d) of The Securities Exchange Act of 1934 September 10, 2015
Date of Report (date of earliest event reported)
Apple Inc.
(Exact name of Registrant as specified in its charter)
California
001-36743
94-2404110
(State or other jurisdiction
of incorporation)
(Commission File
Number)
(IRS. Employer
Identification No.)
1 Infinite Loop
Cupertino, California 95014 (Address of principal
executive offices) (Zip Code) (408) 996-1010
(Registrants telephone number, including area code)
Not applicable (Former name or former address,
if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant
under any of the following provisions:
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 8.01
Other Events. On September 10, 2015, Apple Inc. (Apple) entered into an
underwriting agreement (the Underwriting Agreement) with Goldman, Sachs & Co., as representative of the several underwriters named therein, for the issuance and sale by Apple of
1,000,000,000 aggregate principal amount of Apples 1.375% Notes due 2024 (the 2024 Notes), and 1,000,000,000 aggregate
principal amount of Apples 2.000% Notes due 2027 (the 2027 Notes, and, together with the 2024 Notes, the Notes). The
Notes are being issued pursuant to an indenture, dated as of April 29, 2013 (the Indenture), between Apple and The Bank of New York Mellon Trust Company, N.A., as trustee, together with the officers certificate dated as of
September 17, 2015 issued pursuant thereto establishing the terms of each series of the Notes (the Officers Certificate). The
Notes are being issued pursuant to Apples Registration Statement on Form S-3 filed with the Securities and Exchange Commission on April 29, 2013 (Reg. No. 333-188191) (the Registration Statement).
Interest on the 2024 Notes will be payable annually on January 17 of each year, beginning on January 17, 2016 and on the maturity date for the
2024 Notes. Interest on the 2027 Notes will be payable annually on September 17 of each year, beginning on September 17, 2016 and on the maturity date for the 2027 Notes. The 2024 Notes will mature on January 17, 2024, and the 2027
Notes will mature on September 17, 2027. The Notes will be Apples senior unsecured obligations and will rank equally with Apples
other unsecured and unsubordinated debt from time to time outstanding. The foregoing description of the Notes and related agreements is qualified in
its entirety by the terms of the Underwriting Agreement, the Indenture and the Officers Certificate (including the forms of the Notes). Apple is furnishing the Underwriting Agreement and the Officers Certificate (including the forms of
the Notes) attached hereto as Exhibits 1.1 and 4.1 through 4.3, respectively, and they are incorporated herein by reference. The Indenture is filed as Exhibit 4.1 to the Registration Statement. The computation of Apples ratio of earnings to
fixed charges is filed as Exhibit 12.1 hereto, and is incorporated by reference into the Registration Statement.
Item 9.01
Financial Statements and Exhibits.
(d)
Exhibits
Exhibit
Number
Exhibit Description
1.1
Underwriting Agreement, dated as of September 10, 2015, between Apple Inc. and Goldman, Sachs & Co., as representative of the several underwriters named therein
4.1
Officers Certificate of Apple Inc., dated as of September 17, 2015
4.2
Form of Global Note representing the 2024 Notes (included in Exhibit 4.1)
4.3
Form of Global Note representing the 2027 Notes (included in Exhibit 4.1)
5.1
Opinion of Shearman & Sterling LLP
12.1
Computation of Ratio of Earnings to Fixed Charges
23.1
Consent of Shearman & Sterling LLP (included in the opinion filed as Exhibit 5.1)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
Date: September 17, 2015
Apple Inc.
By:
/s/ Luca Maestri
Senior Vice President, Chief Financial Officer
EXHIBIT INDEX
ExhibitNumber
Exhibit Description
1.1
Underwriting Agreement, dated as of September 10, 2015, between Apple Inc. and Goldman, Sachs & Co., as representative of the several underwriters named therein
4.1
Officers Certificate of Apple Inc., dated as of September 17, 2015
4.2
Form of Global Note representing the 2024 Notes (included in Exhibit 4.1)
4.3
Form of Global Note representing the 2027 Notes (included in Exhibit 4.1)
5.1
Opinion of Shearman & Sterling LLP
12.1
Computation of Ratio of Earnings to Fixed Charges
23.1
Consent of Shearman & Sterling LLP (included in the opinion filed as Exhibit 5.1)
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8-K_1326801_0001326801-24-000019.htm
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meta-202402130001326801false00013268012024-02-132024-02-13UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Date of Report (Date of earliest event reported): February 13, 2024 Meta Platforms, Inc.(Exact name of registrant as specified in its charter)Delaware001-3555120-1665019(State or Other Jurisdiction of Incorporation)(Commission File Number)(IRS Employer Identification No.)1 Meta Way, Menlo Park, California 94025 (Address of principal executive offices and Zip Code)(650) 543-4800 (Registrant’s telephone number, including area code)N/A(Former name or former address, if changed since last report)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredClass A Common Stock, $0.000006 par valueMETAThe Nasdaq Stock Market LLCIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.On February 13, 2024, the Board of Directors (the "Board") of Meta Platforms, Inc. (the "Company") elected John Arnold and Hock Tan as members of the Board, effective immediately. The Board also appointed Messrs. Arnold and Tan as members of the Audit & Risk Oversight Committee of the Board, effective immediately. A copy of the press release announcing the elections is attached as Exhibit 99.1 to this report. The Board has determined that each of Messrs. Arnold and Tan qualifies as an independent director under the corporate governance standards of the Nasdaq Stock Market LLC. Each of Messrs. Arnold and Tan will receive compensation for his service as a non-employee member of the Board as set forth in the Company's Director Compensation Policy.There are no arrangements or understandings between either of Messrs. Arnold or Tan and any other person pursuant to which each of Messrs. Arnold and Tan was selected as a director, and there are no transactions in which the Company is a party and in which Mr. Arnold has a material interest subject to disclosure under Item 404(a) of Regulation S-K. Mr. Tan is the president and chief executive officer of Broadcom Inc. ("Broadcom"). The Company is a party to certain arrangements with Broadcom, whereby the Company directly and indirectly purchases Broadcom’s component products. The Company is also a party to certain other arrangements with Broadcom whereby Broadcom provides it with services such as design, development and engineering and the Company pays Broadcom directly for these services. In 2023, the total amount paid to Broadcom under these arrangements was approximately $500.4 million.Item 9.01 Financial Statements and Exhibits.(d) ExhibitsExhibit NumberExhibit Title or Description99.1Press release dated February 14, 2024104Cover Page Interactive Data File (the cover page XBRL tags are embedded within the inline XBRL document)SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.META PLATFORMS, INC.Date: February 14, 2024By:/s/ Katherine R. KellyName:Katherine R. KellyTitle:Vice President and Corporate Secretary
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8-K_59478_0000059478-21-000213.htm
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lly-202110260000059478false00000594782021-10-262021-10-260000059478us-gaap:CommonClassAMember2021-10-262021-10-260000059478lly:A1.000NotesDueJune22022Member2021-10-262021-10-260000059478lly:A718NotesDueJune12025Member2021-10-262021-10-260000059478lly:A1.625NotesDueJune22026Member2021-10-262021-10-260000059478lly:A2.125NotesDueJune32030Member2021-10-262021-10-260000059478lly:A625Notesdue2031Member2021-10-262021-10-260000059478lly:A500NotesDue2033Member2021-10-262021-10-260000059478lly:A6.77NotesDueJanuary12036Member2021-10-262021-10-260000059478lly:A1625NotesDue2043Member2021-10-262021-10-260000059478lly:A1.700Notesdue2049Member2021-10-262021-10-260000059478lly:A1125NotesDue2051Member2021-10-262021-10-260000059478lly:A1375NotesDue2061Member2021-10-262021-10-26 UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 8-K CURRENT REPORTPursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934Date of Report (Date of Earliest Event Reported): October 26, 2021ELI LILLY AND COMPANY (Exact Name of Registrant as Specified in its Charter) Indiana 001-06351 35-0470950(State or Other Jurisdictionof Incorporation) (CommissionFile Number) (I.R.S. EmployerIdentification No.) Lilly Corporate CenterIndianapolis,Indiana46285(Address of Principal Executive Offices)(Zip Code) Registrant’s Telephone Number, Including Area Code: (317) 276-2000 Not Applicable (Former Name or Former Address, if Changed Since Last Report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2.):☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act: Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock (no par value)LLYNew York Stock Exchange1.000% Notes due 2022LLY22New York Stock Exchange7 1/8% Notes due 2025LLY25New York Stock Exchange1.625% Notes due 2026LLY26New York Stock Exchange2.125% Notes due 2030LLY30New York Stock Exchange0.625% Notes due 2031LLY31New York Stock Exchange0.500% Notes due 2033LLY33New York Stock Exchange6.77% Notes due 2036LLY36New York Stock Exchange1.625% Notes due 2043LLY43New York Stock Exchange1.700% Notes due 2049LLY49ANew York Stock Exchange1.125% Notes due 2051LLY51New York Stock Exchange1.375% Notes due 2061LLY61New York Stock ExchangeIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).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. ☐Item 2.02. Results of Operations and Financial ConditionThe information in this Item 2.02, including Exhibit 99.1 attached hereto, is being furnished and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that Section and shall not be incorporated by reference into any registration statement or other document filed pursuant to the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise expressly stated in such filing.Attached hereto as Exhibit 99.1 and incorporated by reference into this Item 2.02 is a copy of the press release, dated October 26, 2021, announcing the financial results of Eli Lilly and Company for the quarter ended September 30, 2021, including, among other things, unaudited financial results for that period.Item 9.01. Financial Statements and Exhibits.Exhibit No.Description99.1Press Release of Eli Lilly and Company, dated October 26, 2021.104Cover Page Interactive Data File (embedded within the Inline XBRL document). SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.ELI LILLY AND COMPANY(Registrant)By:/s/ Donald A. ZakrowskiName:Donald A. ZakrowskiTitle:Vice President, Finance, and Chief Accounting OfficerDate: October 26, 2021
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8-K_789019_0001193125-22-165839.htm
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8-K
false 0000789019 0000789019 2022-06-02 2022-06-02 0000789019 us-gaap:CommonStockMember 2022-06-02 2022-06-02 0000789019 msft:NotesThreePointOneTwoFivePercentDueDecemberSixTwentyTwentyEightMember 2022-06-02 2022-06-02 0000789019 msft:NotesTwoPointSixTwoFivePercentDueMayTwoTwentyThirtyThreeMember 2022-06-02 2022-06-02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) June 2, 2022 Microsoft Corporation
Washington
001-37845
91-1144442
(State or Other Jurisdictionof Incorporation)
(CommissionFile Number)
(IRS EmployerIdentification No.)
One Microsoft Way, Redmond, Washington
98052-6399 (425) 882-8080 www.microsoft.com/investor Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common stock, $0.00000625 par value per share
MSFT
NASDAQ
3.125% Notes due 2028
MSFT
NASDAQ
2.625% Notes due 2033
MSFT
NASDAQ Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐ Item 7.01. Regulation FD Disclosure On June 2, 2022, Microsoft Corporation updated our guidance for the quarter ending June 30, 2022 due to unfavorable foreign exchange rate movement in the quarter through May. A slide deck with our revised guidance is furnished as Exhibit 99.1 to this report. This Form 8-K contains forward-looking statements, which are any predictions, projections or other statements about future events based on current expectations and assumptions that are subject to risks and uncertainties, which are described in our filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made. Readers are cautioned not to put undue reliance on forward-looking statements, and Microsoft undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the company’s expectations. In accordance with General Instruction B.2 of Form 8-K, the information in this Current Report on Form 8-K, including Exhibit 99.1, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. Item 9.01. Financial Statements and Exhibits (d) Exhibits:
99.1
Slide deck with updated quarterly guidance
104
Cover Page Interactive Data File (embedded within the Inline XBRL document) SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
MICROSOFT CORPORATION
(Registrant)
Date: June 2, 2022
/S/ ALICE L. JOLLA
Alice L. Jolla
Corporate Vice President and Chief AccountingOfficer
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10-K_789019_0001564590-19-027952.htm
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10-K
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msft-10k_20190630.htm
10-K
msft-10k_20190630.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number 001-37845
MICROSOFT CORPORATION
WASHINGTON
91-1144442
(STATE OF INCORPORATION)
(I.R.S. ID)
ONE MICROSOFT WAY, REDMOND, WASHINGTON 98052-6399
(425) 882-8080
www.microsoft.com/investor
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
COMMON STOCK, $0.00000625 par value per share
MSFT
NASDAQ
2.125% Notes due 2021
MSFT
New York Stock Exchange
3.125% Notes due 2028
MSFT
New York Stock Exchange
2.625% Notes due 2033
MSFT
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of December 31, 2018, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $769.6 billion based on the closing sale price as reported on the NASDAQ National Market System. As of July 29, 2019, there were 7,635,409,400 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on December 4, 2019 are incorporated by reference into Part III.
MICROSOFT CORPORATION
FORM 10-K
For the Fiscal Year Ended June 30, 2019
INDEX
Page
PART I
Item 1.
Business
3
Executive Officers of the Registrant
15
Item 1A.
Risk Factors
17
Item 1B.
Unresolved Staff Comments
29
Item 2.
Properties
29
Item 3.
Legal Proceedings
29
Item 4.
Mine Safety Disclosures
29
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
30
Item 6.
Selected Financial Data
31
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
50
Item 8.
Financial Statements and Supplementary Data
51
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
96
Item 9A.
Controls and Procedures
96
Report of Management on Internal Control over Financial Reporting
96
Report of Independent Registered Public Accounting Firm
97
Item 9B.
Other Information
98
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
98
Item 11.
Executive Compensation
98
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
98
Item 13.
Certain Relationships and Related Transactions, and Director Independence
98
Item 14.
Principal Accounting Fees and Services
98
PART IV
Item 15.
Exhibits, Financial Statement Schedules
99
Item 16.
Form 10-K Summary
104
Signatures
105
2
PART I
Item 1
Note About Forward-Looking Statements
This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following sections: “Business” (Part I, Item 1 of this Form 10-K), “Risk Factors” (Part I, Item 1A of this Form 10-K), and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Part II, Item 7 of this Form 10-K). These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures about Market Risk” (Part II, Item 7A of this Form 10-K). Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
PART I
ITEM 1. BUSINESS
GENERAL
Embracing Our Future
Microsoft is a technology company whose mission is to empower every person and every organization on the planet to achieve more. We strive to create local opportunity, growth, and impact in every country around the world. Our platforms and tools help drive small business productivity, large business competitiveness, and public-sector efficiency. They also support new startups, improve educational and health outcomes, and empower human ingenuity.
We continue to transform our business to lead in the new era of the intelligent cloud and intelligent edge. We bring technology and products together into experiences and solutions that unlock value for our customers. In this next phase of innovation, computing is more powerful and ubiquitous from the cloud to the edge. Artificial intelligence (“AI”) capabilities are rapidly advancing, fueled by data and knowledge of the world. Physical and virtual worlds are coming together with the Internet of Things (“IoT”) and mixed reality to create richer experiences that understand the context surrounding people, the things they use, the places they go, and their activities and relationships. A person’s experience with technology spans a multitude of devices and has become increasingly more natural and multi-sensory with voice, ink, and gaze interactions.
What We Offer
Founded in 1975, we develop and support software, services, devices, and solutions that deliver new value for customers and help people and businesses realize their full potential.
We offer an array of services, including cloud-based solutions that provide customers with software, services, platforms, and content, and we provide solution support and consulting services. We also deliver relevant online advertising to a global audience.
Our products include operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; and video games. We also design, manufacture, and sell devices, including PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.
3
PART I
Item 1
The Ambitions That Drive Us
To achieve our vision, our research and development efforts focus on three interconnected ambitions:
•
Reinvent productivity and business processes.
•
Build the intelligent cloud and intelligent edge platform.
•
Create more personal computing.
Reinvent Productivity and Business Processes
We are in a unique position to empower people and organizations to succeed in a rapidly evolving workplace. Computing experiences are evolving, no longer bound to one device at a time. Instead, experiences are expanding to many devices as people move from home to work to on the go. These modern needs, habits, and expectations of our customers are motivating us to bring Microsoft Office 365, Windows platform, devices, including Microsoft Surface, and third-party applications into a more cohesive Microsoft 365 experience.
Our growth depends on securely delivering continuous innovation and advancing our leading productivity and collaboration tools and services, including Office, Microsoft Dynamics, and LinkedIn. Microsoft 365 brings together Office 365, Windows 10, and Enterprise Mobility + Security to help organizations empower their employees with AI-backed tools that unlock creativity, increase teamwork, and fuel innovation, all the while enabling compliance coverage and data protection. Microsoft Teams is core to our vision for the modern workplace as the digital hub that creates a single canvas for teamwork, conversations, meetings, and content. Microsoft Relationship Sales solution brings together LinkedIn Sales Navigator and Dynamics to transform business to business sales through social selling. Dynamics 365 for Talent with LinkedIn Recruiter and Learning gives human resource professionals a complete solution to compete for talent. Microsoft Power Platform empowers employees to build custom applications, automate workflow, and analyze data no matter their technical expertise.
These scenarios represent a move to unlock creativity and inspire teamwork, while simplifying security and management. Organizations of all sizes can now digitize business-critical functions, redefining what customers can expect from their business applications. This creates an opportunity for us to reach new customers and increase usage and engagement with existing customers.
Build the Intelligent Cloud and Intelligent Edge Platform
Companies are looking to use digital technology to fundamentally reimagine how they empower their employees, engage customers, optimize their operations, and change the very core of their products and services. Partnering with organizations on their digital transformation is one of our largest opportunities and we are uniquely positioned to become the strategic digital transformation platform and partner of choice.
Our strategy requires continued investment in datacenters and other hybrid and edge infrastructure to support our services. Microsoft Azure is a trusted cloud with comprehensive compliance coverage and AI-based security built in.
Our cloud business benefits from three economies of scale: datacenters that deploy computational resources at significantly lower cost per unit than smaller ones; datacenters that coordinate and aggregate diverse customer, geographic, and application demand patterns, improving the utilization of computing, storage, and network resources; and multi-tenancy locations that lower application maintenance labor costs.
As one of the two largest providers of cloud computing at scale, we believe we work from a position of strength. Being a global-scale cloud, Azure uniquely offers hybrid consistency, developer productivity, AI capabilities, and trusted security and compliance. We see more emerging use cases and needs for compute and security at the edge and are accelerating our innovation across the spectrum of intelligent edge devices, from IoT sensors to gateway devices and edge hardware to build, manage, and secure edge workloads. With Azure Stack, organizations can extend Azure into their own datacenters to create a consistent stack across the public cloud and the intelligent edge. Our hybrid infrastructure consistency spans identity, data, compute, management, and security, helping to support the real-world needs and evolving regulatory requirements of commercial customers and enterprises. We are accelerating our development of mixed reality solutions, with new Azure services and devices such as HoloLens 2. The opportunity to merge the physical and digital worlds, when combined with the power of Azure cloud services, unlocks the potential for entirely new workloads which we believe will shape the next era of computing.
4
PART I
Item 1
The ability to convert data into AI drives our competitive advantage. Azure SQL Database makes it possible for customers to take Microsoft SQL Server from their on-premises datacenter to a fully managed instance in the cloud to utilize built-in AI. We are accelerating adoption of AI innovations from research to products. Our innovation helps every developer be an AI developer, with approachable new tools from Azure Machine Learning Studio for creating simple machine learning models, to the powerful Azure Machine Learning Workbench for the most advanced AI modeling and data science.
On October 25, 2018, we completed our acquisition of GitHub, Inc. (“GitHub”), a service that millions of developers around the world rely on to write code together. The acquisition is expected to empower developers to achieve more at every stage of the development lifecycle, accelerate enterprise use of GitHub, and bring Microsoft’s developer tools and services to new audiences.
Create More Personal Computing
We strive to make computing more personal by putting users at the core of the experience, enabling them to interact with technology in more intuitive, engaging, and dynamic ways. In support of this, we are bringing Office, Windows, and devices together for an enhanced and more cohesive customer experience.
Windows 10 continues to gain traction in the enterprise as the most secure and productive operating system. It empowers people with AI-first interfaces ranging from voice-activated commands through Cortana, inking, immersive 3D content storytelling, and mixed reality experiences. Windows also plays a critical role in fueling our cloud business and Microsoft 365 strategy, and it powers the growing range of devices on the “intelligent edge.” Our ambition for Windows 10 monetization opportunities includes gaming, services, subscriptions, and search advertising.
We are committed to designing and marketing first-party devices to help drive innovation, create new device categories, and stimulate demand in the Windows ecosystem. We recently expanded our Surface family of devices with the Surface Hub 2S, which brings together Microsoft Teams, Windows, and Surface hardware to power teamwork for organizations.
We are mobilizing to pursue our expansive opportunity in the gaming industry, broadening our approach to how we think about gaming end-to-end, from the way games are created and distributed to how they are played and viewed. We have a strong position with our Xbox One console, our large and growing highly engaged community of gamers on Xbox Live, and with Windows 10, the most popular operating system for PC gamers. We will continue to connect our gaming assets across PC, console, and mobile, and work to grow and engage the Xbox Live member network more deeply and frequently with services like Mixer and Xbox Game Pass. Our approach is to enable gamers to play the games they want, with the people they want, on the devices they want.
Our Future Opportunity
Customers are looking to us to accelerate their own digital transformations and to unlock new opportunity in this era of intelligent cloud and intelligent edge. We continue to develop complete, intelligent solutions for our customers that empower users to be creative and work together while safeguarding businesses and simplifying IT management. Our goal is to lead the industry in several distinct areas of technology over the long-term, which we expect will translate to sustained growth. We are investing significant resources in:
•
Transforming the workplace to deliver new modern, modular business applications to improve how people communicate, collaborate, learn, work, play, and interact with one another.
•
Building and running cloud-based services in ways that unleash new experiences and opportunities for businesses and individuals.
•
Applying AI to drive insights and act on our customer’s behalf by understanding and interpreting their needs using natural methods of communication.
•
Using Windows to fuel our cloud business and Microsoft 365 strategy, and to develop new categories of devices – both our own and third-party – on the intelligent edge.
•
Inventing new gaming experiences that bring people together around their shared love for games on any devices and pushing the boundaries of innovation with console and PC gaming by creating the next wave of entertainment.
5
PART I
Item 1
Our future growth depends on our ability to transcend current product category definitions, business models, and sales motions. We have the opportunity to redefine what customers and partners can expect and are working to deliver new solutions that reflect the best of Microsoft.
OPERATING SEGMENTS
We operate our business and report our financial performance using three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives across the development, sales, marketing, and services organizations, and they provide a framework for timely and rational allocation of resources within businesses.
Additional information on our operating segments and geographic and product information is contained in Note 20 – Segment Information and Geographic Data of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).
Our reportable segments are described below.
Productivity and Business Processes
Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:
•
Office Commercial, including Office 365 subscriptions and Office licensed on-premises, comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Skype for Business, and related Client Access Licenses (“CALs”).
•
Office Consumer, including Office 365 subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive.
•
LinkedIn, including Talent Solutions, Marketing Solutions, and Premium Subscriptions.
•
Dynamics business solutions, including Dynamics 365, a set of cloud-based applications across ERP and CRM, Dynamics ERP on-premises, and Dynamics CRM on-premises.
Office Commercial
Office Commercial is designed to increase personal, team, and organizational productivity through a range of products and services. Growth depends on our ability to reach new users in new markets such as first-line workers, small and medium businesses, and growth markets, as well as add value to our core product and service offerings to span productivity categories such as communication, collaboration, analytics, security, and compliance. Office Commercial revenue is mainly affected by a combination of continued installed base growth and average revenue per user expansion, as well as the continued shift from Office licensed on-premises to Office 365. CALs provide certain Office Commercial products and services with access rights to our server products and CAL revenue is reported with the associated Office products and services.
Office Consumer
Office Consumer is designed to increase personal productivity through a range of products and services. Growth depends on our ability to reach new users, add value to our core product set, and continue to expand our product and service offerings into new markets. Office Consumer revenue is mainly affected by the percentage of customers that buy Office with their new devices and the continued shift from Office licensed on-premises to Office 365. Office Consumer Services revenue is mainly affected by the demand for communication and storage through Skype, Outlook.com, and OneDrive, which is largely driven by subscriptions, advertising, and the sale of minutes.
6
PART I
Item 1
LinkedIn
LinkedIn connects the world's professionals to make them more productive and successful, and is the world's largest professional network on the Internet. LinkedIn offers services that can be used by customers to transform the way they hire, market, sell, and learn. In addition to LinkedIn’s free services, LinkedIn offers three categories of monetized solutions: Talent Solutions, Marketing Solutions, and Premium Subscriptions, which includes Sales Solutions. Talent Solutions is comprised of two elements: Hiring, and Learning and Development. Hiring provides services to recruiters that enable them to attract, recruit, and hire talent. Learning and Development provides subscriptions to enterprises and individuals to access online learning content. Marketing Solutions enables companies to advertise to LinkedIn’s member base. Premium Subscriptions enables professionals to manage their professional identity, grow their network, and connect with talent through additional services like premium search. Premium Subscriptions also includes Sales Solutions, which helps sales professionals find, qualify, and create sales opportunities and accelerate social selling capabilities. Growth will depend on our ability to increase the number of LinkedIn members and our ability to continue offering services that provide value for our members and increase their engagement. LinkedIn revenue is mainly affected by demand from enterprises and professional organizations for subscriptions to Talent Solutions and Premium Subscriptions offerings, as well as member engagement and the quality of the sponsored content delivered to those members to drive Marketing Solutions.
On November 16, 2018, LinkedIn acquired Glint, an employee engagement platform, to expand its Talent Solutions offerings.
Dynamics
Dynamics provides cloud-based and on-premises business solutions for financial management, enterprise resource planning (“ERP”), customer relationship management (“CRM”), supply chain management, and analytics applications for small and medium businesses, large organizations, and divisions of global enterprises. Dynamics revenue is driven by the number of users licensed, expansion of average revenue per user, and the continued shift to Dynamics 365, a unified set of cloud-based intelligent business applications.
Competition
Competitors to Office include software and global application vendors, such as Apple, Cisco Systems, Facebook, Google, IBM, Okta, Proofpoint, Slack, Symantec, Zoom, and numerous web-based and mobile application competitors as well as local application developers. Apple distributes versions of its pre-installed application software, such as email and calendar products, through its PCs, tablets, and phones. Cisco Systems is using its position in enterprise communications equipment to grow its unified communications business. Google provides a hosted messaging and productivity suite. Slack provides teamwork and collaboration software. Zoom offers videoconferencing and cloud phone solutions. Skype for Business and Skype also compete with a variety of instant messaging, voice, and video communication providers, ranging from start-ups to established enterprises. Okta, Proofpoint, and Symantec provide security solutions across email security, information protection, identity, and governance. Web-based offerings competing with individual applications have also positioned themselves as alternatives to our products and services. We compete by providing powerful, flexible, secure, integrated industry-specific, and easy-to-use productivity and collaboration tools and services that create comprehensive solutions and work well with technologies our customers already have both on-premises or in the cloud.
LinkedIn faces competition from online recruiting companies, talent management companies, and larger companies that are focusing on talent management and human resource services; job boards; traditional recruiting firms; and companies that provide learning and development products and services. Marketing Solutions competes with online and offline outlets that generate revenue from advertisers and marketers.
Dynamics competes with vendors such as Infor, NetSuite, Oracle, Salesforce.com, SAP, and The Sage Group to provide cloud-based and on-premise business solutions for small, medium, and large organizations.
7
PART I
Item 1
Intelligent Cloud
Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business. This segment primarily comprises:
•
Server products and cloud services, including SQL Server, Windows Server, Visual Studio, System Center, and related CALs, GitHub, and Azure.
•
Enterprise Services, including Premier Support Services and Microsoft Consulting Services.
Server Products and Cloud Services
Our server products are designed to make IT professionals, developers, and their systems more productive and efficient. Server software is integrated server infrastructure and middleware designed to support software applications built on the Windows Server operating system. This includes the server platform, database, business intelligence, storage, management and operations, virtualization, service-oriented architecture platform, security, and identity software. We also license standalone and software development lifecycle tools for software architects, developers, testers, and project managers. GitHub provides a collaboration platform and code hosting service for developers. Server products revenue is mainly affected by purchases through volume licensing programs, licenses sold to original equipment manufacturers (“OEM”), and retail packaged products. CALs provide access rights to certain server products, including SQL Server and Windows Server, and revenue is reported along with the associated server product.
Azure is a comprehensive set of cloud services that offer developers, IT professionals, and enterprises freedom to build, deploy, and manage applications on any platform or device. Customers can use Azure through our global network of datacenters for computing, networking, storage, mobile and web application services, AI, IoT, cognitive services, and machine learning. Azure enables customers to devote more resources to development and use of applications that benefit their organizations, rather than managing on-premises hardware and software. Azure revenue is mainly affected by infrastructure-as-a-service and platform-as-a-service consumption-based services, and per user-based services such as Enterprise Mobility + Security.
Enterprise Services
Enterprise Services, including Premier Support Services and Microsoft Consulting Services, assist customers in developing, deploying, and managing Microsoft server and desktop solutions and provide training and certification to developers and IT professionals on various Microsoft products.
Competition
Our server products face competition from a wide variety of server operating systems and applications offered by companies with a range of market approaches. Vertically integrated computer manufacturers such as Hewlett-Packard, IBM, and Oracle offer their own versions of the Unix operating system preinstalled on server hardware. Nearly all computer manufacturers offer server hardware for the Linux operating system and many contribute to Linux operating system development. The competitive position of Linux has also benefited from the large number of compatible applications now produced by many commercial and non-commercial software developers. A number of companies, such as Red Hat, supply versions of Linux.
We compete to provide enterprise-wide computing solutions and point solutions with numerous commercial software vendors that offer solutions and middleware technology platforms, software applications for connectivity (both Internet and intranet), security, hosting, database, and e-business servers. IBM and Oracle lead a group of companies focused on the Java Platform Enterprise Edition that competes with our enterprise-wide computing solutions. Commercial competitors for our server applications for PC-based distributed client-server environments include CA Technologies, IBM, and Oracle. Our web application platform software competes with open source software such as Apache, Linux, MySQL, and PHP. In middleware, we compete against Java vendors.
Our database, business intelligence, and data warehousing solutions offerings compete with products from IBM, Oracle, SAP, and other companies. Our system management solutions compete with server management and server virtualization platform providers, such as BMC, CA Technologies, Hewlett-Packard, IBM, and VMware. Our products for software developers compete against offerings from Adobe, IBM, Oracle, and other companies, and also against open-source projects, including Eclipse (sponsored by CA Technologies, IBM, Oracle, and SAP), PHP, and Ruby on Rails.
8
PART I
Item 1
We believe our server products provide customers with advantages in performance, total costs of ownership, and productivity by delivering superior applications, development tools, compatibility with a broad base of hardware and software applications, security, and manageability.
Azure faces diverse competition from companies such as Amazon, Google, IBM, Oracle, Salesforce.com, VMware, and open source offerings. Our Enterprise Mobility + Security offerings also compete with products from a range of competitors including identity vendors, security solution vendors, and numerous other security point solution vendors. Azure’s competitive advantage includes enabling a hybrid cloud, allowing deployment of existing datacenters with our public cloud into a single, cohesive infrastructure, and the ability to run at a scale that meets the needs of businesses of all sizes and complexities. We believe our cloud’s global scale, coupled with our broad portfolio of identity and security solutions, allows us to effectively solve complex cybersecurity challenges for our customers and differentiates us from the competition.
Our Enterprise Services business competes with a wide range of companies that provide strategy and business planning, application development, and infrastructure services, including multinational consulting firms and small niche businesses focused on specific technologies.
More Personal Computing
Our More Personal Computing segment consists of products and services geared towards harmonizing the interests of end users, developers, and IT professionals across all devices. This segment primarily comprises:
•
Windows, including Windows OEM licensing (“Windows OEM”) and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; Windows IoT; and MSN advertising.
•
Devices, including Surface, PC accessories, and other intelligent devices.
•
Gaming, including Xbox hardware and Xbox software and services, comprising Xbox Live transactions, subscriptions, cloud services, and advertising (“Xbox Live”), video games, and third-party video game royalties.
•
Search.
Windows
The Windows operating system is designed to deliver a more personal computing experience for users by enabling consistency of experience, applications, and information across their devices. Windows OEM revenue is impacted significantly by the number of Windows operating system licenses purchased by OEMs, which they pre-install on the devices they sell. In addition to computing device market volume, Windows OEM revenue is impacted by:
•
The mix of computing devices based on form factor and screen size.
•
Differences in device market demand between developed markets and growth markets.
•
Attachment of Windows to devices shipped.
•
Customer mix between consumer, small and medium businesses, and large enterprises.
•
Changes in inventory levels in the OEM channel.
•
Pricing changes and promotions, pricing variation that occurs when the mix of devices manufactured shifts from local and regional system builders to large multinational OEMs, and different pricing of Windows versions licensed.
•
Constraints in the supply chain of device components.
•
Piracy.
Windows Commercial revenue, which includes volume licensing of the Windows operating system and Windows cloud services such as Microsoft Defender Advanced Threat Protection, is affected mainly by the demand from commercial customers for volume licensing and Software Assurance (“SA”), as well as advanced security offerings. Windows Commercial revenue often reflects the number of information workers in a licensed enterprise and is relatively independent of the number of PCs sold in a given year.
9
PART I
Item 1
Patent licensing includes our programs to license patents we own for use across a broad array of technology areas, including mobile devices and cloud offerings.
Windows IoT extends the power of Windows and the cloud to intelligent systems by delivering specialized operating systems, tools, and services for use in embedded devices.
MSN advertising includes both native and display ads.
Devices
We design, manufacture, and sell devices, including Surface, PC accessories, and other intelligent devices. Our devices are designed to enable people and organizations to connect to the people and content that matter most using Windows and integrated Microsoft products and services. Surface is designed to help organizations, students, and consumers be more productive.
Gaming
Our gaming platform is designed to provide a unique variety of entertainment using our devices, peripherals, applications, online services, and content. We released Xbox One S and Xbox One X in August 2016 and November 2017, respectively. With the launch of the Mixer service in May 2017, offering interactive live streaming, and Xbox Game Pass in June 2017, providing unlimited access to over 100 Xbox titles, we continue to open new opportunities for customers to engage both on- and off-console. With our acquisition of PlayFab in January 2018, we enable worldwide game developers to utilize game services, LiveOps, and analytics for player acquisition, engagement, and retention. We have also made these services available for developers outside of the gaming industry.
Xbox Live enables people to connect and share online gaming experiences and is accessible on Xbox consoles, Windows-enabled devices, and other devices. Xbox Live is designed to benefit users by providing access to a network of certified applications and services and to benefit our developer and partner ecosystems by providing access to a large customer base. Xbox Live revenue is mainly affected by subscriptions and sales of Xbox Live enabled content, as well as advertising. We also continue to design and sell gaming content to showcase our unique platform capabilities for Xbox consoles, Windows-enabled devices, and other devices. Growth of our Gaming business is determined by the overall active user base through Xbox Live enabled content, availability of games, providing exclusive game content that gamers seek, the computational power and reliability of the devices used to access our content and services, and the ability to create new experiences via online services including game streaming, downloadable content, and peripherals.
Search
Our Search business, including Bing and Microsoft Advertising, is designed to deliver relevant online advertising to a global audience. We have several partnerships with other companies, including Verizon Media Group, through which we provide and monetize search queries. Growth depends on our ability to attract new users, understand intent, and match intent with relevant content and advertiser offerings.
Competition
Windows faces competition from various software products and from alternative platforms and devices, mainly from Apple and Google. We believe Windows competes effectively by giving customers choice, value, flexibility, security, an easy-to-use interface, and compatibility with a broad range of hardware and software applications, including those that enable productivity.
Devices face competition from various computer, tablet, and hardware manufacturers who offer a unique combination of high-quality industrial design and innovative technologies across various price points. These manufacturers, many of which are also current or potential partners and customers, include Apple and our Windows OEMs.
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Our gaming platform competes with console platforms from Nintendo and Sony, both of which have a large, established base of customers. The lifecycle for gaming and entertainment consoles averages five to ten years. Nintendo released its latest generation console in March 2017 and Sony released its latest generation console in November 2013. We also compete with other providers of entertainment services through online marketplaces. We believe our gaming platform is effectively positioned against competitive products and services based on significant innovation in hardware architecture, user interface, developer tools, online gaming and entertainment services, and continued strong exclusive content from our own game franchises as well as other digital content offerings. Our video games competitors include Electronic Arts and Activision Blizzard. Xbox Live and our cloud gaming services face competition from various online marketplaces, including those operated by Amazon, Apple, and Google.
Our search business competes with Google and a wide array of websites, social platforms like Facebook, and portals that provide content and online offerings to end users.
OPERATIONS
We have operations centers that support operations in their regions, including customer contract and order processing, credit and collections, information processing, and vendor management and logistics. The regional center in Ireland supports the European, Middle Eastern, and African region; the center in Singapore supports the Japan, India, Greater China, and Asia-Pacific region; and the centers in Fargo, North Dakota, Fort Lauderdale, Florida, Puerto Rico, Redmond, Washington, and Reno, Nevada support Latin America and North America. In addition to the operations centers, we also operate datacenters throughout the Americas, Europe, Australia, and Asia, as well as in the Middle East and Africa.
To serve the needs of customers around the world and to improve the quality and usability of products in international markets, we localize many of our products to reflect local languages and conventions. Localizing a product may require modifying the user interface, altering dialog boxes, and translating text.
Our devices are primarily manufactured by third-party contract manufacturers. We generally have the ability to use other manufacturers if a current vendor becomes unavailable or unable to meet our requirements.
RESEARCH AND DEVELOPMENT
Product and Service Development, and Intellectual Property
We develop most of our products and services internally through the following engineering groups.
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Cloud and AI, focuses on making IT professionals, developers, and their systems more productive and efficient through development of cloud infrastructure, server, database, CRM, ERP, management and development tools, AI cognitive services, and other business process applications and services for enterprises.
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Experiences and Devices, focuses on instilling a unifying product ethos across our end-user experiences and devices, including Office, Windows, Enterprise Mobility and Management, and Surface.
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AI and Research, focuses on our AI innovations and other forward-looking research and development efforts spanning infrastructure, services, applications, and search.
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LinkedIn, focuses on our services that transform the way customers hire, market, sell, and learn.
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Gaming, focuses on connecting gaming assets across the range of devices to grow and engage the Xbox Live member network through game experiences, streaming content, and social interaction.
Internal development allows us to maintain competitive advantages that come from product differentiation and closer technical control over our products and services. It also gives us the freedom to decide which modifications and enhancements are most important and when they should be implemented. We strive to obtain information as early as possible about changing usage patterns and hardware advances that may affect software and hardware design. Before releasing new software platforms, and as we make significant modifications to existing platforms, we provide application vendors with a range of resources and guidelines for development, training, and testing. Generally, we also create product documentation internally.
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We protect our intellectual property investments in a variety of ways. We work actively in the U.S. and internationally to ensure the enforcement of copyright, trademark, trade secret, and other protections that apply to our software and hardware products, services, business plans, and branding. We are a leader among technology companies in pursuing patents and currently have a portfolio of over 61,000 U.S. and international patents issued and over 26,000 pending. While we employ much of our internally-developed intellectual property exclusively in our products and services, we also engage in outbound licensing of specific patented technologies that are incorporated into licensees’ products. From time to time, we enter into broader cross-license agreements with other technology companies covering entire groups of patents. We also purchase or license technology that we incorporate into our products and services. At times, we make select intellectual property broadly available at no or low cost to achieve a strategic objective, such as promoting industry standards, advancing interoperability, or attracting and enabling our external development community. Our increasing engagement with open source software will also cause us to license our intellectual property rights broadly in certain situations.
While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, services, and business methods, we believe, based upon past experience and industry practice, such licenses generally can be obtained on commercially reasonable terms. We believe our continuing research and product development are not materially dependent on any single license or other agreement with a third party relating to the development of our products.
Investing in the Future
Our success is based on our ability to create new and compelling products, services, and experiences for our users, to initiate and embrace disruptive technology trends, to enter new geographic and product markets, and to drive broad adoption of our products and services. We invest in a range of emerging technology trends and breakthroughs that we believe offer significant opportunities to deliver value to our customers and growth for the Company. Based on our assessment of key technology trends, we maintain our long-term commitment to research and development across a wide spectrum of technologies, tools, and platforms spanning digital work and life experiences, cloud computing, AI, devices, and operating systems.
While our main research and development facilities are located in Redmond, Washington, we also operate research and development facilities in other parts of the U.S. and around the world, including Canada, China, Czech Republic, India, Ireland, Israel, and the United Kingdom. This global approach helps us remain competitive in local markets and enables us to continue to attract top talent from across the world. We generally fund research at the corporate level to ensure that we are looking beyond immediate product considerations to opportunities further in the future. We also fund research and development activities at the operating segment level. Much of our segment level research and development is coordinated with other segments and leveraged across the Company.
In addition to our main research and development operations, we also operate Microsoft Research. Microsoft Research is one of the world’s largest corporate research organizations and works in close collaboration with top universities around the world to advance the state-of-the-art in computer science and a broad range of other disciplines, providing us a unique perspective on future trends and contributing to our innovation.
We plan to continue to make significant investments in a broad range of research and development efforts.
DISTRIBUTION, SALES, AND MARKETING
We market and distribute our products and services through the following channels: OEMs, direct, and distributors and resellers. Our sales force performs a variety of functions, including working directly with enterprises and public-sector organizations worldwide to identify and meet their technology requirements; managing OEM relationships; and supporting system integrators, independent software vendors, and other partners who engage directly with our customers to perform sales, consulting, and fulfillment functions for our products and services.
OEMs
We distribute our products and services through OEMs that pre-install our software on new devices and servers they sell. The largest component of the OEM business is the Windows operating system pre-installed on devices. OEMs also sell devices pre-installed with other Microsoft products and services, including applications such as Office and the capability to subscribe to Office 365.
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There are two broad categories of OEMs. The largest category of OEMs are direct OEMs as our relationship with them is managed through a direct agreement between Microsoft and the OEM. We have distribution agreements covering one or more of our products with virtually all the multinational OEMs, including Acer, ASUS, Dell, Fujitsu, Hewlett-Packard, Lenovo, Samsung, Sharp, Toshiba, and with many regional and local OEMs. The second broad category of OEMs are system builders consisting of lower-volume PC manufacturers, which source Microsoft software for pre-installation and local redistribution primarily through the Microsoft distributor channel rather than through a direct agreement or relationship with Microsoft.
Direct
Many organizations that license our products and services transact directly with us through Enterprise Agreements and Enterprise Services contracts, with sales support from system integrators, independent software vendors, web agencies, and partners that advise organizations on licensing our products and services (“Enterprise Agreement Software Advisors” or “ESA”). Microsoft offers direct sales programs targeted to reach small, medium, and corporate customers, in addition to those offered through the reseller channel. A large network of partner advisors support many of these sales.
We also sell commercial and consumer products and services directly to customers, such as cloud services, search, and gaming, through our digital marketplaces, online stores, and retail stores.
Distributors and Resellers
Organizations also license our products and services indirectly, primarily through licensing solution partners (“LSP”), distributors, value-added resellers (“VAR”), and retailers. Although each type of reselling partner may reach organizations of all sizes, LSPs are primarily engaged with large organizations, distributors resell primarily to VARs, and VARs typically reach small and medium organizations. ESAs are also typically authorized as LSPs and operate as resellers for our other volume licensing programs. Microsoft Cloud Solution Provider is our main partner program for reselling cloud services.
We distribute our retail packaged products primarily through independent non-exclusive distributors, authorized replicators, resellers, and retail outlets. Individual consumers obtain these products primarily through retail outlets. We distribute our devices through third-party retailers. We have a network of field sales representatives and field support personnel that solicit orders from distributors and resellers, and provide product training and sales support.
Our Dynamics business solutions are also licensed to enterprises through a global network of channel partners providing vertical solutions and specialized services.
LICENSING OPTIONS
We offer options for organizations that want to purchase our cloud services, on-premises software, and Software Assurance. We license software to organizations under volume licensing agreements to allow the customer to acquire multiple licenses of products and services instead of having to acquire separate licenses through retail channels. We use different programs designed to provide flexibility for organizations of various sizes. While these programs may differ in various parts of the world, generally they include those discussed below.
SA conveys rights to new software and upgrades for perpetual licenses released over the contract period. It also provides support, tools, and training to help customers deploy and use software efficiently. SA is included with certain volume licensing agreements and is an optional purchase with others.
Volume Licensing Programs
Enterprise Agreement
Enterprise Agreements offer large organizations a manageable volume licensing program that gives them the flexibility to buy cloud services and software licenses under one agreement. Enterprise Agreements are designed for medium or large organizations that want to license cloud services and on-premises software organization-wide over a three-year period. Organizations can elect to purchase perpetual licenses or subscribe to licenses. SA is included.
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Microsoft Product and Services Agreement
Microsoft Product and Services Agreements are designed for medium and large organizations that want to license cloud services and on-premises software as needed, with no organization-wide commitment, under a single, non-expiring agreement. Organizations purchase perpetual licenses or subscribe to licenses. SA is optional for customers that purchase perpetual licenses.
Open
Open agreements are a simple, cost-effective way to acquire the latest Microsoft technology. Open agreements are designed for small and medium organizations that want to license cloud services and on-premises software over a one- to three-year period. Under the Open agreements, organizations purchase perpetual licenses and SA is optional. Under Open Value agreements, organizations can elect to purchase perpetual licenses or subscribe to licenses and SA is included.
Select Plus
Select Plus agreements are designed for government and academic organizations to acquire on-premises licenses at any affiliate or department level, while realizing advantages as one organization. Organizations purchase perpetual licenses and SA is optional.
Microsoft Online Subscription Agreement
Microsoft Online Subscription Agreements are designed for small and medium organizations that want to subscribe to, activate, provision, and maintain cloud services seamlessly and directly via the web. The agreement allows customers to acquire monthly or annual subscriptions for cloud-based services.
Partner Programs
The Microsoft Cloud Solution Provider program offers customers an easy way to license the cloud services they need in combination with the value-added services offered by their systems integrator, hosting partner, or cloud reseller partner. Partners in this program can easily package their own products and services to directly provision, manage, and support their customer subscriptions.
The Microsoft Services Provider License Agreement allows service providers and independent software vendors who want to license eligible Microsoft software products to provide software services and hosted applications to their end customers. Partners license software over a three-year period and are billed monthly based on consumption.
The Independent Software Vendor Royalty program enables partners to integrate Microsoft products into other applications and then license the unified business solution to their end users.
CUSTOMERS
Our customers include individual consumers, small and medium organizations, large global enterprises, public-sector institutions, Internet service providers, application developers, and OEMs. Our practice is to ship our products promptly upon receipt of purchase orders from customers; consequently, backlog is not significant.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers as of July 31, 2019 were as follows:
Name
Age
Position with the Company
Satya Nadella
51
Chief Executive Officer
Christopher C. Capossela
49
Executive Vice President, Marketing and Consumer Business, and Chief Marketing Officer
Jean-Philippe Courtois
58
Executive Vice President and President, Microsoft Global Sales, Marketing and Operations
Kathleen T. Hogan
53
Executive Vice President, Human Resources
Amy E. Hood
47
Executive Vice President, Chief Financial Officer
Margaret L. Johnson
57
Executive Vice President, Business Development
Bradford L. Smith
60
President and Chief Legal Officer
Mr. Nadella was appointed Chief Executive Officer in February 2014. He served as Executive Vice President, Cloud and Enterprise from July 2013 until that time. From 2011 to 2013, Mr. Nadella served as President, Server and Tools. From 2009 to 2011, he was Senior Vice President, Online Services Division. From 2008 to 2009, he was Senior Vice President, Search, Portal, and Advertising. Since joining Microsoft in 1992, Mr. Nadella’s roles also included Vice President of the Business Division. Mr. Nadella also serves on the Board of Directors of Starbucks Corporation.
Mr. Capossela was appointed Executive Vice President, Marketing and Consumer Business, and Chief Marketing Officer in July 2016. He had served as Executive Vice President, Chief Marketing Officer since March 2014. Previously, he served as the worldwide leader of the Consumer Channels Group, responsible for sales and marketing activities with OEMs, operators, and retail partners. In his more than 25 years at Microsoft, Mr. Capossela has held a variety of marketing leadership roles in the Microsoft Office Division. He was responsible for marketing productivity solutions including Microsoft Office, Office 365, SharePoint, Exchange, Skype for Business, Project, and Visio.
Mr. Courtois was appointed Executive Vice President and President, Microsoft Global Sales, Marketing and Operations in July 2016. Before that he was President of Microsoft International since 2005. He was Chief Executive Officer, Microsoft Europe, Middle East, and Africa from 2003 to 2005. He was Senior Vice President and President, Microsoft Europe, Middle East, and Africa from 2000 to 2003. He was Corporate Vice President, Worldwide Customer Marketing from 1998 to 2000. Mr. Courtois joined Microsoft in 1984.
Ms. Hogan was appointed Executive Vice President, Human Resources in November 2014. Prior to that Ms. Hogan was Corporate Vice President of Microsoft Services. She also served as Corporate Vice President of Customer Service and Support. Ms. Hogan joined Microsoft in 2003.
Ms. Hood was appointed Executive Vice President and Chief Financial Officer in July 2013, subsequent to her appointment as Chief Financial Officer in May 2013. From 2010 to 2013, Ms. Hood was Chief Financial Officer of the Microsoft Business Division. From 2006 through 2009, Ms. Hood was General Manager, Microsoft Business Division Strategy. Since joining Microsoft in 2002, Ms. Hood has also held finance-related positions in the Server and Tools Business and the corporate finance organization. Ms. Hood also serves on the Board of Directors of 3M Corporation.
Ms. Johnson was appointed Executive Vice President, Business Development in September 2014. Prior to that Ms. Johnson spent 24 years at Qualcomm in various leadership positions across engineering, sales, marketing and business development. She most recently served as Executive Vice President of Qualcomm Technologies, Inc. Ms. Johnson also serves on the Board of Directors of BlackRock, Inc.
Mr. Smith was appointed President and Chief Legal Officer in September 2015. He served as Executive Vice President, General Counsel, and Secretary from 2011 to 2015, and served as Senior Vice President, General Counsel, and Secretary from 2001 to 2011. Mr. Smith was also named Chief Compliance Officer in 2002. Since joining Microsoft in 1993, he was Deputy General Counsel for Worldwide Sales and previously was responsible for managing the European Law and Corporate Affairs Group, based in Paris. Mr. Smith also serves on the Board of Directors of Netflix, Inc.
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EMPLOYEES
As of June 30, 2019, we employed approximately 144,000 people on a full-time basis, 85,000 in the U.S. and 59,000 internationally. Of the total employed people, 47,000 were in operations, including manufacturing, distribution, product support, and consulting services; 47,000 were in product research and development; 38,000 were in sales and marketing; and 12,000 were in general and administration. Certain of our employees are subject to collective bargaining agreements.
AVAILABLE INFORMATION
Our Internet address is www.microsoft.com. At our Investor Relations website, www.microsoft.com/investor, we make available free of charge a variety of information for investors. Our goal is to maintain the Investor Relations website as a portal through which investors can easily find or navigate to pertinent information about us, including:
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Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file that material with or furnish it to the Securities and Exchange Commission (“SEC”) at www.sec.gov.
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Information on our business strategies, financial results, and metrics for investors.
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Announcements of investor conferences, speeches, and events at which our executives talk about our product, service, and competitive strategies. Archives of these events are also available.
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Press releases on quarterly earnings, product and service announcements, legal developments, and international news.
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Corporate governance information including our articles of incorporation, bylaws, governance guidelines, committee charters, codes of conduct and ethics, global corporate social responsibility initiatives, and other governance-related policies.
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Other news and announcements that we may post from time to time that investors might find useful or interesting.
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Opportunities to sign up for email alerts to have information pushed in real time.
The information found on our website is not part of this or any other report we file with, or furnish to, the SEC. In addition to these channels, we use social media to communicate to the public. It is possible that the information we post on social media could be deemed to be material to investors. We encourage investors, the media, and others interested in Microsoft to review the information we post on the social media channels listed on our Investor Relations website.
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ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock.
We face intense competition across all markets for our products and services, which may lead to lower revenue or operating margins.
Competition in the technology sector
Our competitors range in size from diversified global companies with significant research and development resources to small, specialized firms whose narrower product lines may let them be more effective in deploying technical, marketing, and financial resources. Barriers to entry in many of our businesses are low and many of the areas in which we compete evolve rapidly with changing and disruptive technologies, shifting user needs, and frequent introductions of new products and services. Our ability to remain competitive depends on our success in making innovative products, devices, and services that appeal to businesses and consumers.
Competition among platform-based ecosystems
An important element of our business model has been to create platform-based ecosystems on which many participants can build diverse solutions. A well-established ecosystem creates beneficial network effects among users, application developers, and the platform provider that can accelerate growth. Establishing significant scale in the marketplace is necessary to achieve and maintain attractive margins. We face significant competition from firms that provide competing platforms.
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A competing vertically-integrated model, in which a single firm controls the software and hardware elements of a product and related services, has succeeded with some consumer products such as personal computers, tablets, phones, gaming consoles, wearables, and other endpoint devices. Competitors pursuing this model also earn revenue from services integrated with the hardware and software platform, including applications and content sold through their integrated marketplaces. They may also be able to claim security and performance benefits from their vertically integrated offer. We also offer some vertically-integrated hardware and software products and services. To the extent we shift a portion of our business to a vertically integrated model we increase our cost of revenue and reduce our operating margins.
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We derive substantial revenue from licenses of Windows operating systems on personal computers. We face significant competition from competing platforms developed for new devices and form factors such as smartphones and tablet computers. These devices compete on multiple bases including price and the perceived utility of the device and its platform. Users are increasingly turning to these devices to perform functions that in the past were performed by personal computers. Even if many users view these devices as complementary to a personal computer, the prevalence of these devices may make it more difficult to attract application developers to our PC operating system platforms. Competing with operating systems licensed at low or no cost may decrease our PC operating system margins. Popular products or services offered on competing platforms could increase their competitive strength. In addition, some of our devices compete with products made by our original equipment manufacturer (“OEM”) partners, which may affect their commitment to our platform.
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Competing platforms have content and application marketplaces with scale and significant installed bases. The variety and utility of content and applications available on a platform are important to device purchasing decisions. Users may incur costs to move data and buy new content and applications when switching platforms. To compete, we must successfully enlist developers to write applications for our platform and ensure that these applications have high quality, security, customer appeal, and value. Efforts to compete with competitors’ content and application marketplaces may increase our cost of revenue and lower our operating margins.
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Business model competition
Companies compete with us based on a growing variety of business models.
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Even as we transition more of our business to infrastructure-, platform-, and software-as-a-service business model, the license-based proprietary software model generates a substantial portion of our software revenue. We bear the costs of converting original ideas into software products through investments in research and development, offsetting these costs with the revenue received from licensing our products. Many of our competitors also develop and sell software to businesses and consumers under this model.
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Other competitors develop and offer free applications, online services and content, and make money by selling third-party advertising. Advertising revenue funds development of products and services these competitors provide to users at no or little cost, competing directly with our revenue-generating products.
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Some companies compete with us by modifying and then distributing open source software at little or no cost to end-users, and earning revenue on advertising or integrated products and services. These firms do not bear the full costs of research and development for the open source software. Some open source software mimics the features and functionality of our products.
The competitive pressures described above may cause decreased sales volumes, price reductions, and/or increased operating costs, such as for research and development, marketing, and sales incentives. This may lead to lower revenue, gross margins, and operating income.
Our increasing focus on cloud-based services presents execution and competitive risks. A growing part of our business involves cloud-based services available across the spectrum of computing devices. Our strategic vision is to compete and grow by building best-in-class platforms and productivity services for an intelligent cloud and an intelligent edge infused with artificial intelligence (“AI”). At the same time, our competitors are rapidly developing and deploying cloud-based services for consumers and business customers. Pricing and delivery models are evolving. Devices and form factors influence how users access services in the cloud and sometimes the user’s choice of which cloud-based services to use. We are devoting significant resources to develop and deploy our cloud-based strategies. The Windows ecosystem must continue to evolve with this changing environment. We are undertaking cultural and organizational changes to drive accountability and eliminate obstacles to innovation. Our intelligent cloud and intelligent edge worldview is connected with the growth of the Internet of Things (“IoT”). Our success in the IoT will depend on the level of adoption of our offerings such as Microsoft Azure, Azure Stack, Azure IoT Edge, and Azure Sphere. We may not establish market share sufficient to achieve scale necessary to achieve our business objectives.
Besides software development costs, we are incurring costs to build and maintain infrastructure to support cloud computing services. These costs will reduce the operating margins we have previously achieved. Whether we succeed in cloud-based services depends on our execution in several areas, including:
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Continuing to bring to market compelling cloud-based experiences that generate increasing traffic and market share.
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Maintaining the utility, compatibility, and performance of our cloud-based services on the growing array of computing devices, including PCs, smartphones, tablets, gaming consoles, and other devices, as well as sensors and other endpoints.
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Continuing to enhance the attractiveness of our cloud platforms to third-party developers.
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Ensuring our cloud-based services meet the reliability expectations of our customers and maintain the security of their data.
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Making our suite of cloud-based services platform-agnostic, available on a wide range of devices and ecosystems, including those of our competitors.
It is uncertain whether our strategies will attract the users or generate the revenue required to succeed. If we are not effective in executing organizational and technical changes to increase efficiency and accelerate innovation, or if we fail to generate sufficient usage of our new products and services, we may not grow revenue in line with the infrastructure and development investments described above. This may negatively impact gross margins and operating income.
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We make significant investments in products and services that may not achieve expected returns. We will continue to make significant investments in research, development, and marketing for existing products, services, and technologies, including the Windows operating system, Microsoft 365, Office, Bing, Microsoft SQL Server, Windows Server, Azure, Office 365, Xbox Live, Mixer, LinkedIn, and other products and services. We also invest in the development and acquisition of a variety of hardware for productivity, communication, and entertainment including PCs, tablets, gaming devices, and HoloLens. Investments in new technology are speculative. Commercial success depends on many factors, including innovativeness, developer support, and effective distribution and marketing. If customers do not perceive our latest offerings as providing significant new functionality or other value, they may reduce their purchases of new software and hardware products or upgrades, unfavorably affecting revenue. We may not achieve significant revenue from new product, service, and distribution channel investments for several years, if at all. New products and services may not be profitable, and even if they are profitable, operating margins for some new products and businesses will not be as high as the margins we have experienced historically. We may not get engagement in certain features, like Microsoft Edge and Bing, that drive post-sale monetization opportunities. Our data handling practices across our products and services will continue to be under scrutiny and perceptions of mismanagement, driven by regulatory activity or negative public reaction to our practices or product experiences, which could negatively impact product and feature adoption, product design, and product quality.
Developing new technologies is complex. It can require long development and testing periods. Significant delays in new releases or significant problems in creating new products or services could adversely affect our revenue.
Acquisitions, joint ventures, and strategic alliances may have an adverse effect on our business. We expect to continue making acquisitions and entering into joint ventures and strategic alliances as part of our long-term business strategy. In December 2016, we completed our acquisition of LinkedIn Corporation (“LinkedIn”) for $27.0 billion, and in October 2018, we completed our acquisition of GitHub, Inc. for $7.5 billion. These acquisitions and other transactions and arrangements involve significant challenges and risks, including that they do not advance our business strategy, that we get an unsatisfactory return on our investment, that we have difficulty integrating and retaining new employees, business systems, and technology, or that they distract management from our other businesses. If an arrangement fails to adequately anticipate changing circumstances and interests of a party, it may result in early termination or renegotiation of the arrangement. The success of these transactions and arrangements will depend in part on our ability to leverage them to enhance our existing products and services or develop compelling new ones. It may take longer than expected to realize the full benefits from these transactions and arrangements such as increased revenue or enhanced efficiencies, or the benefits may ultimately be smaller than we expected. These events could adversely affect our consolidated financial statements.
If our goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings. We acquire other companies and intangible assets and may not realize all the economic benefit from those acquisitions, which could cause an impairment of goodwill or intangibles. We review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill for impairment at least annually. Factors that may be a change in circumstances, indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable, include a decline in our stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in industry segments in which we participate. We have in the past recorded, and may in the future be required to record a significant charge on our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively affecting our results of operations. Our acquisition of LinkedIn resulted in a significant increase in our goodwill and intangible asset balances.
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Cyberattacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims, or harm to our reputation or competitive position.
Security of our information technology
Threats to IT security can take a variety of forms. Individual and groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states, continuously undertake attacks that pose threats to our customers and our IT. These actors may use a wide variety of methods, which may include developing and deploying malicious software or exploiting vulnerabilities in hardware, software, or other infrastructure in order to attack our products and services or gain access to our networks and datacenters, using social engineering techniques to induce our employees, users, partners, or customers to disclose passwords or other sensitive information or take other actions to gain access to our data or our users’ or customers’ data, or acting in a coordinated manner to launch distributed denial of service or other coordinated attacks. Inadequate account security practices may also result in unauthorized access to confidential data. For example, system administrators may fail to timely remove employee account access when no longer appropriate. Employees or third parties may intentionally compromise our or our users’ security or systems, or reveal confidential information.
Cyberthreats are constantly evolving, increasing the difficulty of detecting and successfully defending against them. We may have no current capability to detect certain vulnerabilities, which may allow them to persist in the environment over long periods of time. Cyberthreats can have cascading impacts that unfold with increasing speed across our internal networks and systems and those of our partners and customers. Breaches of our facilities, network, or data security could disrupt the security of our systems and business applications, impair our ability to provide services to our customers and protect the privacy of their data, result in product development delays, compromise confidential or technical business information harming our reputation or competitive position, result in theft or misuse of our intellectual property or other assets, require us to allocate more resources to improved technologies, or otherwise adversely affect our business.
In addition, our internal IT environment continues to evolve. Often, we are early adopters of new devices and technologies. We embrace new ways of sharing data and communicating internally and with partners and customers using methods such as social networking and other consumer-oriented technologies. Our business policies and internal security controls may not keep pace with these changes as new threats emerge.
Security of our products, services, devices, and customers’ data
The security of our products and services is important in our customers’ decisions to purchase or use our products or services. Security threats are a significant challenge to companies like us whose business is providing technology products and services to others. Threats to our own IT infrastructure can also affect our customers. Customers using our cloud-based services rely on the security of our infrastructure, including hardware and other elements provided by third parties, to ensure the reliability of our services and the protection of their data. Adversaries tend to focus their efforts on the most popular operating systems, programs, and services, including many of ours, and we expect that to continue. Adversaries that acquire user account information at other companies can use that information to compromise our users’ accounts where accounts share the same attributes like passwords. Inadequate account security practices may also result in unauthorized access. We are also increasingly incorporating open source software into our products. There may be vulnerabilities in open source software that may make our products susceptible to cyberattacks.
To defend against security threats to our internal IT systems, our cloud-based services, and our customers’ systems, we must continuously engineer more secure products and services, enhance security and reliability features, improve the deployment of software updates to address security vulnerabilities in our own products as well as those provided by others, develop mitigation technologies that help to secure customers from attacks even when software updates are not deployed, maintain the digital security infrastructure that protects the integrity of our network, products, and services, and provide security tools such as firewalls and anti-virus software and information about the need to deploy security measures and the impact of doing so.
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The cost of these steps could reduce our operating margins. If we fail to do these things well, actual or perceived security vulnerabilities in our products and services, data corruption issues, or reduced performance could harm our reputation and lead customers to reduce or delay future purchases of products or subscriptions to services, or to use competing products or services. Customers may also spend more on protecting their existing computer systems from attack, which could delay adoption of additional products or services. Customers may fail to update their systems, continue to run software or operating systems we no longer support, or may fail timely to install or enable security patches. Any of these could adversely affect our reputation and revenue. Actual or perceived vulnerabilities may lead to claims against us. Our license agreements typically contain provisions that eliminate or limit our exposure to liability, but there is no assurance these provisions will withstand legal challenges. At times, to achieve commercial objectives, we may enter into agreements with larger liability exposure to customers.
As illustrated by the Spectre and Meltdown threats, our products operate in conjunction with and are dependent on products and components across a broad ecosystem of third parties. If there is a security vulnerability in one of these components, and if there is a security exploit targeting it, we could face increased costs, liability claims, reduced revenue, or harm to our reputation or competitive position.
Disclosure and misuse of personal data could result in liability and harm our reputation. As we continue to grow the number and scale of our cloud-based offerings, we store and process increasingly large amounts of personally identifiable information of our customers and users. The continued occurrence of high-profile data breaches provides evidence of an external environment increasingly hostile to information security. Despite our efforts to improve the security controls across our business groups and geographies, it is possible our security controls over personal data, our training of employees and third parties on data security, and other practices we follow may not prevent the improper disclosure or misuse of customer or user data we or our vendors store and manage. In addition, third parties who have limited access to our customer or user data may use this data in unauthorized ways. Improper disclosure or misuse could harm our reputation, lead to legal exposure to customers or users, or subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue. Our software products and services also enable our customers and users to store and process personal data on-premises or, increasingly, in a cloud-based environment we host. Government authorities can sometimes require us to produce customer or user data in response to valid legal orders. In the U.S. and elsewhere, we advocate for transparency concerning these requests and appropriate limitations on government authority to compel disclosure. Despite our efforts to protect customer and user data, perceptions that the collection, use, and retention of personal information is not satisfactorily protected could inhibit sales of our products or services, and could limit adoption of our cloud-based solutions by consumers, businesses, and government entities. Additional security measures we may take to address customer or user concerns, or constraints on our flexibility to determine where and how to operate datacenters in response to customer or user expectations or governmental rules or actions, may cause higher operating expenses or hinder growth of our products and services.
We may not be able to protect information in our products and services from use by others. LinkedIn and other Microsoft products and services contain valuable information and content protected by contractual restrictions or technical measures. In certain cases, we have made commitments to our members and users to limit access to or use of this information. Changes in the law or interpretations of the law may weaken our ability to prevent third parties from scraping or gathering information or content through use of bots or other measures and using it for their own benefit, thus diminishing the value of our products and services.
Abuse of our platforms may harm our reputation or user engagement.
Advertising, professional, and social platform abuses
For LinkedIn, Microsoft Advertising, MSN, Xbox Live, and other products and services that provide content or host ads that come from or can be influenced by third parties, our reputation or user engagement may be negatively affected by activity that is hostile or inappropriate. This activity may come from users impersonating other people or organizations, use of our products or services to spread terrorist or violent extremist content or to disseminate information that may be viewed as misleading or intended to manipulate the opinions of our users, or the use of our products or services that violates our terms of service or otherwise for objectionable or illegal ends. Preventing or responding to these actions may require us to make substantial investments in people and technology and these investments may not be successful, adversely affecting our business and consolidated financial statements.
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PART I
Item 1A
Harmful content online
Our hosted consumer services as well as our enterprise services may be used by third parties to disseminate harmful or illegal content in violation of our terms or applicable law. We may not proactively discover such content due to scale and the limitations of existing technologies, and when discovered by users, such content may negatively affect our reputation, our brands, and user engagement. Regulations and other initiatives to make platforms responsible for preventing or eliminating harmful content online are gaining momentum and we expect this to continue. We may be subject to enhanced regulatory oversight, substantial liability, or reputational damage if we fail to comply with content moderation regulations, adversely affecting our business and consolidated financial statements.
The development of the IoT presents security, privacy, and execution risks. To support the growth of the intelligent cloud and the intelligent edge, we are developing products, services, and technologies to power the IoT, a network of distributed and interconnected devices employing sensors, data, and computing capabilities including AI. The IoT’s great potential also carries substantial risks. IoT products and services may contain defects in design, manufacture, or operation, that make them insecure or ineffective for their intended purposes. An IoT solution has multiple layers of hardware, sensors, processors, software, and firmware, several of which we may not develop or control. Each layer, including the weakest layer, can impact the security of the whole system. Many IoT devices have limited interfaces and ability to be updated or patched. IoT solutions may collect large amounts of data, and our handling of IoT data may not satisfy customers or regulatory requirements. IoT scenarios may increasingly affect personal health and safety. If IoT solutions that include our technologies do not work as intended, violate the law, or harm individuals or businesses, we may be subject to legal claims or enforcement actions. These risks, if realized, may increase our costs, damage our reputation or brands, or negatively impact our revenues or margins.
Issues in the use of AI in our offerings may result in reputational harm or liability. We are building AI into many of our offerings and we expect this element of our business to grow. We envision a future in which AI operating in our devices, applications, and the cloud helps our customers be more productive in their work and personal lives. As with many disruptive innovations, AI presents risks and challenges that could affect its adoption, and therefore our business. AI algorithms may be flawed. Datasets may be insufficient or contain biased information. Inappropriate or controversial data practices by Microsoft or others could impair the acceptance of AI solutions. These deficiencies could undermine the decisions, predictions, or analysis AI applications produce, subjecting us to competitive harm, legal liability, and brand or reputational harm. Some AI scenarios present ethical issues. If we enable or offer AI solutions that are controversial because of their impact on human rights, privacy, employment, or other social issues, we may experience brand or reputational harm.
We may have excessive outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure. Our increasing user traffic, growth in services, and the complexity of our products and services demand more computing power. We spend substantial amounts to build, purchase, or lease datacenters and equipment and to upgrade our technology and network infrastructure to handle more traffic on our websites and in our datacenters. These demands continue to increase as we introduce new products and services and support the growth of existing services such as Bing, Azure, Microsoft Account services, Office 365, Microsoft Teams, Dynamics 365, OneDrive, SharePoint Online, Skype, Xbox Live, and Outlook.com. We are rapidly growing our business of providing a platform and back-end hosting for services provided by third parties to their end users. Maintaining, securing, and expanding this infrastructure is expensive and complex. It requires that we maintain an Internet connectivity infrastructure that is robust and reliable within competitive and regulatory constraints that continue to evolve. Inefficiencies or operational failures, including temporary or permanent loss of customer data or insufficient Internet connectivity, could diminish the quality of our products, services, and user experience resulting in contractual liability, claims by customers and other third parties, regulatory actions, damage to our reputation, and loss of current and potential users, subscribers, and advertisers, each of which may adversely impact our consolidated financial statements.
We may experience quality or supply problems. Our hardware products such as Xbox consoles, Surface devices, and other devices we design, manufacture, and market are highly complex and can have defects in design, manufacture, or associated software. We could incur significant expenses, lost revenue, and reputational harm as a result of recalls, safety alerts, or product liability claims if we fail to prevent, detect, or address such issues through design, testing, or warranty repairs.
22
PART I
Item 1A
Our software products and services also may experience quality or reliability problems. The highly sophisticated software we develop may contain bugs and other defects that interfere with their intended operation. Our customers increasingly rely on us for critical functions, potentially magnifying the impact of quality or reliability issues. Any defects we do not detect and fix in pre-release testing could cause reduced sales and revenue, damage to our reputation, repair or remediation costs, delays in the release of new products or versions, or legal liability. Although our license agreements typically contain provisions that eliminate or limit our exposure to liability, there is no assurance these provisions will withstand legal challenge.
We acquire some device and datacenter components from sole suppliers. Our competitors use some of the same suppliers and their demand for hardware components can affect the capacity available to us. If a component from a sole-source supplier is delayed or becomes unavailable, whether because of supplier capacity constraint, industry shortages, legal or regulatory changes, or other reasons, we may not obtain timely replacement supplies, resulting in reduced sales or inadequate datacenter capacity. Component shortages, excess or obsolete inventory, or price reductions resulting in inventory adjustments may increase our cost of revenue. Xbox consoles, Surface devices, datacenter servers, and other hardware are assembled in Asia and other geographies that may be subject to disruptions in the supply chain, resulting in shortages that would affect our revenue and operating margins. These same risks would apply to any other hardware and software products we may offer.
We may not be able to protect our source code from copying if there is an unauthorized disclosure. Source code, the detailed program commands for our operating systems and other software programs, is critical to our business. Although we license portions of our application and operating system source code to several licensees, we take significant measures to protect the secrecy of large portions of our source code. If our source code leaks, we might lose future trade secret protection for that code. It may then become easier for third parties to compete with our products by copying functionality, which could adversely affect our revenue and operating margins. Unauthorized disclosure of source code also could increase the security risks described in the next paragraph.
Legal changes, our evolving business model, piracy, and other factors may decrease the value of our intellectual property. Protecting our intellectual property rights and combating unlicensed copying and use of our software and other intellectual property on a global basis is difficult. While piracy adversely affects U.S. revenue, the impact on revenue from outside the U.S. is more significant, particularly countries in which the legal system provides less protection for intellectual property rights. Our revenue in these markets may grow more slowly than the underlying device market. Similarly, the absence of harmonized patent laws makes it more difficult to ensure consistent respect for patent rights. Throughout the world, we educate users about the benefits of licensing genuine products and obtaining indemnification benefits for intellectual property risks, and we educate lawmakers about the advantages of a business climate where intellectual property rights are protected. Reductions in the legal protection for software intellectual property rights could adversely affect revenue.
We expend significant resources to patent the intellectual property we create with the expectation that we will generate revenues by incorporating that intellectual property in our products or services or, in some instances, by licensing our patents to others in return for a royalty. Changes in the law may continue to weaken our ability to prevent the use of patented technology or collect revenue for licensing our patents. These include legislative changes and regulatory actions that make it more difficult to obtain injunctions, and the increasing use of legal process to challenge issued patents. Similarly, licensees of our patents may fail to satisfy their obligations to pay us royalties, or may contest the scope and extent of their obligations. The royalties we can obtain to monetize our intellectual property may decline because of the evolution of technology, selling price changes in products using licensed patents, or the difficulty of discovering infringements. Finally, our increasing engagement with open source software will also cause us to license our intellectual property rights broadly in certain situations and may negatively impact revenue.
23
PART I
Item 1A
Third parties may claim we infringe their intellectual property rights. From time to time, others claim we infringe their intellectual property rights. The number of these claims may grow because of constant technological change in the markets in which we compete, the extensive patent coverage of existing technologies, the rapid rate of issuance of new patents, and our offering of first-party devices, such as Microsoft Surface. To resolve these claims, we may enter into royalty and licensing agreements on terms that are less favorable than currently available, stop selling or redesign affected products or services, or pay damages to satisfy indemnification commitments with our customers. These outcomes may cause operating margins to decline. Besides money damages, in some jurisdictions plaintiffs can seek injunctive relief that may limit or prevent importing, marketing, and selling our products or services that have infringing technologies. In some countries, such as Germany, an injunction can be issued before the parties have fully litigated the validity of the underlying patents. We have paid significant amounts to settle claims related to the use of technology and intellectual property rights and to procure intellectual property rights as part of our strategy to manage this risk, and may continue to do so.
We have claims and lawsuits against us that may result in adverse outcomes. We are subject to a variety of claims and lawsuits. These claims may arise from a wide variety of business practices and initiatives, including major new product releases such as Windows 10, significant business transactions, warranty or product claims, and employment practices. Adverse outcomes in some or all of these claims may result in significant monetary damages or injunctive relief that could adversely affect our ability to conduct our business. The litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. A material adverse impact on our consolidated financial statements could occur for the period in which the effect of an unfavorable outcome becomes probable and reasonably estimable.
Government litigation and regulatory activity relating to competition rules may limit how we design and market our products. As a leading global software and device maker, government agencies closely scrutinize us under U.S. and foreign competition laws. Governments are actively enforcing competition laws and regulations, and this includes scrutiny in potentially large markets such as the European Union (“EU”), the U.S., and China. Some jurisdictions also allow competitors or consumers to assert claims of anti-competitive conduct. U.S. federal and state antitrust authorities have previously brought enforcement actions and continue to scrutinize our business.
The European Commission (“the Commission”) closely scrutinizes the design of high-volume Microsoft products and the terms on which we make certain technologies used in these products, such as file formats, programming interfaces, and protocols, available to other companies. Flagship product releases such as Windows 10 can receive significant scrutiny under competition laws. For example, in 2004, the Commission ordered us to create new versions of our Windows operating system that do not include certain multimedia technologies and to provide our competitors with specifications for how to implement certain proprietary Windows communications protocols in their own products. In 2009, the Commission accepted a set of commitments we offered to address the Commission’s concerns relating to competition in web browsing software, including an undertaking to address Commission concerns relating to interoperability. The web browsing commitments expired in 2014. The remaining obligations may limit our ability to innovate in Windows or other products in the future, diminish the developer appeal of the Windows platform, and increase our product development costs. The availability of licenses related to protocols and file formats may enable competitors to develop software products that better mimic the functionality of our products, which could hamper sales of our products.
Our portfolio of first-party devices continues to grow; at the same time our OEM partners offer a large variety of devices for our platforms. As a result, increasingly we both cooperate and compete with our OEM partners, creating a risk that we fail to do so in compliance with competition rules. Regulatory scrutiny in this area may increase. Certain foreign governments, particularly in China and other countries in Asia, have advanced arguments under their competition laws that exert downward pressure on royalties for our intellectual property.
Government regulatory actions and court decisions such as these may result in fines, or hinder our ability to provide the benefits of our software to consumers and businesses, reducing the attractiveness of our products and the revenue that come from them. New competition law actions could be initiated, potentially using previous actions as precedent. The outcome of such actions, or steps taken to avoid them, could adversely affect us in a variety of ways, including:
•
We may have to choose between withdrawing products from certain geographies to avoid fines or designing and developing alternative versions of those products to comply with government rulings, which may entail a delay in a product release and removing functionality that customers want or on which developers rely.
24
PART I
Item 1A
•
We may be required to make available licenses to our proprietary technologies on terms that do not reflect their fair market value or do not protect our associated intellectual property.
•
We are subject to a variety of ongoing commitments because of court or administrative orders, consent decrees, or other voluntary actions we have taken. If we fail to comply with these commitments, we may incur litigation costs and be subject to substantial fines or other remedial actions.
•
Our ability to realize anticipated Windows 10 post-sale monetization opportunities may be limited.
Our global operations subject us to potential liability under anti-corruption, trade protection, and other laws and regulations. The Foreign Corrupt Practices Act (“FCPA”) and other anti-corruption laws and regulations (“Anti-Corruption Laws”) prohibit corrupt payments by our employees, vendors, or agents, and the accounting provisions of the FCPA require us to maintain accurate books and records and adequate internal controls. From time to time, we receive inquiries from authorities in the U.S. and elsewhere which may be based on reports from employees and others about our business activities outside the U.S. and our compliance with Anti-Corruption Laws. Periodically, we receive such reports directly and investigate them. On July 22, 2019, our Hungarian subsidiary entered into a non-prosecution agreement (“NPA”) with the U.S. Department of Justice (“DOJ”) and we agreed to the terms of a cease and desist order with the Securities and Exchange Commission. These agreements required us to pay $25.3 million in monetary penalties, disgorgement, and interest pertaining to activities at Microsoft’s subsidiary in Hungary. The NPA, which has a three-year term, also contains certain ongoing compliance requirements, including the obligations to disclose to the DOJ issues that may implicate the FCPA and to cooperate in any inquiries. Most countries in which we operate also have competition laws that prohibit competitors from colluding or otherwise attempting to reduce competition between themselves. While we devote substantial resources to our U.S. and international compliance programs and have implemented policies, training, and internal controls designed to reduce the risk of corrupt payments and collusive activity, our employees, vendors, or agents may violate our policies. Our failure to comply with Anti-Corruption Laws or competition laws could result in significant fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business, and damage to our reputation. Operations outside the U.S. may be affected by changes in trade protection laws, policies, sanctions, and other regulatory requirements affecting trade and investment. We may be subject to legal liability and reputational damage if we sell goods or services in violation of U.S. trade sanctions on restricted entities or countries such as Iran, North Korea, Cuba, Sudan, and Syria.
Other regulatory areas that may apply to our products and online services offerings include user privacy, telecommunications, data storage and protection, and online content. For example, some regulators are taking the position that our offerings such as Skype are covered by existing laws regulating telecommunications services, and some new laws are defining more of our services as regulated telecommunications services. This trend may continue and will result in these offerings being subjected to additional data protection, security, and law enforcement surveillance obligations. Data protection authorities may assert that our collection, use, and management of customer data is inconsistent with their laws and regulations. Legislative or regulatory action relating to cybersecurity requirements may increase the costs to develop, implement, or secure our products and services. Legislative or regulatory action could also emerge in the area of AI and content moderation, increasing costs or restricting opportunity. Applying these laws and regulations to our business is often unclear, subject to change over time, and sometimes may conflict from jurisdiction to jurisdiction. Additionally, these laws and governments’ approach to their enforcement, and our products and services, are continuing to evolve. Compliance with these types of regulation may involve significant costs or require changes in products or business practices that result in reduced revenue. Noncompliance could result in the imposition of penalties or orders we stop the alleged noncompliant activity.
We strive to empower all people and organizations to achieve more, and accessibility of our products is an important aspect of this goal. There is increasing pressure from advocacy groups, regulators, competitors, customers, and other stakeholders to make technology more accessible. If our products do not meet customer expectations or emerging global accessibility requirements, we could lose sales opportunities or face regulatory actions
25
PART I
Item 1A
Laws and regulations relating to the handling of personal data may impede the adoption of our services or result in increased costs, legal claims, fines against us, or reputational damage. The growth of our Internet- and cloud-based services internationally relies increasingly on the movement of data across national boundaries. Legal requirements relating to the collection, storage, handling, and transfer of personal data continue to evolve. For example, the EU and the U.S. formally entered into a new framework in July 2016 that provides a mechanism for companies to transfer data from EU member states to the U.S. This framework, called the Privacy Shield, is intended to address shortcomings identified by the European Court of Justice in a predecessor mechanism. The Privacy Shield and other mechanisms are currently subject to challenges in European courts, which may lead to uncertainty about the legal basis for data transfers across the Atlantic. The Privacy Shield and other potential rules on the flow of data across borders could increase the cost and complexity of delivering our products and services in some markets. In May 2018, a new EU law governing data practices and privacy, the General Data Protection Regulation (“GDPR”), became effective. The law, which applies to all of our activities conducted from an establishment in the EU or related to products and services offered in the EU, imposes a range of new compliance obligations regarding the handling of personal data. Engineering efforts to build new capabilities to facilitate compliance with the law have entailed substantial expense and the diversion of engineering resources from other projects and may continue to do so. We might experience reduced demand for our offerings if we are unable to engineer products that meet our legal duties or help our customers meet their obligations under the GDPR or other data regulations, or if the changes we implement to comply with the GDPR make our offerings less attractive. The GDPR imposes significant new obligations and compliance with these obligations depends in part on how particular regulators interpret and apply them. If we fail to comply with the GDPR, or if regulators assert we have failed to comply with the GDPR, it may lead to regulatory enforcement actions, which can result in monetary penalties of up to 4% of worldwide revenue, private lawsuits, or reputational damage. In the U.S., California has adopted and several states are considering adopting laws and regulations imposing obligations regarding the handling of personal data.
The Company’s investment in gaining insights from data is becoming central to the value of the services we deliver to customers, to our operational efficiency and key opportunities in monetization, customer perceptions of quality, and operational efficiency. Our ability to use data in this way may be constrained by regulatory developments that impede realizing the expected return from this investment. Ongoing legal reviews by regulators may result in burdensome or inconsistent requirements, including data sovereignty and localization requirements, affecting the location and movement of our customer and internal employee data as well as the management of that data. Compliance with applicable laws and regulations regarding personal data may require changes in services, business practices, or internal systems that result in increased costs, lower revenue, reduced efficiency, or greater difficulty in competing with foreign-based firms. Compliance with data regulations might limit our ability to innovate or offer certain features and functionality in some jurisdictions where we operate. Failure to comply with existing or new rules may result in significant penalties or orders to stop the alleged noncompliant activity, as well as negative publicity and diversion of management time and effort.
We may have additional tax liabilities. We are subject to income taxes in the U.S. and many foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. For example, compliance with the 2017 United States Tax Cuts and Jobs Act (“TCJA”) may require the collection of information not regularly produced within the Company, the use of estimates in our consolidated financial statements, and the exercise of significant judgment in accounting for its provisions. As regulations and guidance evolve with respect to the TCJA, and as we gather more information and perform more analysis, our results may differ from previous estimates and may materially affect our consolidated financial statements.
We regularly are under audit by tax authorities in different jurisdictions. Although we believe that our provision for income taxes and our tax estimates are reasonable, tax authorities may disagree with certain positions we have taken. In addition, economic and political pressures to increase tax revenue in various jurisdictions may make resolving tax disputes favorably more difficult. We are currently under Internal Revenue Service audit for prior tax years, with the primary unresolved issues relating to transfer pricing. The final resolution of those audits, and other audits or litigation, may differ from the amounts recorded in our consolidated financial statements and may materially affect our consolidated financial statements in the period or periods in which that determination is made.
26
PART I
Item 1A
We earn a significant amount of our operating income outside the U.S. A change in the mix of earnings and losses in countries with differing statutory tax rates, changes in our business or structure, or the expiration of or disputes about certain tax agreements in a particular country may result in higher effective tax rates for the Company. In addition, changes in U.S. federal and state or international tax laws applicable to corporate multinationals, other fundamental law changes currently being considered by many countries, including in the U.S., and changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions may materially adversely impact our consolidated financial statements.
If our reputation or our brands are damaged, our business and operating results may be harmed. Our reputation and brands are globally recognized and are important to our business. Our reputation and brands affect our ability to attract and retain consumer, business, and public-sector customers. There are numerous ways our reputation or brands could be damaged. These include product safety or quality issues, or our environmental impact and sustainability, supply chain practices, or human rights record. We may experience backlash from customers, government entities, advocacy groups, employees, and other stakeholders that disagree with our product offering decisions or public policy positions. Damage to our reputation or our brands may occur from, among other things:
•
The introduction of new features, products, services, or terms of service that customers, users, or partners do not like.
•
Public scrutiny of our decisions regarding user privacy, data practices, or content.
•
Data security breaches, compliance failures, or actions of partners or individual employees.
The proliferation of social media may increase the likelihood, speed, and magnitude of negative brand events. If our brands or reputation are damaged, it could negatively impact our revenues or margins, or ability to attract the most highly qualified employees.
Our global business exposes us to operational and economic risks. Our customers are located throughout the world and a significant part of our revenue comes from international sales. The global nature of our business creates operational and economic risks. Our results of operations may be affected by global, regional, and local economic developments, monetary policy, inflation, and recession, as well as political and military disputes. In addition, our international growth strategy includes certain markets, the developing nature of which presents several risks, including deterioration of social, political, labor, or economic conditions in a country or region, and difficulties in staffing and managing foreign operations. Emerging nationalist trends in specific countries may significantly alter the trade environment. Changes to trade policy or agreements as a result of populism, protectionism, or economic nationalism may result in higher tariffs, local sourcing initiatives, or other developments that make it more difficult to sell our products in foreign countries. Disruptions of these kinds in developed or emerging markets could negatively impact demand for our products and services or increase operating costs. Although we hedge a portion of our international currency exposure, significant fluctuations in foreign exchange rates between the U.S. dollar and foreign currencies may adversely affect our results of operations.
Adverse economic or market conditions may harm our business. Worsening economic conditions, including inflation, recession, or other changes in economic conditions, may cause lower IT spending and adversely affect our revenue. If demand for PCs, servers, and other computing devices declines, or consumer or business spending for those products declines, our revenue will be adversely affected. Substantial revenue comes from our U.S. government contracts. An extended federal government shutdown resulting from failing to pass budget appropriations, adopt continuing funding resolutions or raise the debt ceiling, and other budgetary decisions limiting or delaying federal government spending, could reduce government IT spending on our products and services and adversely affect our revenue.
Our product distribution system relies on an extensive partner and retail network. OEMs building devices that run our software have also been a significant means of distribution. The impact of economic conditions on our partners, such as the bankruptcy of a major distributor, OEM, or retailer, could cause sales channel disruption.
Challenging economic conditions also may impair the ability of our customers to pay for products and services they have purchased. As a result, allowances for doubtful accounts and write-offs of accounts receivable may increase.
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PART I
Item 1A
We maintain an investment portfolio of various holdings, types, and maturities. These investments are subject to general credit, liquidity, market, and interest rate risks, which may be exacerbated by market downturns or events that affect global financial markets. A significant part of our investment portfolio comprises U.S. government securities. If global financial markets decline for long periods, or if there is a downgrade of the U.S. government credit rating due to an actual or threatened default on government debt, our investment portfolio may be adversely affected and we could determine that more of our investments have experienced an other-than-temporary decline in fair value, requiring impairment charges that could adversely affect our consolidated financial statements.
Catastrophic events or geopolitical conditions may disrupt our business. A disruption or failure of our systems or operations because of a major earthquake, weather event, cyberattack, terrorist attack, or other catastrophic event could cause delays in completing sales, providing services, or performing other critical functions. Our corporate headquarters, a significant portion of our research and development activities, and certain other essential business operations are in the Seattle, Washington area, and we have other business operations in the Silicon Valley area of California, both of which are seismically active regions. A catastrophic event that results in the destruction or disruption of any of our critical business or IT systems, or the infrastructure or systems they rely on, such as power grids, could harm our ability to conduct normal business operations. Providing our customers with more services and solutions in the cloud puts a premium on the resilience of our systems and strength of our business continuity management plans, and magnifies the potential impact of prolonged service outages on our consolidated financial statements.
Abrupt political change, terrorist activity, and armed conflict pose a risk of general economic disruption in affected countries, which may increase our operating costs. These conditions also may add uncertainty to the timing and budget for technology investment decisions by our customers, and may cause supply chain disruptions for hardware manufacturers. Geopolitical change may result in changing regulatory requirements that could impact our operating strategies, access to global markets, hiring, and profitability. Geopolitical instability may lead to sanctions and impact our ability to do business in some markets or with some public-sector customers. Any of these changes may negatively impact our revenues.
The long-term effects of climate change on the global economy or the IT industry in particular are unclear. Environmental regulations or changes in the supply, demand or available sources of energy or other natural resources may affect the availability or cost of goods and services, including natural resources, necessary to run our business. Changes in weather where we operate may increase the costs of powering and cooling computer hardware we use to develop software and provide cloud-based services.
Our business depends on our ability to attract and retain talented employees. Our business is based on successfully attracting and retaining talented employees representing diverse backgrounds, experiences, and skill sets. The market for highly skilled workers and leaders in our industry is extremely competitive. Maintaining our brand and reputation, as well as a diverse and inclusive work environment that enables all our employees to thrive, are important to our ability to recruit and retain employees. We are also limited in our ability to recruit internationally by restrictive domestic immigration laws. Changes to U.S. immigration policies that restrain the flow of technical and professional talent may inhibit our ability to adequately staff our research and development efforts. If we are less successful in our recruiting efforts, or if we cannot retain highly skilled workers and key leaders, our ability to develop and deliver successful products and services may be adversely affected. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution. How employment-related laws are interpreted and applied to our workforce practices may result in increased operating costs and less flexibility in how we meet our workforce needs.
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PART I
Item 1B, 2, 3, 4
ITEM 1B. UNRESOLVED STAFF COMMENTS
We have received no written comments regarding our periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of our fiscal year 2019 that remain unresolved.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Redmond, Washington. We have approximately 15 million square feet of space located in King County, Washington that is used for engineering, sales, marketing, and operations, among other general and administrative purposes. These facilities include approximately 10 million square feet of owned space situated on approximately 520 acres of land we own at our corporate headquarters, and approximately five million square feet of space we lease. In addition, we own and lease space domestically that includes office, datacenter, and retail space.
We also own and lease facilities internationally. The largest owned properties include: our research and development centers in China and India; our datacenters in Ireland, the Netherlands, and Singapore; and our operations and facilities in Ireland and the United Kingdom. The largest leased properties include space in the following locations: Australia, Canada, China, Germany, India, Japan, and the United Kingdom.
In addition to the above locations, we have various product development facilities, both domestically and internationally, as described under Research and Development (Part I, Item 1 of this Form 10-K).
The table below shows a summary of the square footage of our office, datacenter, retail, and other facilities owned and leased domestically and internationally as of June 30, 2019:
(Square feet in millions)
Location
Owned
Leased
Total
U.S.
18
14
32
International
6
14
20
Total
24
28
52
ITEM 3. LEGAL PROCEEDINGS
While not material to the Company, the Company makes the following annual report of the general activities of the Company’s Antitrust Compliance Office as required by the Final Order and Judgment in Barovic v. Ballmer et al, United States District Court for the Western District of Washington (“Final Order”). For more information see http://aka.ms/MSLegalNotice2015. These annual reports will continue through 2020. During fiscal year 2019, the Antitrust Compliance Office (a) monitored the Company’s compliance with the European Commission Decision of March 24, 2004, (“2004 Decision”) and with the Company’s Public Undertaking to the European Commission dated December 16, 2009 (“2009 Undertaking”); (b) monitored, in the manner required by the Final Order, employee, customer, competitor, regulator, or other third-party complaints regarding compliance with the 2004 Decision, the 2009 Undertaking, or other EU or U.S. laws or regulations governing tying, bundling, and exclusive dealing contracts; and, (c) monitored, in the manner required by the Final Order, the training of the Company’s employees regarding the Company’s antitrust compliance polices. In addition, the Antitrust Compliance Officer reports to the Regulatory and Public Policy Committee of the Board at each of its regularly scheduled meetings and to the full Board annually.
Refer to Note 16 – Contingencies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for information regarding legal proceedings in which we are involved.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
Item 5
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET AND STOCKHOLDERS
Our common stock is traded on the NASDAQ Stock Market under the symbol MSFT. On July 29, 2019, there were 94,069 registered holders of record of our common stock.
SHARE REPURCHASES AND DIVIDENDS
Following are our monthly share repurchases for the fourth quarter of fiscal year 2019:
Period
Total Numberof Shares
Purchased
Average
Price Paidper Share
Total Number ofShares Purchased asPart of PubliclyAnnounced Plansor Programs
Approximate Dollar Value of
Shares that May Yet be
Purchased under the Plansor Programs
(In millions)
April 1, 2019 – April 30, 2019
8,547,612
$
122.85
8,547,612
$
14,551
May 1, 2019 – May 31, 2019
14,029,339
126.32
14,029,339
12,778
June 1, 2019 – June 30, 2019
10,469,682
131.59
10,469,682
11,401
33,046,633
33,046,633
All share repurchases were made using cash resources. Our share repurchases may occur through open market purchases or pursuant to a Rule 10b5-1 trading plan. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards.
Our Board of Directors declared the following dividends during the fourth quarter of fiscal year 2019:
Declaration Date
Record Date
Payment Date
Dividend
Per Share
Amount
(In millions)
June 12, 2019
August 15, 2019
September 12, 2019
$
0.46
$
3,516
We returned $7.7 billion to shareholders in the form of share repurchases and dividends in the fourth quarter of fiscal year 2019. Refer to Note 17 – Stockholders’ Equity of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion regarding share repurchases and dividends.
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ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(In millions, except per share amounts)
Year Ended June 30,
2019
(a)
2018
2017
(d)(e)
2016
(d)
2015
Revenue
$
125,843
$
110,360
$
96,571
$
91,154
$
93,580
Gross margin
82,933
72,007
62,310
58,374
60,542
Operating income
42,959
35,058
29,025
(f)
26,078
(g)
18,161
(h)
Net income
39,240
(b)
16,571
(c)
25,489
(f)
20,539
(g)
12,193
(h)
Diluted earnings per share
5.06
(b)
2.13
(c)
3.25
(f)
2.56
(g)
1.48
(h)
Cash dividends declared per share
1.84
1.68
1.56
1.44
1.24
Cash, cash equivalents, and short-term investments
133,819
133,768
132,981
113,240
96,526
Total assets
286,556
258,848
250,312
202,897
174,303
Long-term obligations
114,806
117,642
106,856
66,705
44,574
Stockholders’ equity
102,330
82,718
87,711
83,090
80,083
(a)
GitHub has been included in our consolidated results of operations starting on the October 25, 2018 acquisition date.
(b)
Includes a $2.6 billion net income tax benefit related to intangible property transfers and a $157 million net charge related to the enactment of the Tax Cuts and Jobs Act (“TCJA”), which together increased net income and diluted earnings per share (“EPS”) by $2.4 billion and $0.31, respectively. Refer to Note 12 – Income Taxes of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.
(c)
Includes a $13.7 billion net charge related to the enactment of the TCJA, which decreased net income and diluted EPS by $13.7 billion and $1.75, respectively. Refer to Note 12 – Income Taxes of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.
(d)
Reflects the impact of the adoption of new accounting standards in fiscal year 2018 related to revenue recognition and leases.
(e)
LinkedIn has been included in our consolidated results of operations starting on the December 8, 2016 acquisition date.
(f)
Includes $306 million of employee severance expenses primarily related to our sales and marketing restructuring plan, which decreased operating income, net income, and diluted EPS by $306 million, $243 million, and $0.04, respectively.
(g)
Includes $630 million of asset impairment charges related to our Phone business and $480 million of restructuring charges associated with our Phone business restructuring plans, which together decreased operating income, net income, and diluted EPS by $1.1 billion, $895 million, and $0.11, respectively.
(h)
Includes $7.5 billion of goodwill and asset impairment charges related to our Phone business and $2.5 billion of integration and restructuring expenses, primarily associated with our Phone business restructuring plans, which together decreased operating income, net income, and diluted EPS by $10.0 billion, $9.5 billion, and $1.15, respectively.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Microsoft Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K).
OVERVIEW
Microsoft is a technology company whose mission is to empower every person and every organization on the planet to achieve more. We strive to create local opportunity, growth, and impact in every country around the world. Our platforms and tools help drive small business productivity, large business competitiveness, and public-sector efficiency. They also support new startups, improve educational and health outcomes, and empower human ingenuity.
We generate revenue by offering a wide range of cloud-based and other services to people and businesses; licensing and supporting an array of software products; designing, manufacturing, and selling devices; and delivering relevant online advertising to a global audience. Our most significant expenses are related to compensating employees; designing, manufacturing, marketing, and selling our products and services; datacenter costs in support of our cloud-based services; and income taxes.
Highlights from fiscal year 2019 compared with fiscal year 2018 included:
•
Commercial cloud revenue, which includes Microsoft Office 365 Commercial, Microsoft Azure, the commercial portion of LinkedIn, Microsoft Dynamics 365, and other commercial cloud properties, increased 43% to $38.1 billion.
•
Office Commercial revenue increased 13%, driven by Office 365 Commercial growth of 33%.
•
Office Consumer revenue increased 7%, and Office 365 Consumer subscribers increased to 34.8 million.
•
LinkedIn revenue increased 28%, with record levels of engagement highlighted by LinkedIn sessions growth of 27%.
•
Dynamics revenue increased 15%, driven by Dynamics 365 growth of 47%.
•
Server products and cloud services revenue, including GitHub, increased 25%, driven by Azure growth of 72%.
•
Enterprise Services revenue increased 5%.
•
Windows original equipment manufacturer licensing (“Windows OEM”) revenue increased 4%.
•
Windows Commercial revenue increased 14%.
•
Microsoft Surface revenue increased 23%.
•
Gaming revenue increased 10%, driven by Xbox software and services growth of 19%.
•
Search advertising revenue, excluding traffic acquisition costs, increased 13%.
We have recast certain prior period commercial cloud metrics to include the commercial portion of LinkedIn to provide a comparable view of our commercial cloud business performance. The commercial portion of LinkedIn includes LinkedIn Recruiter, Sales Navigator, premium business subscriptions, and other services for organizations.
On October 25, 2018, we acquired GitHub, Inc. (“GitHub”) in a $7.5 billion stock transaction (inclusive of total cash payments of $1.3 billion in respect of vested GitHub equity awards and an indemnity escrow). The financial results of GitHub have been included in our consolidated financial statements since the date of the acquisition. GitHub is reported as part of our Intelligent Cloud segment. Refer to Note 8 – Business Combinations of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.
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On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changed existing U.S. tax law and included numerous provisions that affect our business. We recorded a provisional net charge related to the enactment of the TCJA of $13.7 billion in fiscal year 2018, and adjusted our provisional net charge by recording additional tax expense of $157 million in the second quarter of fiscal year 2019. In the fourth quarter of fiscal year 2019, in response to the TCJA and recently issued regulations, we transferred certain intangible properties held by our foreign subsidiaries to the U.S. and Ireland, which resulted in a $2.6 billion net income tax benefit. Refer to Note 12 – Income Taxes of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.
Industry Trends
Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business. At Microsoft, we push the boundaries of what is possible through a broad range of research and development activities that seek to identify and address the changing demands of customers and users, industry trends, and competitive forces.
Economic Conditions, Challenges, and Risks
The markets for software, devices, and cloud-based services are dynamic and highly competitive. Our competitors are developing new software and devices, while also deploying competing cloud-based services for consumers and businesses. The devices and form factors customers prefer evolve rapidly, and influence how users access services in the cloud, and in some cases, the user’s choice of which suite of cloud-based services to use. We must continue to evolve and adapt over an extended time in pace with this changing environment. The investments we are making in infrastructure and devices will continue to increase our operating costs and may decrease our operating margins.
Our success is highly dependent on our ability to attract and retain qualified employees. We hire a mix of university and industry talent worldwide. We compete for talented individuals globally by offering an exceptional working environment, broad customer reach, scale in resources, the ability to grow one’s career across many different products and businesses, and competitive compensation and benefits. Aggregate demand for our software, services, and devices is correlated to global macroeconomic and geopolitical factors, which remain dynamic.
Our international operations provide a significant portion of our total revenue and expenses. Many of these revenue and expenses are denominated in currencies other than the U.S. dollar. As a result, changes in foreign exchange rates may significantly affect revenue and expenses. Strengthening of foreign currencies relative to the U.S. dollar throughout fiscal year 2018 positively impacted reported revenue and increased reported expenses from our international operations. Strengthening of the U.S. dollar relative to certain foreign currencies did not significantly impact reported revenue or expenses from our international operations in the first and second quarters of fiscal year 2019, and reduced reported revenue and expenses from our international operations in the third and fourth quarters of fiscal year 2019.
Refer to Risk Factors (Part I, Item 1A of this Form 10-K) for a discussion of these factors and other risks.
Seasonality
Our revenue fluctuates quarterly and is generally higher in the second and fourth quarters of our fiscal year. Second quarter revenue is driven by corporate year-end spending trends in our major markets and holiday season spending by consumers, and fourth quarter revenue is driven by the volume of multi-year on-premises contracts executed during the period.
Reportable Segments
We report our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting. All differences between our internal management reporting basis and accounting principles generally accepted in the United States of America (“GAAP”), along with certain corporate-level and other activity, are included in Corporate and Other.
Additional information on our reportable segments is contained in Note 20 – Segment Information and Geographic Data of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).
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SUMMARY RESULTS OF OPERATIONS
(In millions, except percentages and per share amounts)
2019
2018
2017
PercentageChange 2019
Versus 2018
PercentageChange 2018
Versus 2017
Revenue
$
125,843
$
110,360
$
96,571
14%
14%
Gross margin
82,933
72,007
62,310
15%
16%
Operating income
42,959
35,058
29,025
23%
21%
Net income
39,240
16,571
25,489
137%
(35)%
Diluted earnings per share
5.06
2.13
3.25
138%
(34)%
Non-GAAP operating income
42,959
35,058
29,331
23%
20%
Non-GAAP net income
36,830
30,267
25,732
22%
18%
Non-GAAP diluted earnings per share
4.75
3.88
3.29
22%
18%
Non-GAAP operating income, net income, and diluted earnings per share (“EPS”) exclude the net tax impact of transfer of intangible properties, the net tax impact of the TCJA, and restructuring expenses. Refer to the Non-GAAP Financial Measures section below for a reconciliation of our financial results reported in accordance with GAAP to non-GAAP financial results.
Fiscal Year 2019 Compared with Fiscal Year 2018
Revenue increased $15.5 billion or 14%, driven by growth across each of our segments. Intelligent Cloud revenue increased, driven by server products and cloud services. Productivity and Business Processes revenue increased, driven by Office and LinkedIn. More Personal Computing revenue increased, driven by Surface, Gaming, and Windows.
Gross margin increased $10.9 billion or 15%, driven by growth across each of our segments. Gross margin percentage increased slightly, due to gross margin percentage improvement across each of our segments and favorable segment sales mix. Gross margin included a 5 percentage point improvement in commercial cloud, primarily from Azure.
Operating income increased $7.9 billion or 23%, driven by growth across each of our segments.
Key changes in expenses were:
•
Cost of revenue increased $4.6 billion or 12%, driven by growth in commercial cloud, Surface, and Gaming.
•
Research and development expenses increased $2.2 billion or 15%, driven by investments in cloud and artificial intelligence (“AI”) engineering, Gaming, LinkedIn, and GitHub.
•
Sales and marketing expenses increased $744 million or 4%, driven by investments in commercial sales capacity, LinkedIn, and GitHub, offset in part by a decrease in marketing. Sales and marketing expenses included a favorable foreign currency impact of 2%.
Current year net income included a $2.6 billion net income tax benefit related to intangible property transfers and a $157 million net charge related to the enactment of the TCJA, which together resulted in an increase to net income and diluted EPS of $2.4 billion and $0.31, respectively. Prior year net income and diluted EPS were negatively impacted by the net charge related to the enactment of the TCJA, which resulted in a decrease to net income and diluted EPS of $13.7 billion and $1.75, respectively.
Fiscal Year 2018 Compared with Fiscal Year 2017
Revenue increased $13.8 billion or 14%, driven by growth across each of our segments. Productivity and Business Processes revenue increased, driven by LinkedIn and higher revenue from Office. Intelligent Cloud revenue increased, primarily due to higher revenue from server products and cloud services. More Personal Computing revenue increased, driven by higher revenue from Gaming, Windows, Search advertising, and Surface, offset in part by lower revenue from Phone.
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Gross margin increased $9.7 billion or 16%, due to growth across each of our segments. Gross margin percentage increased slightly, driven by favorable segment sales mix and gross margin percentage improvement in More Personal Computing. Gross margin included a 7 percentage point improvement in commercial cloud, primarily from Azure.
Operating income increased $6.0 billion or 21%, driven by growth across each of our segments. LinkedIn operating loss increased $63 million to $987 million, including $1.5 billion of amortization of intangible assets. Operating income included a favorable foreign currency impact of 2%.
Key changes in expenses were:
•
Cost of revenue increased $4.1 billion or 12%, mainly due to growth in our commercial cloud, Gaming, LinkedIn, and Search advertising, offset in part by a reduction in Phone cost of revenue.
•
Sales and marketing expenses increased $2.0 billion or 13%, primarily due to LinkedIn expenses and investments in commercial sales capacity, offset in part by a decrease in Windows marketing expenses.
•
Research and development expenses increased $1.7 billion or 13%, primarily due to investments in cloud engineering and LinkedIn expenses.
•
General and administrative expenses increased $273 million or 6%, primarily due to LinkedIn expenses.
Fiscal year 2018 net income and diluted EPS were negatively impacted by the net charge related to the enactment of the TCJA, which resulted in a decrease to net income and diluted earnings per share of $13.7 billion and $1.75, respectively. Fiscal year 2017 operating income, net income, and diluted EPS were negatively impacted by restructuring expenses, which resulted in a decrease to operating income, net income, and diluted EPS of $306 million, $243 million, and $0.04, respectively.
SEGMENT RESULTS OF OPERATIONS
(In millions, except percentages)
2019
2018
2017
PercentageChange 2019
Versus 2018
PercentageChange 2018
Versus 2017
Revenue
Productivity and Business Processes
$
41,160
$
35,865
$
29,870
15%
20%
Intelligent Cloud
38,985
32,219
27,407
21%
18%
More Personal Computing
45,698
42,276
39,294
8%
8%
Total
$
125,843
$
110,360
$
96,571
14%
14%
Operating Income (Loss)
Productivity and Business Processes
$
16,219
$
12,924
$
11,389
25%
13%
Intelligent Cloud
13,920
11,524
9,127
21%
26%
More Personal Computing
12,820
10,610
8,815
21%
20%
Corporate and Other
0
0
(306
)
*
*
Total
$
42,959
$
35,058
$
29,025
23%
21%
*
Not meaningful.
Reportable Segments
Fiscal Year 2019 Compared with Fiscal Year 2018
Productivity and Business Processes
Revenue increased $5.3 billion or 15%.
•
Office Commercial revenue increased $3.2 billion or 13%, driven by Office 365 Commercial, offset in part by lower revenue from products licensed on-premises, reflecting a continued shift to cloud offerings. Office 365 Commercial grew 33%, due to growth in seats and higher average revenue per user.
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•
Office Consumer revenue increased $286 million or 7%, driven by Office 365 Consumer, due to recurring subscription revenue and transactional strength in Japan.
•
LinkedIn revenue increased $1.5 billion or 28%, driven by growth across each line of business.
•
Dynamics revenue increased 15%, driven by Dynamics 365 growth.
Operating income increased $3.3 billion or 25%, including an unfavorable foreign currency impact of 2%.
•
Gross margin increased $4.1 billion or 15%, driven by growth in Office Commercial and LinkedIn. Gross margin percentage increased slightly, due to gross margin percentage improvement in LinkedIn and Office 365 Commercial, offset in part by an increased mix of cloud offerings.
•
Operating expenses increased $806 million or 6%, driven by investments in LinkedIn and cloud engineering, offset in part by a decrease in marketing.
Intelligent Cloud
Revenue increased $6.8 billion or 21%.
•
Server products and cloud services revenue, including GitHub, increased $6.5 billion or 25%, driven by Azure. Azure revenue growth was 72%, due to higher infrastructure-as-a-service and platform-as-a-service consumption-based and per user-based services. Server products revenue increased 6%, due to continued demand for premium versions and hybrid solutions, GitHub, and demand ahead of end-of-support for SQL Server 2008 and Windows Server 2008.
•
Enterprise Services revenue increased $278 million or 5%, driven by growth in Premier Support Services and Microsoft Consulting Services.
Operating income increased $2.4 billion or 21%.
•
Gross margin increased $4.8 billion or 22%, driven by growth in server products and cloud services revenue and cloud services scale and efficiencies. Gross margin percentage increased slightly, due to gross margin percentage improvement in Azure, offset in part by an increased mix of cloud offerings.
•
Operating expenses increased $2.4 billion or 22%, driven by investments in cloud and AI engineering, GitHub, and commercial sales capacity.
More Personal Computing
Revenue increased $3.4 billion or 8%.
•
Windows revenue increased $877 million or 4%, driven by growth in Windows Commercial and Windows OEM, offset in part by a decline in patent licensing. Windows Commercial revenue increased 14%, driven by an increased mix of multi-year agreements that carry higher in-quarter revenue recognition. Windows OEM revenue increased 4%. Windows OEM Pro revenue grew 10%, ahead of the commercial PC market, driven by healthy Windows 10 demand. Windows OEM non-Pro revenue declined 7%, below the consumer PC market, driven by continued pressure in the entry level category.
•
Surface revenue increased $1.1 billion or 23%, with strong growth across commercial and consumer.
•
Gaming revenue increased $1.0 billion or 10%, driven by Xbox software and services growth of 19%, primarily due to third-party title strength and subscriptions growth, offset in part by a decline in Xbox hardware of 13% primarily due to a decrease in volume of consoles sold.
•
Search advertising revenue increased $616 million or 9%. Search advertising revenue, excluding traffic acquisition costs, increased 13%, driven by higher revenue per search.
Operating income increased $2.2 billion or 21%, including an unfavorable foreign currency impact of 2%.
•
Gross margin increased $2.0 billion or 9%, driven by growth in Windows, Gaming, and Search. Gross margin percentage increased slightly, due to a sales mix shift to higher gross margin businesses in Windows and Gaming.
•
Operating expenses decreased $172 million or 1%.
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Fiscal Year 2018 Compared with Fiscal Year 2017
Productivity and Business Processes
Revenue increased $6.0 billion or 20%.
•
LinkedIn revenue increased $3.0 billion to $5.3 billion. Fiscal year 2018 included a full period of results, whereas fiscal year 2017 only included results from the date of acquisition on December 8, 2016. LinkedIn revenue primarily consisted of revenue from Talent Solutions.
•
Office Commercial revenue increased $2.4 billion or 11%, driven by Office 365 Commercial revenue growth, mainly due to growth in subscribers and average revenue per user, offset in part by lower revenue from products licensed on-premises, reflecting a continued shift to Office 365 Commercial.
•
Office Consumer revenue increased $382 million or 11%, driven by Office 365 Consumer revenue growth, mainly due to growth in subscribers.
•
Dynamics revenue increased 13%, driven by Dynamics 365 revenue growth.
Operating income increased $1.5 billion or 13%, including a favorable foreign currency impact of 2%.
•
Gross margin increased $4.4 billion or 19%, driven by LinkedIn and growth in Office Commercial. Gross margin percentage decreased slightly, due to an increased mix of cloud offerings, offset in part by gross margin percentage improvement in Office 365 Commercial and LinkedIn. LinkedIn cost of revenue increased $818 million to $1.7 billion, including $888 million of amortization for acquired intangible assets.
•
Operating expenses increased $2.9 billion or 25%, driven by LinkedIn expenses and investments in commercial sales capacity and cloud engineering. LinkedIn operating expenses increased $2.2 billion to $4.5 billion, including $617 million of amortization of acquired intangible assets.
Intelligent Cloud
Revenue increased $4.8 billion or 18%.
•
Server products and cloud services revenue increased $4.5 billion or 21%, driven by Azure and server products licensed on-premises revenue growth. Azure revenue grew 91%, due to higher infrastructure-as-a-service and platform-as-a-service consumption-based and per user-based services. Server products licensed on-premises revenue increased 5%, mainly due to a higher mix of premium licenses for Windows Server and Microsoft SQL Server.
•
Enterprise Services revenue increased $304 million or 5%, driven by higher revenue from Premier Support Services and Microsoft Consulting Services, offset in part by a decline in revenue from custom support agreements.
Operating income increased $2.4 billion or 26%.
•
Gross margin increased $3.1 billion or 16%, driven by growth in server products and cloud services revenue and cloud services scale and efficiencies. Gross margin percentage decreased, due to an increased mix of cloud offerings, offset in part by gross margin percentage improvement in Azure.
•
Operating expenses increased $683 million or 7%, driven by investments in commercial sales capacity and cloud engineering.
More Personal Computing
Revenue increased $3.0 billion or 8%.
•
Windows revenue increased $925 million or 5%, driven by growth in Windows Commercial and Windows OEM, offset by a decline in patent licensing revenue. Windows Commercial revenue increased 12%, driven by multi-year agreement revenue growth. Windows OEM revenue increased 5%. Windows OEM Pro revenue grew 11%, ahead of a strengthening commercial PC market. Windows OEM non-Pro revenue declined 4%, below the consumer PC market, driven by continued pressure in the entry-level price category.
•
Gaming revenue increased $1.3 billion or 14%, driven by Xbox software and services revenue growth of 20%, mainly from third-party title strength.
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•
Search advertising revenue increased $793 million or 13%. Search advertising revenue, excluding traffic acquisition costs, increased 16%, driven by growth in Bing, due to higher revenue per search and search volume.
•
Surface revenue increased $625 million or 16%, driven by a higher mix of premium devices and an increase in volumes sold, due to the latest editions of Surface.
•
Phone revenue decreased $525 million.
Operating income increased $1.8 billion or 20%, including a favorable foreign currency impact of 2%.
•
Gross margin increased $2.2 billion or 11%, driven by growth in Windows, Surface, Search, and Gaming. Gross margin percentage increased, primarily due to gross margin percentage improvement in Surface.
•
Operating expenses increased $391 million or 3%, driven by investments in Search, AI, and Gaming engineering and commercial sales capacity, offset in part by a decrease in Windows marketing expenses.
Corporate and Other
Corporate and Other includes corporate-level activity not specifically allocated to a segment, including restructuring expenses.
Fiscal Year 2019 Compared with Fiscal Year 2018
We did not incur Corporate and Other activity in fiscal years 2019 or 2018.
Fiscal Year 2018 Compared with Fiscal Year 2017
Corporate and Other operating loss decreased $306 million, due to a reduction in restructuring expenses, driven by employee severance expenses primarily related to our sales and marketing restructuring plan in fiscal year 2017.
OPERATING EXPENSES
Research and Development
(In millions, except percentages)
2019
2018
2017
Percentage
Change 2019Versus 2018
PercentageChange 2018Versus 2017
Research and development
$
16,876
$
14,726
$
13,037
15%
13%
As a percent of revenue
13%
13%
13%
0ppt
0ppt
Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content.
Fiscal Year 2019 Compared with Fiscal Year 2018
Research and development expenses increased $2.2 billion or 15%, driven by investments in cloud and AI engineering, Gaming, LinkedIn, and GitHub.
Fiscal Year 2018 Compared with Fiscal Year 2017
Research and development expenses increased $1.7 billion or 13%, primarily due to investments in cloud engineering and LinkedIn expenses. LinkedIn expenses increased $762 million to $1.5 billion.
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Sales and Marketing
(In millions, except percentages)
2019
2018
2017
Percentage
Change 2019Versus 2018
PercentageChange 2018Versus 2017
Sales and marketing
$
18,213
$
17,469
$
15,461
4%
13%
As a percent of revenue
14%
16%
16%
(2)ppt
0ppt
Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs.
Fiscal Year 2019 Compared with Fiscal Year 2018
Sales and marketing expenses increased $744 million or 4%, driven by investments in commercial sales capacity, LinkedIn, and GitHub, offset in part by a decrease in marketing. Expenses included a favorable foreign currency impact of 2%.
Fiscal Year 2018 Compared with Fiscal Year 2017
Sales and marketing expenses increased $2.0 billion or 13%, primarily due to LinkedIn expenses and investments in commercial sales capacity, offset in part by a decrease in Windows marketing expenses. LinkedIn expenses increased $1.2 billion to $2.5 billion, including $617 million of amortization of acquired intangible assets.
General and Administrative
(In millions, except percentages)
2019
2018
2017
Percentage
Change 2019Versus 2018
PercentageChange 2018Versus 2017
General and administrative
$
4,885
$
4,754
$
4,481
3%
6%
As a percent of revenue
4%
4%
5%
0ppt
(1)ppt
General and administrative expenses include payroll, employee benefits, stock-based compensation expense, severance expense, and other headcount-related expenses associated with finance, legal, facilities, certain human resources and other administrative personnel, certain taxes, and legal and other administrative fees.
Fiscal Year 2019 Compared with Fiscal Year 2018
General and administrative expenses increased $131 million or 3%.
Fiscal Year 2018 Compared with Fiscal Year 2017
General and administrative expenses increased $273 million or 6%, primarily due to LinkedIn expenses. LinkedIn expenses increased $234 million to $528 million.
RESTRUCTURING EXPENSES
Restructuring expenses include employee severance expenses and other costs associated with the consolidation of facilities and manufacturing operations related to restructuring activities.
Fiscal Year 2019 Compared with Fiscal Year 2018
We did not incur restructuring expenses in fiscal years 2019 or 2018.
Fiscal Year 2018 Compared with Fiscal Year 2017
During fiscal year 2017, we recorded $306 million of employee severance expenses, primarily related to our sales and marketing restructuring plan.
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OTHER INCOME (EXPENSE), NET
The components of other income (expense), net were as follows:
(In millions)
Year Ended June 30,
2019
2018
2017
Interest and dividends income
$
2,762
$
2,214
$
1,387
Interest expense
(2,686
)
(2,733
)
(2,222
)
Net recognized gains on investments
648
2,399
2,583
Net gains (losses) on derivatives
144
(187
)
(510
)
Net losses on foreign currency remeasurements
(82
)
(218
)
(111
)
Other, net
(57
)
(59
)
(251
)
Total
$
729
$
1,416
$
876
We use derivative instruments to: manage risks related to foreign currencies, equity prices, interest rates, and credit; enhance investment returns; and facilitate portfolio diversification. Gains and losses from changes in fair values of derivatives that are not designated as hedging instruments are primarily recognized in other income (expense), net.
Fiscal Year 2019 Compared with Fiscal Year 2018
Interest and dividends income increased primarily due to higher yields on fixed-income securities. Interest expense decreased primarily driven by a decrease in outstanding long-term debt due to debt maturities, offset in part by higher finance lease expense. Net recognized gains on investments decreased primarily due to lower gains on sales of equity investments. Net gains on derivatives includes gains on foreign exchange and interest rate derivatives in the current period as compared to losses in the prior period.
Fiscal Year 2018 Compared with Fiscal Year 2017
Dividends and interest income increased primarily due to higher average portfolio balances and yields on fixed-income securities. Interest expense increased primarily due to higher average outstanding long-term debt and higher finance lease expense. Net recognized gains on investments decreased primarily due to higher losses on sales of fixed-income securities, offset in part by higher gains on sales of equity securities. Net losses on derivatives decreased primarily due to lower losses on equity, foreign exchange, and commodity derivatives, offset in part by losses on interest rate derivatives in the current period as compared to gains in the prior period.
INCOME TAXES
Effective Tax Rate
Fiscal Year 2019 Compared with Fiscal Year 2018
Our effective tax rate for fiscal years 2019 and 2018 was 10% and 55%, respectively. The decrease in our effective tax rate for fiscal year 2019 compared to fiscal year 2018 was primarily due to the net charge related to the enactment of the TCJA in the second quarter of fiscal year 2018 and a $2.6 billion net income tax benefit in the fourth quarter of fiscal year 2019 related to intangible property transfers. Our effective tax rate was lower than the U.S. federal statutory rate, primarily due to the tax benefit related to intangible property transfers, and earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico.
The mix of income before income taxes between the U.S. and foreign countries impacted our effective tax rate as a result of the geographic distribution of, and customer demand for, our products and services. In fiscal year 2019, our U.S. income before income taxes was $15.8 billion and our foreign income before income taxes was $27.9 billion. In fiscal year 2018, our U.S. income before income taxes was $11.5 billion and our foreign income before income taxes was $24.9 billion.
40
PART II
Item 7
Fiscal Year 2018 Compared with Fiscal Year 2017
Our effective tax rate for fiscal years 2018 and 2017 was 55% and 15%, respectively. The increase in our effective tax rate for fiscal year 2018 compared to fiscal year 2017 was primarily due to the net charge related to the enactment of the TCJA in fiscal year 2018 and the realization of tax benefits attributable to previous Phone business losses in fiscal year 2017. Our effective tax rate was higher than the U.S. federal statutory rate primarily due to the net charge related to the enactment of the TCJA, offset in part by earnings taxed at lower rates in foreign jurisdictions resulting from our foreign regional operations centers in Ireland, Singapore, and Puerto Rico.
The mix of income before income taxes between the U.S. and foreign countries impacted our effective tax rate as a result of the geographic distribution of, and customer demand for, our products and services. In fiscal year 2018, our U.S. income before income taxes was $11.5 billion and our foreign income before income taxes was $24.9 billion. In fiscal year 2017, our U.S. income before income taxes was $6.8 billion and our foreign income before income taxes was $23.1 billion.
Tax Cuts and Jobs Act
On December 22, 2017, the TCJA was enacted into law, which significantly changed existing U.S. tax law and included numerous provisions that affect our business, such as imposing a one-time transition tax on deemed repatriation of deferred foreign income, reducing the U.S. federal statutory tax rate, and adopting a territorial tax system. In fiscal year 2018, the TCJA required us to incur a transition tax on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for foreign cash and certain other net current assets, and 8% on the remaining income. The TCJA reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. In addition, the TCJA subjected us to a tax on our global intangible low-taxed income (“GILTI”) effective July 1, 2018.
Under GAAP, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense or factor such amounts into our measurement of deferred taxes. We elected the deferred method, under which we recorded the corresponding deferred tax assets and liabilities on our consolidated balance sheets.
During fiscal year 2018, we recorded a net charge of $13.7 billion related to the enactment of the TCJA, due to the impact of the one-time transition tax on the deemed repatriation of deferred foreign income of $17.9 billion, offset in part by the impact of changes in the tax rate of $4.2 billion, primarily on deferred tax assets and liabilities. During the second quarter of fiscal year 2019, we recorded additional tax expense of $157 million, which related to completing our provisional accounting for GILTI deferred taxes pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 118.
In the fourth quarter of fiscal year 2019, in response to the TCJA and recently issued regulations, we transferred certain intangible properties held by our foreign subsidiaries to the U.S. and Ireland. The transfers of intangible properties resulted in a $2.6 billion net income tax benefit recorded in the fourth quarter of fiscal year 2019, as the value of future tax deductions exceeded the current tax liability from foreign jurisdictions and U.S. GILTI tax.
Refer to Note 12 – Income Taxes of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.
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PART II
Item 7
Uncertain Tax Positions
We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 in fiscal year 2011. In February 2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues for tax years 2004 to 2006 and reopened the audit phase of the examination. We also settled a portion of the IRS audit for tax years 2007 to 2009 in fiscal year 2016, and a portion of the IRS audit for tax years 2010 to 2013 in fiscal year 2018. We remain under audit for tax years 2004 to 2013. We expect the IRS to begin an examination of tax years 2014 to 2017 within the next 12 months.
As of June 30, 2019, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact on our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.
We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2018, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.
NON-GAAP FINANCIAL MEASURES
Non-GAAP operating income, net income, and diluted EPS are non-GAAP financial measures which exclude the net tax impact of transfer of intangible properties, the net tax impact of the TCJA, and restructuring expenses. We believe these non-GAAP measures aid investors by providing additional insight into our operational performance and help clarify trends affecting our business. For comparability of reporting, management considers non-GAAP measures in conjunction with GAAP financial results in evaluating business performance. These non-GAAP financial measures presented should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.
The following table reconciles our financial results reported in accordance with GAAP to non-GAAP financial results:
(In millions, except percentages and per share amounts)
2019
2018
2017
PercentageChange 2019Versus 2018
PercentageChange 2018Versus 2017
Operating income
$
42,959
$
35,058
$
29,025
23%
21%
Net tax impact of transfer of intangible properties
0
0
0
*
*
Net tax impact of the TCJA
0
0
0
*
*
Restructuring expenses
0
0
306
*
*
Non-GAAP operating income
$
42,959
$
35,058
$
29,331
23%
20%
Net income
$
39,240
$
16,571
$
25,489
137%
(35)%
Net tax impact of transfer of intangible properties
(2,567
)
0
0
*
*
Net tax impact of the TCJA
157
13,696
0
*
*
Restructuring expenses
0
0
243
*
*
Non-GAAP net income
$
36,830
$
30,267
$
25,732
22%
18%
Diluted earnings per share
$
5.06
$
2.13
$
3.25
138%
(34)%
Net tax impact of transfer of intangible properties
(0.33
)
0
0
*
*
Net tax impact of the TCJA
0.02
1.75
0
*
*
Restructuring expenses
0
0
0.04
*
*
Non-GAAP diluted earnings per share
$
4.75
$
3.88
$
3.29
22%
18%
*
Not meaningful.
42
PART II
Item 7
FINANCIAL CONDITION
Cash, Cash Equivalents, and Investments
Cash, cash equivalents, and short-term investments totaled $133.8 billion as of both June 30, 2019 and 2018. Equity investments were $2.6 billion and $1.9 billion as of June 30, 2019 and 2018, respectively. Our short-term investments are primarily intended to facilitate liquidity and capital preservation. They consist predominantly of highly liquid investment-grade fixed-income securities, diversified among industries and individual issuers. The investments are predominantly U.S. dollar-denominated securities, but also include foreign currency-denominated securities to diversify risk. Our fixed-income investments are exposed to interest rate risk and credit risk. The credit risk and average maturity of our fixed-income portfolio are managed to achieve economic returns that correlate to certain fixed-income indices. The settlement risk related to these investments is insignificant given that the short-term investments held are primarily highly liquid investment-grade fixed-income securities.
Valuation
In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair value of our financial instruments. This pricing methodology applies to our Level 1 investments, such as U.S. government securities, common and preferred stock, and mutual funds. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. This pricing methodology applies to our Level 2 investments, such as commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Level 3 investments are valued using internally-developed models with unobservable inputs. Assets and liabilities measured at fair value on a recurring basis using unobservable inputs are an immaterial portion of our portfolio.
A majority of our investments are priced by pricing vendors and are generally Level 1 or Level 2 investments as these vendors either provide a quoted market price in an active market or use observable inputs for their pricing without applying significant adjustments. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors, or when a broker price is more reflective of fair values in the market in which the investment trades. Our broker-priced investments are generally classified as Level 2 investments because the broker prices these investments based on similar assets without applying significant adjustments. In addition, all our broker-priced investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate for these investments. Our fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include model validation, review of key model inputs, analysis of period-over-period fluctuations, and independent recalculation of prices where appropriate.
Cash Flows
Fiscal Year 2019 Compared with Fiscal Year 2018
Cash from operations increased $8.3 billion to $52.2 billion for fiscal year 2019, mainly due to an increase in cash received from customers, offset in part by an increase in cash paid to suppliers and employees and an increase in cash paid for income taxes. Cash used in financing increased $3.3 billion to $36.9 billion for fiscal year 2019, mainly due to an $8.8 billion increase in common stock repurchases and a $1.1 billion increase in dividends paid, offset in part by a $6.2 billion decrease in repayments of debt, net of proceeds from issuance of debt. Cash used in investing increased $9.7 billion to $15.8 billion for fiscal year 2019, mainly due to a $6.0 billion decrease in cash from net investment purchases, sales, and maturities, a $2.3 billion increase in additions to property and equipment, and a $1.5 billion increase in cash used for acquisitions of companies, net of cash acquired, and purchases of intangible and other assets.
43
PART II
Item 7
Fiscal Year 2018 Compared with Fiscal Year 2017
Cash from operations increased $4.4 billion to $43.9 billion for fiscal year 2018, mainly due to an increase in cash received from customers, offset in part by an increase in cash paid to employees, net cash paid for income taxes, cash paid for interest on debt, and cash paid to suppliers. Cash used in financing was $33.6 billion for fiscal year 2018, compared to cash from financing of $8.4 billion for fiscal year 2017. The change was mainly due to a $41.7 billion decrease in proceeds from issuance of debt, net of repayments of debt, offset in part by a $1.1 billion decrease in cash used for common stock repurchases. Cash used in investing decreased $40.7 billion to $6.1 billion for fiscal year 2018, mainly due to a $25.1 billion decrease in cash used for acquisitions of companies, net of cash acquired, and purchases of intangible and other assets, and a $19.1 billion increase in cash from net investment purchases, sales, and maturities.
Debt
We issue debt to take advantage of favorable pricing and liquidity in the debt markets, reflecting our credit rating and the low interest rate environment. The proceeds of these issuances were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, repurchases of capital stock, acquisitions, and repayment of existing debt. Refer to Note 11 – Debt of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.
Unearned Revenue
Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include Software Assurance (“SA”) and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service. Refer to Note 1 – Accounting Policies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.
The following table outlines the expected future recognition of unearned revenue as of June 30, 2019:
(In millions)
Three Months Ending,
September 30, 2019
$
12,353
December 31, 2019
9,807
March 31, 2020
6,887
June 30, 2020
3,629
Thereafter
4,530
Total
$
37,206
If our customers choose to license cloud-based versions of our products and services rather than licensing transaction-based products and services, the associated revenue will shift from being recognized at the time of the transaction to being recognized over the subscription period or upon consumption, as applicable.
Share Repurchases
For fiscal years 2019, 2018, and 2017, we repurchased 150 million shares, 99 million shares, and 170 million shares of our common stock for $16.8 billion, $8.6 billion, and $10.3 billion, respectively, through our share repurchase programs. All repurchases were made using cash resources. Refer to Note 17 – Stockholders’ Equity of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.
Dividends
Refer to Note 17 – Stockholders’ Equity of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.
44
PART II
Item 7
Off-Balance Sheet Arrangements
We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products and certain other matters. Additionally, we have agreed to cover damages resulting from breaches of certain security and privacy commitments in our cloud business. In evaluating estimated losses on these obligations, we consider factors such as the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of loss. These obligations did not have a material impact on our consolidated financial statements during the periods presented.
Contractual Obligations
The following table summarizes the payments due by fiscal year for our outstanding contractual obligations as of June 30, 2019:
(In millions)
2020
2021-2022
2023-2024
Thereafter
Total
Long-term debt: (a)
Principal payments
$
5,518
$
11,744
$
8,000
$
47,519
$
72,781
Interest payments
2,299
4,309
3,818
29,383
39,809
Construction commitments (b)
3,443
515
0
0
3,958
Operating leases, including imputed interest (c)
1,790
3,144
2,413
3,645
10,992
Finance leases, including imputed interest (c)
797
2,008
2,165
9,872
14,842
Transition tax (d)
1,180
2,900
4,168
8,155
16,403
Purchase commitments (e)
17,478
1,185
159
339
19,161
Other long-term liabilities (f)
0
72
29
324
425
Total
$
32,505
$
25,877
$
20,752
$
99,237
$
178,371
(a)
Refer to Note 11 – Debt of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).
(b)
Refer to Note 7 – Property and Equipment of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).
(c)
Refer to Note 15 – Leases of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).
(d)
Refer to Note 12 – Income Taxes of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).
(e)
Amounts represent purchase commitments, including open purchase orders and take-or-pay contracts that are not presented as construction commitments above.
(f)
We have excluded long-term tax contingencies, other tax liabilities, and deferred income taxes of $14.2 billion from the amounts presented as the timing of these obligations is uncertain. We have also excluded unearned revenue and non-cash items.
Other Planned Uses of Capital
We will continue to invest in sales, marketing, product support infrastructure, and existing and advanced areas of technology, as well as continue making acquisitions that align with our business strategy. Additions to property and equipment will continue, including new facilities, datacenters, and computer systems for research and development, sales and marketing, support, and administrative staff. We expect capital expenditures to increase in coming years to support growth in our cloud offerings. We have operating and finance leases for datacenters, corporate offices, research and development facilities, retail stores, and certain equipment. We have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of capital resources.
Liquidity
As a result of the TCJA, we are required to pay a one-time transition tax on deferred foreign income not previously subject to U.S. income tax. Under the TCJA, the transition tax is payable interest free over eight years, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight. We have paid transition tax of approximately $2.0 billion, which included $1.5 billion for fiscal year 2019. The first installment of the transition tax was paid in fiscal year 2019, and the remaining transition tax of $16.4 billion is payable over the next seven years with a final payment in fiscal year 2026. During the first quarter of fiscal year 2020, we expect to pay $1.2 billion related to the second installment of the transition tax, and $3.5 billion related to the transfer of intangible properties in the fourth quarter of fiscal year 2019.
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PART II
Item 7
We expect existing cash, cash equivalents, short-term investments, cash flows from operations, and access to capital markets to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, such as dividends, share repurchases, debt maturities, material capital expenditures, and the transition tax related to the TCJA, for at least the next 12 months and thereafter for the foreseeable future.
RECENT ACCOUNTING GUIDANCE
Refer to Note 1 – Accounting Policies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for us include revenue recognition, impairment of investment securities, goodwill, research and development costs, contingencies, income taxes, and inventories.
Revenue Recognition
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.
Judgment is required to determine the stand-alone selling price (“SSP") for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.
In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.
Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers.
Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented.
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PART II
Item 7
Impairment of Investment Securities
We review debt investments quarterly for indicators of other-than-temporary impairment. This determination requires significant judgment. In making this judgment, we employ a systematic methodology quarterly that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the duration and extent to which the fair value is less than cost. We also evaluate whether we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery. In addition, we consider specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.
Equity investments without readily determinable fair values are written down to fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than carrying value. We perform a qualitative assessment on a quarterly basis. We are required to estimate the fair value of the investment to determine the amount of the impairment loss. Once an investment is determined to be impaired, an impairment charge is recorded in other income (expense), net.
Goodwill
We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.
The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit.
Research and Development Costs
Costs incurred internally in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to production. The amortization of these costs is included in cost of revenue over the estimated life of the products.
Legal and Other Contingencies
The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our consolidated financial statements.
47
PART II
Item 7
Income Taxes
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting literature also provides guidance on derecognition of income tax assets and liabilities, classification of deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized on our consolidated financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements.
The TCJA significantly changes existing U.S. tax law and includes numerous provisions that affect our business. Refer to Note 12 – Income Taxes of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.
Inventories
Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. These reviews include analysis of demand forecasts, product life cycle status, product development plans, current sales levels, pricing strategy, and component cost trends. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.
48
PART II
Item 7
STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the consolidated financial statements and related information that are presented in this report. The consolidated financial statements, which include amounts based on management’s estimates and judgments, have been prepared in conformity with accounting principles generally accepted in the United States of America.
The Company designs and maintains accounting and internal control systems to provide reasonable assurance at reasonable cost that assets are safeguarded against loss from unauthorized use or disposition, and that the financial records are reliable for preparing consolidated financial statements and maintaining accountability for assets. These systems are augmented by written policies, an organizational structure providing division of responsibilities, careful selection and training of qualified personnel, and a program of internal audits.
The Company engaged Deloitte & Touche LLP, an independent registered public accounting firm, to audit and render an opinion on the consolidated financial statements and internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).
The Board of Directors, through its Audit Committee, consisting solely of independent directors of the Company, meets periodically with management, internal auditors, and our independent registered public accounting firm to ensure that each is meeting its responsibilities and to discuss matters concerning internal controls and financial reporting. Deloitte & Touche LLP and the internal auditors each have full and free access to the Audit Committee.
Satya Nadella
Chief Executive Officer
Amy E. Hood
Executive Vice President and Chief Financial Officer
Frank H. Brod
Corporate Vice President, Finance and Administration;Chief Accounting Officer
49
PART II
Item 7A
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS
We are exposed to economic risk from foreign exchange rates, interest rates, credit risk, and equity prices. We use derivatives instruments to manage these risks, however, they may still impact our consolidated financial statements.
Foreign Currency
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency positions. Principal currencies hedged include the euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.
Interest Rate
Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of the fixed-income portfolio to achieve economic returns that correlate to certain global fixed-income indices.
Credit
Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We manage credit exposures relative to broad-based indices and to facilitate portfolio diversification.
Equity
Securities held in our equity investments portfolio are subject to price risk.
SENSITIVITY ANALYSIS
The following table sets forth the potential loss in future earnings or fair values, including associated derivatives, resulting from hypothetical changes in relevant market rates or prices:
(In millions)
Risk Categories
Hypothetical Change
June 30,
2019
Impact
Foreign currency - Revenue
10% decrease in foreign exchange rates
$
(3,402
)
Earnings
Foreign currency - Investments
10% decrease in foreign exchange rates
(120
)
Fair Value
Interest rate
100 basis point increase in U.S. treasury interest rates
(2,909
)
Fair Value
Credit
100 basis point increase in credit spreads
(224
)
Fair Value
Equity
10% decrease in equity market prices
(244
)
Earnings
50
PART II
Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INCOME STATEMENTS
(In millions, except per share amounts)
Year Ended June 30,
2019
2018
2017
Revenue:
Product
$
66,069
$
64,497
$
63,811
Service and other
59,774
45,863
32,760
Total revenue
125,843
110,360
96,571
Cost of revenue:
Product
16,273
15,420
15,175
Service and other
26,637
22,933
19,086
Total cost of revenue
42,910
38,353
34,261
Gross margin
82,933
72,007
62,310
Research and development
16,876
14,726
13,037
Sales and marketing
18,213
17,469
15,461
General and administrative
4,885
4,754
4,481
Restructuring
0
0
306
Operating income
42,959
35,058
29,025
Other income, net
729
1,416
876
Income before income taxes
43,688
36,474
29,901
Provision for income taxes
4,448
19,903
4,412
Net income
$
39,240
$
16,571
$
25,489
Earnings per share:
Basic
$
5.11
$
2.15
$
3.29
Diluted
$
5.06
$
2.13
$
3.25
Weighted average shares outstanding:
Basic
7,673
7,700
7,746
Diluted
7,753
7,794
7,832
Refer to accompanying notes.
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COMPREHENSIVE INCOME STATEMENTS
(In millions)
Year Ended June 30,
2019
2018
2017
Net income
$
39,240
$
16,571
$
25,489
Other comprehensive income (loss), net of tax:
Net change related to derivatives
(173
)
39
(218
)
Net change related to investments
2,405
(2,717
)
(1,116
)
Translation adjustments and other
(318
)
(178
)
167
Other comprehensive income (loss)
1,914
(2,856
)
(1,167
)
Comprehensive income
$
41,154
$
13,715
$
24,322
Refer to accompanying notes. Refer to Note 18 – Accumulated Other Comprehensive Income (Loss) for further information.
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BALANCE SHEETS
(In millions)
June 30,
2019
2018
Assets
Current assets:
Cash and cash equivalents
$
11,356
$
11,946
Short-term investments
122,463
121,822
Total cash, cash equivalents, and short-term investments
133,819
133,768
Accounts receivable, net of allowance for doubtful accounts of $411 and $377
29,524
26,481
Inventories
2,063
2,662
Other
10,146
6,751
Total current assets
175,552
169,662
Property and equipment, net of accumulated depreciation of $35,330 and $29,223
36,477
29,460
Operating lease right-of-use assets
7,379
6,686
Equity investments
2,649
1,862
Goodwill
42,026
35,683
Intangible assets, net
7,750
8,053
Other long-term assets
14,723
7,442
Total assets
$
286,556
$
258,848
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
$
9,382
$
8,617
Current portion of long-term debt
5,516
3,998
Accrued compensation
6,830
6,103
Short-term income taxes
5,665
2,121
Short-term unearned revenue
32,676
28,905
Other
9,351
8,744
Total current liabilities
69,420
58,488
Long-term debt
66,662
72,242
Long-term income taxes
29,612
30,265
Long-term unearned revenue
4,530
3,815
Deferred income taxes
233
541
Operating lease liabilities
6,188
5,568
Other long-term liabilities
7,581
5,211
Total liabilities
184,226
176,130
Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital – shares authorized 24,000; outstanding 7,643 and 7,677
78,520
71,223
Retained earnings
24,150
13,682
Accumulated other comprehensive loss
(340
)
(2,187
)
Total stockholders’ equity
102,330
82,718
Total liabilities and stockholders’ equity
$
286,556
$
258,848
Refer to accompanying notes.
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CASH FLOWS STATEMENTS
(In millions)
Year Ended June 30,
2019
2018
2017
Operations
Net income
$
39,240
$
16,571
$
25,489
Adjustments to reconcile net income to net cash from operations:
Depreciation, amortization, and other
11,682
10,261
8,778
Stock-based compensation expense
4,652
3,940
3,266
Net recognized gains on investments and derivatives
(792
)
(2,212
)
(2,073
)
Deferred income taxes
(6,463
)
(5,143
)
(829
)
Changes in operating assets and liabilities:
Accounts receivable
(2,812
)
(3,862
)
(1,216
)
Inventories
597
(465
)
50
Other current assets
(1,718
)
(952
)
1,028
Other long-term assets
(1,834
)
(285
)
(917
)
Accounts payable
232
1,148
81
Unearned revenue
4,462
5,922
3,820
Income taxes
2,929
18,183
1,792
Other current liabilities
1,419
798
356
Other long-term liabilities
591
(20
)
(118
)
Net cash from operations
52,185
43,884
39,507
Financing
Repayments of short-term debt, maturities of 90 days or less, net
0
(7,324
)
(4,963
)
Proceeds from issuance of debt
0
7,183
44,344
Repayments of debt
(4,000
)
(10,060
)
(7,922
)
Common stock issued
1,142
1,002
772
Common stock repurchased
(19,543
)
(10,721
)
(11,788
)
Common stock cash dividends paid
(13,811
)
(12,699
)
(11,845
)
Other, net
(675
)
(971
)
(190
)
Net cash from (used in) financing
(36,887
)
(33,590
)
8,408
Investing
Additions to property and equipment
(13,925
)
(11,632
)
(8,129
)
Acquisition of companies, net of cash acquired, and purchases of intangible and other assets
(2,388
)
(888
)
(25,944
)
Purchases of investments
(57,697
)
(137,380
)
(176,905
)
Maturities of investments
20,043
26,360
28,044
Sales of investments
38,194
117,577
136,350
Securities lending payable
0
(98
)
(197
)
Net cash used in investing
(15,773
)
(6,061
)
(46,781
)
Effect of foreign exchange rates on cash and cash equivalents
(115
)
50
19
Net change in cash and cash equivalents
(590
)
4,283
1,153
Cash and cash equivalents, beginning of period
11,946
7,663
6,510
Cash and cash equivalents, end of period
$
11,356
$
11,946
$
7,663
Refer to accompanying notes.
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STOCKHOLDERS’ EQUITY STATEMENTS
(In millions)
Year Ended June 30,
2019
2018
2017
Common stock and paid-in capital
Balance, beginning of period
$
71,223
$
69,315
$
68,178
Common stock issued
6,829
1,002
772
Common stock repurchased
(4,195
)
(3,033
)
(2,987
)
Stock-based compensation expense
4,652
3,940
3,266
Other, net
11
(1
)
86
Balance, end of period
78,520
71,223
69,315
Retained earnings
Balance, beginning of period
13,682
17,769
13,118
Net income
39,240
16,571
25,489
Common stock cash dividends
(14,103
)
(12,917
)
(12,040
)
Common stock repurchased
(15,346
)
(7,699
)
(8,798
)
Cumulative effect of accounting changes
677
(42
)
0
Balance, end of period
24,150
13,682
17,769
Accumulated other comprehensive income (loss)
Balance, beginning of period
(2,187
)
627
1,794
Other comprehensive income (loss)
1,914
(2,856
)
(1,167
)
Cumulative effect of accounting changes
(67
)
42
0
Balance, end of period
(340
)
(2,187
)
627
Total stockholders’ equity
$
102,330
$
82,718
$
87,711
Cash dividends declared per common share
$
1.84
$
1.68
$
1.56
Refer to accompanying notes.
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NOTES TO FINANCIAL STATEMENTS
NOTE 1 — ACCOUNTING POLICIES
Accounting Principles
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
We have recast certain prior period amounts related to investments, derivatives, and fair value measurements to conform to the current period presentation based on our adoption of the new accounting standard for financial instruments. We have recast prior period commercial cloud revenue to include the commercial portion of LinkedIn to provide a comparable view of our commercial cloud business performance. The commercial portion of LinkedIn includes LinkedIn Recruiter, Sales Navigator, premium business subscriptions, and other services for organizations. We have also recast components of the prior period deferred income tax assets and liabilities to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or net cash from or used in operating, financing, or investing on our consolidated cash flows statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.
Estimates and Assumptions
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized on our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions.
Foreign Currencies
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income (“OCI”).
Revenue
Product Revenue and Service and Other Revenue
Product revenue includes sales from operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; video games; and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.
Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Microsoft Office 365, Microsoft Azure, Microsoft Dynamics 365, and Xbox Live; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.
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Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Nature of Products and Services
Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where we allocate revenue to software updates, primarily because the updates are provided at no additional charge, revenue is recognized as the updates are provided, which is generally ratably over the estimated life of the related device or license.
Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time.
Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such resources. When cloud services require a significant level of integration and interdependency with software and the individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are provided.
Revenue from search advertising is recognized when the advertisement appears in the search results or when the action necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are provided.
Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces.
Refer to Note 20 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.
Significant Judgments
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.
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Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.
In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.
Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers.
Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.
As of June 30, 2019 and 2018, long-term accounts receivable, net of allowance for doubtful accounts, was $2.2 billion and $1.8 billion, respectively, and is included in other long-term assets in our consolidated balance sheets.
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.
Activity in the allowance for doubtful accounts was as follows:
(In millions)
Year Ended June 30,
2019
2018
2017
Balance, beginning of period
$
397
$
361
$
409
Charged to costs and other
153
134
58
Write-offs
(116
)
(98
)
(106
)
Balance, end of period
$
434
$
397
$
361
Allowance for doubtful accounts included in our consolidated balance sheets:
(In millions)
June 30,
2019
2018
2017
Accounts receivable, net of allowance for doubtful accounts
$
411
$
377
$
345
Other long-term assets
23
20
16
Total
$
434
$
397
$
361
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Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future; LinkedIn subscriptions; Office 365 subscriptions; Xbox Live subscriptions; Windows 10 post-delivery support; Dynamics business solutions; Skype prepaid credits and subscriptions; and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.
Refer to Note 14 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and multi-year on-premises licenses that are invoiced annually with revenue recognized upfront.
Assets Recognized from Costs to Obtain a Contract with a Customer
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets in our consolidated balance sheets.
We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.
Cost of Revenue
Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain online products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products.
Product Warranty
We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
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Research and Development
Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products.
Sales and Marketing
Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $1.6 billion, $1.6 billion, and $1.5 billion in fiscal years 2019, 2018, and 2017, respectively.
Stock-Based Compensation
Compensation cost for stock awards, which include restricted stock units (“RSUs”) and performance stock units (“PSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related service or performance period. The fair value of stock awards is based on the quoted price of our common stock on the grant date less the present value of expected dividends not received during the vesting period. We measure the fair value of PSUs using a Monte Carlo valuation model. Compensation cost for RSUs is recognized using the straight-line method and for PSUs is recognized using the accelerated method.
Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.
Income Taxes
Income tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as long-term in our consolidated balance sheets.
Financial Instruments
Investments
We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.
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Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding other-than-temporary impairments, are recorded in OCI. Debt investments are impaired when a decline in fair value is judged to be other-than-temporary. Fair value is calculated based on publicly available market information or other estimates determined by management. We employ a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the duration and extent to which the fair value is less than cost. We also evaluate whether we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery. In addition, we consider specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in other income (expense), net and a new cost basis in the investment is established.
Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method, or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a quarterly basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.
We lend certain fixed-income and equity securities to increase investment returns. These transactions are accounted for as secured borrowings and the loaned securities continue to be carried as investments on our consolidated balance sheets. Cash and/or security interests are received as collateral for the loaned securities with the amount determined based upon the underlying security lent and the creditworthiness of the borrower. Cash received is recorded as an asset with a corresponding liability.
Derivatives
Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.
For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items.
For derivative instruments designated as cash flow hedges, the effective portion of the gains and losses are initially reported as a component of OCI and subsequently recognized in revenue when the hedged exposure is recognized in revenue. Gains and losses on derivatives representing either hedge components excluded from the assessment of effectiveness or hedge ineffectiveness are recognized in other income (expense), net.
For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.
Fair Value Measurements
We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
•
Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges.
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•
Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts.
•
Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.
We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.
Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.
Inventories
Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use, three to seven years; computer equipment, two to three years; buildings and improvements, five to 15 years; leasehold improvements, three to 20 years; and furniture and equipment, one to 10 years. Land is not depreciated.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
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We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Intangible Assets
Our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from one to 20 years. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.
Recent Accounting Guidance
Recently Adopted Accounting Guidance
Income Taxes – Intra-Entity Asset Transfers
In October 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party. We adopted the guidance effective July 1, 2018. Adoption of the guidance was applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We recorded a net cumulative-effect adjustment that resulted in an increase in retained earnings of $557 million, which reversed the previous deferral of income tax consequences and recorded new deferred tax assets from intra-entity transfers involving assets other than inventory, partially offset by a U.S. deferred tax liability related to global intangible low-taxed income (“GILTI”). Adoption of the standard resulted in an increase in long-term deferred tax assets of $2.8 billion, an increase in long-term deferred tax liabilities of $2.1 billion, and a reduction in other current assets of $152 million. Adoption of the standard had no impact on cash from or used in operating, financing, or investing on our consolidated cash flows statements.
Financial Instruments – Recognition, Measurement, Presentation, and Disclosure
In January 2016, the FASB issued a new standard related to certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the changes in the standard is the requirement for changes in the fair value of our equity investments, with certain exceptions, to be recognized through net income rather than OCI.
We adopted the standard effective July 1, 2018. Adoption of the standard was applied using a modified retrospective approach through a cumulative-effect adjustment from accumulated other comprehensive income (“AOCI”) to retained earnings as of the effective date, and we elected to measure equity investments without readily determinable fair values at cost with adjustments for observable changes in price or impairments. The cumulative-effect adjustment included any previously held unrealized gains and losses held in AOCI related to our equity investments carried at fair value as well as the impact of recording the fair value of certain equity investments carried at cost. The impact on our consolidated balance sheets upon adoption was not material. Adoption of the standard had no impact on cash from or used in operating, financing, or investing on our consolidated cash flows statements.
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Recent Accounting Guidance Not Yet Adopted
Financial Instruments – Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued new guidance related to accounting for hedging activities. This guidance expands strategies that qualify for hedge accounting, changes how many hedging relationships are presented in the financial statements, and simplifies the application of hedge accounting in certain situations. The standard will be effective for us beginning July 1, 2019, with early adoption permitted for any interim or annual period before the effective date. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We evaluated the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems, and do not expect the impact to be material upon adoption.
Financial Instruments – Credit Losses
In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be adopted upon the effective date for us beginning July 1, 2020. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. We are currently evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems.
NOTE 2 — EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.
The components of basic and diluted EPS were as follows:
(In millions, except earnings per share)
Year Ended June 30,
2019
2018
2017
Net income available for common shareholders (A)
$
39,240
$
16,571
$
25,489
Weighted average outstanding shares of common stock (B)
7,673
7,700
7,746
Dilutive effect of stock-based awards
80
94
86
Common stock and common stock equivalents (C)
7,753
7,794
7,832
Earnings Per Share
Basic (A/B)
$
5.11
$
2.15
$
3.29
Diluted (A/C)
$
5.06
$
2.13
$
3.25
Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.
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NOTE 3 — OTHER INCOME (EXPENSE), NET
The components of other income (expense), net were as follows:
(In millions)
Year Ended June 30,
2019
2018
2017
Interest and dividends income
$
2,762
$
2,214
$
1,387
Interest expense
(2,686
)
(2,733
)
(2,222
)
Net recognized gains on investments
648
2,399
2,583
Net gains (losses) on derivatives
144
(187
)
(510
)
Net losses on foreign currency remeasurements
(82
)
(218
)
(111
)
Other, net
(57
)
(59
)
(251
)
Total
$
729
$
1,416
$
876
Net Recognized Gains (Losses) on Investments
Net recognized gains (losses) on debt investments were as follows:
(In millions)
Year Ended June 30,
2019
2018
2017
Realized gains from sales of available-for-sale securities
$
12
$
27
$
108
Realized losses from sales of available-for-sale securities
(93
)
(987
)
(162
)
Other-than-temporary impairments of investments
(16
)
(6
)
(14
)
Total
$
(97
)
$
(966
)
$
(68
)
Net recognized gains (losses) on equity investments were as follows:
(In millions)
Year Ended June 30,
2019
2018
2017
Net realized gains on investments sold
$
276
$
3,406
$
2,692
Net unrealized gains on investments still held
479
0
0
Impairments of investments
(10
)
(41
)
(41
)
Total
$
745
$
3,365
$
2,651
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NOTE 4 — INVESTMENTS
Investment Components
The components of investments were as follows:
(In millions)
Fair Value Level
Cost Basis
Unrealized
Gains
Unrealized
Losses
Recorded
Basis
Cash
and Cash Equivalents
Short-term
Investments
Equity
Investments
June 30, 2019
Changes in Fair Value Recorded in
Other Comprehensive Income
Commercial paper
Level 2
$
2,211
$
0
$
0
$
2,211
$
1,773
$
438
$
0
Certificates of deposit
Level 2
2,018
0
0
2,018
1,430
588
0
U.S. government securities
Level 1
104,925
1,854
(104
)
106,675
769
105,906
0
U.S. agency securities
Level 2
988
0
0
988
698
290
0
Foreign government bonds
Level 2
6,350
4
(8
)
6,346
2,506
3,840
0
Mortgage- and asset-backed securities
Level 2
3,554
10
(3
)
3,561
0
3,561
0
Corporate notes and bonds
Level 2
7,437
111
(7
)
7,541
0
7,541
0
Corporate notes and bonds
Level 3
15
0
0
15
0
15
0
Municipal securities
Level 2
242
48
0
290
0
290
0
Municipal securities
Level 3
7
0
0
7
0
7
0
Total debt investments
$
127,747
$
2,027
$
(122
)
$
129,652
$
7,176
$
122,476
$
0
Changes in Fair Value Recorded in
Net Income
Equity investments
Level 1
$
973
$
409
$
0
$
564
Equity investments
Other
2,085
0
0
2,085
Total equity investments
$
3,058
$
409
$
0
$
2,649
Cash
$
3,771
$
3,771
$
0
$
0
Derivatives, net (a)
(13
)
0
(13
)
0
Total
$
136,468
$
11,356
$
122,463
$
2,649
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PART II
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(In millions)
Fair Value Level
Cost Basis
Unrealized
Gains
Unrealized
Losses
Recorded
Basis
Cash
and Cash
Equivalents
Short-term
Investments
Equity
Investments
June 30, 2018
Changes in Fair Value Recorded in
Other Comprehensive Income
Commercial paper
Level 2
$
2,513
$
0
$
0
$
2,513
$
2,215
$
298
$
0
Certificates of deposit
Level 2
2,058
0
0
2,058
1,865
193
0
U.S. government securities
Level 1
108,120
62
(1,167
)
107,015
2,280
104,735
0
U.S. agency securities
Level 2
1,742
0
0
1,742
1,398
344
0
Foreign government bonds
Level 1
22
0
0
22
0
22
0
Foreign government bonds
Level 2
5,063
1
(10
)
5,054
0
5,054
0
Mortgage- and asset-backed securities
Level 2
3,864
4
(13
)
3,855
0
3,855
0
Corporate notes and bonds
Level 2
6,929
21
(56
)
6,894
0
6,894
0
Corporate notes and bonds
Level 3
15
0
0
15
0
15
0
Municipal securities
Level 2
271
37
(1
)
307
0
307
0
Total debt investments
$
130,597
$
125
$
(1,247
)
$
129,475
$
7,758
$
121,717
$
0
Equity investments
Level 1
$
533
$
246
$
0
$
287
Equity investments
Level 3
18
0
0
18
Equity investments
Other
1,558
0
1
1,557
Total equity investments
$
2,109
$
246
$
1
$
1,862
Cash
$
3,942
$
3,942
$
0
$
0
Derivatives, net (a)
104
0
104
0
Total
$
135,630
$
11,946
$
121,822
$
1,862
(a)
Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments.
Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2019 and 2018, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $1.2 billion and $697 million, respectively.
As of June 30, 2019, we had no collateral received under agreements for loaned securities. As of June 30, 2018, collateral received under agreements for loaned securities was $1.8 billion and primarily comprised U.S. government and agency securities.
Unrealized Losses on Debt Investments
Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:
Less than 12 Months
12 Months or Greater
TotalUnrealizedLosses
(In millions)
Fair Value
UnrealizedLosses
Fair Value
UnrealizedLosses
TotalFair Value
June 30, 2019
U.S. government and agency securities
$
1,491
$
(1
)
$
39,158
$
(103
)
$
40,649
$
(104
)
Foreign government bonds
25
0
77
(8
)
102
(8
)
Mortgage- and asset-backed securities
664
(1
)
378
(2
)
1,042
(3
)
Corporate notes and bonds
498
(3
)
376
(4
)
874
(7
)
Total
$
2,678
$
(5
)
$
39,989
$
(117
)
$
42,667
$
(122
)
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Less than 12 Months
12 Months or Greater
Total
Unrealized
Losses
(In millions)
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Total
Fair Value
June 30, 2018
U.S. government and agency securities
$
82,352
$
(1,064
)
$
4,459
$
(103
)
$
86,811
$
(1,167
)
Foreign government bonds
3,457
(7
)
13
(3
)
3,470
(10
)
Mortgage- and asset-backed securities
2,072
(9
)
96
(4
)
2,168
(13
)
Corporate notes and bonds
3,111
(43
)
301
(13
)
3,412
(56
)
Municipal securities
45
(1
)
0
0
45
(1
)
Total
$
91,037
$
(1,124
)
$
4,869
$
(123
)
$
95,906
$
(1,247
)
Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence.
Debt Investment Maturities
(In millions)
Cost Basis
Estimated
Fair Value
June 30, 2019
Due in one year or less
$
53,200
$
53,124
Due after one year through five years
47,016
47,783
Due after five years through 10 years
26,658
27,824
Due after 10 years
873
921
Total
$
127,747
$
129,652
NOTE 5 — DERIVATIVES
We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.
Foreign Currency
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions. Option and forward contracts are used to hedge a portion of forecasted international revenue and are designated as cash flow hedging instruments. Principal currencies hedged include the euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.
Foreign currency risks related to certain non-U.S. dollar denominated securities are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments.
Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures.
Equity
Securities held in our equity investments portfolio are subject to market price risk. Market price risk is managed relative to broad-based global and domestic equity indices using certain convertible preferred investments, options, futures, and swap contracts not designated as hedging instruments. In the past, to hedge our price risk, we also used and designated equity derivatives as hedging instruments, including puts, calls, swaps, and forwards.
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Other
Interest Rate
Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts, and over-the-counter swap and option contracts, none of which are designated as hedging instruments.
In addition, we use “To Be Announced” forward purchase commitments of mortgage-backed assets to gain exposure to agency mortgage-backed securities. These meet the definition of a derivative instrument in cases where physical delivery of the assets is not taken at the earliest available delivery date.
Credit
Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts, not designated as hedging instruments, to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. We use credit default swaps as they are a low-cost method of managing exposure to individual credit risks or groups of credit risks.
Credit-Risk-Related Contingent Features
Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2019, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.
The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:
(In millions)
June 30,
2019
June 30,
2018
Designated as Hedging Instruments
Foreign exchange contracts sold
$
6,034
$
11,101
Not Designated as Hedging Instruments
Foreign exchange contracts purchased
14,889
9,425
Foreign exchange contracts sold
15,614
13,374
Equity contracts purchased
680
49
Equity contracts sold
5
5
Other contracts purchased
1,327
878
Other contracts sold
451
472
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Fair Values of Derivative Instruments
The following table presents our derivative instruments:
Derivative
Derivative
Derivative
Derivative
(In millions)
Assets
Liabilities
Assets
Liabilities
June 30,
2019
June 30,
2018
Changes in Fair Value Recorded in Other Comprehensive Income
Designated as Hedging Instruments
Foreign exchange contracts
$
0
$
0
$
174
$
0
Changes in Fair Value Recorded in Net Income
Designated as Hedging Instruments
Foreign exchange contracts
0
(93
)
95
0
Not Designated as Hedging Instruments
Foreign exchange contracts
204
(172
)
256
(197
)
Equity contracts
38
0
2
(7
)
Other contracts
8
(7
)
11
(3
)
Gross amounts of derivatives
250
(272
)
538
(207
)
Gross amounts of derivatives offset in the balance sheet
(113
)
114
(152
)
153
Cash collateral received
0
(78
)
0
(235
)
Net amounts of derivatives
$
137
$
(236
)
$
386
$
(289
)
Reported as
Short-term investments
$
(13
)
$
0
$
104
$
0
Other current assets
146
0
260
0
Other long-term assets
4
0
22
0
Other current liabilities
0
(221
)
0
(288
)
Other long-term liabilities
0
(15
)
0
(1
)
Total
$
137
$
(236
)
$
386
$
(289
)
Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $247 million and $272 million, respectively, as of June 30, 2019, and $533 million and $207 million, respectively, as of June 30, 2018.
The following table presents the fair value of our derivatives instruments on a gross basis:
(In millions)
Level 1
Level 2
Level 3
Total
June 30, 2019
Derivative assets
$
0
$
247
$
3
$
250
Derivative liabilities
0
(272
)
0
(272
)
June 30, 2018
Derivative assets
1
535
2
538
Derivative liabilities
(1
)
(206
)
0
(207
)
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Fair Value Hedge Gains (Losses)
We recognized in other income (expense), net the following gains (losses) on contracts designated as fair value hedges and their related hedged items:
(In millions)
Year Ended June 30,
2019
2018
2017
Foreign Exchange Contracts
Derivatives
$
38
$
25
$
441
Hedged items
130
78
(386
)
Total amount of ineffectiveness
$
168
$
103
$
55
Equity Contracts
Derivatives
$
0
$
(324
)
$
(74
)
Hedged items
0
324
74
Total amount of ineffectiveness
$
0
$
0
$
0
Amount of equity contracts excluded from effectiveness assessment
$
0
$
80
$
(80
)
Cash Flow Hedge Gains (Losses)
We recognized the following gains (losses) on foreign exchange contracts designated as cash flow hedges:
(In millions)
Year Ended June 30,
2019
2018
2017
Effective Portion
Gains recognized in other comprehensive income (loss), net of tax of $1, $11, and $4
$
159
$
219
$
328
Gains reclassified from accumulated other comprehensive income (loss) into revenue
341
185
555
Amount Excluded from Effectiveness Assessment and Ineffective Portion
Losses recognized in other income (expense), net
(64
)
(255
)
(389
)
We do not have any net derivative gains included in AOCI as of June 30, 2019 that will be reclassified into earnings within the following 12 months. No significant amounts of gains (losses) were reclassified from AOCI into earnings as a result of forecasted transactions that failed to occur during fiscal year 2019.
Non-designated Derivative Gains (Losses)
We recognized in other income (expense), net the following gains (losses) on derivatives not designated as hedging instruments:
(In millions)
Year Ended June 30,
2019
2018
2017
Foreign exchange contracts
$
(97
)
$
(33
)
$
(117
)
Equity contracts
3
(87
)
(114
)
Other contracts
35
(17
)
(3
)
Total
$
(59
)
$
(137
)
$
(234
)
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NOTE 6 — INVENTORIES
The components of inventories were as follows:
(In millions)
June 30,
2019
2018
Raw materials
$
399
$
655
Work in process
53
54
Finished goods
1,611
1,953
Total
$
2,063
$
2,662
NOTE 7 — PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
(In millions)
June 30,
2019
2018
Land
$
1,540
$
1,254
Buildings and improvements
26,288
20,604
Leasehold improvements
5,316
4,735
Computer equipment and software
33,823
27,633
Furniture and equipment
4,840
4,457
Total, at cost
71,807
58,683
Accumulated depreciation
(35,330
)
(29,223
)
Total, net
$
36,477
$
29,460
During fiscal years 2019, 2018, and 2017, depreciation expense was $9.7 billion, $7.7 billion, and $6.1 billion, respectively. We have committed $4.0 billion for the construction of new buildings, building improvements, and leasehold improvements as of June 30, 2019.
NOTE 8 — BUSINESS COMBINATIONS
GitHub, Inc.
On October 25, 2018, we acquired GitHub, Inc. (“GitHub”), a software development platform, in a $7.5 billion stock transaction (inclusive of total cash payments of $1.3 billion in respect of vested GitHub equity awards and an indemnity escrow). The acquisition is expected to empower developers to achieve more at every stage of the development lifecycle, accelerate enterprise use of GitHub, and bring Microsoft’s developer tools and services to new audiences. The financial results of GitHub have been included in our consolidated financial statements since the date of the acquisition. GitHub is reported as part of our Intelligent Cloud segment.
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The allocation of the purchase price to goodwill was completed as of June 30, 2019. The major classes of assets and liabilities to which we allocated the purchase price were as follows:
(In millions)
Cash, cash equivalents, and short-term investments
$
234
Goodwill
5,497
Intangible assets
1,267
Other assets
143
Other liabilities
(217
)
Total
$
6,924
The goodwill recognized in connection with the acquisition is primarily attributable to anticipated synergies from future growth and is not expected to be deductible for tax purposes. We assigned the goodwill to our Intelligent Cloud segment.
Following are the details of the purchase price allocated to the intangible assets acquired:
(In millions)
Amount
Weighted
Average Life
Customer-related
$
648
8 years
Technology-based
447
5 years
Marketing-related
170
10 years
Contract-based
2
2 years
Total
$
1,267
7 years
Transactions recognized separately from the purchase price allocation were approximately $600 million, primarily related to equity awards recognized as expense over the related service period.
LinkedIn Corporation
On December 8, 2016, we completed our acquisition of all issued and outstanding shares of LinkedIn Corporation (“LinkedIn”), the world’s largest professional network on the Internet, for a total purchase price of $27.0 billion. The purchase price consisted primarily of cash of $26.9 billion. The acquisition is expected to accelerate the growth of LinkedIn, Office 365, and Dynamics 365. The financial results of LinkedIn have been included in our consolidated financial statements since the date of the acquisition.
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The allocation of the purchase price to goodwill was completed as of June 30, 2017. The major classes of assets and liabilities to which we allocated the purchase price were as follows:
(In millions)
Cash and cash equivalents
$
1,328
Short-term investments
2,110
Other current assets
697
Property and equipment
1,529
Intangible assets
7,887
Goodwill (a)
16,803
Short-term debt (b)
(1,323
)
Other current liabilities
(1,117
)
Deferred income taxes
(774
)
Other
(131
)
Total purchase price
$
27,009
(a)
Goodwill was assigned to our Productivity and Business Processes segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of LinkedIn. None of the goodwill is expected to be deductible for income tax purposes.
(b)
Convertible senior notes issued by LinkedIn on November 12, 2014, substantially all of which were redeemed after our acquisition of LinkedIn. The remaining $18 million of notes are not redeemable and are included in long-term debt in our consolidated balance sheets. Refer to Note 11 – Debt for further information.
Following are the details of the purchase price allocated to the intangible assets acquired:
(In millions)
Amount
Weighted
Average Life
Customer-related
$
3,607
7 years
Marketing-related (trade names)
2,148
20 years
Technology-based
2,109
3 years
Contract-based
23
5 years
Fair value of intangible assets acquired
$
7,887
9 years
Our consolidated income statements include the following revenue and operating loss attributable to LinkedIn since the date of acquisition:
(In millions)
Year Ended June 30,
2017
Revenue
$
2,271
Operating loss
(924
)
Following are the supplemental consolidated financial results of Microsoft Corporation on an unaudited pro forma basis, as if the acquisition had been consummated on July 1, 2015:
(In millions, except per share amounts)
Year Ended June 30,
2017
2016
Revenue
$
98,291
$
94,490
Net income
25,179
19,128
Diluted earnings per share
3.21
2.38
These pro forma results were based on estimates and assumptions, which we believe are reasonable. They are not the results that would have been realized had we been a combined company during the periods presented and are not necessarily indicative of our consolidated results of operations in future periods. The pro forma results include adjustments related to purchase accounting, primarily amortization of intangible assets. Acquisition costs and other nonrecurring charges were immaterial and are included in the earliest period presented.
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Other
During fiscal year 2019, we completed 19 additional acquisitions for $1.6 billion, substantially all of which were paid in cash. These entities have been included in our consolidated results of operations since their respective acquisition dates.
NOTE 9 — GOODWILL
Changes in the carrying amount of goodwill were as follows:
(In millions)
June 30,
2017
Acquisitions
Other
June 30,
2018
Acquisitions
Other
June 30,2019
Productivity and Business Processes
$
23,739
$
72
$
12
$
23,823
$
514
$
(60
)
$
24,277
Intelligent Cloud
5,555
164
(16
)
5,703
5,605
(a)
43
(a)
11,351
More Personal Computing
5,828
394
(65
)
6,157
289
(48
)
6,398
Total
$
35,122
$
630
$
(69
)
$
35,683
$
6,408
$
(65
)
$
42,026
(a)
Includes goodwill of $5.5 billion related to GitHub. See Note 8 – Business Combinations for further information.
The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.
Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.
Goodwill Impairment
We test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses.
No instances of impairment were identified in our May 1, 2019, May 1, 2018, or May 1, 2017 tests. As of June 30, 2019 and 2018, accumulated goodwill impairment was $11.3 billion.
NOTE 10 — INTANGIBLE ASSETS
The components of intangible assets, all of which are finite-lived, were as follows:
(In millions)
GrossCarryingAmount
AccumulatedAmortization
Net CarryingAmount
GrossCarryingAmount
AccumulatedAmortization
Net CarryingAmount
June 30,
2019
2018
Technology-based
$
7,691
$
(5,771
)
$
1,920
$
7,220
$
(5,018
)
$
2,202
Customer-related
4,709
(1,785
)
2,924
4,031
(1,205
)
2,826
Marketing-related
4,165
(1,327
)
2,838
4,006
(1,071
)
2,935
Contract-based
574
(506
)
68
679
(589
)
90
Total
$
17,139
(a)
$
(9,389
)
$
7,750
$
15,936
$
(7,883
)
$
8,053
(a)
Includes intangible assets of $1.3 billion related to GitHub. See Note 8 – Business Combinations for further information.
No material impairments of intangible assets were identified during fiscal years 2019, 2018, or 2017. We estimate that we have no significant residual value related to our intangible assets.
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The components of intangible assets acquired during the periods presented were as follows:
(In millions)
Amount
Weighted
Average Life
Amount
Weighted
Average Life
Year Ended June 30,
2019
2018
Technology-based
$
814
5 years
$
178
4 years
Marketing-related
177
10 years
14
5 years
Contract-based
7
3 years
14
4 years
Customer-related
710
8 years
13
5 years
Total
$
1,708
7 years
$
219
5 years
Intangible assets amortization expense was $1.9 billion, $2.2 billion, and $1.7 billion for fiscal years 2019, 2018, and 2017, respectively.
The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2019:
(In millions)
Year Ending June 30,
2020
$
1,488
2021
1,282
2022
1,187
2023
1,053
2024
737
Thereafter
2,003
Total
$
7,750
NOTE 11 — DEBT
Short-term Debt
As of June 30, 2019 and 2018, we had no commercial paper issued or outstanding. Effective August 31, 2018, we terminated our credit facilities, which served as back-up for our commercial paper program.
Long-term Debt
As of June 30, 2019, the total carrying value and estimated fair value of our long-term debt, including the current portion, were $72.2 billion and $78.9 billion, respectively. As of June 30, 2018, the total carrying value and estimated fair value of our long-term debt, including the current portion, were $76.2 billion and $77.5 billion, respectively. These estimated fair values are based on Level 2 inputs.
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The components of our long-term debt, including the current portion, and the associated interest rates were as follows:
(In millions, except interest rates)
Face ValueJune 30,
2019
Face ValueJune 30,
2018
Stated
Interest
Rate
Effective
Interest
Rate
Notes
November 3, 2018
$
0
$
1,750
1.300%
1.396%
December 6, 2018
0
1,250
1.625%
1.824%
June 1, 2019
0
1,000
4.200%
4.379%
August 8, 2019
2,500
2,500
1.100%
1.203%
November 1, 2019
18
18
0.500%
0.500%
February 6, 2020
1,500
1,500
1.850%
1.952%
February 12, 2020
1,500
1,500
1.850%
1.935%
October 1, 2020
1,000
1,000
3.000%
3.137%
November 3, 2020
2,250
2,250
2.000%
2.093%
February 8, 2021
500
500
4.000%
4.082%
August 8, 2021
2,750
2,750
1.550%
1.642%
December 6, 2021 (a)
1,994
2,044
2.125%
2.233%
February 6, 2022
1,750
1,750
2.400%
2.520%
February 12, 2022
1,500
1,500
2.375%
2.466%
November 3, 2022
1,000
1,000
2.650%
2.717%
November 15, 2022
750
750
2.125%
2.239%
May 1, 2023
1,000
1,000
2.375%
2.465%
August 8, 2023
1,500
1,500
2.000%
2.101%
December 15, 2023
1,500
1,500
3.625%
3.726%
February 6, 2024
2,250
2,250
2.875%
3.041%
February 12, 2025
2,250
2,250
2.700%
2.772%
November 3, 2025
3,000
3,000
3.125%
3.176%
August 8, 2026
4,000
4,000
2.400%
2.464%
February 6, 2027
4,000
4,000
3.300%
3.383%
December 6, 2028 (a)
1,993
2,044
3.125%
3.218%
May 2, 2033 (a)
626
642
2.625%
2.690%
February 12, 2035
1,500
1,500
3.500%
3.604%
November 3, 2035
1,000
1,000
4.200%
4.260%
August 8, 2036
2,250
2,250
3.450%
3.510%
February 6, 2037
2,500
2,500
4.100%
4.152%
June 1, 2039
750
750
5.200%
5.240%
October 1, 2040
1,000
1,000
4.500%
4.567%
February 8, 2041
1,000
1,000
5.300%
5.361%
November 15, 2042
900
900
3.500%
3.571%
May 1, 2043
500
500
3.750%
3.829%
December 15, 2043
500
500
4.875%
4.918%
February 12, 2045
1,750
1,750
3.750%
3.800%
November 3, 2045
3,000
3,000
4.450%
4.492%
August 8, 2046
4,500
4,500
3.700%
3.743%
February 6, 2047
3,000
3,000
4.250%
4.287%
February 12, 2055
2,250
2,250
4.000%
4.063%
November 3, 2055
1,000
1,000
4.750%
4.782%
August 8, 2056
2,250
2,250
3.950%
4.033%
February 6, 2057
2,000
2,000
4.500%
4.528%
Total
$
72,781
$
76,898
(a)
Euro-denominated debt securities.
The notes in the table above are senior unsecured obligations and rank equally with our other senior unsecured debt outstanding. Interest on these notes is paid semi-annually, except for the euro-denominated debt securities on which interest is paid annually. Cash paid for interest on our debt for fiscal years 2019, 2018, and 2017 was $2.4 billion, $2.4 billion, and $1.6 billion, respectively. As of June 30, 2019 and 2018, the aggregate debt issuance costs and unamortized discount associated with our long-term debt, including the current portion, were $603 million and $658 million, respectively.
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Maturities of our long-term debt for each of the next five years and thereafter are as follows:
(In millions)
Year Ending June 30,
2020
$
5,518
2021
3,750
2022
7,994
2023
2,750
2024
5,250
Thereafter
47,519
Total
$
72,781
NOTE 12 — INCOME TAXES
Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changed existing U.S. tax law and included numerous provisions that affect our business, such as imposing a one-time transition tax on deemed repatriation of deferred foreign income, reducing the U.S. federal statutory tax rate, and adopting a territorial tax system. In fiscal year 2018, the TCJA required us to incur a transition tax on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for foreign cash and certain other net current assets, and 8% on the remaining income. The TCJA reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. In addition, the TCJA subjected us to a tax on our GILTI effective July 1, 2018.
Under GAAP, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense or factor such amounts into our measurement of deferred taxes. We elected the deferred method, under which we recorded the corresponding deferred tax assets and liabilities on our consolidated balance sheets.
During fiscal year 2018, we recorded a net charge of $13.7 billion related to the enactment of the TCJA, due to the impact of the one-time transition tax on the deemed repatriation of deferred foreign income of $17.9 billion, offset in part by the impact of changes in the tax rate of $4.2 billion, primarily on deferred tax assets and liabilities. During the second quarter of fiscal year 2019, we recorded additional tax expense of $157 million, which related to completing our provisional accounting for GILTI deferred taxes pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 118.
In the fourth quarter of fiscal year 2019, in response to the TCJA and recently issued regulations, we transferred certain intangible properties held by our foreign subsidiaries to the U.S. and Ireland. The transfers of intangible properties resulted in a $2.6 billion net income tax benefit recorded in the fourth quarter of fiscal year 2019, as the value of future tax deductions exceeded the current tax liability from foreign jurisdictions and U.S. GILTI tax.
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Provision for Income Taxes
The components of the provision for income taxes were as follows:
(In millions)
Year Ended June 30,
2019
2018
2017
Current Taxes
U.S. federal
$
4,718
$
19,764
$
2,739
U.S. state and local
662
934
30
Foreign
5,531
4,348
2,472
Current taxes
$
10,911
$
25,046
$
5,241
Deferred Taxes
U.S. federal
$
(5,647
)
$
(4,292
)
$
(554
)
U.S. state and local
(1,010
)
(458
)
269
Foreign
194
(393
)
(544
)
Deferred taxes
$
(6,463
)
$
(5,143
)
$
(829
)
Provision for income taxes
$
4,448
$
19,903
$
4,412
U.S. and foreign components of income before income taxes were as follows:
(In millions)
Year Ended June 30,
2019
2018
2017
U.S.
$
15,799
$
11,527
$
6,843
Foreign
27,889
24,947
23,058
Income before income taxes
$
43,688
$
36,474
$
29,901
Effective Tax Rate
The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:
Year Ended June 30,
2019
2018
2017
Federal statutory rate
21.0%
28.1%
35.0%
Effect of:
Foreign earnings taxed at lower rates
(4.1)%
(7.8)%
(11.6)%
Impact of the enactment of the TCJA
0.4%
37.7%
0%
Phone business losses
0%
0%
(5.7)%
Impact of intangible property transfers
(5.9)%
0%
0%
Foreign-derived intangible income deduction
(1.4)%
0%
0%
Research and development credit
(1.1)%
(1.3)%
(0.9)%
Excess tax benefits relating to stock-based compensation
(2.2)%
(2.5)%
(2.1)%
Interest, net
1.0%
1.2%
1.4%
Other reconciling items, net
2.5%
(0.8)%
(1.3)%
Effective rate
10.2%
54.6%
14.8%
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The decrease from the federal statutory rate in fiscal year 2019 is primarily due to a $2.6 billion net income tax benefit related to intangible property transfers, and earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico. The increase from the federal statutory rate in fiscal year 2018 is primarily due to the net charge related to the enactment of the TCJA in the second quarter of fiscal year 2018, offset in part by earnings taxed at lower rates in foreign jurisdictions. The decrease from the federal statutory rate in fiscal year 2017 is primarily due to earnings taxed at lower rates in foreign jurisdictions. Our foreign regional operating centers in Ireland, Singapore and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 82%, 87%, and 76% of our foreign income before tax in fiscal years 2019, 2018, and 2017, respectively. Other reconciling items, net consists primarily of tax credits, GILTI, and U.S. state income taxes. In fiscal years 2019, 2018, and 2017, there were no individually significant other reconciling items.
The decrease in our effective tax rate for fiscal year 2019 compared to fiscal year 2018 was primarily due to the net charge related to the enactment of the TCJA in the second quarter of fiscal year 2018, and a $2.6 billion net income tax benefit in the fourth quarter of fiscal year 2019 related to intangible property transfers. The increase in our effective tax rate for fiscal year 2018 compared to fiscal year 2017 was primarily due to the net charge related to the enactment of the TCJA and the realization of tax benefits attributable to previous Phone business losses in fiscal year 2017.
The components of the deferred income tax assets and liabilities were as follows:
(In millions)
June 30,
2019
2018
Deferred Income Tax Assets
Stock-based compensation expense
$
406
$
460
Accruals, reserves, and other expenses
2,287
1,832
Loss and credit carryforwards
3,518
3,369
Depreciation and amortization
7,046
351
Leasing liabilities
1,594
1,427
Unearned revenue
475
0
Other
367
56
Deferred income tax assets
15,693
7,495
Less valuation allowance
(3,214
)
(3,186
)
Deferred income tax assets, net of valuation allowance
$
12,479
$
4,309
Deferred Income Tax Liabilities
Unrealized gain on investments and debt
$
(738
)
$
0
Unearned revenue
(30
)
(639
)
Depreciation and amortization
0
(1,164
)
Leasing assets
(1,510
)
(1,366
)
Deferred GILTI tax liabilities
(2,607
)
(61
)
Other
(291
)
(251
)
Deferred income tax liabilities
$
(5,176
)
$
(3,481
)
Net deferred income tax assets (liabilities)
$
7,303
$
828
Reported As
Other long-term assets
$
7,536
$
1,369
Long-term deferred income tax liabilities
(233
)
(541
)
Net deferred income tax assets (liabilities)
$
7,303
$
828
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered.
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As of June 30, 2019, we had federal, state and foreign net operating loss carryforwards of $978 million, $770 million, and $11.6 billion, respectively. The federal and state net operating loss carryforwards will expire in various years from fiscal 2020 through 2039, if not utilized. The majority of our foreign net operating loss carryforwards do not expire. Certain acquired net operating loss carryforwards are subject to an annual limitation, but are expected to be realized with the exception of those which have a valuation allowance.
The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards and other net deferred tax assets that may not be realized.
Income taxes paid, net of refunds, were $8.4 billion, $5.5 billion, and $2.4 billion in fiscal years 2019, 2018, and 2017, respectively.
Uncertain Tax Positions
Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2019, 2018, and 2017, were $13.1 billion, $12.0 billion, and $11.7 billion, respectively, which were primarily included in long-term income taxes in our consolidated balance sheets. If recognized, the resulting tax benefit would affect our effective tax rates for fiscal years 2019, 2018, and 2017 by $12.0 billion, $11.3 billion, and $10.2 billion, respectively.
As of June 30, 2019, 2018, and 2017, we had accrued interest expense related to uncertain tax positions of $3.4 billion, $3.0 billion, and $2.3 billion, respectively, net of income tax benefits. The provision for (benefit from) income taxes for fiscal years 2019, 2018, and 2017 included interest expense related to uncertain tax positions of $515 million, $688 million, and $399 million, respectively, net of income tax benefits.
The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:
(In millions)
Year Ended June 30,
2019
2018
2017
Beginning unrecognized tax benefits
$
11,961
$
11,737
$
10,164
Decreases related to settlements
(316
)
(193
)
(4
)
Increases for tax positions related to the current year
2,106
1,445
1,277
Increases for tax positions related to prior years
508
151
397
Decreases for tax positions related to prior years
(1,113
)
(1,176
)
(49
)
Decreases due to lapsed statutes of limitations
0
(3
)
(48
)
Ending unrecognized tax benefits
$
13,146
$
11,961
$
11,737
We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 in fiscal year 2011. In February 2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues for tax years 2004 to 2006 and reopened the audit phase of the examination. We also settled a portion of the IRS audit for tax years 2007 to 2009 in fiscal year 2016, and a portion of the IRS audit for tax years 2010 to 2013 in fiscal year 2018. We remain under audit for tax years 2004 to 2013. We expect the IRS to begin an examination of tax years 2014 to 2017 within the next 12 months.
As of June 30, 2019, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact on our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.
We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2018, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.
NOTE 13 — RESTRUCTURING CHARGES
In June 2017, management approved a sales and marketing restructuring plan. In fiscal year 2017, we recorded employee severance expenses of $306 million primarily related to this sales and marketing restructuring plan. The actions associated with this restructuring plan were completed as of June 30, 2018.
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NOTE 14 — UNEARNED REVENUE
Unearned revenue by segment was as follows:
(In millions)
June 30,
2019
2018
Productivity and Business Processes
$
16,831
$
14,864
Intelligent Cloud
16,988
14,706
More Personal Computing
3,387
3,150
Total
$
37,206
$
32,720
Changes in unearned revenue were as follows:
(In millions)
Year Ended June 30, 2019
Balance, beginning of period
$
32,720
Deferral of revenue
69,493
Recognition of unearned revenue
(65,007
)
Balance, end of period
$
37,206
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted not recognized revenue was $91 billion as of June 30, 2019, of which we expect to recognize approximately 50% of the revenue over the next 12 months and the remainder thereafter. Many customers are committing to our products and services for longer contract terms, which is increasing the percentage of contracted revenue that will be recognized beyond the next 12 months.
NOTE 15 — LEASES
We have operating and finance leases for datacenters, corporate offices, research and development facilities, retail stores, and certain equipment. Our leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.
The components of lease expense were as follows:
(In millions)
Year Ended June 30,
2019
2018
2017
Operating lease cost
$
1,707
$
1,585
$
1,412
Finance lease cost:
Amortization of right-of-use assets
$
370
$
243
$
104
Interest on lease liabilities
247
175
68
Total finance lease cost
$
617
$
418
$
172
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PART II
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Supplemental cash flow information related to leases was as follows:
(In millions)
Year Ended June 30,
2019
2018
2017
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
1,670
$
1,522
$
1,157
Operating cash flows from finance leases
247
175
68
Financing cash flows from finance leases
221
144
46
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
2,303
1,571
1,270
Finance leases
2,532
1,933
1,773
Supplemental balance sheet information related to leases was as follows:
(In millions, except lease term and discount rate)
June 30,
2019
2018
Operating Leases
Operating lease right-of-use assets
$
7,379
$
6,686
Other current liabilities
$
1,515
$
1,399
Operating lease liabilities
6,188
5,568
Total operating lease liabilities
$
7,703
$
6,967
Finance Leases
Property and equipment, at cost
$
7,041
$
4,543
Accumulated depreciation
(774
)
(404
)
Property and equipment, net
$
6,267
$
4,139
Other current liabilities
$
317
$
176
Other long-term liabilities
6,257
4,125
Total finance lease liabilities
$
6,574
$
4,301
Weighted Average Remaining Lease Term
Operating leases
7 years
7 years
Finance leases
13 years
13 years
Weighted Average Discount Rate
Operating leases
3.0%
2.7%
Finance leases
4.6%
5.2%
Maturities of lease liabilities were as follows:
(In millions)
Year Ending June 30,
Operating Leases
Finance Leases
2020
$
1,678
$
591
2021
1,438
616
2022
1,235
626
2023
1,036
631
2024
839
641
Thereafter
2,438
5,671
Total lease payments
8,664
8,776
Less imputed interest
(961
)
(2,202
)
Total
$
7,703
$
6,574
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As of June 30, 2019, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $2.3 billion and $6.1 billion, respectively. These operating and finance leases will commence between fiscal year 2020 and fiscal year 2022 with lease terms of 1 year to 15 years.
NOTE 16 — CONTINGENCIES
Patent and Intellectual Property Claims
There were 44 patent infringement cases pending against Microsoft as of June 30, 2019, none of which are material individually or in aggregate.
Antitrust, Unfair Competition, and Overcharge Class Actions
Antitrust and unfair competition class action lawsuits were filed against us in British Columbia, Ontario, and Quebec, Canada. All three have been certified on behalf of Canadian indirect purchasers who acquired licenses for Microsoft operating system software and/or productivity application software between 1998 and 2010.
The trial of the British Columbia action commenced in May 2016. Following a mediation, the parties agreed to a global settlement of all three Canadian actions, and submitted the proposed settlement agreement to the courts in all three jurisdictions for approval. The final settlement has been approved by the courts in British Columbia, Ontario, and Quebec, and the claims administration process will commence.
Other Antitrust Litigation and Claims
China State Administration for Industry and Commerce Investigation
In 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. The SAMR has presented its preliminary views as to certain possible violations of China's Anti-Monopoly Law, and discussions are expected to continue.
Product-Related Litigation
U.S. Cell Phone Litigation
Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 40 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.
In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which the defendants have moved to strike. In August 2018, the trial court issued an order striking portions of the plaintiffs’ expert reports. A hearing is expected to be scheduled in the second half of calendar year 2019.
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Employment-Related Litigation
Moussouris v. Microsoft
Current and former female Microsoft employees in certain engineering and information technology roles brought this class action in federal court in Seattle in 2015, alleging systemic gender discrimination in pay and promotions. The plaintiffs moved to certify the class in October 2017. Microsoft filed an opposition in January 2018, attaching an expert report showing no statistically significant disparity in pay and promotions between similarly situated men and women. In June 2018, the court denied the plaintiffs’ motion for class certification. Plaintiffs sought an interlocutory appeal to the U.S. Court of Appeals for the Ninth Circuit, which was granted in September 2018. Oral argument is scheduled for October 2019.
Other Contingencies
We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact on our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
As of June 30, 2019, we accrued aggregate legal liabilities of $386 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $1.0 billion in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on our consolidated financial statements for the period in which the effects become reasonably estimable.
NOTE 17 — STOCKHOLDERS’ EQUITY
Shares Outstanding
Shares of common stock outstanding were as follows:
(In millions)
Year Ended June 30,
2019
2018
2017
Balance, beginning of year
7,677
7,708
7,808
Issued
116
68
70
Repurchased
(150
)
(99
)
(170
)
Balance, end of year
7,643
7,677
7,708
Share Repurchases
On September 16, 2013, our Board of Directors approved a share repurchase program (“2013 Share Repurchase Program”) authorizing up to $40.0 billion in share repurchases. The 2013 Share Repurchase Program became effective on October 1, 2013, and was completed on December 22, 2016.
On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to an additional $40.0 billion in share repurchases (“2016 Share Repurchase Program”). This share repurchase program commenced on December 22, 2016 following completion of the 2013 Share Repurchase Program, has no expiration date, and may be suspended or discontinued at any time without notice. As of June 30, 2019, $11.4 billion remained of the 2016 Share Repurchase Program.
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We repurchased the following shares of common stock under the share repurchase programs:
(In millions)
Shares
Amount
Shares
Amount
Shares
Amount
Year Ended June 30,
2019
2018
2017
First Quarter
24
$
2,600
22
$
1,600
63
$
3,550
Second Quarter
57
6,100
22
1,800
59
3,533
Third Quarter
36
3,899
34
3,100
25
1,600
Fourth Quarter
33
4,200
21
2,100
23
1,600
Total
150
$
16,799
99
$
8,600
170
$
10,283
Shares repurchased in the first and second quarter of fiscal year 2017 were under the 2013 Share Repurchase Program. All other shares repurchased were under the 2016 Share Repurchase Program. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $2.7 billion, $2.1 billion, and $1.5 billion for fiscal years 2019, 2018, and 2017, respectively. All share repurchases were made using cash resources.
Dividends
Our Board of Directors declared the following dividends:
Declaration Date
Record Date
Payment Date
Dividend
Per Share
Amount
Fiscal Year 2019
(In millions)
September 18, 2018
November 15, 2018
December 13, 2018
$
0.46
$
3,544
November 28, 2018
February 21, 2019
March 14, 2019
0.46
3,526
March 11, 2019
May 16, 2019
June 13, 2019
0.46
3,521
June 12, 2019
August 15, 2019
September 12, 2019
0.46
3,516
Total
$
1.84
$
14,107
Fiscal Year 2018
September 19, 2017
November 16, 2017
December 14, 2017
$
0.42
$
3,238
November 29, 2017
February 15, 2018
March 8, 2018
0.42
3,232
March 12, 2018
May 17, 2018
June 14, 2018
0.42
3,226
June 13, 2018
August 16, 2018
September 13, 2018
0.42
3,220
Total
$
1.68
$
12,916
The dividend declared on June 12, 2019 was included in other current liabilities as of June 30, 2019.
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NOTE 18 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component:
(In millions)
Year Ended June 30,
2019
2018
2017
Derivatives
Balance, beginning of period
$
173
$
134
$
352
Unrealized gains, net of tax of $2, $11, and $4
160
218
328
Reclassification adjustments for gains included in revenue
(341
)
(185
)
(555
)
Tax expense included in provision for income taxes
8
6
9
Amounts reclassified from accumulated other comprehensive income (loss)
(333
)
(179
)
(546
)
Net change related to derivatives, net of tax of $(6), $5, and $(5)
(173
)
39
(218
)
Balance, end of period
$
0
$
173
$
134
Investments
Balance, beginning of period
$
(850
)
$
1,825
$
2,941
Unrealized gains (losses), net of tax of $616, $(427), and $267
2,331
(1,146
)
517
Reclassification adjustments for (gains) losses included in other income (expense), net
93
(2,309
)
(2,513
)
Tax expense (benefit) included in provision for income taxes
(19
)
738
880
Amounts reclassified from accumulated other comprehensive income (loss)
74
(1,571
)
(1,633
)
Net change related to investments, net of tax of $635, $(1,165), and $(613)
2,405
(2,717
)
(1,116
)
Cumulative effect of accounting changes
(67
)
42
0
Balance, end of period
$
1,488
$
(850
)
$
1,825
Translation Adjustments and Other
Balance, beginning of period
$
(1,510
)
$
(1,332
)
$
(1,499
)
Translation adjustments and other, net of tax effects of $(1), $0, and $9
(318
)
(178
)
167
Balance, end of period
$
(1,828
)
$
(1,510
)
$
(1,332
)
Accumulated other comprehensive income (loss), end of period
$
(340
)
$
(2,187
)
$
627
NOTE 19 — EMPLOYEE STOCK AND SAVINGS PLANS
We grant stock-based compensation to employees and directors. As of June 30, 2019, an aggregate of 327 million shares were authorized for future grant under our stock plans. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.
Stock-based compensation expense and related income tax benefits were as follows:
(In millions)
Year Ended June 30,
2019
2018
2017
Stock-based compensation expense
$
4,652
$
3,940
$
3,266
Income tax benefits related to stock-based compensation
816
823
1,066
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Stock Plans
Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a four or five-year service period.
Executive Incentive Plan
Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a four-year service period. PSUs generally vest over a three-year performance period. The number of shares the PSU holder receives is based on the extent to which the corresponding performance goals have been achieved.
Activity for All Stock Plans
The fair value of stock awards was estimated on the date of grant using the following assumptions:
Year Ended June 30,
2019
2018
2017
Dividends per share (quarterly amounts)
$0.42 - $0.46
$0.39 - $0.42
$0.36 - $0.39
Interest rates
1.8% - 3.1%
1.7% - 2.9%
1.2% - 2.2%
During fiscal year 2019, the following activity occurred under our stock plans:
Shares
Weighted
Average
Grant-Date
Fair Value
(In millions)
Stock Awards
Nonvested balance, beginning of year
174
$
57.85
Granted (a)
63
107.02
Vested
(77
)
57.08
Forfeited
(13
)
69.35
Nonvested balance, end of year
147
$
78.49
(a)
Includes 2 million, 3 million, and 2 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2019, 2018, and 2017, respectively.
As of June 30, 2019, there was approximately $8.6 billion of total unrecognized compensation costs related to stock awards. These costs are expected to be recognized over a weighted average period of 3 years. The weighted average grant-date fair value of stock awards granted was $107.02, $75.88, and $55.64 for fiscal years 2019, 2018, and 2017, respectively. The fair value of stock awards vested was $8.7 billion, $6.6 billion, and $4.8 billion, for fiscal years 2019, 2018, and 2017, respectively.
Employee Stock Purchase Plan
We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value on the last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period. Employees purchased the following shares during the periods presented:
(Shares in millions)
Year Ended June 30,
2019
2018
2017
Shares purchased
11
13
13
Average price per share
$
104.85
$
76.40
$
56.36
As of June 30, 2019, 105 million shares of our common stock were reserved for future issuance through the ESPP.
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Savings Plan
We have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We contribute fifty cents for each dollar a participant contributes into the plans, with a maximum employer contribution of 50% of the IRS contribution limit for the calendar year. Employer-funded retirement benefits for all plans were $877 million, $807 million, and $734 million in fiscal years 2019, 2018, and 2017, respectively, and were expensed as contributed.
NOTE 20 — SEGMENT INFORMATION AND GEOGRAPHIC DATA
In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
Our reportable segments are described below.
Productivity and Business Processes
Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:
•
Office Commercial, including Office 365 subscriptions and Office licensed on-premises, comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Skype for Business, and related Client Access Licenses (“CALs”).
•
Office Consumer, including Office 365 subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive.
•
LinkedIn, including Talent Solutions, Marketing Solutions, and Premium Subscriptions.
•
Dynamics business solutions, including Dynamics 365, a set of cloud-based applications across ERP and CRM, Dynamics ERP on-premises, and Dynamics CRM on-premises.
Intelligent Cloud
Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business. This segment primarily comprises:
•
Server products and cloud services, including Microsoft SQL Server, Windows Server, Visual Studio, System Center, and related CALs, GitHub, and Azure.
•
Enterprise Services, including Premier Support Services and Microsoft Consulting Services.
More Personal Computing
Our More Personal Computing segment consists of products and services geared towards harmonizing the interests of end users, developers, and IT professionals across all devices. This segment primarily comprises:
•
Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; Windows Internet of Things (“IoT”); and MSN advertising.
•
Devices, including Microsoft Surface, PC accessories, and other intelligent devices.
•
Gaming, including Xbox hardware and Xbox software and services, comprising Xbox Live transactions, subscriptions, cloud services, and advertising (“Xbox Live”), video games, and third-party video game royalties.
•
Search.
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Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin.
In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include costs of: legal, including settlements and fines; information technology; human resources; finance; excise taxes; field selling; shared facilities services; and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Certain corporate-level activity is not allocated to our segments, including restructuring expenses.
Segment revenue and operating income were as follows during the periods presented:
(In millions)
Year Ended June 30,
2019
2018
2017
Revenue
Productivity and Business Processes
$
41,160
$
35,865
$
29,870
Intelligent Cloud
38,985
32,219
27,407
More Personal Computing
45,698
42,276
39,294
Total
$
125,843
$
110,360
$
96,571
Operating Income (Loss)
Productivity and Business Processes
$
16,219
$
12,924
$
11,389
Intelligent Cloud
13,920
11,524
9,127
More Personal Computing
12,820
10,610
8,815
Corporate and Other
0
0
(306
)
Total
$
42,959
$
35,058
$
29,025
Corporate and Other operating loss comprised restructuring expenses.
No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2019, 2018, or 2017. Revenue, classified by the major geographic areas in which our customers were located, was as follows:
(In millions)
Year Ended June 30,
2019
2018
2017
United States (a)
$
64,199
$
55,926
$
51,078
Other countries
61,644
54,434
45,493
Total
$
125,843
$
110,360
$
96,571
(a)
Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.
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Revenue from external customers, classified by significant product and service offerings, was as follows:
(In millions)
Year Ended June 30,
2019
2018
2017
Server products and cloud services
$
32,622
$
26,129
$
21,649
Office products and cloud services
31,769
28,316
25,573
Windows
20,395
19,518
18,593
Gaming
11,386
10,353
9,051
Search advertising
7,628
7,012
6,219
LinkedIn
6,754
5,259
2,271
Enterprise Services
6,124
5,846
5,542
Devices
6,095
5,134
5,062
Other
3,070
2,793
2,611
Total
$
125,843
$
110,360
$
96,571
Our commercial cloud revenue, which includes Office 365 Commercial, Azure, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $38.1 billion, $26.6 billion and $16.2 billion in fiscal years 2019, 2018, and 2017, respectively. These amounts are primarily included in Office products and cloud services, Server products and cloud services, and LinkedIn in the table above.
Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment; it is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.
Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows:
(In millions)
June 30,
2019
2018
2017
United States
$
55,252
$
44,501
$
42,730
Ireland
12,958
12,843
12,889
Other countries
25,422
22,538
19,898
Total
$
93,632
$
79,882
$
75,517
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NOTE 21 — QUARTERLY INFORMATION (UNAUDITED)
(In millions, except per share amounts)
Quarter Ended
September 30
December 31
March 31
June 30
Total
Fiscal Year 2019
Revenue
$
29,084
$
32,471
$
30,571
$
33,717
$
125,843
Gross margin
19,179
20,048
20,401
23,305
82,933
Operating income
9,955
10,258
10,341
12,405
42,959
Net income (a)
8,824
8,420
8,809
13,187
39,240
Basic earnings per share
1.15
1.09
1.15
1.72
5.11
Diluted earnings per share (b)
1.14
1.08
1.14
1.71
5.06
Fiscal Year 2018
Revenue
$
24,538
$
28,918
$
26,819
$
30,085
$
110,360
Gross margin
16,260
17,854
17,550
20,343
72,007
Operating income
7,708
8,679
8,292
10,379
35,058
Net income (loss) (c)
6,576
(6,302
)
7,424
8,873
16,571
Basic earnings (loss) per share
0.85
(0.82
)
0.96
1.15
2.15
Diluted earnings (loss) per share (d)
0.84
(0.82
)
0.95
1.14
2.13
(a)
Reflects the $157 million net charge related to the enactment of the TCJA for the second quarter and the $2.6 billion net income tax benefit related to the intangible property transfers for the fourth quarter, which together increased net income by $2.4 billion for fiscal year 2019. See Note 12 – Income Taxes for further information.
(b)
Reflects the net charge related to the enactment of the TCJA and the net income tax benefit related to the intangible property transfers, which decreased (increased) diluted EPS $0.02 for the second quarter, $(0.34) for the fourth quarter, and $(0.31) for fiscal year 2019.
(c)
Reflects the net charge (benefit) related to the enactment of the TCJA of $13.8 billion for the second quarter, $(104) million for the fourth quarter, and $13.7 billion for fiscal year 2018.
(d)
Reflects the net charge (benefit) related to the enactment of the TCJA, which decreased (increased) diluted EPS $1.78 for the second quarter, $(0.01) for the fourth quarter, and $1.75 for fiscal year 2018.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Microsoft Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the “Company”) as of June 30, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended June 30, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 1, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the Company’s Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Revenue Recognition — Refer to Note 1 to the Financial Statements
Critical Audit Matter Description
The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.
Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:
•
Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services.
•
Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately.
•
The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.
•
Estimation of variable consideration when determining the amount of revenue to recognize (e.g., customer credits, incentives, and in certain instances, estimation of customer usage of products and services).
Given these factors, the related audit effort in evaluating management’s judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company’s revenue recognition for these customer agreements included the following:
•
We tested the effectiveness of internal controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration.
•
We evaluated management’s significant accounting policies related to these customer agreements for reasonableness.
•
We selected a sample of customer agreements and performed the following procedures:
•
Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement.
•
Tested management’s identification of significant terms for completeness, including the identification of distinct performance obligations and variable consideration.
•
Assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.
•
We evaluated the reasonableness of management’s estimate of stand-alone selling prices for products and services that are not sold separately.
•
We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements.
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Income Taxes — Uncertain Tax Positions — Refer to Note 12 to the Financial Statements
Critical Audit Matter Description
The Company’s long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service (“IRS”). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. While the Company has settled a portion of the IRS audits, resolution of the remaining matters could have a material impact on the Company’s financial statements.
Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior-year audit settlements. Given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the IRS, evaluating management’s estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures to evaluate management’s estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:
•
We evaluated the appropriateness and consistency of management’s methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls.
•
We read and evaluated management’s documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions.
•
We tested the reasonableness of management’s judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions.
•
For those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions.
•
We evaluated the reasonableness of management’s estimates by considering how tax law, including statutes, regulations and case law, impacted management’s judgments.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
August 1, 2019
We have served as the Company’s auditor since 1983.
95
PART II
Item 9, 9A
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our consolidated financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use, or disposition of company assets that could have a material effect on our consolidated financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our consolidated financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of June 30, 2019. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Deloitte & Touche LLP has audited our internal control over financial reporting as of June 30, 2019; their report is included in Item 9A.
96
PART II
Item 9A
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Microsoft Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2019, based on the criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements and the related notes (collectively referred to as the “financial statements”) as of and for the year ended June 30, 2019, of the Company and our report dated August 1, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
August 1, 2019
97
PART II, III
Item 9B, 10, 11, 12, 13, 14
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
A list of our executive officers and biographical information appears in Part I, Item 1 of this Form 10-K. Information about our directors may be found under the caption “Our director nominees” in our Proxy Statement for the Annual Meeting of Shareholders to be held December 4, 2019 (the “Proxy Statement”). Information about our Audit Committee may be found under the caption “Board committees” in the Proxy Statement. That information is incorporated herein by reference.
We have adopted the Microsoft Finance Code of Professional Conduct (the “finance code of ethics”), a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, and other finance organization employees. The finance code of ethics is publicly available on our website at https://aka.ms/FinanceCodeProfessionalConduct. If we make any substantive amendments to the finance code of ethics or grant any waiver, including any implicit waiver, from a provision of the code to our Chief Executive Officer, Chief Financial Officer, or Chief Accounting Officer, we will disclose the nature of the amendment or waiver on that website or in a report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The information in the Proxy Statement set forth under the captions “Director compensation,” “Named executive officer compensation,” “Compensation Committee interlocks and insider participation,” and “Compensation Committee report” is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information in the Proxy Statement set forth under the captions “Stock ownership information,” “Principal shareholders” and “Equity compensation plan information” is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information set forth in the Proxy Statement under the captions “Director independence” and “Certain relationships and related transactions” is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accountant fees and services appears in the Proxy Statement under the headings “Fees billed by Deloitte & Touche” and “Policy on Audit Committee pre-approval of audit and permissible non-audit services of independent auditor” and is incorporated herein by reference.
98
PART IV
Item 15
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Financial Statements and Schedules
The financial statements are set forth under Item 8 of this Form 10-K, as indexed below. Financial statement schedules have been omitted since they either are not required, not applicable, or the information is otherwise included.
Index to Financial Statements
Page
Income Statements
51
Comprehensive Income Statements
52
Balance Sheets
53
Cash Flows Statements
54
Stockholders’ Equity Statements
55
Notes to Financial Statements
56
Report of Independent Registered Public Accounting Firm
93
(b)
Exhibit Listing
Incorporated by Reference
ExhibitNumber
Exhibit Description
Filed
Herewith
Form
Period
Ending
Exhibit
Filing Date
3.1
Amended and Restated Articles of Incorporation of Microsoft Corporation
8-K
3.1
12/1/16
3.2
Bylaws of Microsoft Corporation
8-K
3.2
6/14/17
4.1
Form of Indenture between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee (“Base Indenture”)
S-3ASR
4.1
11/20/08
4.2
Form of First Supplemental Indenture for 2.95% Notes due 2014, 4.20% Notes due 2019, and 5.20% Notes due 2039, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Base Indenture
8-K
4.2
5/15/09
4.5
Form of Second Supplemental Indenture for 0.875% Notes due 2013, 1.625% Notes due 2015, 3.00% Notes due 2020, and 4.50% Notes due 2040, dated as of September 27, 2010, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee
8-K
4.2
9/27/10
99
PART IV
Item 15
Incorporated by Reference
ExhibitNumber
Exhibit Description
Filed
Herewith
Form
Period
Ending
Exhibit
Filing Date
4.6
Third Supplemental Indenture for 2.500% Notes due 2016, 4.000% Notes due 2021, and 5.300% Notes due 2041, dated as of February 8, 2011, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee
8-K
4.2
2/8/11
4.7
Fourth Supplemental Indenture for 0.875% Notes due 2017, 2.125% Notes due 2022, and 3.500% Notes due 2042, dated as of November 7, 2012, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee
8-K
4.1
11/7/12
4.8
Fifth Supplemental Indenture for 2.625% Notes due 2033, dated as of May 2, 2013, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee
8-K
4.1
5/1/13
4.9
Sixth Supplemental Indenture for 1.000% Notes due 2018, 2.375% Notes due 2023, and 3.750% Notes due 2043, dated as of May 2, 2013, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee
8-K
4.2
5/1/13
4.10
Seventh Supplemental Indenture for 2.125% Notes due 2021 and 3.125% Notes due 2028, dated as of December 6, 2013, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee
8-K
4.1
12/6/13
100
PART IV
Item 15
Incorporated by Reference
ExhibitNumber
Exhibit Description
Filed
Herewith
Form
Period
Ending
Exhibit
Filing Date
4.11
Eighth Supplemental Indenture for 1.625% Notes due 2018, 3.625% Notes due 2023, and 4.875% Notes due 2043, dated as of December 6, 2013, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee
8-K
4.2
12/6/13
4.12
Ninth Supplemental Indenture for 1.850% Notes due 2020, 2.375% Notes due 2022, 2.700% Notes due 2025, 3.500% Notes due 2035, 3.750% Notes due 2045, and 4.000% Notes due 2055, dated as of February 12, 2015, between Microsoft Corporation and U.S. Bank National Association, as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee
8-K
4.1
2/12/15
4.13
Tenth Supplemental Indenture for 1.300% Notes due 2018, 2.000% Notes due 2020, 2.650% Notes due 2022, 3.125% Notes due 2025, 4.200% Notes due 2035, 4.450% Notes due 2045, and 4.750% Notes due 2055, dated as of November 3, 2015, between Microsoft Corporation and U.S. Bank National Association, as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee
8-K
4.1
11/3/15
4.14
Eleventh Supplemental Indenture for 1.100% Notes due 2019, 1.550% Notes due 2021, 2.000% Notes due 2023, 2.400% Notes due 2026, 3.450% Notes due 2036, 3.700% Notes due 2046, and 3.950% Notes due 2056, dated as of August 8, 2016, between Microsoft Corporation and U.S. Bank, National Association, as trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee
8-K
4.1
8/5/16
101
PART IV
Item 15
Incorporated by Reference
ExhibitNumber
Exhibit Description
Filed
Herewith
Form
Period
Ending
Exhibit
Filing Date
4.15
Twelfth Supplemental Indenture for 1.850% Notes due 2020, 2.400% Notes due 2022, 2.875% Notes due 2024, 3.300% Notes due 2027, 4.100% Notes due 2037, 4.250% Notes due 2047, and 4.500% Notes due 2057, dated as of February 6, 2017, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee
8-K
4.1
2/3/17
4.16
Description of Securities
X
10.1*
Microsoft Corporation 2001 Stock Plan
10-Q
9/30/16
10.1
10/20/16
10.4*
Microsoft Corporation Employee Stock Purchase Plan
10-K
6/30/12
10.4
7/26/12
10.5*
Microsoft Corporation Deferred Compensation Plan
10-K
6/30/18
10.5
8/3/18
10.6*
Microsoft Corporation 2017 Stock Plan
DEF14A
Annex C
10/16/17
10.7*
Form of Stock Award Agreement Under the Microsoft Corporation 2017 Stock Plan
10-Q
3/31/2018
10.26
4/26/18
10.8*
Form of Performance Stock Award Agreement Under the Microsoft Corporation 2017 Stock Plan
10-Q
3/31/2018
10.27
4/26/18
10.12
Amended and Restated Officers’ Indemnification Trust Agreement between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee
10-Q
9/30/16
10.12
10/20/16
10.13
Form of Indemnification Agreement and Amended and Restated Directors’ Indemnification Trust Agreement between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee
X
10.14*
Microsoft Corporation Deferred Compensation Plan for Non-Employee Directors
10-Q
12/31/17
10.14
1/31/18
10.15*
Microsoft Corporation Executive Incentive Plan
8-K
10.1
9/19/18
10.19*
Microsoft Corporation Executive Incentive Plan
10-Q
9/30/16
10.17
10/20/16
10.20*
Form of Executive Incentive Plan (Executive Officer SAs) Stock Award Agreement under the Microsoft Corporation 2001 Stock Plan
10-Q
9/30/16
10.18
10/20/16
102
PART IV
Item 15
10.21*
Form of Executive Incentive Plan Performance Stock Award Agreement under the Microsoft Corporation 2001 Stock Plan
10-Q
9/30/16
10.25
10/20/16
10.22*
Senior Executive Severance Benefit Plan
10-Q
9/30/16
10.22
10/20/16
10.23*
Offer Letter, dated February 3, 2014, between Microsoft Corporation and Satya Nadella
8-K
10.1
2/4/14
10.24*
Long-Term Performance Stock Award Agreement between Microsoft Corporation and Satya Nadella
10-Q
12/31/14
10.24
1/26/15
21
Subsidiaries of Registrant
X
23.1
Consent of Independent Registered Public Accounting Firm
X
31.1
Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
31.2
Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
32.1**
Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
32.2**
Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
101.INS
XBRL Instance Document
X
101.SCH
XBRL Taxonomy Extension Schema
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase
X
101.LAB
XBRL Taxonomy Extension Label Linkbase
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
X
*
Indicates a management contract or compensatory plan or arrangement.
**
Furnished, not filed.
103
PART IV
Item 15
ITEM 16. FORM 10-K SUMMARY
None.
104
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, in the City of Redmond, State of Washington, on August 1, 2019.
MICROSOFT CORPORATION
/S/ FRANK H. BROD
Frank H. Brod
Corporate Vice President, Finance and Administration;
Chief Accounting Officer (Principal Accounting Officer)
105
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities indicated on August 1, 2019.
Signature
Title
/s/ JOHN W. THOMPSON
John W. Thompson
Chairman
/s/ SATYA NADELLA
Satya Nadella
Director and Chief Executive Officer
/s/ WILLIAM H. GATES III
William H. Gates III
Director
/s/ REID HOFFMAN
Reid Hoffman
Director
/s/ HUGH F. JOHNSTON
Hugh F. Johnston
Director
/s/ TERI L. LIST-STOLL
Teri L. List-Stoll
Director
/s/ CHARLES H. NOSKI
Charles H. Noski
Director
/s/ HELMUT PANKE
Helmut Panke
Director
/s/ SANDRA E. PETERSON
Sandra E. Peterson
Director
/s/ PENNY S. PRITZKER
Penny S. Pritzker
Director
/s/ CHARLES W. SCHARF
Charles W. Scharf
Director
/s/ ARNE M. SORENSON
Arne M. Sorenson
Director
/s/ JOHN W. STANTON
John W. Stanton
Director
/s/ PADMASREE WARRIOR
Padmasree Warrior
Director
/s/ AMY E. HOOD
Amy E. Hood
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ FRANK H. BROD
Frank H. Brod
Corporate Vice President, Finance and Administration;
Chief Accounting Officer
(Principal Accounting Officer)
106
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8-K_1067983_0001193125-23-204791.htm
|
8-K
BERKSHIRE HATHAWAY INC DE false 0001067983 0001067983 2023-08-05 2023-08-05 0001067983 brka:ClassACommonStock2Member 2023-08-05 2023-08-05 0001067983 brka:ClassBCommonStock1Member 2023-08-05 2023-08-05 0001067983 brka:M1.300SeniorNotesDue2024Member12Member 2023-08-05 2023-08-05 0001067983 brka:M0.000SeniorNotesDue20253Member 2023-08-05 2023-08-05 0001067983 brka:M1.125SeniorNotesDue20274Member 2023-08-05 2023-08-05 0001067983 brka:M2.150SeniorNotesDue20285Member 2023-08-05 2023-08-05 0001067983 brka:M1.500SeniorNotesDue20306Member 2023-08-05 2023-08-05 0001067983 brka:M2.000SeniorNotesDue20347Member 2023-08-05 2023-08-05 0001067983 brka:M1.625SeniorNotesDue20358Member 2023-08-05 2023-08-05 0001067983 brka:M2.375SeniorNotesDue20399Member 2023-08-05 2023-08-05 0001067983 brka:M0.500SeniorNotesDue204110Member 2023-08-05 2023-08-05 0001067983 brka:M2.625SeniorNotesDue205911Member 2023-08-05 2023-08-05 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) August 5, 2023 BERKSHIRE HATHAWAY INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
001-14905
47-0813844
(STATE OR OTHER JURISDICTION OF INCORPORATION)
(COMMISSION FILE NUMBER)
(I.R.S. EMPLOYER IDENTIFICATION NO.)
3555 Farnam Street
Omaha, Nebraska
68131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE) (402) 346-1400 REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
TradingSymbols
Name of each exchange on which registered
Class A Common Stock
BRK.A
New York Stock Exchange
Class B Common Stock
BRK.B
New York Stock Exchange
1.300% Senior Notes due 2024
BRK24
New York Stock Exchange
0.000% Senior Notes due 2025
BRK25
New York Stock Exchange
1.125% Senior Notes due 2027
BRK27
New York Stock Exchange
2.150% Senior Notes due 2028
BRK28
New York Stock Exchange
1.500% Senior Notes due 2030
BRK30
New York Stock Exchange
2.000% Senior Notes due 2034
BRK34
New York Stock Exchange
1.625% Senior Notes due 2035
BRK35
New York Stock Exchange
2.375% Senior Notes due 2039
BRK39
New York Stock Exchange
0.500% Senior Notes due 2041
BRK41
New York Stock Exchange
2.625% Senior Notes due 2059
BRK59
New York Stock Exchange Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
ITEM 2.02
Results of Operations and Financial Condition. On August 5, 2023, Berkshire Hathaway Inc. issued a press release announcing the Company’s earnings for the second quarter and first six months ended June 30, 2023. A copy of this press release is furnished with this report as an exhibit to this Form 8-K.
ITEM 9.01
Financial Statements and Exhibits
Exhibit 99.1
Berkshire Hathaway Inc. Earnings Release Dated August 5, 2023
Exhibit 104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
August 7, 2023
BERKSHIRE HATHAWAY INC.
/s/ Marc D. Hamburg
By:
Marc D. Hamburg
Senior Vice President and Chief Financial Officer
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8-K_59478_0001193125-21-174261.htm
|
8-K
ELI LILLY & Co false 0000059478 0000059478 2021-05-27 2021-05-27 0000059478 us-gaap:CommonClassAMember 2021-05-27 2021-05-27 0000059478 lly:A1.000NotesDueJune22022Member 2021-05-27 2021-05-27 0000059478 lly:A718NotesDueJune12025Member 2021-05-27 2021-05-27 0000059478 lly:A1.625NotesDueJune22026Member 2021-05-27 2021-05-27 0000059478 lly:A2.125NotesDueJune32030Member 2021-05-27 2021-05-27 0000059478 lly:A625Notesdue2031Member 2021-05-27 2021-05-27 0000059478 lly:A6.77NotesDueJanuary12036Member 2021-05-27 2021-05-27 0000059478 lly:A1.700Notesdue2049Member 2021-05-27 2021-05-27 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): May 27, 2021 ELI LILLY AND COMPANY (Exact Name of Registrant as Specified in its Charter)
Indiana
001-06351
35-0470950
(State or Other Jurisdictionof Incorporation)
(CommissionFile Number)
(I.R.S. EmployerIdentification No.)
Lilly Corporate Center Indianapolis, Indiana
46285
(Address of Principal Executive Offices)
(Zip Code) Registrant’s Telephone Number, Including Area Code: (317) 276-2000 Not Applicable (Former Name or Former Address, if Changed Since Last Report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2.):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock (no par value)
LLY
New York Stock Exchange
1.000% Notes due 2022
LLY22
New York Stock Exchange
7 1/8% Notes due 2025
LLY25
New York Stock Exchange
1.625% Notes due 2026
LLY26
New York Stock Exchange
2.125% Notes due 2030
LLY30
New York Stock Exchange
0.625% Notes due 2031
LLY31
New York Stock Exchange
6.77% Notes due 2036
LLY36
New York Stock Exchange
1.700% Notes due 2049
LLY49A
New York Stock Exchange Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). 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. ☐
Item 8.01.
Other Events. In May 2021, Eli Lilly and Company (“Lilly”) received a subpoena from the U.S. Department of Justice requesting the production of certain documents relating to its manufacturing site in Branchburg, New Jersey (“Branchburg”). Lilly is cooperating fully with the investigation. Lilly had previously engaged external counsel to conduct an independent investigation of certain allegations relating to Branchburg. Lilly, through its counsel, is investigating these allegations thoroughly. Lilly is deeply committed to manufacturing high-quality medicines for patients who need them, and the safety and quality of our products is our highest priority.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ELI LILLY AND COMPANY
(Registrant)
By:
/s/ Anat Hakim
Name:
Anat Hakim
Title:
Senior Vice President, General Counsel and Secretary
Date:
May 27, 2021
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8-K_1730168_0001193125-22-090874.htm
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8-K
false 0001730168 0001730168 2022-03-31 2022-03-31 0001730168 us-gaap:CommonStockMember 2022-03-31 2022-03-31 0001730168 us-gaap:SeriesAPreferredStockMember 2022-03-31 2022-03-31 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): March 31, 2022 BROADCOM INC. (Exact Name of Registrant as Specified in Charter)
Delaware
001-38449
35-2617337
(State or other jurisdictionof incorporation)
(CommissionFile Number)
(IRS EmployerIdentification No.)
1320 Ridder Park Drive, San Jose, California
95131
(Address of principal executive offices)
(Zip Code) (408) 433-8000 (Registrant’s telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
AVGO
The NASDAQ Global Select Market
8.00% Mandatory Convertible Preferred Stock, Series A, $0.001 par value
AVGOP
The NASDAQ Global Select Market Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). 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. ☐
Item 8.01
Other Events Proposed Offering of Senior Notes and Private Exchange Offers of Certain Outstanding Notes for New Notes In a press release issued on March 31, 2022, Broadcom Inc. (“Broadcom” or the “Company”) announced that it intends to offer senior notes due 2029 and senior notes due 2032 (together, the “New Notes”), subject to market conditions and other factors. Broadcom intends to use the net proceeds from the sale of the New Notes to redeem in full its 4.700% Senior Notes due 2025 and 4.250% Senior Notes due 2026 (collectively, the “Redemption Notes”), including accrued and unpaid interest thereon, and to pay fees and expenses in connection therewith. The redemption of the Redemption Notes is conditioned on the completion by the Company of one or more debt financing transactions and the receipt of the net proceeds therefrom in an amount, together with cash on hand, sufficient to pay the redemption price for the Redemption Notes. On or about the date hereof, Broadcom intends to commence exchange offers (the “Exchange Offers”) with respect to certain series of its and its subsidiaries’ outstanding notes maturing between 2027 and 2032 for a new series of senior notes maturing in 2037 (the “Exchange Notes”), subject to market conditions and other factors. The New Notes and the Exchange Notes are being sold in private placements to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to non-U.S. persons outside the United States under Regulation S under the Securities Act. The foregoing description is qualified in its entirety by reference to the press release dated March 31, 2022, a copy of which is attached hereto as Exhibit 99.1. Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements (including within the meaning of Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended) concerning Broadcom. These statements include, but are not limited to, statements that address our expected future business and financial performance, the anticipated offerings and use of proceeds, and other statements identified by words such as “will,” “expect,” “believe,” “anticipate,” “estimate,” “should,” “intend,” “plan,” “potential,” “predict,” “project,” “aim,” and similar words, phrases or expressions. These forward-looking statements are based on current expectations and beliefs of the management of Broadcom, as well as assumptions made by, and information currently available to, such management, current market trends and market conditions and involve risks and uncertainties, many of which are outside the Company’s and management’s control, and which may cause actual results to differ materially from those contained in forward-looking statements. Accordingly, you should not place undue reliance on such statements. Particular uncertainties that could materially affect future results include risks associated with: the COVID-19 pandemic, which has disrupted, and will likely continue to disrupt, normal business activity, and which may have an adverse effect on our results of operations; any loss of our significant customers and fluctuations in the timing and volume of significant customer demand; our dependence on contract manufacturing and outsourced supply chain; our dependency on a limited number of suppliers; government regulations and administrative proceedings, trade restrictions and trade tensions; global economic conditions and concerns; cyclicality in the semiconductor industry or in our target markets; global political and economic conditions; our significant indebtedness and the need to generate sufficient cash flows to service and repay such debt; the amount and frequency of our share repurchase program; dependence on and risks associated with distributors and resellers of our products; dependence on senior management and our ability to attract and retain qualified personnel; any acquisitions we may make, such as delays, challenges and expenses associated with receiving governmental and regulatory approvals and satisfying other closing conditions, and with integrating acquired businesses with our existing businesses and our ability to achieve the benefits, growth prospects and synergies expected by such acquisitions; involvement in legal proceedings; quarterly and annual fluctuations in operating results; our ability to accurately estimate customers’ demand and adjust our manufacturing and supply chain accordingly; our competitive performance and ability to continue achieving design wins with our customers, as well as the timing of any design wins; prolonged disruptions of our or our contract manufacturers’ manufacturing facilities, warehouses or other significant operations; our ability to improve our manufacturing efficiency and quality; our dependence on outsourced service providers for certain key business services and their ability to execute to our requirements; our ability to maintain or improve gross margin; our ability to protect our intellectual property and the unpredictability of any associated litigation expenses; compatibility of our software products with operating environments, platforms or third-party products; our ability to enter into satisfactory software license agreements; availability of third party software used in our products; use of open source code sources in our products; any expenses or reputational damage associated with resolving customer product warranty and indemnification claims; market acceptance of the end products into which our products are designed; our ability to sell to new types of customers and to keep pace with technological advances; our compliance with privacy and data security laws; our ability to protect against a breach of security systems; fluctuations in foreign exchange rates; our provision for income taxes and overall cash tax costs, legislation that may impact our overall cash tax costs and our ability to maintain tax concessions in certain jurisdictions; and other events and trends on a national, regional and global scale, including those of a political, economic, business, competitive and regulatory nature. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. Our filings with the Securities and Exchange Commission (“SEC”), which you may obtain for free at the SEC’s website at http://www.sec.gov, discuss some of the important risk factors that may affect our business, results of operations and financial condition. Actual results may vary from the estimates provided. We undertake no intent or obligation to publicly update or revise any of the estimates and other forward-looking statements made in this announcement, whether as a result of new information, future events or otherwise, except as required by law.
Item 9.01
Financial Statements and Exhibits.
ExhibitNo.
Description
99.1
Press release, dated March 31, 2022, entitled “Broadcom Inc. Announces Commencement of Private Offering of Senior Notes”
104
Cover Page Interactive Data File (formatted as Inline XBRL).
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
BROADCOM INC.
Date: March 31, 2022
By:
/s/ Kirsten Spears
Name:
Kirsten Spears
Title:
Chief Financial Officer
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8-K
1
d478060d8k.htm
FORM 8-K
Form 8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
November 6, 2017 Date of Report (date of
earliest event reported)
Apple Inc.
(Exact name of Registrant as specified in its charter)
California
001-36743
94-2404110
(State or other jurisdiction
of incorporation)
(Commission File
Number)
(IRS. Employer
Identification No.)
1 Infinite Loop
Cupertino, California 95014 (Address of principal
executive offices) (Zip Code) (408) 996-1010
(Registrants telephone number, including area code)
Not applicable (Former name or former address,
if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule
14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule
13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the Registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this
chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ☐
Item 8.01
Other Events. On November 13, 2017, Apple Inc. (Apple) consummated the issuance
and sale of $1,000,000,000 aggregate principal amount of Apples 1.800% Notes due 2019 (the 2019 Notes), $1,000,000,000 aggregate principal amount of Apples 2.000% Notes due 2020 (the 2020 Notes), $750,000,000
aggregate principal amount of Apples 2.400% Notes due 2023 (the 2023 Notes), $1,500,000,000 aggregate principal amount of Apples 2.750% Notes due 2025 (the 2025 Notes), $1,500,000,000 aggregate principal amount of
Apples 3.000% Notes due 2027 (the 2027 Notes) and $1,250,000,000 aggregate principal amount of Apples 3.750% Notes due 2047 (the 2047 Notes and, together with the 2019 Notes, 2020 Notes, 2023 Notes, the 2025 Notes
and the 2027 Notes, the Notes), pursuant to an underwriting agreement (the Underwriting Agreement) dated November 6, 2017 among Apple and Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, as representatives of the several underwriters named therein. The Notes are being issued pursuant to
an indenture, dated as of April 29, 2013 (the Indenture), between Apple and The Bank of New York Mellon Trust Company, N.A., as trustee, together with the officers certificate, dated November 13, 2017 (the
Officers Certificate), issued pursuant to the Indenture establishing the terms of each series of Notes. The Notes are being issued
pursuant to Apples Registration Statement on Form S-3 filed with the Securities and Exchange Commission on April 28, 2016 (Reg. No. 333-210983) (the
Registration Statement). Interest on the 2019 Notes, the 2020 Notes, the 2027 Notes and the 2047 Notes will be paid semi-annually in
arrears on May 13 and November 13 of each year, beginning on May 13, 2018. Interest on the 2023 Notes and the 2025 Notes will be paid semi-annually in arrears on January 13 and July 13 of each year, beginning on
July 13, 2018. The 2019 Notes will mature on November 13, 2019. The 2020 Notes will mature on November 13, 2020. The 2023 Notes will
mature on January 13, 2023. The 2025 Notes will mature on January 13, 2025. The 2027 Notes will mature on November 13, 2027. The 2047 Notes will mature on November 13, 2047.
The Notes will be Apples senior unsecured obligations and will rank equally with Apples other unsecured and unsubordinated debt from time to
time outstanding. The foregoing description of the Notes and related agreements is qualified in its entirety by the terms of the Underwriting
Agreement, the Indenture and the Officers Certificate (including the forms of the Notes). Apple is furnishing the Underwriting Agreement and the Officers Certificate (including the forms of the Notes) attached hereto as Exhibits 1.1 and
4.1 through 4.7, respectively, and they are incorporated herein by reference. The Indenture is filed as Exhibit 4.1 to Apples Registration Statement on Form S-3 filed with the Securities and Exchange
Commission on April 29, 2013 (Reg. No. 333-188191). The computation of Apples ratio of earnings to fixed charges is filed as Exhibit 12.1, and is incorporated by reference into the Registration
Statement. An opinion regarding the legality of the Notes is filed as Exhibit 5.1, and is incorporated by reference into the Registration Statement; and a consent relating to the incorporation of such opinion is incorporated by reference into the
Registration Statement and is filed as Exhibit 23.1 by reference to its inclusion within Exhibit 5.1.
Item 9.01
Financial Statements and Exhibits.
(d)
Exhibits
Exhibit
Number
Exhibit Description
1.1
Underwriting Agreement, dated November 6, 2017, among Apple Inc. and Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner
& Smith Incorporated, as representatives of the several underwriters named therein
4.1
Officers Certificate of Apple Inc., dated November 13, 2017
4.2
Form of Global Note representing the 2019 Notes (included in Exhibit 4.1)
4.3
Form of Global Note representing the 2020 Notes (included in Exhibit 4.1)
4.4
Form of Global Note representing the 2023 Notes (included in Exhibit 4.1)
4.5
Form of Global Note representing the 2025 Notes (included in Exhibit 4.1)
4.6
Form of Global Note representing the 2027 Notes (included in Exhibit 4.1)
4.7
Form of Global Note representing the 2047 Notes (included in Exhibit 4.1)
5.1
Opinion of Hogan Lovells US LLP
12.1
Computation of Ratio of Earnings to Fixed Charges
23.1
Consent of Hogan Lovells US LLP (included in the opinion filed as Exhibit 5.1)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: November 13, 2017
Apple Inc.
By:
/s/ Luca Maestri
Luca Maestri Senior Vice President, Chief Financial
Officer
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8-K
false 0001730168 0001730168 2020-01-23 2020-01-23 0001730168 us-gaap:CommonStockMember 2020-01-23 2020-01-23 0001730168 us-gaap:SeriesAPreferredStockMember 2020-01-23 2020-01-23 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): January 23, 2020 BROADCOM INC. (Exact Name of Registrant as Specified in Charter)
Delaware
001-38449
35-2617337
(State or other jurisdiction of incorporation)
(Commission File Number)
(IRS Employer Identification No.)
1320 Ridder Park Drive, San Jose, California
95131
(Address of principal executive offices)
(Zip Code) (408) 433-8000 (Registrant’s telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value
AVGO
The Nasdaq Global Select Market
Mandatory Convertible Preferred Stock,Series A, $0.01 par value
AVGOP
The Nasdaq Global Select Market Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). 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. ☐
Item 7.01
Regulation FD Disclosure. Certain subsidiaries of Broadcom Inc. (the “Company”) have entered into two separate multi-year statement of work agreements (the “2020 SOWs”) with Apple Inc. (“Apple”). Both are for the supply of a range of specified high-performance wireless components and modules to Apple for use in its products. The 2020 SOWs are in addition to the agreement between the Company and Apple entered into on June 9, 2019, which remains in effect with respect to the supply of specified RF components and modules to Apple (the “2019 SOW”). The 2020 SOWs, and the remaining portion of the 2019 SOW, apply to Apple products launched during the three and a half year period beginning in January 2020 (the “Covered Products”). The Company estimates that, based on past experience, and subject to the Company’s ability to satisfy its applicable contractual obligations, the 2020 SOWs and the 2019 SOW could, collectively, generate aggregate total future revenue associated with the Covered Products of approximately $15 billion for the Company. Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements (including within the meaning of Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended) concerning the Company and its expectations regarding the 2020 SOWs and the 2019 SOW and the anticipated revenue it may generate therefrom. These statements include, but are not limited to, statements that address its expected future business and financial performance and other statements identified by words such as “will”, “expect”, “believe”, “anticipate”, “estimate”, “should”, “could,” “intend”, “plan”, “potential”, “predict” “project”, “aim”, and similar words, phrases or expressions. These forward-looking statements are based on current expectations and beliefs of the management of Broadcom, as well as assumptions made by, and information currently available to, such management, current market trends and market conditions and involve risks and uncertainties, many of which are outside the Company’s and management’s control, and which may cause actual results to differ materially from those contained in forward-looking statements. Accordingly, you should not place undue reliance on such statements. Particular uncertainties that could materially affect future results include risks associated with: the Company’s expectations with regard to the demand for, and expected lifespan of, the Covered Products, as well as its ability to comply with its obligations under the 2020 SOWs and the 2019 SOW; its acquisition of Symantec Corporation’s Enterprise Security business (“Symantec Business”), including (1) potential difficulties in employee retention, (2) unexpected costs, charges or expenses, and (3) its ability to successfully integrate the Symantec Business and achieve the anticipated benefits of the transaction; any loss of its significant customers and fluctuations in the timing and volume of significant customer demand; its dependence on contract manufacturing and outsourced supply chain; its dependency on a limited number of suppliers; global economic conditions and concerns; international political and economic conditions; any acquisitions it may make, such as delays, challenges and expenses associated with receiving governmental and regulatory approvals and satisfying other closing conditions, and with integrating acquired businesses with its existing businesses and its ability to achieve the benefits, growth prospects and synergies expected by such acquisitions, including its recent acquisition of the Symantec Business; government regulations and trade restrictions; its significant indebtedness and the need to generate sufficient cash flows to service and repay such debt; dependence on and risks associated with distributors and resellers of its products; dependence on senior management and its ability to attract and retain qualified personnel; involvement in legal or administrative proceedings; quarterly and annual fluctuations in operating results; its ability to accurately estimate customers’ demand and adjust its manufacturing and supply chain accordingly; cyclicality in the semiconductor industry or in its target markets; its competitive performance and ability to continue achieving design wins with its customers, as well as the timing of any design wins; prolonged disruptions of its or its contract manufacturers’ manufacturing facilities or other significant operations; its ability to improve its manufacturing efficiency and quality; its dependence on outsourced service providers for certain key business services and their ability to execute to its requirements; its ability to maintain or improve gross margin; its ability to protect its intellectual property and the unpredictability of any associated litigation expenses; compatibility of its software products with operating environments, platforms or third-party products; its ability to enter into satisfactory software license agreements; sales to its government clients; availability of third party software used in its products; use of open source code sources in its products; any expenses or reputational damage associated with resolving customer product warranty and indemnification claims; market acceptance of the end products into which its products are designed; its ability to sell to new types of customers and to keep pace with technological advances; its compliance with privacy and data security laws; its ability to protect against a breach of security systems; changes in accounting standards; fluctuations in foreign exchange rates; its provision for income taxes and overall cash tax costs, legislation that may impact its overall cash tax costs and its ability to maintain tax concessions in certain jurisdictions; and other events and trends on a national, regional and global scale, including those of a political, economic, business, competitive and regulatory nature.
The Company’s filings with the SEC, which you may obtain for free at the SEC’s website at http://www.sec.gov, discuss some of the important risk factors that may affect its business, results of operations and financial condition. Actual results may vary from the estimates provided. The Company undertakes no intent or obligation to publicly update or revise any of the estimates and other forward-looking statements made in this announcement, whether as a result of new information, future events or otherwise, except as required by law.
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
BROADCOM INC.
Date: January 23, 2020
By:
/s/ Thomas H. Krause, Jr.
Name:
Thomas H. Krause, Jr.
Title:
Chief Financial Officer
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8-K_59478_0000059478-21-000004.htm
|
lly-202101130000059478false00000594782021-01-132021-01-130000059478us-gaap:CommonClassAMember2021-01-132021-01-130000059478lly:A1.000NotesDueJune22022Member2021-01-132021-01-130000059478lly:A718NotesDueJune12025Member2021-01-132021-01-130000059478lly:A1.625NotesDueJune22026Member2021-01-132021-01-130000059478lly:A2.125NotesDueJune32030Member2021-01-132021-01-130000059478lly:A625Notesdue2031Member2021-01-132021-01-130000059478lly:A6.77NotesDueJanuary12036Member2021-01-132021-01-130000059478lly:A1.700Notesdue2049Member2021-01-132021-01-13 UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 8-K CURRENT REPORTPursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934Date of Report (Date of Earliest Event Reported): January 13, 2021 ELI LILLY AND COMPANY (Exact Name of Registrant as Specified in its Charter) Indiana 001-06351 35-0470950(State or Other Jurisdictionof Incorporation) (CommissionFile Number) (I.R.S. EmployerIdentification No.) Lilly Corporate CenterIndianapolis,Indiana46285(Address of Principal Executive Offices)(Zip Code) Registrant’s Telephone Number, Including Area Code: (317) 276-2000 Not Applicable (Former Name or Former Address, if Changed Since Last Report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2.):☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act: Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock (no par value)LLYNew York Stock Exchange1.000% Notes due 2022LLY22New York Stock Exchange7 1/8% Notes due 2025LLY25New York Stock Exchange1.625% Notes due 2026LLY26New York Stock Exchange2.125% Notes due 2030LLY30New York Stock Exchange0.625% Notes due 2031LLY31New York Stock Exchange6.77% Notes due 2036LLY36New York Stock Exchange1.700% Notes due 2049LLY49ANew York Stock ExchangeIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).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. ☐Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. On January 13, 2021, the Board of Directors of Eli Lilly and Company (the “Company”) elected Gabrielle Sulzberger as a new member of the class of 2021, effective January 25, 2021. The size of the Board of Directors was increased to fourteen, effective January 25, 2021, in connection with the election of Ms. Sulzberger.Ms. Sulzberger, age 60, is a strategic advisor to Two Sigma Impact (“Two Sigma”), a New York based private equity firm. Prior to joining Two Sigma, from 2005 to 2018, Ms. Sulzberger was a General Partner of Rustic Canyon/Fontis Partners L.P., a private equity fund based in Pasadena, California focused on socially responsible investing. Ms. Sulzberger has previously served as principal of several private equity funds over her 30-year career in financial services, as well as chief financial officer of several public and private companies. Ms. Sulzberger is currently a member of the Boards of Directors of MasterCard Incorporated, Brixmor Property Group Inc., Cerevel Therapeutics Holdings, Inc., and several other private companies and philanthropic organizations. She has previously served on the Boards of Directors of Whole Foods Market, Inc., Teva Pharmaceutical Industries Limited, and Bright Horizons Family Solutions, among others. Ms. Sulzberger holds a Bachelor of Arts degree from the Woodrow Wilson School of Princeton University, a Master of Business Administration from Harvard Business School, and a Juris Doctor from Harvard Law School. Ms. Sulzberger will serve on the Audit Committee and the Ethics and Compliance Committee. Ms. Sulzberger will stand for election by the Company’s shareholders at the Company’s annual meeting of shareholders scheduled to be held on May 3, 2021. The Board of Directors has determined that Ms. Sulzberger is independent under applicable standards of the New York Stock Exchange and the Company’s director independence guidelines, as well as the rules of the Securities and Exchange Commission for independence required for audit committees.There are no arrangements or understandings between Ms. Sulzberger and any person pursuant to which she was selected as a director. Ms. Sulzberger is not a party to any transaction subject to Section 404(a) of Regulation S-K involving the Company or any of its subsidiaries. Ms. Sulzberger will participate in the Company’s standard director compensation program as described in the Company’s Definitive Proxy Statement, which was filed with the Securities and Exchange Commission on March 20, 2020.On January 14, 2021, the Company issued a press release announcing Ms. Sulzberger’s appointment to the Board of Directors. A copy of the release is attached as Exhibit 99.1 to this Current Report on Form 8-K.Item 9.01. Financial Statements and Exhibits.(d) ExhibitsExhibit No.Description99.1Press Release of Eli Lilly and Company, dated January 14, 2021.104Cover Page Interactive Data File (embedded within the Inline XBRL document). SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.ELI LILLY AND COMPANY(Registrant)By:/s/ Anat HakimName:Anat HakimTitle:Senior Vice President, General Counseland SecretaryDate: January 14, 2021
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lly-202101290000059478false00000594782021-01-292021-01-290000059478us-gaap:CommonClassAMember2021-01-292021-01-290000059478lly:A1.000NotesDueJune22022Member2021-01-292021-01-290000059478lly:A718NotesDueJune12025Member2021-01-292021-01-290000059478lly:A1.625NotesDueJune22026Member2021-01-292021-01-290000059478lly:A2.125NotesDueJune32030Member2021-01-292021-01-290000059478lly:A625Notesdue2031Member2021-01-292021-01-290000059478lly:A6.77NotesDueJanuary12036Member2021-01-292021-01-290000059478lly:A1.700Notesdue2049Member2021-01-292021-01-29 UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 8-K CURRENT REPORTPursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934Date of Report (Date of Earliest Event Reported): January 29, 2021ELI LILLY AND COMPANY (Exact Name of Registrant as Specified in its Charter) Indiana 001-06351 35-0470950(State or Other Jurisdictionof Incorporation) (CommissionFile Number) (I.R.S. EmployerIdentification No.) Lilly Corporate CenterIndianapolis,Indiana46285(Address of Principal Executive Offices)(Zip Code) Registrant’s Telephone Number, Including Area Code: (317) 276-2000 Not Applicable (Former Name or Former Address, if Changed Since Last Report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2.):☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act: Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock (no par value)LLYNew York Stock Exchange1.000% Notes due 2022LLY22New York Stock Exchange7 1/8% Notes due 2025LLY25New York Stock Exchange1.625% Notes due 2026LLY26New York Stock Exchange2.125% Notes due 2030LLY30New York Stock Exchange0.625% Notes due 2031LLY31New York Stock Exchange6.77% Notes due 2036LLY36New York Stock Exchange1.700% Notes due 2049LLY49ANew York Stock ExchangeIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).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. ☐Item 2.02. Results of Operations and Financial ConditionThe information in this Item 2.02, including Exhibit 99.1 attached hereto, is being furnished and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that Section and shall not be incorporated by reference into any registration statement or other document filed pursuant to the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise expressly stated in such filing.Attached hereto as Exhibit 99.1 and incorporated by reference into this Item 2.02 is a copy of the press release, dated January 29, 2021, announcing the financial results of Eli Lilly and Company for the quarter and year ended December 31, 2020, including, among other things, unaudited financial results for that period.Item 9.01. Financial Statements and Exhibits.(d) ExhibitsExhibit No.Description99.1Press Release of Eli Lilly and Company, dated January 29, 2021.104Cover Page Interactive Data File (embedded within the Inline XBRL document). SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.ELI LILLY AND COMPANY(Registrant)By:/s/ Donald A. ZakrowskiName:Donald A. ZakrowskiTitle:Vice President, Finance, and Chief Accounting OfficerDate: January 29, 2021
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Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549____________________________________________________________________________________________FORM 10-K[x]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 28, 2018OR[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission file number: 0-23985 NVIDIA CORPORATION(Exact name of registrant as specified in its charter)Delaware94-3177549(State or other jurisdiction of(I.R.S. EmployerIncorporation or Organization)Identification No.)2788 San Tomas ExpresswaySanta Clara, California 95051(408) 486-2000(Address, including zip code, and telephone number, including area code, of principal executive offices)Securities registered pursuant to Section 12(b) of the Act:Title of each className of each exchange on which registeredCommon Stock, $0.001 par value per shareThe NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No oIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ýIndicate 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 ý No oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. oIndicate 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 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 xAccelerated filer o Non-accelerated filer o Smaller reporting company oEmerging growth company o (Do not check if a smaller reporting 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. oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý The aggregate market value of the voting stock held by non-affiliates of the registrant as of July 28, 2017 was approximately $94.31 billion (based on the closing sales price of the registrant's common stock as reported by the NASDAQ Global Select Market on July 28, 2017). This calculation excludes 26 million shares held by directors and executive officers of the registrant. This calculation does not exclude shares held by such organizations whose ownership exceeds 5% of the registrant's outstanding common stock that have represented to the registrant that they are registered investment advisers or investment companies registered under section 8 of the Investment Company Act of 1940.The number of shares of common stock outstanding as of February 26, 2018 was 605 million.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant's Proxy Statement for its 2018 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.Table of ContentsNVIDIA CORPORATIONTABLE OF CONTENTS Page PART I Item 1. Business 4 Item 1A. Risk Factors 12 Item 1B. Unresolved Staff Comments 19 Item 2. Properties 19 Item 3. Legal Proceedings 19 Item 4.Mine Safety Disclosures 19 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 20 Item 6. Selected Financial Data22 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 34 Item 8. Financial Statements and Supplementary Data 35 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 35 Item 9A. Controls and Procedures 35 Item 9B. Other Information 36 PART III Item 10. Directors, Executive Officers and Corporate Governance 36 Item 11. Executive Compensation 36 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters37 Item 13. Certain Relationships and Related Transactions, and Director Independence37 Item 14. Principal Accounting Fees and Services 37 PART IV Item 15. Exhibits, Financial Statement Schedules 38 Signatures 812Table of ContentsWHERE YOU CAN FIND MORE INFORMATIONInvestors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We also use the following social media channels as a means of disclosing information about the company, our products, our planned financial and other announcements and attendance at upcoming investor and industry conferences, and other matters and for complying with our disclosure obligations under Regulation FD:NVIDIA Twitter Account (https://twitter.com/NVIDIA)NVIDIA Company Blog (http://blogs.nvidia.com) NVIDIA Facebook Page (https://www.facebook.com/NVIDIA) NVIDIA LinkedIn Page (http://www.linkedin.com/company/nvidia?trk=hb_tab_compy_id_3608)NVIDIA Instagram Page (https://www.instagram.com/nvidia/)NVIDIA Flipboard Page (https://flipboard.com/@NVIDIACorp)In addition, investors and others can view NVIDIA videos on YouTube.The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts and the blog, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Annual Report on Form 10-K. These channels may be updated from time to time on NVIDIA's investor relations website.Forward-Looking StatementsThis Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Annual Report on Form 10-K in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.All references to “NVIDIA,” “we,” “us,” “our” or the “Company” mean NVIDIA Corporation and its subsidiaries, except where it is made clear that the term means only the parent company.© 2018 NVIDIA Corporation. All rights reserved. NVIDIA, the NVIDIA logo, Ansel, GeForce, Quadro, Tegra, Tesla, CUDA, GeForce NOW, Jetson, NVIDIA DesignWorks, NVIDIA DGX, NVIDIA DRIVE, NVIDIA GameWorks, NVIDIA GRID, NVIDIA Holodeck, NVIDIA SHIELD, NVIDIA VRWorks, NVLink, OptiX, Pascal, ShadowPlay and TensorRT are trademarks and/or registered trademarks of NVIDIA Corporation in the United States and other countries. MAXQ® is the registered trademark of Maxim Integrated Products, Inc. Other company and product names may be trademarks of the respective companies with which they are associated.3Table of ContentsPART IITEM 1. BUSINESSOur CompanyStarting with a focus on PC graphics, NVIDIA invented the graphics processing unit, or GPU, to solve some of the most complex problems in computer science. We have extended our focus in recent years to the revolutionary field of artificial intelligence, or AI. Fueled by the sustained demand for better 3D graphics and the scale of the gaming market, NVIDIA has evolved the GPU into a computer brain at the intersection of virtual reality, or VR, high performance computing, or HPC, and AI. The GPU was initially used to simulate human imagination, enabling the virtual worlds of video games and films. Today, it also simulates human intelligence, enabling a deeper understanding of the physical world. Its parallel processing capabilities, supported by up to thousands of computing cores, are essential to running deep learning algorithms. This form of AI, in which software writes itself by learning from data, can serve as the brain of computers, robots and self-driving cars that can perceive and understand the world. GPU-powered deep learning is being rapidly adopted by thousands of enterprises to deliver services and features that would have been impossible with traditional coding.NVIDIA has a platform strategy, bringing together hardware, system software, programmable algorithms, libraries, systems, and services to create unique value for the markets we serve. While the requirements of these end markets are diverse, we address them with a unified underlying architecture leveraging our GPUs and Compute Unified Device Architecture, or CUDA, as the fundamental building blocks. The programmable nature of our architecture allows us to support several multi-billion dollar end markets with the same underlying technology by using a variety of software stacks developed either internally or by third party developers and partners. The large and growing number of developers for each of our platforms strengthens our ecosystem and increases the value of our platform to our customers. Innovation is at our core. We have invested over $15 billion in research and development since our inception, yielding inventions that are essential to modern computing. Our invention of the GPU in 1999 defined modern computer graphics and established NVIDIA as the leader in visual computing. With our introduction of the CUDA programming model in 2006, we opened the parallel processing capabilities of the GPU for general purpose computing. This approach significantly accelerates the performance of the most demanding applications in HPC in fields such as aerospace, bio-science research, mechanical and fluid simulations, and energy exploration. Today, GPUs power the fastest supercomputers across the world. In addition, the massively parallel compute architecture of our GPUs and associated software have proven to be well suited for deep learning, an approach we believe will power the era of AI. As the laws of physics have begun to slow down Moore’s Law, we continue to deliver GPU performance improvements ahead of Moore’s Law, giving the industry a path forward.Gamers choose NVIDIA GPUs to enjoy immersive, increasingly cinematic virtual worlds. GPUs also help underpin the world’s fastest growing spectator sport, eSports, which attracts hundreds of millions of viewers to watch top-quality gaming. More than 100 million people participate in MOBA - multiplayer online battle area - games, which are powered by GPUs.Researchers use our GPUs to accelerate a wide range of important applications, from simulating viruses to exploring the origins of the universe. With support for more than 500 applications - including the top 15 HPC applications - NVIDIA GPUs enable some of the most promising areas of discovery, from weather prediction to materials science and from wind tunnel simulation to genomics. In 2017, NVIDIA’s GPU computing supported the Nobel Prize-winning discoveries in physics and chemistry.The world’s leading cloud service providers use our GPUs to enable, accelerate or enrich the services they deliver to billions of end-users, including search, social networking, online shopping, live video, translation, AI assistants, navigation, and cloud computing. A rapidly growing number of enterprises and startups use our GPUs to facilitate deep learning that meets, and in several cases surpasses, human perception, in fields ranging from radiology to precision agriculture. For example, the transportation industry is turning to our GPUs and AI to enable autonomous vehicles, or AVs, with more than 320 companies and organizations working with NVIDIA’s DRIVE platform. Professional designers use our GPUs to create visual effects in movies and design products ranging from soft drink bottles to commercial aircraft.While our GPU and CUDA architecture is unified, our GPU product brands are aimed at specialized markets including GeForce for gamers; Quadro for designers; Tesla and DGX for AI data scientists and big data researchers; and GRID for cloud-based visual computing users. Our Tegra brand integrates an entire computer onto a single chip, and incorporates GPUs and multi-4Table of Contentscore CPUs to drive supercomputing for autonomous robots, drones, and cars, as well as for consoles and mobile gaming and entertainment devices. Headquartered in Santa Clara, California, NVIDIA was incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our BusinessesOur two reportable segments - GPU and Tegra Processor - are based on a single underlying architecture. GPU∙GeForce for PC gaming and mainstream PCs ∙GeForce NOW for cloud-based game-streaming service ∙Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications ∙Tesla for AI utilizing deep learning and accelerated computing, leveraging the parallel computing capabilities of GPUs for general purpose computing ∙GRID to provide the power of NVIDIA graphics through the cloud and datacenters ∙DGX for AI scientists, researchers and developers ∙Cryptocurrency-specific GPUs Tegra Processor∙Tegra processors are primarily designed to enable branded platforms - DRIVE and SHIELD ∙DRIVE automotive supercomputers and software stacks that provide self-driving capabilities ∙SHIELD devices and services designed to harness the power of mobile-cloud to revolutionize home entertainment, AI and gaming ∙Jetson TX 2 is a power-efficient AI computing platform for embedded useOur MarketsWe specialize in markets in which GPU-based visual computing and accelerated computing platforms can provide tremendous throughput for applications. These platforms incorporate processors, systems software, programmable algorithms, systems, and services to deliver value that is unique in the marketplace. From our proprietary processors, we have created platforms that address four large markets where our expertise is critical: Gaming, Professional Visualization, Datacenter, and Automotive.GamingComputer gaming is the largest entertainment industry. Many factors propel computer gaming’s growth, including new high production value games and franchises, the rise of competitive online gaming, eSports, and the rise of virtual and augmented reality.Our GPUs enhance the gaming experience by improving the visual quality of graphics, increasing the frame rate for smoother gameplay and improving realism by incorporating the behavior of light and physical objects. These can be enjoyed independently or together to extend the gaming experience across platforms.Our gaming platforms utilize sophisticated 3D software and algorithms, including our GameWorks libraries that provide special effects for games. These enable us to deliver realism and immersion, even when playing games remotely from the cloud. We further enhance gaming with GeForce Experience, our gaming application that optimizes the PC user’s settings for each title and enables players to record and share gameplay. It has been downloaded by more than 90 million users.To enable VR, we provide developers with a suite of software libraries called VRWorks. VRWorks allows developers to create fully immersive experiences by enabling physically realistic visuals, sound, touch interactions, and simulated environments. VR requires advanced high-performance GPUs as the engine to simulate complete immersion.Our products for the gaming market include GeForce GTX GPUs for PC gaming, SHIELD devices for gaming and streaming, GeForce NOW for cloud-based gaming, as well as platforms and development services for specialized console gaming devices.5Table of ContentsProfessional VisualizationWe serve the Professional Visualization market by working closely with independent software vendors to optimize their offerings for NVIDIA GPUs. Our GPU computing solutions enhance productivity and introduce new capabilities for critical parts of the workflow for such major industries as automotive, media and entertainment, architectural engineering, oil and gas, and medical imaging. Designers who build the products we use every day need the images that they view digitally to mirror reality. This requires simulating the physical behavior of light and materials, or physically-based rendering, an emerging trend in professional design. Our DesignWorks software delivers this to designers and enables an architect designing a building with a computer-aided design package to interact with the model in real time, view it in greater detail, and generate photorealistic renderings for the client. It also allows an automotive designer to create a highly realistic 3D image of a car, which can be viewed from all angles, reducing reliance on costly, time-consuming full-scale clay models.Just as VR is becoming more important in gaming, it is also being incorporated in a growing number of enterprise applications, including within medicine, architecture, product design, and retail. Virtual car showrooms, surgical training, architectural walkthroughs, and bringing historical scenes to life all deploy this technology, powered by our GPUs. Visual computing is vital to productivity in many environments, including design and manufacturing and digital content creation. Design and manufacturing includes computer-aided design, architectural design, consumer-products manufacturing, medical instrumentation, and aerospace. Digital content creation includes professional video editing and post production, special effects for films, and broadcast-television graphics.Our brand for this market is Quadro for workstations. Quadro GPUs enhance the productivity of designers by improving performance and adding functionality, such as photorealistic rendering, high color fidelity, and advanced scalable display capabilities. During fiscal year 2018, we also introduced Holodeck, a photorealistic, collaborative VR environment that allows creators and designers to import high-fidelity, full-resolution models into VR and leverage physics simulation to make design decisions easier and faster.DatacenterThe NVIDIA accelerated computing platform addresses AI, in which systems learn using unstructured data, and HPC, in which it speeds work toward reaching answers for more narrowly defined problems. The platform consists of our energy efficient GPUs, our CUDA programming language, specific libraries such as cuDNN and TensorRT, and innovations such as NVLink, which enables application scalability across multiple GPUs.Deep learning is a new AI computer model where neural networks are trained to recognize patterns from massive amounts of data in the form of images, sounds and text - in some instances better than humans. It also greatly increases the performance and power efficiency of high-performance computers and datacenter systems. GPUs excel at parallel workloads, speeding applications by 10-75x compared with CPUs, reducing each of the many data training iterations from weeks to days. In the past year alone, GPUs have sped up training of deep neural networks for AI by as much as 12x.We are engaged with thousands of organizations working on AI in a multitude of industries, from automating tasks such as reading medical images, to enabling fraud detection in financial services, to optimizing oil exploration and drilling. These organizations include the world’s leading cloud services companies such as Amazon, Baidu, and Facebook, which are infusing AI in applications that enable highly accurate voice recognition and real-time translation; enterprises that are increasingly turning to AI to improve products and services; and startups seeking to implement AI in disruptive ways across multiple industries. We have partnered with industry leaders such as IBM, Microsoft, and SAP to bring AI to enterprise users. We also have partnerships in healthcare and manufacturing, among others, to accelerate the adoption of AI.To enable deep learning, we provide a family of GPUs designed to speed up training and inferencing of neural networks. They are available in industry standard servers from every major computer maker worldwide, including Cisco, Dell, HP, Inspur, and Lenovo; from every major cloud service provider such as Alicloud, Amazon Web Services, Baidu Cloud, Google Cloud, IBM Cloud, Microsoft Azure, and Oracle Cloud; as well as in our DGX AI supercomputer, a purpose-built system for deep learning and GPU accelerated applications. DGX delivers performance equal to hundreds of conventional servers, comes fully integrated with hardware, deep learning software, development tools, support for existing AI frameworks, and runs popular accelerated applications. We also offer the NVIDIA GPU Cloud, or NGC, a cloud-based service for AI developers that provides comprehensive, easy-to-use, optimized deep learning software stacks. With NGC, AI developers can get started with deep learning development and deploy it with NVIDIA’s cloud partners such as Amazon.6Table of ContentsGPUs also increase the speed of applications used in such fields as aerospace, bio-science research, mechanical and fluid simulations, and energy exploration. They have already had a significant impact on scientific discovery, including improving heart surgery, mapping human genome folds, seismic modeling, and weather simulations.Accelerated computing is recognized as the path forward for computing amid the slowing of Moore’s Law. The proportion of supercomputers utilizing accelerators has grown sharply over the past five years, now accounting for a significant proportion of both the total systems on the TOP500 list, which ranks the 500 most powerful commercially available computer systems, and the list’s total floating-point operations per second. Tesla GPU accelerators power many of the world’s fastest supercomputers, including the U.S. Department of Energy’s next generation of supercomputers, Summit and Sierra, at Oak Ridge and Lawrence Livermore National Laboratories, and Japan’s ABCI supercomputer.We also serve the datacenter market with GRID for virtualized graphics. GRID makes it possible to run graphics-intensive applications remotely on a server in the datacenter. Applications include accelerating virtual desktop infrastructures and delivering graphics-intensive applications from the cloud for industries such as manufacturing, healthcare, and educational institutions, among others.AutomotiveNVIDIA’s Automotive market is comprised of infotainment solutions, advanced driver assistance systems, and AV opportunities. Leveraging our technology leadership in AI and building on its long-standing automotive relationships, we are delivering a full solution for the AV market under the DRIVE brand. NVIDIA has demonstrated multiple applications of AI within the car. AI can drive the car itself as a pilot, in either partial or fully autonomous mode. AI can also be a co-pilot, assisting the human driver in creating a safer driving experience. NVIDIA is working with over 320 automakers, tier-one suppliers, automotive research institutions, HD mapping companies, and startups to develop and deploy AI systems for self-driving vehicles. Our unified AI computing architecture starts with mapping and training deep neural networks using our Tesla GPUs, and then running them within the vehicle on the NVIDIA DRIVE AI car computing platform. This end-to-end approach leverages NVIDIA DriveWorks software and allows cars to receive over-the-air updates to add new features and capabilities throughout the life of a vehicle.DRIVE PX can understand in real-time what's happening around the vehicle, precisely locate itself on an HD map, and plan a safe path forward. This advanced self-driving car platform combines deep learning, sensor fusion, and surround vision to change the driving experience. Our DRIVE PX platform scales from a palm-sized, energy-efficient module for AutoCruise automated highway-driving capabilities to a configuration with multiple systems aimed at enabling driverless cars. A new single-processor configuration of DRIVE PX enables vehicles to use deep neural networks to process data from multiple cameras and sensors.Business StrategiesNVIDIA’s key strategies that shape our overall business approach include:Advancing the GPU computing platform. The massive parallel processing capabilities of NVIDIA GPUs can solve complex problems in significantly less time and with lower power consumption than alternative computational approaches. Indeed, GPUs can help solve problems that were previously deemed unsolvable. We work to deliver continued GPU performance leaps that outpace Moore’s Law by leveraging innovation across the architecture, chip design, system, and software layers. Our strategy is to target markets where GPUs deliver order-of-magnitude performance advantages relative to legacy approaches. Our target markets so far include gaming, professional visualization, datacenter, and automotive. While the requirements of these end markets are diverse, we address them with a unified underlying architecture leveraging our GPUs and CUDA as the fundamental building blocks. The programmable nature of our architecture allows us to make leveraged investments in R&D: we can support several multi-billion dollar end markets with the same underlying technology by using a variety of software stacks developed either internally or by third party developers and partners. We utilize this platform approach in each of our target markets. Extending our technology and platform leadership in AI. Deep learning is fundamental to the evolution of AI. We provide a complete, end-to-end GPU computing platform for deep learning, addressing both training and inferencing. This includes GPUs, our CUDA programming language, algorithms, libraries, and system software. GPUs are uniquely suited to AI, and we will continue to add AI-specific features to our GPU architecture to further extend our leadership position. Our AI technology leadership is reinforced by our large and expanding ecosystem in a virtuous cycle. Our GPU platforms are available from virtually every major server maker and cloud service provider, as well as on our own AI supercomputer. There are over 700,000 CUDA developers worldwide who write programs using CUDA to help deploy our technology in our target markets. We evangelize AI through partnerships with hundreds of universities and more than 2,000 startups through our Inception program. Additionally, our Deep Learning Institute provides instruction on the latest techniques on how to 7Table of Contentsdesign, train, and deploy neural network-powered machine learning in applications. It covers widely used open-source frameworks and NVIDIA’s latest GPU-accelerated deep learning platforms.Extending our technology and platform leadership in visual computing. We believe that visual computing is fundamental to the continued expansion and evolution of computing. We apply our research and development resources to extending our leadership in visual computing, enabling us to enhance the user experience for consumer entertainment and professional visualization applications. Our technologies are instrumental in driving gaming forward, as developers leverage our libraries and algorithms to create near-cinematic and VR experiences. Our close collaboration with game developers allows us to deliver an optimized gaming experience on our GeForce platform. Our GeForce Experience gaming application further enhances each gamer’s experience by optimizing their PC’s settings, as well as enabling the recording and sharing of gameplay. We also enable interactive graphics applications - such as games, movie and photo editing and design software - to be accessed by almost any device, almost anywhere, through our cloud platforms such as GRID for enterprise and GeForce NOW for gaming.Advancing the leading autonomous vehicle platform. We believe the advent of AV will soon revolutionize the transportation industry. In our view, AI is the key technology enabler of this opportunity, as the algorithms required for autonomous driving - such as perception, localization, and planning - are too complex for legacy hand-coded approaches, and will run on multiple trained neural networks instead. Therefore, we have provided a full functionally safe AI-based hardware and software solution for the AV market under the DRIVE brand, which we are bringing to market through our partnerships with automotive original equipment manufacturers, or OEMs, tier-1 suppliers, and start-ups. Our AV solution also includes the GPU-based hardware required to train the neural networks before their in-vehicle deployment, as well as to re-simulate their operation prior to any over-the-air software updates. We believe our comprehensive, top-to-bottom and end-to-end approach will enable the transportation industry to solve the complex problems arising from the shift to autonomous driving. Leveraging our intellectual property. We believe our intellectual property is a valuable asset that can be accessed by our customers and partners through licenses and development agreements when they desire to build such capabilities directly into their own products, or have us do so through a custom development. Such license and development arrangements can further enhance the reach of our technology.Sales and MarketingOur sales strategy involves working with end customers and various industry ecosystems through our partner network. Our worldwide sales and marketing strategy is key to achieving our objective of providing markets with our high-performance and efficient GPU and embedded system-on-a-chip, or SOC, platforms. Our sales and marketing teams, located across our global markets, work closely with end customers in each industry. Our partner network incorporates each industry's respective OEMs, original device manufacturers, or ODMs, system builders, add-in board manufacturers, or AIBs, retailers/distributors, internet and cloud service providers, automotive manufacturers and tier-1 automotive suppliers, mapping companies, start-ups, and other ecosystem participants.Members of our sales team have technical expertise and product and industry knowledge. We also employ a team of application engineers to assist our partner network in designing, testing, and qualifying system designs that incorporate our platforms. We believe that the depth and quality of our design support are key to improving our partner network’s time-to-market, maintaining a high level of customer satisfaction, and fostering relationships that encourage our end customers and partner network to use the next generation of our products within each platform.To encourage the development of applications optimized for our GPUs, we seek to establish and maintain strong relationships in the software development community. Engineering and marketing personnel engage with key software developers to promote and discuss our platforms, as well as to ascertain individual product requirements and solve technical problems. Our developer program makes our products available to developers prior to launch in order to encourage the development of AI frameworks, SDKs, and APIs for software applications and game titles that are optimized for our platforms. Our Deep Learning Institute provides in-person and online training for developers in industries and organizations around the world to build AI and accelerated computing applications that leverage our GPU and CUDA platforms. We now have over 700,000 registered developers across our platforms, including accelerated computing, gaming, deep learning, autonomous machines, and others.As NVIDIA’s business has evolved from a focus primarily on gaming products to broader markets, and from chips to platforms and complete systems, so, too, have our avenues to market. Thus, in addition to sales to customers in our partner network, certain of our platforms are also sold through e-tail channels, or direct to cloud service providers and enterprise customers.Backlog Our sales are primarily made pursuant to standard purchase orders. The quantity of products purchased by our customers as well as our shipment schedules are subject to revisions that reflect changes in both the customers' requirements and 8Table of Contentsin manufacturing availability. Our industry is characterized by relatively short lead time orders and delivery schedules, thus, we believe that only a small portion of our backlog is non-cancelable and that the dollar amount associated with the non-cancelable portion is not significant.SeasonalityOur GPU and Tegra processor platforms serve many markets from consumer PC gaming to enterprise workstations to government and cloud service provider datacenters, although a majority of our revenue stems from the consumer industry. Our consumer products have typically seen stronger revenue in the second half of our fiscal year. However, there can be no assurance that this trend will continue.Manufacturing We do not directly manufacture semiconductors used for our products. Instead, we utilize a fabless manufacturing strategy, whereby we employ world-class suppliers for all phases of the manufacturing process, including wafer fabrication, assembly, testing, and packaging. This strategy uses the expertise of industry-leading suppliers that are certified by the International Organization for Standardization in such areas as fabrication, assembly, quality control and assurance, reliability, and testing. Additionally, we can avoid many of the significant costs and risks associated with owning and operating manufacturing operations. While we may directly procure certain raw materials used in the production of our products, such as substrates and a variety of components, our suppliers are responsible for procurement of the majority of the raw materials used in the production of our products. As a result, we can focus our resources on product design, additional quality assurance, marketing, and customer support.We utilize industry-leading suppliers, such as Taiwan Semiconductor Manufacturing Company Limited and Samsung Electronics Co. Ltd, to produce our semiconductor wafers. We then utilize independent subcontractors, such as Advanced Semiconductor Engineering, Inc., BYD Auto Co. Ltd., Hon Hai Precision Industry Co., Ltd., JSI Logistics Ltd., King Yuan Electronics Co., Ltd., and Siliconware Precision Industries Company Ltd. to perform assembly, testing, and packaging of most of our products and platforms. We purchase substrates from IbidenCo. Ltd., Nanya Technology Corporation, and Unimicron Technology Corporation, and memory from Micron Technology, Samsung Semiconductor, Inc., and SK Hynix.We typically receive semiconductor products from our subcontractors, perform incoming quality assurance, and then ship the semiconductors to contract equipment manufacturers, or CEMs, distributors, motherboard and AIB customers from our third-party warehouse in Hong Kong. Generally, these manufacturers assemble and test the boards based on our design kit and test specifications, and then ship our products to retailers, system builders, or OEMs as motherboard and AIB solutions.We also utilize industry-leading contract manufacturers, or CMs, such as BYD and Quanta Computer, to manufacture some of our products for sale directly to end customers. In those cases, key elements such as the GPU, SOC and memory are often consigned by us to the CMs, who are responsible for the procurement of other components used in the production process.Working CapitalWe focus considerable attention on managing our inventories and other working-capital-related items. We manage inventories by communicating with our customers and partners and then using our industry experience to forecast demand on a platform-by-platform basis. We then place manufacturing orders for our products that are based on forecasted demand. We generally maintain substantial inventories of our products because the semiconductor industry is characterized by short lead time orders and quick delivery schedules. A substantial amount of our inventories is maintained as semi-finished products that can be leveraged across a wide range of our processors to balance our customer demands.Our existing cash and marketable securities balances increased by 5% to $7.11 billion at the end of fiscal year 2018 compared with the end of fiscal year 2017.Research and DevelopmentWe believe that the continued introduction of new and enhanced products designed to deliver leading accelerated computing technology is essential to our future success. Our research and development strategy is focused on a unified hardware and software architecture. Our products take years to design and bring to market, and we concurrently develop multiple generations of our architecture. Our research and development efforts include software engineering, including efforts related to the development of our CUDA platform, hardware engineering related to our GPUs, Tegra processors, and systems, very large scale integration design engineering, process engineering, architecture and algorithms.9Table of ContentsAs of January 28, 2018, we had 8,191 full-time employees engaged in research and development. During fiscal years 2018, 2017 and 2016, we incurred research and development expenses of $1.80 billion, $1.46 billion, and $1.33 billion, respectively.Competition The market for our products is intensely competitive and is characterized by rapid technological change and evolving industry standards. We believe that the principal competitive factors in this market are performance, breadth of product offerings, access to customers and partners and distribution channels, software support, conformity to industry standard Application Programming Interfaces, manufacturing capabilities, processor pricing, and total system costs. We believe that our ability to remain competitive will depend on how well we are able to anticipate the features and functions that customers and partners will demand and whether we are able to deliver consistent volumes of our products at acceptable levels of quality and at competitive prices. We expect competition to increase from both existing competitors and new market entrants with products that may be less costly than ours, or may provide better performance or additional features not provided by our products. In addition, it is possible that new competitors or alliances among competitors could emerge and acquire significant market share.A significant source of competition comes from companies that provide or intend to provide GPUs, embedded SOCs, and accelerated and AI computing processor products. Some of our competitors may have greater marketing, financial, distribution and manufacturing resources than we do and may be more able to adapt to customer or technological changes.Our current competitors include:•suppliers or licensors of discrete and integrated GPUs and accelerated computing solutions, including chipsets that incorporate 3D graphics, or HPC or accelerated computing functionality as part of their solutions or platforms, such as Advanced Micro Devices, or AMD, ARM Holdings plc, Imagination Technologies Group plc, Intel Corporation, or Intel, and Xilinx, Inc.; and•suppliers of SOC products that are embedded into automobiles, autonomous machines, and smart devices such as televisions, monitors, set-top boxes, and gaming devices, such as Ambarella, Inc., AMD, Broadcom Ltd., Intel, Qualcomm Incorporated, Renesas Electronics Corporation, Samsung, and Texas Instruments Incorporated.Patents and Proprietary RightsWe rely primarily on a combination of patents, trademarks, trade secrets, employee and third-party nondisclosure agreements, and licensing arrangements to protect our intellectual property in the United States and internationally. Our currently issued patents have expiration dates from April 2018 to January 2037. We have numerous patents issued, allowed, and pending in the United States and in foreign jurisdictions. Our patents and pending patent applications primarily relate to our products and the technology used in connection with our products. We also rely on international treaties, organizations, and foreign laws to protect our intellectual property. The laws of certain foreign countries in which our products are or may be manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as the laws of the United States. This decreased protection makes the possibility of piracy of our technology and products more likely. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as:•the location in which our products are manufactured;•our strategic technology or product directions in different countries;•the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions; and•the commercial significance of our operations and our competitors' operations in particular countries and regions.We have also licensed technology from third parties for incorporation in some of our products and for defensive reasons, and expect to continue to enter into such license agreements.EmployeesAs of January 28, 2018, we had 11,528 employees, 8,191 of whom were engaged in research and development and 3,337 of whom were engaged in sales, marketing, operations, and administrative positions. Environmental Regulatory ComplianceTo date, we have not incurred significant expenses related to environmental regulatory compliance matters. Financial Information by Reporting Segment and Geographic DataThe information included in Note 16 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K, including financial information by reportable segment and revenue and long-lived assets by 10Table of Contentsgeographic region, is hereby incorporated by reference. For additional detail regarding the risks attendant to our foreign operations see “Item 1A. Risk Factors - Risks Related to Our Business, Industry and Partners - We are subject to risks and uncertainties associated with international operations, which may harm our business.”Executive Officers of the RegistrantThe following sets forth certain information regarding our executive officers, their ages and positions as of February 26, 2018:Name Age PositionJen-Hsun Huang 55 President, Chief Executive Officer and DirectorColette M. Kress 50 Executive Vice President and Chief Financial OfficerAjay K. Puri 63 Executive Vice President, Worldwide Field OperationsDebora Shoquist 63 Executive Vice President, OperationsTimothy S. Teter 51 Executive Vice President, General Counsel and SecretaryJen-Hsun Huang co-founded NVIDIA in 1993 and has served as our President, Chief Executive Officer and a member of the Board of Directors since our inception. From 1985 to 1993, Mr. Huang was employed at LSI Logic Corporation, a computer chip manufacturer, where he held a variety of positions including as Director of Coreware, the business unit responsible for LSI's SOC. From 1983 to 1985, Mr. Huang was a microprocessor designer for Advanced Micro Devices, Inc., a semiconductor company. Mr. Huang holds a B.S.E.E. degree from Oregon State University and an M.S.E.E. degree from Stanford University.Colette M. Kress joined NVIDIA in 2013 as Executive Vice President and Chief Financial Officer. Prior to NVIDIA, Ms. Kress most recently served as Senior Vice President and Chief Financial Officer of the Business Technology and Operations Finance organization at Cisco Systems, Inc., a networking equipment company, since 2010. At Cisco, Ms. Kress was responsible for financial strategy, planning, reporting and business development for all business segments, engineering and operations. From 1997 to 2010 Ms. Kress held a variety of positions at Microsoft Corporation, a software company, including, beginning in 2006, Chief Financial Officer of the Server and Tools division, where Ms. Kress was responsible for financial strategy, planning, reporting and business development for the division. Prior to joining Microsoft, Ms. Kress spent eight years at Texas Instruments Incorporated, a semiconductor company, where she held a variety of finance positions. Ms. Kress holds a B.S. degree in Finance from University of Arizona and an M.B.A. degree from Southern Methodist University.Ajay K. Puri joined NVIDIA in 2005 as Senior Vice President, Worldwide Sales and became Executive Vice President, Worldwide Field Operations in 2009. Prior to NVIDIA, he held positions in sales, marketing, and general management over a 22-year career at Sun Microsystems, Inc., a computing systems company. Mr. Puri previously held marketing, management consulting, and product development positions at Hewlett-Packard Company, an information technology company, Booz Allen Hamilton Inc., a management and technology consulting company, and Texas Instruments Incorporated. Mr. Puri holds a B.S.E.E. degree from the University of Minnesota, an M.S.E.E. degree from the California Institute of Technology and an M.B.A. degree from Harvard Business School.Debora Shoquist joined NVIDIA in 2007 as Senior Vice President of Operations and in 2009 became Executive Vice President of Operations. Her role has since expanded with responsibility added for Facilities in 2013, and for Information Technology in 2015. Prior to NVIDIA, Ms. Shoquist served from 2004 to 2007 as Executive Vice President of Operations at JDS Uniphase Corp., a provider of communications test and measurement solutions and optical products for the telecommunications industry. She served from 2002 to 2004 as Senior Vice President and General Manager of the Electro-Optics business at Coherent, Inc., a manufacturer of commercial and scientific laser equipment. Previously, she worked at Quantum Corp., a data protection company, as President of the Personal Computer Hard Disk Drive Division, and at Hewlett-Packard Corp. Ms. Shoquist holds a B.S. degree in Electrical Engineering from Kansas State University and a B.S. degree in Biology from Santa Clara University.Timothy S. Teter joined NVIDIA in 2017 as Senior Vice President, General Counsel and Secretary and became Executive Vice President, General Counsel and Secretary in February 2018. Prior to NVIDIA, Mr. Teter spent more than two decades at the law firm of Cooley LLP. He was most recently a partner at Cooley, where he focused on litigating patent and technology related matters. Prior to attending law school, he worked as an engineer at Lockheed Missiles and Space Company. Mr. Teter holds a B.S. degree in Mechanical Engineering from the University of California at Davis and a J.D. degree from Stanford Law School.11Table of ContentsAvailable InformationOur annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, are available free of charge on or through our web site, http://www.nvidia.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or the SEC. Our web site and the information on it or connected to it are not a part of this Annual Report on Form 10-K.ITEM 1A. RISK FACTORSIn evaluating NVIDIA and our business, the following factors should be considered in addition to the other information in this Annual Report on Form 10-K. Before you buy our common stock, you should know that making such an investment involves risks including, but not limited to, the risks described below. Any one of the following risks could harm our business, financial condition, results of operations or reputation, which could cause our stock price to decline, and you may lose all or a part of your investment. Additional risks, trends and uncertainties not presently known to us or that we currently believe are immaterial may also harm our business, financial condition, results of operations or reputation.Risks Related to Our Business, Industry and PartnersIf we fail to meet the evolving needs of our markets, or identify new products, services or technologies, our revenue and financial results may be adversely impacted.We have created GPU-based visual and accelerated computing platforms that address four large markets: Gaming, Professional Visualization, Datacenter, and Automotive. These markets often experience rapid technological change, changes in customer requirements, new product introductions and enhancements, and evolving industry standards. Our success depends on our ability to identify these emerging industry changes and to develop new (or enhance our existing) products, services and technologies that meet the evolving needs of these markets. Such activities may require considerable technical, financial, compliance, sales and marketing investments. We currently devote significant resources to the development of technologies and business offerings in markets where we have a limited operating history, such as the automotive and datacenter markets, which presents additional risks to our business. We must also continue to develop the infrastructure needed to appropriately scale our business in these areas, including customer service and customer support. We also must meet customer safety and compliance standards, which are subject to change. Additionally, we continue to make considerable investments in research and development, which may not produce significant revenue for several years, if at all. If our investments are unsuccessful and we fail to develop new products, services and technologies, or if we focus on technologies that do not become widely adopted, our business, revenue, financial condition and results of operations could be adversely affected. We cannot assure you that our strategic direction will result in innovative products and technologies that provide value to our customers, partners and ultimately, our shareholders. If we fail to anticipate the changing needs of our target markets and emerging technology trends, or if we do not appropriately adapt that strategy as market conditions evolve, in a timely manner to exploit potential market opportunities, our business will be harmed.Competition in our current and target markets could prevent us from growing our revenue.Our target markets remain extremely competitive, and we expect competition to intensify as current competitors expand their product and/or service offerings, industry standards continue to evolve, customer needs change and new competitors enter these markets. Our competitors’ products, services and technologies may be less costly, or may offer superior functionality or better features, than ours, which may result, among other things, in lower than expected selling prices for our products. In addition, some of our competitors operate and maintain their own fabrication facilities, have longer operating histories, larger customer bases, more comprehensive intellectual property, or IP, portfolios and patent protections, and greater financial, sales, marketing and distribution resources than we do. These competitors may be able to more effectively identify and capitalize upon opportunities in new markets and end user customer trends, quickly transition their products, including semiconductor products, to increasingly smaller line width geometries, and obtain sufficient foundry capacity and packaging materials, which could harm our business. If we are unable to successfully compete in our target markets, respond to changes in our target markets or introduce new offerings to meet the needs of this competitive environment, including in significant international markets such as China, demand for our products, services and technologies could decrease, which would cause our revenue to decline and cause our results of operations to suffer. In addition, the competitive landscape in our target markets has changed and may continue to evolve due to a trend toward consolidation, which could lead to fewer customers, partners, or suppliers, any of which could negatively affect our financial results.12Table of ContentsSystem security and data protection breaches, as well as cyber-attacks, could disrupt our operations, reduce our expected revenue and increase our expenses, which could adversely affect our stock price and damage our reputation.Security breaches, computer malware and cyber-attacks have become more prevalent and sophisticated in recent years. These threats are constantly evolving, making it increasingly difficult to successfully defend against them or implement adequate preventative measures. These attacks have occurred on our systems in the past and are expected to occur in the future. Experienced computer programmers, hackers and employees may penetrate our security controls and misappropriate or compromise our confidential information, or that of our employees or third parties. These attacks may create system disruptions or cause shutdowns. These hackers may also develop and deploy viruses, worms and other malicious software programs that attack or otherwise exploit security vulnerabilities in our products, including consumer and automotive products, where we utilize over-the-air updates to improve functionality over time. For portions of our IT infrastructure, including business management and communication software products, we rely on products and services provided by third parties. These providers may also experience breaches and attacks to their products which may impact our systems. Data security breaches may also result from non-technical means, such as actions by an employee with access to our systems. To defend against security threats, both to our internal systems and those of our customers, we must continuously engineer more secure products and enhance security and reliability features, which may result in increased expenses.Actual or perceived breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us, our partners, our customers or third parties could expose us and the parties affected to a risk of loss or misuse of this information, resulting in litigation and potential liability, paying damages, regulatory inquiries or actions, damage to our brand and reputation or other harm to our business. Our efforts to prevent and overcome these challenges could increase our expenses and may not be successful. We may experience interruptions, delays, cessation of service and loss of existing or potential customers. Such disruptions could adversely impact our ability to fulfill orders and interrupt other critical functions. Delayed sales, lower margins or lost customers as a result of these disruptions could adversely affect our financial results, stock price and reputation.If our products contain significant defects, we could incur significant expenses to remediate such defects, our reputation could be damaged, and we could lose market share.Our products are complex and may contain defects or security vulnerabilities, or experience failures or unsatisfactory performance due to any number of issues in design, fabrication, packaging, materials and/or use within a system. These risks may increase as our products are introduced into new devices, markets, technologies and applications, including into the automotive market, or as new versions are released. Some errors in our products or services may only be discovered after a product or service has been shipped or used by customers or the end users of such product. Undiscovered vulnerabilities in our products or services could expose our customers or end users to hackers or other unscrupulous third parties who develop and deploy viruses, worms and other malicious software programs that could attack our products or services. Failure of our products to perform to specifications, or other product defects, could lead to substantial damage to the products we sell directly to customers, the end product in which our device has been integrated by OEMs, ODMs, AIBs and Tier 1 automotive suppliers, and to the user of such end product. Any such defect may cause us to incur significant warranty, support and repair or replacement costs, write off the value of related inventory, cause us to lose market share, and divert the attention of our engineering personnel from our product development efforts to find and correct the issue. In addition, an error or defect in new products or releases or related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins, harm our relationships with customers and partners and harm consumers’ perceptions of our brand. Also, we may be required to reimburse our customers, partners or consumers, including costs to repair or replace products in the field. A product recall, including automotive recalls or a recall due to a bug in our products, or a significant number of product returns could be expensive, damage our reputation, harm our ability to attract new customers, result in the shifting of business to our competitors and result in litigation against us, such as product liability suits. If a product liability claim is brought against us, the cost of defending the claim could be significant and would divert the efforts of our technical and management personnel, and harm our business. Further, our business liability insurance may be inadequate or future coverage may be unavailable on acceptable terms, which could adversely impact our financial results.We depend on third parties and their technology to manufacture, assemble, test and/or package our products, which reduces our control over product quantity and quality, manufacturing yields, development, enhancement and product delivery schedule and could harm our business.We do not manufacture the silicon wafers used for our GPUs and Tegra processors and do not own or operate a wafer fabrication facility. Instead, we are dependent on industry-leading foundries, such as Taiwan Semiconductor Manufacturing Company Limited and Samsung Electronics Co. Ltd., to manufacture our semiconductor wafers using their fabrication equipment and techniques. Similarly, we do not directly assemble, test or package our products, but instead rely on 13Table of Contentsindependent subcontractors. We do not have long-term commitment contracts with these foundries or subcontractors. As a result, we face several significant risks which could have an adverse effect on our ability to meet customer demand and/or negatively impact our business operations, gross margin, revenue and/or financial results, including:•a lack of guaranteed supply of wafers and other components and potential higher wafer and component prices due to supply constraints;•a failure by our foundries to procure raw materials or to provide or allocate adequate or any manufacturing or test capacity for our products;•a failure to develop, obtain or successfully implement high quality, leading-edge process technologies, including transitions to smaller geometry process technologies such as 16nm FinFET, and memory designs such as CoWoS, needed to manufacture our products profitably or on a timely basis;•loss of a supplier and additional expense and/or production delays as a result of qualifying a new foundry or subcontractor and commencing volume production or testing in the event of a loss of or a decision to add or change a supplier;•a lack of direct control over delivery schedules or product quantity and quality; and•delays in product shipments, shortages, a decrease in product quality and/or higher expenses in the event our subcontractors or foundries prioritize our competitors’ orders over our orders or otherwise.In addition, low manufacturing yields could have an adverse effect on our ability to meet customer demand, increase manufacturing costs, harm customer or partner relationships, and/or negatively impact our business operations, gross margin, revenue and/or financial results. Manufacturing yields for our products are a function of product design, which is developed largely by us, and process technology, which typically is proprietary to the foundry. Low yields may result from either product design or process technology failure. We do not know whether a yield problem will exist until our design is actually manufactured by the foundry. As a result, yield problems may not be identified until well into the manufacturing process and require us and the foundry to cooperate to resolve the problem. We also rely on third-party software development tools to assist us in the design, simulation and verification of new products or product enhancements, and to bring such new products and enhancements to market in a timely manner. In the past, we have experienced delays in the introduction of products and enhancements as a result of the inability of then available software development tools to fully simulate the complex features and functionalities of our products. The design requirements necessary to meet consumer demands for more features and greater functionality from our products may exceed the capabilities of available software development tools. If we miss design cycles or lose design wins due to the unavailability of such software development tools, we could lose market share and our revenues could decline.If we fail to achieve design wins for our products, our business will be harmed.For our products that we do not sell directly to consumers, achieving design wins is an important success factor. Achieving design wins may involve a lengthy process in pursuit of a customer opportunity and depend on our ability to anticipate features and functionality that customers and consumers will demand. Failure to obtain a particular design win may prevent us from obtaining design wins in subsequent generations of a particular product. This could result in lost revenue and could weaken our position in future competitive bid selection processes. Unanticipated changes in industry standards could render our products incompatible with products developed by major hardware manufacturers and software developers. Further, if our products are not in compliance with prevailing industry standards, including safety standards, our customers may not incorporate our products into their design strategies. Winning a product design does not guarantee sales to a customer or that we will realize as much revenue as anticipated, if any.Business disruptions could harm our business, lead to a decline in revenues and increase our costs.Our worldwide operations could be disrupted by earthquakes, telecommunications failures, power or water shortages, outages at cloud service providers, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions, cyber-attacks, terrorist attacks, medical epidemics or pandemics and other natural or man-made disasters, catastrophic events or climate change. The occurrence of any of these disruptions could harm our business and result in significant losses, a decline in revenue and an increase in our costs and expenses. Any of these business disruptions could require substantial expenditures and recovery time in order to fully resume operations. Our corporate headquarters, and a portion of our research and development activities, are located in California, and other critical business operations and some of our suppliers are located in Asia, near major earthquake faults known for seismic activity. In addition, a majority of our current datacenter capacity is located in California, making our operations vulnerable to natural disasters or other business disruptions occurring in these geographical areas. The manufacture of product components, the final assembly of our products and other critical operations are concentrated in certain geographic locations, including Taiwan, China and Korea. Geopolitical change or changes in government regulations and policies in the U.S. or abroad also may result in changing regulatory requirements, 14Table of Contentstrade policies, and economic disruptions that could impact our operating strategies, access to global markets, hiring, and profitability. Catastrophic events can also have an impact on third-party vendors who provide us critical infrastructure services for IT and research and development systems and personnel. Our operations could be harmed if manufacturing, logistics or other operations in these locations are disrupted for any reason, including natural disasters, high heat events or water shortages, information technology system failures, military actions or economic, business, labor, environmental, public health, regulatory or political issues. The ultimate impact on us, our third-party foundries and other suppliers and our general infrastructure of being located near major earthquake faults and being consolidated in certain geographical areas is unknown. In the event a major earthquake or other disaster or catastrophic event affects us or the third-party systems on which we rely, our business could be harmed as a result of declines in revenue, increases in expenses, substantial expenditures and time spent to fully resume operations.If we fail to estimate customer demand properly, our financial results could be harmed.We manufacture our GPUs and Tegra processors based on estimates of customer demand and requirements. In order to have shorter shipment lead times and quicker delivery schedules for our customers, we may build inventories for anticipated periods of growth which do not occur, or may build inventory anticipating demand for a product that does not materialize. In estimating demand, we make multiple assumptions, any of which may prove to be incorrect. Situations that may result in excess or obsolete inventory include:•changes in business and economic conditions, including downturns in our target markets and/or overall economy;•changes in consumer confidence caused by changes in market conditions, including changes in the credit market;•a sudden and significant decrease in demand for our products;•a higher incidence of inventory obsolescence because of rapidly changing technology or customer requirements;•our introduction of new products resulting in lower demand for older products; •less demand than expected for newly-introduced products; or•increased competition, including competitive pricing actions.The cancellation or deferral of customer purchase orders could result in our holding excess inventory, which could adversely affect our gross margins. In addition, because we often sell a substantial portion of our products in the last month of each quarter, we may not be able to reduce our inventory purchase commitments in a timely manner in response to customer cancellations or deferrals. We could be required to write-down our inventory to the lower of cost or market or write-off excess inventory, and we could experience a reduction in average selling prices if we incorrectly forecast product demand, any of which could harm our financial results.Conversely, if we underestimate our customers' demand for our products, our foundry partners may not have adequate lead-time or capacity to increase production and we may not be able to obtain sufficient inventory to fill customers' orders on a timely basis. We may also face supply constraints caused by natural disasters or other events. In such cases, even if we are able to increase production levels to meet customer demand, we may not be able to do so in a cost-effective or timely manner. If we fail to fulfill our customers' orders on a timely basis, or at all, our customer relationships could be damaged, we could lose revenue and market share and our reputation could be damaged.We are subject to risks and uncertainties associated with international operations, which may harm our business.We conduct our business worldwide and we have offices in various countries outside of the United States. Our semiconductor wafers are manufactured, assembled, tested and packaged by third parties located outside of the United States and Other Americas. We also generate a significant portion of our revenue from sales outside the United States and Other Americas. Revenue from sales outside of the United States and Other Americas accounted for 79%, 80%, and 79% of total revenue for fiscal years 2018, 2017, and 2016, respectively. Additionally, as of January 28, 2018, approximately 47% of our employees were located outside of the United States. The global nature of our business subjects us to a number of risks and uncertainties, which could have a material adverse effect on our business, financial condition and results of operations, including:•international economic and political conditions, such as political tensions between countries in which we do business;•unexpected changes in, or impositions of, legislative or regulatory requirements, including changes in tax laws;•differing legal standards with respect to protection of intellectual property and employment practices;•local business and cultural factors that differ from our normal standards and practices, including business practices that we are prohibited from engaging in by the Foreign Corrupt Practices Act and other anticorruption laws and regulations;•exporting or importing issues related to export or import restrictions, including deemed export restrictions, tariffs, quotas and other trade barriers and restrictions; 15Table of Contents•disruptions of capital and trading markets and currency fluctuations; and•increased costs due to imposition of climate change regulations, such as carbon taxes, fuel or energy taxes, and pollution limits.If our sales outside of the United States and Other Americas are delayed or cancelled because of any of the above factors, our revenue may be negatively impacted.If we are unable to attract, retain and motivate our executives and key employees, we may not be able to execute our business strategy effectively. To be competitive and execute our business strategy successfully, we must attract, retain and motivate our executives and key employees. The market for highly skilled workers and leaders in our industry is extremely competitive. In particular, hiring qualified executives, scientists, engineers, technical staff and research and development personnel is critical to our business. Additionally, changes in immigration and work permit laws and regulations or the administration or interpretation of such laws or regulations could impair our ability to attract and retain highly qualified employees. If we are less successful in our recruiting efforts, or if we cannot retain key employees, our ability to develop and deliver successful products and services may be adversely affected. Additionally, competition for personnel results in increased costs in the form of cash and stock-based compensation. The interpretation and application of employment related laws to our workforce practices may result in increased operating costs and less flexibility in how we meet our workforce needs. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution.We may not be able to realize the potential financial or strategic benefits of business acquisitions or strategic investments and we may not be able to successfully integrate acquisition targets, which could hurt our ability to grow our business, develop new products or sell our products.We have in the past acquired and invested in, and may continue to acquire and invest in, other businesses that offer products, services and technologies that we believe will help expand or enhance our existing products, strategic objectives and business. The risks associated with past or future acquisitions or investments could impair our ability to grow our business, develop new products or sell our products, and ultimately could have a negative impact on our growth or our financial results. Given that our resources are limited, our decision to pursue a transaction has opportunity costs; accordingly, if we pursue a particular transaction, we may need to forgo the prospect of entering into other transactions that could help us achieve our strategic objectives. Additional risks related to acquisitions or strategic investments include, but are not limited to:•difficulty in combining the technology, products, operations or workforce of the acquired business with our business;•diversion of capital and other resources, including management’s attention; •assumption of liabilities and incurring amortization expenses, impairment charges to goodwill or write-downs of acquired assets; •difficulty in realizing a satisfactory return, if at all; •difficulty in obtaining regulatory, other approvals or financing; •failure and costs associated with the failure to consummate a proposed acquisition or other strategic investment; •legal proceedings initiated as a result of an acquisition or investment; •uncertainties and time needed to realize the benefits of an acquisition or strategic investment, if at all; •the need to later divest acquired assets if an acquisition does not meet our expectations; •potential failure of our due diligence processes to identify significant issues with the acquired assets or company; and•impairment of relationships with, or loss of our or our target’s, employees, vendors and customers, as a result of our acquisition or investment.Risks Related to Regulatory, Legal, Our Common Stock and Other MattersActions to adequately protect our IP rights could result in substantial costs to us and our ability to compete could be harmed if we are unsuccessful in doing so or if we are prohibited from making or selling our products.We have in the past, currently are, and may in the future become involved in lawsuits or other legal proceedings alleging patent infringement or other intellectual property rights violations by us, our employees or parties that we have agreed to indemnify for certain claims of infringement. An unfavorable ruling in any such intellectual property related litigation could include significant damages, invalidation of a patent or family of patents, indemnification of customers, payment of lost profits, or, when it has been sought, injunctive relief. Claims that our products or processes infringe the IP rights of others, 16Table of Contentsregardless of their merit, could cause us to incur significant costs to respond to, defend, and resolve such claims, and they may also divert the efforts and attention of management and technical personnel.We may commence litigation or other legal proceedings in order to protect our intellectual property rights. Such proceedings may increase our operating expenses, which could negatively impact our operating results. Further, we could be subject to countersuits as a result of our initiation of litigation. If infringement claims are made against us or our products are found to infringe a third party’s patent or intellectual property, we or one of our indemnitees may have to seek a license to the third party’s patent or other intellectual property rights. However, we may not be able to obtain licenses at all or on terms acceptable to us particularly from our competitors. If we or one of our indemnitees is unable to obtain a license from a third party for technology that we use or that is used in one of our products, we could be subject to substantial liabilities or have to suspend or discontinue the manufacture and sale of one or more of our products. We may also have to make royalty or other payments, or cross license our technology. If these arrangements are not concluded on commercially reasonable terms, our business could be negatively impacted. Furthermore, the indemnification of a customer or other indemnitee may increase our operating expenses which could negatively impact our operating results.Our success depends in part on protecting our intellectual property. To accomplish this, we rely primarily on a combination of patents, trademarks, trade secrets, employee and third-party nondisclosure agreements, licensing arrangements, and the laws of the countries in which we operate to protect our intellectual property in the United States and internationally. We may be required to spend significant resources to monitor and protect our intellectual property rights, and even with significant expenditures we may not be able to protect our intellectual property rights that are valuable to our business. The laws of certain foreign countries may not protect our products or intellectual property rights to the same extent as the laws of the United States. This makes the possibility of piracy of our technology and products more likely. In addition, the theft or unauthorized use or publication of our trade secrets and other confidential business information could harm our competitive position and reduce acceptance of our products; as a result, the value of our investment in research and development, product development, and marketing could be reduced. We continuously assess whether and where to seek formal protection for existing and new innovations and technologies, but cannot be certain whether our applications for such protections will be approved, and, if approved, whether we will be able to enforce such protections.Our operating results have in the past fluctuated and may in the future fluctuate, and if our operating results are below the expectations of securities analysts or investors, our stock price could decline.Our operating results have in the past fluctuated and may in the future continue to fluctuate due to numerous factors. Therefore, investors should not rely on quarterly comparisons of our results of operations as an indication of our future performance.Factors, other than those described elsewhere in these risk factors, that could affect our results of operations in the future include, but are not limited to:•our ability to achieve volume production of our next-generation products;•our inability to adjust spending to offset revenue shortfalls due to the multi-year development cycle for some of our products and services;•fluctuations in the demand for our products related to cryptocurrencies; •changes in the timing of product orders due to unexpected delays in the introduction of our partners’ products;• our ability to cover the manufacturing and design costs of our products through competitive pricing;•our ability to comply and continue to comply with our customers’ contractual obligations;•product rates of return in excess of that forecasted or expected due to quality issues;•our ability to secure appropriate safety certifications and meet industry safety standards;•supply constraints for and changes in the cost of the other components incorporated into our products •inventory write-downs;•our ability to continue generating revenue from our partner network, including by generating sales within our partner network and ensuring our products are incorporated into our partners product ecosystems, and our partner network’s ability to sell products that incorporate our GPUs and Tegra processors;•the inability of certain of our customers to make required payments to us, and our ability to obtain credit insurance over the purchasing credit extended to these customers;•customer bad debt write-offs;•any unanticipated costs associated with environmental liabilities;•unexpected costs related to our ownership of real property;17Table of Contents•changes in financial accounting standards or interpretations of existing standards; and•general macroeconomic or industry events and factors affecting the overall market and our target markets.Any one or more of the factors discussed above could prevent us from achieving our expected future financial results. Any such failure to meet our expectations or the expectations of our investors or security analysts could cause our stock price to decline or experience substantial price volatility.Privacy concerns relating to our products and services could damage our reputation, deter current and potential users from using our products and services, result in liability, or result in legal or regulatory proceedings.Our products and services may provide us with access to sensitive, confidential or personal data or information that is subject to privacy and security laws and regulations. Concerns about our practices with regard to the collection, use, retention, security or disclosure of personal information or other privacy-related matters, even if unfounded, could damage our reputation and adversely affect our operating results. The theft, loss, or misuse of personal data collected, used, stored, or transferred by us to run our business or by one of our partners could result in significantly increased security costs, damage to our reputation, regulatory proceedings, disruption of our business activities or increased costs related to defending legal claims.Worldwide regulatory authorities are considering and have approved various legislative proposals concerning data protection, which continue to evolve and apply to our business. For example, the European Union adopted the General Data Protection Regulation, or GDPR, which requires companies to meet new requirements beginning in May 2018 regarding the handling of personal data, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. Failure to meet GDPR requirements could result in penalties of up to 4% of worldwide revenue. In addition, the interpretation and application of consumer and data protection laws in the United States, Europe and elsewhere are often uncertain and fluid, and may be interpreted and applied in a manner that is inconsistent with our data practices. If so, we may be ordered to change our data practices and/or be fined. Complying with these changing laws has caused, and could continue to cause, us to incur substantial costs, which could have an adverse effect on our business and results of operations. Further, failure to comply with existing or new rules may result in significant penalties or orders to stop the alleged noncompliant activity.We may have exposure to additional tax liabilities and our operating results may be adversely impacted by higher than expected tax rates.As a multinational corporation, we are subject to income taxes as well as non-income based taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in both the United States and various foreign jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenue and expenses in different jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and other tax liabilities. Further, changes in United States federal, and state or international tax laws applicable to multinational corporations or other fundamental law changes may materially impact our tax expense and cash flows, as we experienced in fiscal year 2018 with the passage of the Tax Cuts and Jobs Act, or TCJA.Our future effective tax rate may be affected by such factors as changes in tax laws, changes in our business or statutory rates, changes in jurisdictions in which our profits are determined to be earned and taxed, changes in available tax credits, the resolution of issues arising from tax audits, changes in United States generally accepted accounting principles, adjustments to income taxes upon finalization of tax returns, increases in expenses not deductible for tax purposes, changes in the valuation of our deferred tax assets and liabilities and in deferred tax valuation allowances, changing interpretation of existing laws or regulations, the impact of accounting for stock-based compensation and the recognition of excess tax benefits and tax deficiencies within the income tax provision in the period in which they occur, the impact of accounting for business combinations, shifts in the amount of earnings in the United States compared with other regions in the world and overall levels of income before tax, changes in our international organization, as well as the expiration of statute of limitations and settlements of audits. Any changes in our effective tax rate may reduce our net income.Our business is exposed to the risks associated with litigation, investigations and regulatory proceedings.We have in the past and may, from time to time, face legal, administrative and regulatory proceedings, claims, demands and investigations involving shareholder, consumer, competition and other issues relating to our business on a global basis. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities and we have been in the past, and may be in the future, the target of securities litigation. The laws and regulations our business is subject to are complex, and change frequently. We may be required to incur significant expense to comply with, or remedy violations of, these regulations. Litigation and regulatory proceedings are inherently uncertain, and adverse rulings could occur, including monetary damages, or an injunction stopping us from manufacturing or selling certain products, engaging in certain business practices, or requiring other remedies, such as compulsory licensing 18Table of Contentsof patents. An unfavorable outcome or settlement may result in a material adverse impact on our business, results of operations, financial position, and overall trends. In addition, regardless of the outcome, litigation can be costly, time-consuming, and disruptive to our operations.Delaware law and provisions in our certificate of incorporation, our bylaws and our agreement with Microsoft Corporation could delay or prevent a change in control.Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested shareholder for a period of three years after the person becomes an interested shareholder, even if a change of control would be beneficial to our existing shareholders. In addition, our certificate of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire a majority of our outstanding voting stock. These provisions include the following:•the ability of our Board of Directors to create and issue preferred stock without prior shareholder approval;•the prohibition of shareholder action by written consent;•advance notice requirements for director nominations and shareholder proposals;•the ability of our Board of Directors to increase or decrease the number of directors without shareholder approval;•a super-majority voting requirement to amend some provisions in our certificate of incorporation and bylaws;•the inability of our shareholders to call special meetings of shareholders; and•the ability of our Board of Directors to make, amend or repeal our bylaws.On March 5, 2000, we entered into an agreement with Microsoft in which we agreed to develop and sell graphics chips and to license certain technology to Microsoft and its licensees for use in the Xbox. Under the agreement, if an individual or corporation makes an offer to purchase shares equal to or greater than 30% of the outstanding shares of our common stock, Microsoft may have first and last rights of refusal to purchase the stock. The Microsoft provision and the other factors listed above could also delay or prevent a change in control of NVIDIA. These provisions could also discourage proxy contests and make it more difficult for shareholders to elect directors of their choosing and to cause us to take other corporate actions they desire.ITEM 1B. UNRESOLVED STAFF COMMENTSNot applicable.ITEM 2. PROPERTIESOur headquarters complex is located in Santa Clara, California. It includes ten leased commercial buildings totaling 963,317 square feet, and real property that we own totaling 1,496,006 square feet. Our owned property consists of seven commercial buildings on 36 acres of land. In addition, we also lease datacenter space in Santa Clara, California.Outside of Santa Clara, California, we lease facilities in Austin, Texas and a number of regional facilities in other U.S. locations, that are used as research and development centers and/or sales and administrative offices. Outside of the United States, we own a building in Hyderabad, India, that is being used primarily as a research and development center. We also lease facilities in various international locations that are used as research and development centers and/or sales and administrative offices. These leased facilities are located primarily in Asia and Europe. In addition, we also lease datacenter space in various locations around the world.We believe that we currently have sufficient facilities to conduct our operations for the next twelve months. For additional information regarding obligations under leases, refer to Note 12 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K under the subheading “Lease Obligations,” which information is hereby incorporated by reference.ITEM 3. LEGAL PROCEEDINGSPlease see Note 12 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for a discussion of our legal proceedings.ITEM 4. MINE SAFETY DISCLOSURESNot Applicable.19Table of ContentsPART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESOur common stock is traded on the NASDAQ Global Select Market under the symbol NVDA. Public trading of our common stock began on January 22, 1999. Prior to that, there was no public market for our common stock. As of February 26, 2018, we had approximately 314 registered shareholders, not including those shares held in street or nominee name. The following table sets forth for the periods indicated the high and low sales price for our common stock as quoted on the NASDAQ Global Select Market: High LowFiscal year ending January 27, 2019 First Quarter (through February 26, 2018)$251.97 $204.00Fiscal year ended January 28, 2018 Fourth Quarter$243.34 $180.58Third Quarter$201.87 $152.91Second Quarter$169.93 $102.31First Quarter$120.92 $95.17Fiscal year ended January 29, 2017 Fourth Quarter$119.93 $66.58Third Quarter$72.95 $55.50Second Quarter$57.25 $34.40First Quarter$37.46 $24.75Dividend Policy In November 2017, we increased our quarterly cash dividend from $0.14 per share, or $0.56 on an annual basis, to $0.15 per share, or $0.60 on an annual basis. In fiscal years 2018 and 2017, we paid $341 million and $261 million, respectively, in cash dividends to our common shareholders. Our cash dividend program and the payment of future cash dividends under the program are subject to continued capital availability and our Board of Directors' continuing determination that the dividend program and the declaration of dividends thereunder are in the best interests of our shareholders and are in compliance with all laws and agreements of NVIDIA applicable to the declaration and payment of cash dividends. In calendar year 2017, based upon our earnings and profits, 100% of our dividend payments were considered to be ordinary dividends. It is possible that a portion of our dividend payments in future calendar years may be considered a return of capital for U.S. federal income tax purposes.Issuer Purchases of Equity SecuritiesBeginning August 2004, our Board of Directors authorized us to repurchase our stock. In November 2016, the Board authorized an additional $2.00 billion under our repurchase program and extended it through December 2020. Since the inception of our share repurchase program, we have repurchased an aggregate of 251 million shares under our share repurchase program for a total cost of $5.5 billion through January 28, 2018. All shares delivered from these repurchases have been placed into treasury stock. As of January 28, 2018, we were authorized, subject to certain specifications, to repurchase additional shares of our common stock up to $1.82 billion through December 2020. For fiscal year 2019, we intend to return $1.25 billion to our shareholders through ongoing quarterly cash dividends and share repurchases.The repurchases can be made in the open market, in privately negotiated transactions, or in structured share repurchase programs, and can be made in one or more larger repurchases, in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. As part of our share repurchase program, we may enter into structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement.20Table of ContentsTransactions Related to our Convertible Notes and Note HedgesDuring fiscal year 2018, we issued an aggregate of 33 million shares of our common stock upon settlement of $812 million in principal amount of Convertible Notes submitted for conversion. In connection with these conversions, we exercised a portion of our Note Hedges to acquire an equal number of shares of our common stock. The counterparty to the Note Hedges may be deemed an “affiliated purchaser” and may have purchased the shares of our common stock deliverable to us upon this exercise of our option. Refer to Note 11 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for further discussion regarding the Convertible Notes and the Note Hedges.Restricted Stock Unit Share WithholdingWe also withhold common stock shares associated with net share settlements to cover tax withholding obligations upon the vesting of restricted stock unit awards under our employee equity incentive program. During fiscal year 2018, we withheld approximately 4 million shares at a total cost of $612 million through net share settlements. Refer to Note 2 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for further discussion regarding our equity incentive plans.Stock Performance Graphs The following graph compares the cumulative total shareholder return for our common stock, the S&P 500 Index, and the NASDAQ 100 Index for the five years ended January 28, 2018. The graph assumes that $100 was invested on January 27, 2013 in our common stock and in each of the S&P 500 Index and the NASDAQ 100 Index. Our common stock is a component of each of the presented indices. Total return assumes reinvestment of dividends in each of the indices indicated. Total return is based on historical results and is not intended to indicate future performance.*$100 invested on 1/27/13 in stock and in indices, including reinvestment of dividends. The S&P 500 index is proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P® and S&P 500®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. © 2016 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. All rights reserved.21Table of Contents 1/27/2013 1/26/2014 1/25/2015 1/31/2016 1/29/2017 1/28/2018NVIDIA Corporation$100.00 $128.11 $173.58 $249.54 $961.32 $2,100.92S&P 500$100.00 $121.52 $138.80 $137.88 $165.51 $209.22NASDAQ 100$100.00 $130.82 $156.01 $162.90 $197.32 $271.03ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with our financial statements and the notes thereto, and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Consolidated Statements of Income data for fiscal years 2018, 2017, and 2016 and the Consolidated Balance Sheets data as of January 28, 2018 and January 29, 2017 have been derived from and should be read in conjunction with our audited consolidated financial statements and the notes thereto included in Part IV, Item 15 in this Annual Report on Form 10-K. We operate on a 52- or 53-week year, ending on the last Sunday in January. Fiscal years 2018, 2017, 2015, and 2014 were 52-week years and fiscal year 2016 was a 53-week year. Year Ended January 28,2018 January 29,2017 January 31,2016 (A) January 25, 2015 January 26, 2014Consolidated Statements of Income Data:(In millions, except per share data)Revenue$9,714 $6,910 $5,010 $4,682 $4,130Income from operations$3,210 $1,934 $747 $759 $496Net income$3,047 $1,666 $614 $631 $440Net income per share: Basic$5.09 $3.08 $1.13 $1.14 $0.75Diluted$4.82 $2.57 $1.08 $1.12 $0.74Weighted average shares used in per share computation: Basic599 541 543 552 588Diluted632 649 569 563 595 Year Ended January 28, 2018 (B,C) January 29, 2017 (B,C) January 31,2016 (B) January 25,2015 January 26,2014Consolidated Balance Sheets Data:(In millions, except per share data)Cash, cash equivalents and marketable securities$7,108 $6,798 $5,037 $4,623 $4,672Total assets$11,241 $9,841 $7,370 $7,201 $7,251Debt obligations$2,000 $2,779 $1,413 $1,384 $1,356Convertible debt conversion obligation$— $31 $87 $— $—Total shareholders’ equity$7,471 $5,762 $4,469 $4,418 $4,456Cash dividends declared and paid per common share (D)$0.570 $0.485 $0.395 $0.340 $0.310 (A)In fiscal year 2016, we began the wind down of our Icera modem operations. As a result, our income from operations for fiscal year 2016 included $131 million of restructuring and other charges.(B)In fiscal year 2014, we issued 1.00% Convertible Senior Notes due 2018 in the aggregate principal amount of $1.50 billion. The Convertible Notes first became convertible as of February 1, 2016. As of January 28, 2018, the carrying value of the Convertible Notes was classified as a current liability and the difference between the principal amount and the carrying value of the Convertible Notes was classified as convertible debt conversion obligation in the mezzanine equity section of our Consolidated Balance Sheet. Refer to Note 11 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.(C)In fiscal year 2017, we issued $1.00 billion of the Notes Due 2021, and $1.00 billion of the Notes Due 2026. Interest on the Notes is payable on March 16 and September 16 of each year, beginning on March 16, 2017. Refer to Note 11 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.(D)In November 2012, we initiated a quarterly dividend payment of $0.075 per share, or $0.30 per share on an annual basis. In November 2013, we increased the quarterly cash dividend to $0.085 per share, or $0.34 per share on an annual basis. In May 2015, we increased the quarterly cash dividend to $0.0975 per share, or $0.39 per share on an annual basis. In November 2015, we increased the quarterly cash dividend to $0.115 per 22Table of Contentsshare, or $0.46 per share on an annual basis. In November 2016, we increased the quarterly cash dividend to $0.14 per share, or $0.56 per share on an annual basis. In November 2017, we increased the quarterly cash dividend to $0.15 per share, or $0.60 per share on an annual basis.ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Item 1A. Risk Factors”, “Item 6. Selected Financial Data”, our Consolidated Financial Statements and related Notes thereto, as well as other cautionary statements and risks described elsewhere in this Annual Report on Form 10-K, before deciding to purchase, hold or sell shares of our common stock. OverviewOur Company and Our BusinessesStarting with a focus on PC graphics, NVIDIA invented the GPU to solve some of the most complex problems in computer science. We have extended our focus in recent years to the revolutionary field of AI. Fueled by the sustained demand for better 3D graphics and the scale of the gaming market, NVIDIA has evolved the GPU into a computer brain at the intersection of VR, HPC, and AI. Our two reportable segments - GPU and Tegra Processor - are based on a single underlying architecture. From our proprietary processors, we have created platforms that address four large markets where our expertise is critical: Gaming, Professional Visualization, Datacenter, and Automotive.While our GPU and CUDA architecture is unified, our GPU product brands are aimed at specialized markets including GeForce for gamers; Quadro for designers; Tesla and DGX for AI data scientists and big data researchers; and GRID for cloud-based visual computing users. Our Tegra brand integrates an entire computer onto a single chip, and incorporates GPUs and multi-core CPUs to drive supercomputing for autonomous robots, drones, and cars, as well as for consoles and mobile gaming and entertainment devices. Headquartered in Santa Clara, California, NVIDIA was incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Recent Developments, Future Objectives and ChallengesFiscal Year 2018 Summary Year Ended January 28, 2018 January 29, 2017 Change ($ in millions, except per share data)Revenue$9,714 $6,910 Up 41%Gross margin59.9% 58.8% Up 110 bpsOperating expenses$2,612 $2,129 Up 23%Income from operations$3,210 $1,934 Up 66%Net income$3,047 $1,666 Up 83%Net income per diluted share$4.82 $2.57 Up 88%Revenue for fiscal year 2018 grew 41% to $9.71 billion, reflecting broad growth in each of our market platforms - gaming, professional visualization, datacenter, and automotive. GPU business revenue was $8.14 billion, up 40% from a year earlier, led by growth in gaming, datacenter, and professional visualization. Strong growth across our Pascal-based GeForce gaming GPUs was driven by growth associated with GPU refreshes/upgrades, new gamers, new games, eSports, and cryptocurrency mining. Revenue for datacenter, including Tesla, NVIDIA GRID and NVIDIA DGX, was $1.93 billion, up 133% year on year, led by strong sales of our Volta architecture, including V100 GPU accelerators, which began shipping in the first half of fiscal year 2018 and are available through major computer makers and cloud providers, new DGX systems, and design wins in HPC. Professional visualization revenue grew 12% year over year to $934 million, led by ultra-high-end and high-end desktop workstations, as well as unique form factors and emerging opportunities, including AI, deep learning, VR and rendering.23Table of ContentsTegra processor business revenue was $1.53 billion, up 86% from a year ago. Tegra processor business revenue includes SOC modules for the Nintendo Switch gaming console and development services. Also included was automotive revenue of $558 million, which was up 15% from a year earlier, incorporating infotainment modules, production DRIVE PX platforms, and development agreements for self-driving cars.Revenue from our patent license agreement with Intel concluded in the first quarter of fiscal year 2018.Gross margin for fiscal year 2018 was 59.9%, compared with 58.8% a year earlier, reflecting a favorable shift in mix, the growth of our GeForce gaming GPUs, and the growth of our GPU computing platform for cloud, deep learning, AI, and graphics virtualization, partially offset by the conclusion of our patent license agreement with Intel.Operating expenses for fiscal year 2018 were $2.61 billion, up from $2.13 billion in the previous year. This reflects growth in employees and related costs, as well as investments in growth initiatives, including gaming, AI, and autonomous driving. We recorded a U.S. tax reform provisional net tax benefit of $133 million associated with the one-time transition tax on our historical foreign earnings and the adjustment of deferred tax balances to the lower corporate tax rate. Net income and net income per diluted share for fiscal year 2018 were $3.05 billion and $4.82, respectively, up 83% and 88%, respectively, from a year earlier, fueled by strong revenue growth and improved gross and operating margins.We returned $1.25 billion to shareholders in fiscal year 2018 through a combination of $909 million in share repurchases and $341 million in quarterly cash dividends. In November 2017, we declared an increase in our quarterly cash dividend to $0.15 per share from $0.14 per share. For fiscal year 2019, we intend to return $1.25 billion to shareholders through ongoing quarterly cash dividends and share repurchases. Cash, cash equivalents and marketable securities were $7.11 billion as of January 28, 2018, compared with $6.80 billion as of January 29, 2017. The increase was primarily related to the increase in operating income. GPU BusinessDuring fiscal year 2018, we released many new gaming GPU products based on our new NVIDIA Pascal architecture, including GeForce GTX 1070 Ti, 1080 Ti, and TITAN Xp. We also announced gaming laptops using the Max-Q design, which are 3x faster and 3x thinner than previous-generation gaming laptops, and enhanced GeForce Experience with new tools, including NVIDIA Freestyle for customizing gameplay and an updated interface for the NVIDIA Ansel™ photo mode, as well as new titles including PlayerUnknown's Battleground and Fortnite that support NVIDIA ShadowPlay™ Highlights for capturing gaming achievements.For our professional visualization platform, we opened early access to NVIDIA Holodeck, and launched the Quadro Virtual Data Center Workstation; introduced Project Holodeck, a photorealistic, collaborative VR environment; launched external GPU support for creative professionals; and released the NVIDIA Optix 5.0 and NVIDIA VRWorks 360 Video software development kits.For our datacenter platform, we announced that NVIDIA Tesla V100 GPU accelerators are available through virtually every major computer maker and have been chosen by nearly every major cloud provider to deliver AI and HPC. We added 34 GPU-accelerated systems to the Top 500 supercomputer list, bringing the total number of systems relying on NVIDIA GPUs to 87, announced partnerships to further AI in key vertical industries, and launched the NVIDIA GPU Cloud container registry to support scientists using HPC applications and AI researchers using desktop GPUs.Tegra Processor BusinessDuring fiscal year 2018, for the automotive market, we announced the NVIDIA DRIVE AI self-driving platform, which enables automakers and Tier-1 suppliers to accelerate production of automated and autonomous vehicles, the NVIDIA DRIVE Xavier autonomous machine processor to power the NVIDIA DRIVE software stack, and NVIDIA DRIVE PX Pegasus, an auto-grade AI computer designed to enable driverless robotaxis without steering wheels, pedals or mirrors. We also announced several new partnerships aimed at getting AI-powered cars, trucks and commercial vehicles on the road, including partnerships with Aurora, Autoliv, Baidu, Bosch, Continental, Mercedes-Benz, Uber, Volkswagen, Volvo, Toyota, and ZF.In addition, we introduced NVIDIA Jetson TX2, a high-performance, low-power computer platform for delivering AI at the edge, with deep learning and computer vision capabilities for robots, drones and smart cameras, the NVIDIA Isaac robot simulator for training intelligent machines in simulated real-world conditions before deployment, and the NVIDIA Metropolis platform, used by more than 50 partners to make cities safer and smarter by applying deep learning to surveillance video streams.24Table of ContentsCritical Accounting Policies and EstimatesManagement’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, cost of revenue, expenses and related disclosure of contingencies. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, inventories, income taxes, goodwill, cash equivalents and marketable securities, stock-based compensation, and litigation, investigation and settlement costs and other contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.We believe the following critical accounting policies affect our significant judgments and estimates used in the preparation of our consolidated financial statements. Our management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors. The Audit Committee has reviewed our disclosures relating to our critical accounting policies and estimates in this Annual Report on Form 10-K.Revenue RecognitionProduct RevenueWe recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable and collection of the related receivable is reasonably assured. Our customer programs primarily involve rebates, which are designed to serve as sales incentives to resellers of our products in various target markets. We account for rebates as a reduction of revenue and accrue for 100% of the potential rebates and do not apply a breakage factor, as we typically find that over 95% of the rebates we accrue each year are eventually claimed, which is substantially close to 100%, and that this percentage varies by program and by customer. We recognize a liability for these rebates at the later of the date at which we record the related revenue or the date at which we offer the rebate. Rebates typically expire six months from the date of the original sale, unless we reasonably believe that the customer intends to claim the rebate. Unclaimed rebates are reversed to revenue, the amount of which typically represents less than 0.5% of total revenue.Our customer programs also include marketing development funds, or MDFs. MDFs represent monies paid to our partners that are earmarked for market segment development and expansion and are typically designed to support our partners’ activities while also promoting NVIDIA products. We account for MDFs as a reduction of revenue and apply a breakage factor to certain types of MDF program accruals for which we believe we can make a reasonable and reliable estimate of the amount that will ultimately be unclaimed. We also record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time revenue is recognized, based primarily on historical return rates. However, if product returns for a particular fiscal period exceed historical return rates we may determine that additional sales return allowances are required to properly reflect our estimated exposure for product returns. License and Development RevenueFor license arrangements that require significant customization of our intellectual property components, we generally recognize the related revenue over the period that services are performed. For most license and service arrangements, we determine progress to completion based on actual cost incurred to date as a percentage of the estimated total cost required to complete the project. We periodically evaluate the actual status of each project to ensure that the estimates to complete each contract remain accurate. Revenue recognized in any period is dependent on our progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total cost. Any changes in or deviations from these estimates could have a material effect on the amount of revenue we recognize in any period.For license arrangements that do not require significant customization but where we are obligated to provide further deliverables over the term of the license agreement, we record revenue over the life of the license term, with consideration received in advance of the performance period classified as deferred revenue. Refer to Note 1 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.25Table of ContentsInventoriesInventory cost is computed on an adjusted standard basis, which approximates actual cost on an average or first-in, first-out basis. We charge cost of sales for inventory provisions to write down our inventory to the lower of cost or net realizable value or to completely write off obsolete or excess inventory. Most of our inventory provisions relate to the write-off of excess quantities of products, based on our inventory levels and future product purchase commitments compared to assumptions about future demand and market conditions.Situations that may result in excess or obsolete inventory include changes in business and economic conditions, changes in market conditions, sudden and significant decreases in demand for our products, inventory obsolescence because of changing technology and customer requirements, failure to estimate customer demand properly, or unexpected competitive pricing actions by our competition. In addition, cancellation or deferral of customer purchase orders could result in our holding excess inventory.The overall net effect on our gross margin from inventory provisions and sales of items previously written down was insignificant in fiscal years 2018 and 2017 and an unfavorable impact of 1.6% in fiscal year 2016. The charges we took to cost of sales for inventory provisions during these fiscal years were primarily related to the write-off of excess quantities of products whose inventory levels were higher than our updated forecasts of future demand for those products. As a fabless semiconductor company, we must make commitments to purchase inventory based on forecasts of future customer demand. In doing so, we must account for our third-party manufacturers' lead times and constraints. We also adjust to other market factors, such as product offerings and pricing actions by our competitors, new product transitions, and macroeconomic conditions - all of which may impact demand for our products.Refer to the Gross Profit and Gross Margin discussion below in this Management's Discussion and Analysis for further discussion.Income TaxesWe recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carryforwards; and we record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.Our calculation of deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting standards or tax laws in the United States, or foreign jurisdictions where we operate, or changes in other facts or circumstances. In addition, we recognize liabilities for potential United States and foreign income tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements accordingly.As of January 28, 2018, we had a valuation allowance of $469 million related to state and certain foreign deferred tax assets that management determined are not likely to be realized due to projections of future taxable income and potential utilization limitations of tax attributes acquired as a result of stock ownership changes. To the extent realization of the deferred tax assets becomes more-likely-than-not, we would recognize such deferred tax asset as an income tax benefit during the period.We recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. The TCJA, which was enacted in December 2017, significantly changes U.S. tax law, including a reduction of the U.S. federal corporate income tax rate from 35% to 21%, a requirement for companies to pay a one-time transition tax on the earnings of certain foreign subsidiaries that were previously tax deferred and the creation of new taxes on certain foreign-source earnings. As a fiscal year-end taxpayer, certain provisions of the TCJA began to impact us in the fourth quarter of fiscal year 2018, while other provisions will impact us beginning in fiscal year 2019. Refer to Note 13 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information specific to accounting for income taxes and the impacts from the enactment of the TCJA.26Table of ContentsGoodwillGoodwill is subject to our annual impairment test during the fourth quarter of our fiscal year, or earlier, if indicators of potential impairment exist, using either a qualitative or a quantitative assessment. Our impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value. We have identified two reporting units, GPU and Tegra Processor, for the purposes of completing our goodwill analysis. Goodwill assigned to the GPU and Tegra Processor reporting units as of January 28, 2018 was $210 million and $408 million, respectively. Determining the fair value of a reporting unit requires us to make judgments and involves the use of significant estimates and assumptions. We also make judgments and assumptions in allocating assets and liabilities to each of our reporting units. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain.We use the quantitative assessment to test goodwill for impairment for each reporting unit. In applying the fair value based test of each reporting unit, the results from the income approach and the market approach were equally weighted. These valuation approaches consider a number of factors that include, but are not limited to, prospective financial information, growth rates, terminal or residual values, discount rates and comparable multiples from publicly traded companies in our industry and require us to make certain assumptions and estimates regarding industry economic factors and the future profitability of our business.During the fourth quarter of fiscal year 2018, we concluded that there was no impairment of our goodwill. The fair values of our GPU and Tegra Processor reporting units significantly exceeded their respective carrying values. As such, even the application of a hypothetical 10% decrease to the fair value of each reporting unit would not have resulted in the fair value of either reporting unit being less than its carrying value.Refer to Note 4 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.Cash Equivalents and Marketable SecuritiesCash equivalents consist of financial instruments which are readily convertible into cash and have original maturities of three months or less at the time of acquisition. Marketable securities consist primarily of highly liquid investments with maturities greater than three months when purchased. We measure our cash equivalents and marketable securities at fair value. The fair values of our financial assets are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. All of our available-for-sale investments are subject to a periodic impairment review. We record a charge to earnings when a decline in fair value is significantly below cost basis and judged to be other-than-temporary, or have other indicators of impairments. We performed an impairment review of our investment portfolio as of January 28, 2018. We concluded that our investments were appropriately valued and that no other-than-temporary impairment charges were necessary on our portfolio of available-for-sale investments as of January 28, 2018.Refer to Notes 6 and 7 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.Stock-based CompensationOur stock-based compensation expense is associated with restricted stock units, or RSUs, performance stock units that are based on our corporate financial performance targets, or PSUs, performance stock units that are based on market conditions, or market-based PSUs, and our employee stock purchase plan, or ESPP. The number of PSUs and market-based PSUs that will ultimately be awarded is contingent on the Company’s level of achievement compared with the corporate financial performance target established by our Compensation Committee in the beginning of each fiscal year.Refer to Notes 1 and 2 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.Litigation, Investigation and Settlement CostsFrom time to time, we are involved in legal actions and/or investigations by regulatory bodies. We are aggressively defending our current litigation matters. However, there are many uncertainties associated with any litigation or investigations, and we cannot be certain that these actions or other third-party claims against us will be resolved without costly litigation, fines and/or substantial settlement payments. If that occurs, our business, financial condition and results of operations could be materially and adversely affected. If information becomes available that causes us to determine that a loss in any of our pending litigation, investigations or settlements is probable, and we can reasonably estimate the loss associated with such 27Table of Contentsevents, we will record the loss in accordance with U.S. GAAP. However, the actual liability in any such litigation or investigation may be materially different from our estimates, which could require us to record additional costs.Results of OperationsThe following table sets forth, for the periods indicated, certain items in our Consolidated Statements of Income expressed as a percentage of revenue. Year Ended January 28, 2018 January 29, 2017 January 31, 2016Revenue100.0 % 100.0 % 100.0 %Cost of revenue40.1 41.2 43.9Gross profit59.9 58.8 56.1Operating expenses: Research and development18.5 21.2 26.6Sales, general and administrative8.4 9.6 12.0Restructuring and other charges— — 2.6Total operating expenses26.9 30.8 41.2Income from operations33.0 28.0 14.9Interest income0.7 0.8 0.8Interest expense(0.6) (0.8) (0.9)Other, net(0.2) (0.4) 0.1Total other income (expense)(0.1) (0.4) —Income before income tax expense32.9 27.6 14.9Income tax expense1.5 3.5 2.6Net income31.4 % 24.1 % 12.3 %RevenueRevenue by Reportable Segments Year Ended Year Ended January 28, 2018 January 29, 2017 $Change %Change January 29, 2017 January 31, 2016 $Change %Change ($ in millions) ($ in millions)GPU$8,137 $5,822 $2,315 40 % $5,822 $4,187 $1,635 39%Tegra Processor1,534 824 710 86 % 824 559 265 47%All Other43 264 (221) (84)% 264 264 — —%Total$9,714 $6,910 $2,804 41 % $6,910 $5,010 $1,900 38%GPU Business. GPU business revenue increased by 40% in fiscal year 2018 compared to fiscal year 2017 led by growth in gaming, datacenter and professional visualization. Revenue from sales of GeForce GPU products for gaming increased over 20%, reflecting continued strong demand for our Pascal-based GPU products. Datacenter revenue, including Tesla, GRID and DGX, increased 133%, reflecting strong demand from hyperscale and cloud customers for deep learning training and accelerated GPU computing as well as demand for HPC, DGX AI supercomputing and GRID virtualization platforms. Revenue from Quadro GPUs for professional visualization increased by 12% due primarily to higher sales in both high end desktop and mobile workstation products. Revenue from GeForce GPU products for mainstream PC OEMs increased by over 90% due primarily to strong demand for GPU products targeted for cryptocurrency mining.GPU business revenue increased by 39% in fiscal year 2017 compared to fiscal year 2016. This increase was primarily due to increased revenue from our GeForce GPU gaming and datacenter platforms. Sales of high-end GeForce GPU products for gaming increased over 40%, reflecting a combination of continued strength in PC gaming and strong demand for our recent Pascal-based GPU products. Datacenter revenue, including our Tesla, NVIDIA GRID, and DGX-1 brands, increased by 145%, reflecting strong demand for deep learning training for AI, cloud, accelerated, and virtualized 28Table of Contentscomputing and initial DGX-1 sales. Revenue from Quadro GPUs for professional visualization increased 11% due primarily to higher sales in high end desktop and mobile workstation products. Revenue from GeForce GPU products for mainstream PC OEMs declined compared to fiscal year 2016.Tegra Processor Business. Tegra Processor business revenue increased by 86% in fiscal year 2018 compared to fiscal year 2017. This was driven by an increase of over 300% in revenue from SOC modules for gaming platforms and development services, and an increase of 15% in automotive revenue, primarily from infotainment modules, DRIVE PX platforms and development agreements for self-driving cars.Tegra Processor business revenue increased by 47% in fiscal year 2017 compared to fiscal year 2016. This was driven by an increase of over 50% in sales of Tegra products and services serving automotive systems and an increase of almost 50% in gaming development platforms and services compared to fiscal year 2016.All Other. Our patent license agreement with Intel concluded in the first quarter of fiscal year 2018. For fiscal year 2018, we recognized related revenue of $43 million, down from $264 million for fiscal years 2017 and 2016. Concentration of RevenueRevenue from sales to customers outside of the United States and Other Americas accounted for 79%, 80%, and 79% of total revenue for fiscal years 2018, 2017, and 2016, respectively. Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if the revenue is attributable to end customers in a different location.No single customer represented more than 10% of total revenue for fiscal year 2018. In fiscal years 2017 and 2016, we had one customer that represented 12% and 11% of our total revenue, respectively. Gross Profit and Gross MarginGross profit consists of total revenue, net of allowances, less cost of revenue. Cost of revenue consists primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, board and device costs, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory and warranty provisions, memory and component costs, and shipping costs. Cost of revenue also includes development costs for license and service arrangements and stock-based compensation related to personnel associated with manufacturing. Our overall gross margin was 59.9%, 58.8%, and 56.1% for fiscal years 2018, 2017, and 2016, respectively. These increases were driven primarily by a favorable shift in mix, the growth of our GeForce gaming GPU revenue, and the growth of our datacenter revenue for cloud, deep learning, AI, and graphics virtualization. The increase in fiscal year 2018 was partially offset by the conclusion of our patent license agreement with Intel in the first quarter of fiscal year 2018.Charges to cost of sales for inventory provisions totaled $48 million, $62 million, and $112 million for fiscal years 2018, 2017, and 2016, respectively. Sales of inventory that was previously written-off or written-down totaled $35 million, $51 million, and $32 million for fiscal years 2018, 2017, and 2016, respectively. As a result, the overall net effect on our gross margin from inventory provisions and sales of items previously written down was insignificant for fiscal years 2018 and 2017, and an unfavorable impact of 1.6% for fiscal year 2016.A discussion of our gross margin results for each of our reportable segments is as follows: GPU Business. The gross margin of our GPU business increased during fiscal year 2018 when compared to fiscal year 2017, primarily due to strong sales of our GeForce gaming GPU products and revenue growth in datacenter, including Tesla, GRID and DGX, for cloud, deep learning, AI, and graphics virtualization. The gross margin of our GPU business increased during fiscal year 2017 when compared to fiscal year 2016 primarily due to product mix resulting from increased sales of our gaming, datacenter, and professional visualization GPU products, as well as a continued decrease in sales volumes of lower margin PC OEM products. Tegra Processor Business. The gross margin of our Tegra Processor business increased during fiscal year 2018 when compared to fiscal year 2017, primarily due to revenue growth in gaming development platforms and automotive. The gross margin of our Tegra Processor business increased during fiscal year 2017 when compared to fiscal year 2016, primarily due to fewer inventory provisions, and the absence of the warranty charge associated with the SHIELD tablet product recall during fiscal year 2016.29Table of ContentsOperating Expenses Year Ended Year Ended January 28, 2018 January 29, 2017 $Change %Change January 29,2017 January 31, 2016 $Change %Change ($ in millions) ($ in millions)Research and development expenses$1,797 $1,463 $334 23 % $1,463 $1,331 $132 10 %% of net revenue18.5% 21.2% 21.2% 26.6% Sales, general and administrative expenses815 663 152 23 % 663 602 61 10 %% of net revenue8.4% 9.6% 9.6% 12.0% Restructuring and other charges— 3 (3) (100)% 3 131 (128) (98)%% of net revenue—% —% —% 2.6% Total operating expenses$2,612 $2,129 $483 23 % $2,129 $2,064 $65 3 %Research and DevelopmentResearch and development expenses increased by 23% in fiscal year 2018 compared to fiscal year 2017 and increased 10% in fiscal year 2017 compared to fiscal year 2016, driven primarily by employee additions and increases in employee compensation and other related costs, including stock-based compensation expense.Sales, General and AdministrativeSales, general and administrative expenses increased by 23% in fiscal year 2018 compared to fiscal year 2017 and increased by 10% in fiscal year 2017 compared to fiscal year 2016, driven primarily by employee additions and increases in employee compensation and other related costs, including stock-based compensation expense. Offsetting these increases was a decrease in outside professional fees of $11 million in fiscal year 2018 and $57 million in fiscal year 2017 resulting from the resolution of our intellectual property disputes with Samsung and Qualcomm.Restructuring and Other ChargesIn fiscal year 2016, we began to wind down our Icera modem operations. As a result, our operating expenses for fiscal year 2016 included $131 million of restructuring and other charges. Total Other Income (Expense) Interest Income and Interest ExpenseInterest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income was $69 million, $54 million, and $39 million in fiscal years 2018, 2017, and 2016, respectively. The increase in interest income was primarily due to higher average invested balances and higher yields on our investments from a rising interest rate environment.Interest expense is primarily comprised of coupon interest and debt discount amortization related to the 2.20% Notes Due 2021 and 3.20% Notes Due 2026 issued in September 2016, and the Convertible Notes issued in December 2013. Interest expense was $61 million, $58 million, and $47 million in fiscal years 2018, 2017, and 2016.Other, NetOther, net, consists primarily of realized gains and losses from the sale of marketable securities, sales or impairments of investments in non-affiliated companies, losses on early conversions of the Convertible Notes, and the impact of changes in foreign currency rates. Net other expense was $22 million and $25 million in fiscal years 2018 and 2017, respectively, and was insignificant in fiscal year 2016. The net other expense in fiscal years 2018 and 2017 was primarily due to losses on early conversions of the Convertible Notes. 30Table of ContentsIncome TaxesThe TCJA, which was enacted in December 2017, significantly changes U.S. tax law, including a reduction of the U.S. federal corporate income tax rate from 35% to 21%, a requirement for companies to pay a one-time transition tax on the earnings of certain foreign subsidiaries that were previously tax deferred and the creation of new taxes on certain foreign-source earnings. As a fiscal year-end taxpayer, certain provisions of the TCJA began to impact us in the fourth quarter of fiscal year 2018, while other provisions will impact us beginning in fiscal year 2019.The corporate tax reduction is effective as of January 1, 2018. Since we operate on a fiscal year rather than a calendar year, we are subject to transitional tax rules. As a result, our fiscal year 2018 federal statutory rate is a blended rate of 33.9%. The change in the statutory tax rate from 35% to 33.9% for fiscal year 2018 did not have a significant impact on the effective tax rate.We recognized income tax expense of $149 million, $239 million and $129 million for fiscal years 2018, 2017, and 2016, respectively. Our annual effective tax rate was 4.7%, 12.5%, and 17.3% for fiscal years 2018, 2017, and 2016, respectively. The decrease in our effective tax rate in fiscal year 2018 as compared to fiscal years 2017 and 2016 was primarily due to the provisional impact of the recent tax law changes and the recognition of excess tax benefits related to stock-based compensation. The decrease in our effective tax rate in fiscal year 2017 as compared to fiscal year 2016 was primarily due to the recognition of excess tax benefits from our adoption of a new accounting standard in fiscal year 2017 related to the simplification of certain aspects of stock-based compensation accounting.Our effective tax rate for fiscal year 2018 was lower than the blended U.S. federal statutory rate of 33.9% due primarily to income earned in jurisdictions, including British Virgin Islands, Hong Kong, China, Taiwan and United Kingdom, where the tax rate was lower than the U.S. federal statutory tax rates, favorable recognition of the U.S. federal research tax credit, the provisional impact of the recent tax law changes in 2018, and excess tax benefits related to stock-based compensation. Our effective tax rate for fiscal years 2017 and 2016 was lower than U.S. federal statutory tax rate of 35% due primarily to income earned in jurisdictions, including British Virgin Islands, Hong Kong, China, Taiwan and United Kingdom, where the tax rate was lower than the U.S. federal statutory tax rates, favorable recognition in those fiscal years of the U.S. federal research tax credit, favorable discrete events primarily attributable to the tax benefit recognized upon the expiration of the applicable statutes of limitations, and adoption of an accounting standard related to stock-based compensation in fiscal year 2017.For fiscal year 2018, we recognized provisional amounts for the tax effects of the TCJA, which were included as components of income tax expense and reflected in our effective tax rate for fiscal year 2018. We will continue to assess the impact of the recently enacted tax law on our business and our consolidated financial statements. The final impact of the TCJA recorded by us may vary materially from the provisional impact recorded due to a number of uncertainties and factors, including the need for further guidance and clarification of the new law by U.S. federal and state tax authorities and the need for further guidance on the income tax accounting.In addition to the impact on fiscal year 2018, the TCJA also establishes new tax laws that will be effective for our fiscal year 2019. While each of these new tax laws is expected to have some impact on our tax expense for fiscal year 2019 and future periods, we expect the provision designed to tax the low-taxed income of foreign subsidiaries to have the most significant impact.Because of the complexity of the new tax laws on the low-taxed income of certain foreign subsidiaries, we are continuing to evaluate this provision of the TCJA and the application of related accounting standards. Based on recent deliberations of the Financial Accounting Standards Board, or FASB, we expect to be allowed to make an accounting policy choice of either (1) treating taxes due on future taxable income in the U.S. as a current-period expense when incurred or (2) factoring such amounts into our measurement of deferred taxes. Our selection of an accounting policy will depend, in part, on our analysis of relevant facts to determine what the expected impact would be under each method.Refer to Note 13 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.31Table of ContentsLiquidity and Capital Resources January 28, 2018 January 29, 2017 (In millions)Cash and cash equivalents$4,002 $1,766Marketable securities3,106 5,032Cash, cash equivalents, and marketable securities$7,108 $6,798 Year Ended January 28, 2018 January 29, 2017 January 31, 2016 (In millions)Net cash provided by operating activities$3,502 $1,672 $1,175Net cash provided by (used in) investing activities$1,278 $(793) $(400)Net cash provided by (used in) financing activities$(2,544) $291 $(676)As of January 28, 2018, we had $7.11 billion in cash, cash equivalents and marketable securities, an increase of $310 million from the end of fiscal year 2017. Our portfolio of cash equivalents and marketable securities is managed on our behalf by several financial institutions. Our portfolio managers are required to follow our investment policy, which requires the purchase of high grade investment securities, the diversification of asset types, and certain limits on our portfolio duration.Cash provided by operating activities increased in fiscal year 2018 compared to fiscal year 2017 and in fiscal year 2017 compared to fiscal year 2016, primarily due to higher net income and changes in working capital. Cash provided by investing activities increased in fiscal year 2018 compared to fiscal year 2017, primarily due to a reduction in purchases of marketable securities, partially offset by the purchase of our previously-financed Santa Clara campus building. Cash used in investing activities for fiscal year 2017 increased from fiscal year 2016, primarily due to higher purchases of property and equipment and intangible assets and lower proceeds from sales and maturities of marketable securities.Cash used in financing activities increased in fiscal year 2018 compared to fiscal year 2017, primarily due to cash provided from the issuance of $2.00 billion of Notes in fiscal year 2017 as well as higher repayments of Convertible Notes, tax payments related to employee stock plans, share repurchases and dividend payments in fiscal year 2018. Cash provided by financing activities in fiscal year 2017 increased from fiscal year 2016, primarily due to the $2.00 billion of Notes issued in September 2016, partially offset by the repayments of Convertible Notes and $1.00 billion of capital return to shareholders in the form of share repurchases and dividend payments. LiquidityOur primary sources of liquidity are our cash and cash equivalents, our marketable securities, and the cash generated by our operations. As of January 28, 2018 and January 29, 2017, we had $7.11 billion and $6.80 billion, respectively, in cash, cash equivalents and marketable securities. Our marketable securities consist of debt securities issued by the United States government and its agencies, highly rated corporations and financial institutions, asset-backed issuers, mortgage-backed securities by government-sponsored enterprises, and foreign government entities. These marketable securities are denominated in United States dollars. Refer to Critical Accounting Policies and Estimates in Part II, Item 7, Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A and Note 6 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.The recent TCJA that was signed into law in December 2017 subjects U.S. companies to a one-time transition tax on certain earnings of foreign subsidiaries. Our reasonable estimate of the one-time transition tax that resulted from enactment of the TCJA is $401 million, which will be payable in eight annual installments. Accordingly, substantially all of our cash, cash equivalents and marketable securities held outside of the United States as of January 28, 2018 will now be available for use in the U.S. without incurring additional U.S. federal income taxes. Refer to Note 13 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.32Table of ContentsCapital Return to ShareholdersDuring fiscal year 2018, we repurchased a total of 6 million shares for $909 million and paid $341 million in cash dividends to our shareholders. As a result, we returned $1.25 billion to shareholders during fiscal year 2018.For fiscal year 2019, we intend to return $1.25 billion to shareholders through ongoing quarterly cash dividends and share repurchases. Our cash dividend program and the payment of future cash dividends under that program are subject to our Board's continuing determination that the dividend program and the declaration of dividends thereunder are in the best interests of our shareholders. Refer to Note 14 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for further discussion.Notes Due 2021 and Notes Due 2026 In fiscal year 2017, we issued $1.00 billion of the Notes Due 2021 and $1.00 billion of the Notes Due 2026. The net proceeds from the Notes were $1.98 billion, after deducting debt discounts and issuance costs.Convertible NotesAs of January 28, 2018, we had $15 million of Convertible Notes outstanding. Refer to Note 11 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for further discussion.Revolving Credit Facility In fiscal year 2017, we entered into a Credit Agreement under which we may borrow, repay and re-borrow amounts from time to time, up to $575 million. The commitments under the Credit Agreement are available for a 5-year period ending on October 7, 2021. The Credit Agreement also permits us to obtain additional revolving loan commitments and/or commitments to issue letters of credit of up to $425 million, subject to certain conditions. As of January 28, 2018, we had not borrowed any amounts and were in compliance with all related covenants under the Credit Agreement.Commercial Paper In December 2017, we established a commercial paper program to support general corporate purposes. Under the program, we can issue up to $575 million in commercial paper. As of January 28, 2018, there was no commercial paper outstanding.Operating Capital and Capital Expenditure RequirementsWe believe that our existing cash balances and anticipated cash flows from operations will be sufficient to meet our operating and capital expenditure requirements for at least the next twelve months.Off-Balance Sheet Arrangements In January 2018, we terminated the off-balance sheet, build-to-suit operating lease financing arrangement related to our new Santa Clara campus building and exercised our option to purchase the property for $335 million, which was recorded in Property and equipment, net, in our Consolidated Balance Sheet. Refer to Note 12 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for further discussion.Contractual ObligationsThe following table summarizes our contractual obligations as of January 28, 2018:33Table of Contents Payment Due By PeriodContractual ObligationsTotal Less than1 Year 1-3 Years 4-5 Years More than5 Years All Other (In millions)Long-term debt (1) $2,376 $54 $162 $1,064 $1,096 $—Inventory purchase obligations1,331 1,331 — — — —Transition tax payable (2)401 32 64 64 241 —Uncertain tax positions, interest and penalties (3)190 — — — — 190Operating leases246 63 103 69 11 —Capital purchase obligations135 135 — — — —1.00% Convertible Notes (4)15 15 — — — —Total contractual obligations $4,694 $1,630 $329 $1,197 $1,348 $190(1)Represents the aggregate principal amount of $2.00 billion and anticipated interest payments of $376 million for the Notes. Refer to Note 11 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K.(2)Represents our reasonable estimate of a provisional tax payable amount of $401 million for the one-time transition tax that resulted from enactment of the TCJA in fiscal year 2018, which will be payable in eight annual installments. The first installment of $32 million is classified as a current income tax payable. The installment amounts will be equal to 8% of the total liability, payable in fiscal years 2019 through 2023, 15% in fiscal year 2024, 20% in fiscal year 2025 and 25% in fiscal year 2026. Refer to Note 13 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K, for additional information about the one-time transition tax.(3)Represents unrecognized tax benefits of $190 million which consists of $175 million and the related interest and penalties of $15 million recorded in non-current income tax payable as of January 28, 2018. We are unable to reasonably estimate the timing of any potential tax liability or interest/penalty payments in individual years due to uncertainties in the underlying income tax positions and the timing of the effective settlement of such tax positions.(4)Represents the aggregate principal amount of $15 million for the Convertible Notes. Refer to Note 11 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K.Adoption of New and Recently Issued Accounting PronouncementsRefer to Note 1 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for a discussion of adoption of new and recently issued accounting pronouncements.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKInterest Rate RiskWe are exposed to interest rate risk related to our floating and fixed-rate investment portfolio and outstanding debt. The investment portfolio is managed consistent with our overall liquidity strategy in support of both working capital needs and strategic growth of our businesses.As of January 28, 2018, we performed a sensitivity analysis on our floating and fixed rate financial investments. According to our analysis, parallel shifts in the yield curve of both plus or minus 0.5% would result in changes in fair values for these investments of $14 million. In fiscal year 2017, we issued $1.00 billion of the Notes Due 2021 and $1.00 billion of the Notes Due 2026. In fiscal year 2014, we issued $1.50 billion of Convertible Notes which had $15 million in principal amount outstanding as of January 28, 2018. We carry the Notes at face value less unamortized discount on our Consolidated Balance Sheets. As the Notes bear interest at a fixed rate, we have no financial statement risk associated with changes in interest rates. However, the fair value of the Convertible Notes changes primarily when the market price of our stock fluctuates. Refer to Note 11 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information. Foreign Exchange Rate RiskWe consider our direct exposure to foreign exchange rate fluctuations to be minimal. Gains or losses from foreign currency remeasurement are included in other income or expense and to date have not been significant. The impact of foreign currency transaction gain or loss included in determining net income was not significant for fiscal years 2018, 2017, and 2016. Sales and arrangements with third-party manufacturers provide for pricing and payment in United States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the United States’ dollar relative to other 34Table of Contentscurrencies would make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States’ dollar relative to other currencies could result in our suppliers raising their prices in order to continue doing business with us. Additionally, we have international operations and incur expenditures in currencies other than U.S. dollars. Our operating expenses benefit from a stronger dollar and are adversely affected by a weaker dollar. We use foreign currency forward contracts to mitigate the impact of foreign currency exchange rate movements on our operating expenses. We designate these contracts as cash flow hedges and assess the effectiveness of the hedge relationships on a spot to spot basis. Gains or losses on the contracts are recorded in accumulated other comprehensive income or loss, and then reclassified to operating expense when the related operating expenses are recognized in earnings or ineffectiveness should occur.We also use foreign currency forward contracts to mitigate the impact of foreign currency movements on monetary assets and liabilities that are denominated in currencies other than U.S. dollar. These forward contracts were not designated for hedge accounting treatment. Therefore, the change in fair value of these contracts is recorded in other income or expense and offsets the change in fair value of the hedged foreign currency denominated monetary assets and liabilities, which is also recorded in other income or expense.Refer to Note 9 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe information required by this Item is set forth in our Consolidated Financial Statements and Notes thereto included in this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone. ITEM 9A. CONTROLS AND PROCEDURESControls and ProceduresDisclosure Controls and ProceduresBased on their evaluation as of January 28, 2018, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) were effective to provide reasonable assurance.Management’s Annual Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of January 28, 2018 based on the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the criteria set forth in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of January 28, 2018.The effectiveness of our internal control over financial reporting as of January 28, 2018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which is included herein.Changes in Internal Control Over Financial ReportingThere were no changes in our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.35Table of ContentsInherent Limitations on Effectiveness of ControlsOur management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within NVIDIA have been detected.ITEM 9B. OTHER INFORMATIONNone.PART III Certain information required by Part III is omitted from this report because we will file with the SEC a definitive proxy statement pursuant to Regulation 14A, or the 2018 Proxy Statement, no later than 120 days after the end of fiscal year 2018, and certain information included therein is incorporated herein by reference.ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEIdentification of DirectorsInformation regarding directors required by this item will be contained in our 2018 Proxy Statement under the caption “Proposal 1 - Election of Directors,” and is hereby incorporated by reference.Identification of Executive OfficersReference is made to the information regarding executive officers appearing under the heading “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K, which information is hereby incorporated by reference.Identification of Audit Committee and Financial ExpertsInformation regarding our Audit Committee required by this item will be contained in our 2018 Proxy Statement under the captions “Report of the Audit Committee of the Board of Directors” and “Information About the Board of Directors and Corporate Governance,” and is hereby incorporated by reference.Material Changes to Procedures for Recommending DirectorsInformation regarding procedures for recommending directors required by this item will be contained in our 2018 Proxy Statement under the caption “Information About the Board of Directors and Corporate Governance,” and is hereby incorporated by reference.Compliance with Section 16(a) of the Exchange ActInformation regarding compliance with Section 16(a) of the Exchange Act required by this item will be contained in our 2018 Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance,” and is hereby incorporated by reference.Code of ConductInformation regarding our Code of Conduct required by this item will be contained in our 2018 Proxy Statement under the caption “Information About the Board of Directors and Corporate Governance - Code of Conduct,” and is hereby incorporated by reference. The full text of our Code of Conduct and Financial Team Code of Conduct are published on the Investor Relations portion of our website, under Corporate Governance, at www.nvidia.com. The contents of our website are not a part of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATIONInformation regarding our executive compensation required by this item will be contained in our 2018 Proxy Statement under the captions “Executive Compensation”, “Compensation Committee Interlocks and Insider Participation”, “Director Compensation” and “Compensation Committee Report,” and is hereby incorporated by reference.36Table of ContentsITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSOwnership of NVIDIA SecuritiesInformation regarding ownership of NVIDIA securities required by this item will be contained in our 2018 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management,” and is hereby incorporated by reference.Equity Compensation Plan InformationInformation regarding our equity compensation plans required by this item will be contained in our 2018 Proxy Statement under the caption "Equity Compensation Plan Information," and is hereby incorporated by reference.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEInformation regarding related transactions and director independence required by this item will be contained in our 2018 Proxy Statement under the captions “Review of Transactions with Related Persons” and “Information About the Board of Directors and Corporate Governance - Independence of the Members of the Board of Directors,” and is hereby incorporated by reference.ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESInformation regarding accounting fees and services required by this item will be contained in our 2018 Proxy Statement under the caption “Fees Billed by the Independent Registered Public Accounting Firm,” and is hereby incorporated by reference. 37Table of ContentsPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE Page(a)1. Consolidated Financial Statements Report of Independent Registered Public Accounting Firm39 Consolidated Statements of Income for the years ended January 28, 2018, January 29, 2017, and January 31, 201641 Consolidated Statements of Comprehensive Income for the years ended January 28, 2018, January 29, 2017, and January 31, 201642 Consolidated Balance Sheets as of January 28, 2018 and January 29, 201743 Consolidated Statements of Shareholders’ Equity for the years ended January 28, 2018, January 29, 2017, and January 31, 201644 Consolidated Statements of Cash Flows for the years ended January 28, 2018, January 29, 2017, and January 31, 2016 45 Notes to the Consolidated Financial Statements47 2. Financial Statement Schedule Schedule II Valuation and Qualifying Accounts for the years ended January 28, 2018, January 29, 2017, and January 31, 201676 3. Exhibits The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as a part of this Annual Report on Form 10-K.7738Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of NVIDIA Corporation:Opinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of NVIDIA Corporation and its subsidiaries as of January 28, 2018 and January 29, 2017, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended January 28, 2018, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 28, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 28, 2018 and January 29, 2017, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.Basis for OpinionsThe Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.39Table of ContentsBecause of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaFebruary 28, 2018We have served as the Company’s auditor since 2004. 40Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(In millions, except per share data) Year Ended January 28, 2018 January 29, 2017 January 31, 2016Revenue$9,714 $6,910 $5,010Cost of revenue3,892 2,847 2,199Gross profit5,822 4,063 2,811Operating expenses Research and development1,797 1,463 1,331Sales, general and administrative815 663 602Restructuring and other charges— 3 131Total operating expenses2,612 2,129 2,064Income from operations3,210 1,934 747Interest income69 54 39Interest expense(61) (58) (47)Other, net(22) (25) 4Total other income (expense)(14) (29) (4)Income before income tax3,196 1,905 743Income tax expense149 239 129Net income$3,047 $1,666 $614 Net income per share: Basic$5.09 $3.08 $1.13Diluted$4.82 $2.57 $1.08 Weighted average shares used in per share computation: Basic599 541 543Diluted632 649 569 Cash dividends declared and paid per common share$0.570 $0.485 $0.395See accompanying notes to the consolidated financial statements.41Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In millions) Year Ended January 28, 2018 January 29, 2017 January 31, 2016 Net income$3,047 $1,666 $614Other comprehensive loss, net of tax: Available-for-sale securities: Net unrealized loss(5) (17) (6)Reclassification adjustments for net realized gain (loss) included in net income1 1 (2)Net change in unrealized loss(4) (16) (8)Cash flow hedges: Net unrealized gain (loss)(1) 2 (4)Reclassification adjustments for net realized gain (loss) included in net income3 2 —Net change in unrealized gain (loss)2 4 (4)Other comprehensive loss, net of tax(2) (12) (12)Total comprehensive income$3,045 $1,654 $602See accompanying notes to the consolidated financial statements.42Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In millions, except par value) January 28, 2018 January 29, 2017ASSETS Current assets: Cash and cash equivalents$4,002 $1,766Marketable securities3,106 5,032Accounts receivable, less allowances of $13 as of January 28, 2018 and January 29, 20171,265 826Inventories796 794Prepaid expenses and other current assets86 118Total current assets9,255 8,536Property and equipment, net997 521Goodwill618 618Intangible assets, net52 104Other assets319 62Total assets$11,241 $9,841 LIABILITIES, CONVERTIBLE DEBT CONVERSION OBLIGATION AND SHAREHOLDERS' EQUITYCurrent liabilities: Accounts payable$596 $485Accrued and other current liabilities542 507Convertible short-term debt15 796Total current liabilities1,153 1,788Long-term debt1,985 1,983Other long-term liabilities632 277Total liabilities3,770 4,048Commitments and contingencies - see Note 12 Convertible debt conversion obligation— 31Shareholders’ equity: Preferred stock, $.001 par value; 2 shares authorized; none issued— —Common stock, $.001 par value; 2,000 shares authorized; 932 shares issued and 606 outstanding as of January 28, 2018; 868 shares issued and 585 outstanding as of January 29, 20171 1Additional paid-in capital5,351 4,708Treasury stock, at cost (326 shares in 2018 and 283 shares in 2017)(6,650) (5,039)Accumulated other comprehensive loss(18) (16)Retained earnings8,787 6,108Total shareholders' equity7,471 5,762Total liabilities, convertible debt conversion obligation and shareholders' equity$11,241 $9,841See accompanying notes to the consolidated financial statements.43Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Common StockOutstanding Additional Treasury Accumulated Other Comprehensive Retained Total Shareholders'(In millions, except per share data)Shares Amount Paid-in Capital Stock Income (Loss) Earnings EquityBalances, January 25, 2015545 $1 $3,855 $(3,395) $8 $3,949 $4,418Other comprehensive loss— — — — (12) — (12)Net income— — — — — 614 614Issuance of common stock from stock plans 22 — 186 — — — 186Tax withholding related to vesting of restricted stock units(3) — — (66) — — (66)Share repurchase(25) — — (587) — — (587)Cash dividends declared and paid ($0.395 per common share)— — — — — (213) (213)Tax benefit from stock-based compensation — — 10 — — — 10Stock-based compensation— — 206 — — — 206Reclassification of convertible debt conversion obligation— — (87) — — — (87)Balances, January 31, 2016539 1 4,170 (4,048) (4) 4,350 4,469Retained earnings adjustment due to adoption of an accounting standard related to stock-based compensation— — — — — 353 353Other comprehensive loss— — — — (12) — (12)Net income— — — — — 1,666 1,666Issuance of common stock in exchange for warrants44 — (1) — — — (1)Convertible debt conversion23 — (6) — — — (6)Issuance of common stock from stock plans 20 — 167 — — — 167Tax withholding related to vesting of restricted stock units(3) — — (177) — — (177)Share repurchase(15) — — (739) — — (739)Exercise of convertible note hedges(23) — 75 (75) — — —Cash dividends declared and paid ($0.485 per common share)— — — — — (261) (261)Stock-based compensation— — 248 — — — 248Reclassification of convertible debt conversion obligation— — 55 — — — 55Balances, January 29, 2017585 1 4,708 (5,039) (16) 6,108 5,762Retained earnings adjustment due to adoption of an accounting standard related to income tax consequences of an intra-entity transfer of an asset— — — — — (27) (27)Other comprehensive loss— — — — (2) — (2)Net income— — — — — 3,047 3,047Issuance of common stock in exchange for warrants13 — — — — — —Convertible debt conversion33 — (7) — — — (7)Issuance of common stock from stock plans 18 — 138 — — — 138Tax withholding related to vesting of restricted stock units(4) — — (612) — — (612)Share repurchase(6) — — (909) — — (909)Exercise of convertible note hedges(33) — 90 (90) — — —Cash dividends declared and paid ($0.570 per common share)— — — — — (341) (341)Stock-based compensation— — 391 — — — 391Reclassification of convertible debt conversion obligation— — 31 — — — 31Balances, January 28, 2018606 $1 $5,351 $(6,650) $(18) $8,787 $7,471See accompanying notes to the consolidated financial statements.44Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In millions) Year Ended January 28, 2018 January 29, 2017 January 31, 2016Cash flows from operating activities: Net income$3,047 $1,666 $614Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation expense391 247 204Depreciation and amortization199 187 197Loss on early debt conversions19 21 —Amortization of debt discount3 25 29Deferred income taxes(359) 197 134Net gain on sale and disposal of long-lived assets and investments(1) (3) (6)Restructuring and other charges— — 45Tax benefit from stock-based compensation— — (10)Other18 11 19Changes in operating assets and liabilities: Accounts receivable(440) (321) (32)Inventories— (375) 66Prepaid expenses and other assets21 (18) (16)Accounts payable90 184 (11)Accrued and other current liabilities33 (135) 39Other long-term liabilities481 (14) (97)Net cash provided by operating activities3,502 1,672 1,175Cash flows from investing activities: Proceeds from sales of marketable securities863 1,546 2,102Proceeds from maturities of marketable securities1,078 969 1,036Proceeds from sale of long-lived assets and investments2 7 7Purchases of marketable securities(36) (3,134) (3,477)Purchases of property and equipment and intangible assets(593) (176) (86)Reimbursement of building development costs from banks— — 24Investment in non-affiliates(36) (5) (6)Net cash provided by (used in) investing activities1,278 (793) (400)Cash flows from financing activities: Proceeds from issuance of debt— 1,988 —Payments related to repurchases of common stock(909) (739) (587)Repayment of Convertible Notes(812) (673) —Dividends paid(341) (261) (213)Proceeds related to employee stock plans139 167 186Payments related to tax on restricted stock units(612) (176) (66)Payments for debt issuance costs— (8) —Tax benefit from stock-based compensation— — 10Other(9) (7) (6)Net cash provided by (used in) financing activities(2,544) 291 (676)Change in cash and cash equivalents2,236 1,170 99Cash and cash equivalents at beginning of period1,766 596 497Cash and cash equivalents at end of period$4,002 $1,766 $59645Table of Contents Year Ended January 28, 2018 January 29, 2017 January 31, 2016Supplemental disclosures of cash flow information: Cash paid for income taxes, net$22 $14 $14Cash paid for interest$55 $13 $17 Non-cash investing and financing activity: Assets acquired by assuming related liabilities$36 $16 $19See accompanying notes to the consolidated financial statements.46Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNote 1 - Organization and Summary of Significant Accounting PoliciesOur CompanyStarting with a focus on PC graphics, NVIDIA invented the GPU to solve some of the most complex problems in computer science. We have extended our focus in recent years to the revolutionary field of artificial intelligence. Headquartered in Santa Clara, California, NVIDIA was incorporated in California in April 1993 and reincorporated in Delaware in April 1998. All references to “NVIDIA,” “we,” “us,” “our” or the “Company” mean NVIDIA Corporation and its subsidiaries, except where it is made clear that the term means only the parent company.Fiscal YearWe operate on a 52- or 53-week year, ending on the last Sunday in January. Fiscal years 2018 and 2017 are both 52-week years and fiscal year 2016 was a 53-week year.ReclassificationsCertain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation.Principles of ConsolidationOur consolidated financial statements include the accounts of NVIDIA Corporation and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.Use of EstimatesThe preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from our estimates. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, cash equivalents and marketable securities, accounts receivable, inventories, income taxes, goodwill, stock-based compensation, litigation, investigation and settlement costs, restructuring and other charges, and other contingencies. These estimates are based on historical facts and various other assumptions that we believe are reasonable.Revenue RecognitionProduct RevenueWe recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable and collection of the related receivable is reasonably assured. For most sales, we use a binding purchase order and in certain cases we use a contractual agreement as evidence of an arrangement. We consider delivery to occur upon shipment provided title and risk of loss have passed to the customer. At the point of sale, we assess whether the arrangement fee is fixed or determinable and whether collection is reasonably assured. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of payment.Our customer programs primarily involve rebates, which are designed to serve as sales incentives to resellers of our products in various target markets. We account for rebates as a reduction of revenue and accrue for 100% of the potential rebates and do not apply a breakage factor, as we typically find that over 95% of the rebates we accrue each year are eventually claimed, which is substantially close to 100%, and that this percentage varies by program and by customer. We recognize a liability for these rebates at the later of the date at which we record the related revenue or the date at which we offer the rebate. Rebates typically expire six months from the date of the original sale, unless we reasonably believe that the customer intends to claim the rebate. Unclaimed rebates are reversed to revenue, the amount of which typically represents less than 0.5% of total revenue. Our customer programs also include marketing development funds, or MDFs. MDFs represent monies paid to our partners that are earmarked for market segment development and expansion and are typically designed to support our partners’ 47Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)activities while also promoting NVIDIA products. We account for MDFs as a reduction of revenue and apply a breakage factor to certain types of MDF program accruals for which we believe we can make a reasonable and reliable estimate of the amount that will ultimately be unclaimed. We also record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time revenue is recognized, based primarily on historical return rates. However, if product returns for a particular fiscal period exceed historical return rates we may determine that additional sales return allowances are required to properly reflect our estimated exposure for product returns. License and Development RevenueFor license arrangements that require significant customization of our intellectual property components, we generally recognize the related revenue over the period that services are performed. For most license and service arrangements, we determine progress to completion based on actual cost incurred to date as a percentage of the estimated total cost required to complete the project. A provision for estimated losses on contracts is made in the period in which the loss becomes probable and can be reasonably estimated. Costs incurred in advance of revenue recognized are recorded as deferred costs on uncompleted contracts. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenue.For license arrangements that do not require significant customization but where we are obligated to provide further deliverables over the term of the license agreement, we record revenue over the life of the license term, with consideration received in advance of the performance period classified as deferred revenue. Royalty revenue is recognized related to the distribution or sale of products that use our technologies under license agreements with third parties. We recognize royalty revenue upon receipt of a confirmation of earned royalties and when collectability is reasonably assured from the applicable licensee.Advertising ExpensesWe expense advertising costs in the period in which they are incurred. Advertising expenses for fiscal years 2018, 2017, and 2016 were $25 million, $17 million, and $30 million, respectively. Rent ExpenseWe recognize rent expense on a straight-line basis over the lease period and accrue for rent expense incurred, but not paid.Product WarrantiesWe generally offer a limited warranty to end-users that ranges from one to three years for products in order to repair or replace products for any manufacturing defects or hardware component failures. Cost of revenue includes the estimated cost of product warranties that are calculated at the point of revenue recognition. Under limited circumstances, we may offer an extended limited warranty to customers for certain products. We also accrue for known warranty and indemnification issues if a loss is probable and can be reasonably estimated.Stock-based CompensationWe use the closing trading price of our common stock on the date of grant, minus a dividend yield discount, as the fair value of awards of restricted stock units, or RSUs, and performance stock units that are based on our corporate financial performance targets, or PSUs. We use a Monte Carlo simulation on the date of grant to estimate the fair value of performance stock units that are based on market conditions, or market-based PSUs. The compensation expense for RSUs and market-based PSUs is recognized using a straight-line attribution method over the requisite employee service period while compensation expense for PSUs is recognized using an accelerated amortization model. We estimate the fair value of shares to be issued under our employee stock purchase plan, or ESPP, using the Black-Scholes model at the commencement of an offering period in March and September of each year. Stock-based compensation for our ESPP is expensed using an accelerated amortization model. Additionally, we estimate forfeitures annually based on historical experience and revise the estimates of forfeiture in subsequent periods if actual forfeitures differ from those estimates. If factors change, the compensation expense that we record under these accounting standards may differ significantly from what we have recorded in the current period.48Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)Restructuring and Other Charges Our restructuring and other charges include employee severance and related costs, the write-down of assets, and other exit costs. The severance and related costs include one-time termination benefits as well as certain statutory termination benefits or employee terminations under ongoing benefit arrangements. One-time termination benefits are recognized as a liability at estimated fair value when the approved plan of termination has been communicated to employees, unless employees must provide future service, in which case the benefits are recognized ratably over the future service period. Ongoing termination benefits arrangements are recognized as a liability at estimated fair value when the amount of such benefits becomes estimable and payment is probable. Any contract termination costs are recognized at estimated fair value when we terminate the contract in accordance with the contract terms. Other associated costs are recognized in the period the liability is incurred. Our operating expenses for fiscal year 2016 included $131 million of restructuring and other charges related to the wind-down of our Icera operations, which was comprised mainly of employee severance, facilities, and related costs. Restructuring charges were not significant for fiscal years 2018 and 2017.Litigation, Investigation and Settlement CostsFrom time to time, we are involved in legal actions and/or investigations by regulatory bodies. We are aggressively defending our current litigation matters. However, there are many uncertainties associated with any litigation or investigation, and we cannot be certain that these actions or other third-party claims against us will be resolved without litigation, fines and/or substantial settlement payments. If that occurs, our business, financial condition and results of operations could be materially and adversely affected. If information becomes available that causes us to determine that a loss in any of our pending litigation, investigations or settlements is probable, and we can reasonably estimate the loss associated with such events, we will record the loss in accordance with U.S. GAAP. However, the actual liability in any such litigation or investigation may be materially different from our estimates, which could require us to record additional costs. Foreign Currency RemeasurementWe use the United States dollar as our functional currency for all of our subsidiaries. Foreign currency monetary assets and liabilities are remeasured into United States dollars at end-of-period exchange rates. Non-monetary assets and liabilities such as property and equipment, and equity are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each period, except for those expenses related to the previously noted balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in other income or expense in our Consolidated Statements of Income and to date have not been significant.Income TaxesWe recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carryforwards; and we record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.Our calculation of deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting standards or tax laws in the United States, or foreign jurisdictions where we operate, or changes in other facts or circumstances. In addition, we recognize liabilities for potential United States and foreign income tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements accordingly.As of January 28, 2018, we had a valuation allowance of $469 million related to state and certain foreign deferred tax assets that management determined are not likely to be realized due to projections of future taxable income and potential utilization limitations of tax attributes acquired as a result of stock ownership changes. To the extent realization of the deferred tax assets becomes more-likely-than-not, we would recognize such deferred tax asset as an income tax benefit during the period.49Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)We recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. In December 2017, the Tax Cuts and Jobs Act, or TCJA, was enacted into law. The TCJA significantly changes U.S. tax law including a reduction of the U.S. federal corporate income tax rate from 35% to 21%, a requirement for companies to pay a one-time transition tax on the earnings of certain foreign subsidiaries that were previously tax deferred and the creation of new taxes on certain foreign-source earnings. As a fiscal year-end taxpayer, certain provisions of the TCJA began to impact us in the fourth quarter of fiscal year 2018, while other provisions will impact us beginning in fiscal year 2019. Refer to Note 13 of these Notes to the Consolidated Financial Statements for additional information.Comprehensive Income Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss components include unrealized gains or losses on available-for-sale securities and unrealized gains or losses on cash flow hedges.Net Income Per ShareBasic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and potentially dilutive shares outstanding during the period, using the treasury stock method. Under the treasury stock method, the effect of stock options outstanding is not included in the computation of diluted net income per share for periods when their effect is anti-dilutive. Additionally, we issued convertible notes with a net settlement feature that requires us, upon conversion, to settle the principal amount of debt for cash and the conversion premium for cash or shares of our common stock. Our convertible notes, note hedges, and related warrants contain various conversion features, which are further described in Note 11 of these Notes to the Consolidated Financial Statements. The potentially dilutive shares resulting from the convertible notes and warrants under the treasury stock method will be included in the calculation of diluted income per share when their inclusion is dilutive. However, unless actually exercised, the note hedges were not included in the calculation of diluted net income per share, as their pre-exercised effect would be anti-dilutive under the treasury stock method. Cash and Cash EquivalentsWe consider all highly liquid investments that are readily convertible into cash and have an original maturity of three months or less at the time of purchase to be cash equivalents. As of January 28, 2018 and January 29, 2017, our cash and cash equivalents were $4.00 billion and $1.77 billion, respectively, including $3.79 billion and $321 million, respectively, invested in money market funds.Marketable SecuritiesMarketable securities consist primarily of highly liquid investments with maturities of greater than three months when purchased. We generally classify our marketable securities at the date of acquisition as available-for-sale. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income or loss, a component of shareholders’ equity, net of tax. The fair value of interest-bearing securities includes accrued interest. Any unrealized losses which are considered to be other-than-temporary impairments are recorded in the other income or expense, net, section of our Consolidated Statements of Income. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method and recorded in the other income or expense, net, section of our Consolidated Statements of Income.All of our available-for-sale investments are subject to a periodic impairment review. We record a charge to earnings when a decline in fair value is significantly below cost basis and judged to be other-than-temporary, or have other indicators of impairments. If the fair value of an available-for-sale debt instrument is less than its amortized cost basis, an other-than-temporary impairment is triggered in circumstances where (1) we intend to sell the instrument, (2) it is more likely than not that we will be required to sell the instrument before recovery of its amortized cost basis, or (3) a credit loss exists where we do not expect to recover the entire amortized cost basis of the instrument. In these situations, we recognize an other-than-temporary impairment in earnings equal to the entire difference between the debt instruments’ amortized cost basis and its fair value. For available-for-sale debt instruments that are considered other-than-temporarily impaired due to the existence of a credit loss, if we do not intend to sell and it is not more likely than not that we will not be required to sell the instrument before recovery of its remaining amortized cost basis (amortized cost basis less any current-period 50Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)credit loss), we separate the amount of the impairment into the amount that is credit related and the amount due to all other factors. The credit loss component is recognized in earnings while loss related to all other factors is recorded in accumulated other comprehensive income or loss.Fair Value of Financial InstrumentsThe carrying value of cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their relatively short maturities as of January 28, 2018 and January 29, 2017. Marketable securities are comprised of available-for-sale securities that are reported at fair value with the related unrealized gains or losses included in accumulated other comprehensive income or loss, a component of shareholders’ equity, net of tax. Fair value of the marketable securities is determined based on quoted market prices. Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For derivative instruments designated as fair value hedges, the gains or losses are recognized in earnings in the periods of change together with the offsetting losses or gains on the hedged items attributed to the risk being hedged. For derivative instruments designated as cash-flow hedges, the effective portion of the gains or losses on the derivatives is initially reported as a component of other comprehensive income or loss and is subsequently recognized in earnings when the hedged exposure is recognized in earnings. Concentration of Credit RiskFinancial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, marketable securities, accounts receivable, note hedge and interest rate swap. Our investment policy requires the purchase of high grade investment securities, the diversification of asset type and includes certain limits on our portfolio duration. All marketable securities are held in our name, managed by several investment managers and held by one major financial institution under a custodial arrangement. Accounts receivable from significant customers, those representing 10% or more of total accounts receivable, aggregated approximately 28% of our accounts receivable balance from two customers as of January 28, 2018 and 29% of our account receivable balance from two customers as of January 29, 2017. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for potential credit losses. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. Our overall estimated exposure excludes amounts covered by credit insurance and letters of credit.Accounts ReceivableWe maintain an allowance for doubtful accounts receivable for estimated losses resulting from the inability of our customers to make required payments. We determine this allowance by identifying amounts for specific customer issues as well as amounts based on overall estimated exposure. Factors impacting the allowance include the level of gross receivables, the financial condition of our customers and the extent to which balances are covered by credit insurance or letters of credit.InventoriesInventory cost is computed on an adjusted standard basis, which approximates actual cost on an average or first-in, first-out basis. Inventory costs consist primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, and shipping costs, as well as the cost of purchased memory products and other component parts. We charge cost of sales for inventory provisions to write down our inventory to the lower of cost or net realizable value or to completely write off obsolete or excess inventory. Most of our inventory provisions relate to the write-off of excess quantities of products, based on our inventory levels and future product purchase commitments compared to assumptions about future demand and market conditions. Once inventory has been written-off or written-down, it creates a new cost basis for the inventory that is not subsequently written-up. Property and EquipmentProperty and equipment are stated at cost. Depreciation of property and equipment is computed using the straight-line method based on the estimated useful lives of the assets, generally three to five years. Once an asset is identified for retirement or disposition, the related cost and accumulated depreciation or amortization are removed, and a gain or loss is recorded. The estimated useful lives of our buildings are up to thirty years. Depreciation expense includes the amortization of assets recorded under capital leases. Leasehold improvements and assets recorded under capital leases are amortized over the shorter of the expected lease term or the estimated useful life of the asset.51Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)GoodwillGoodwill is subject to our annual impairment test during the fourth quarter of our fiscal year, or earlier if indicators of potential impairment exist. For the purposes of completing our impairment test, we perform either a qualitative or a quantitative analysis on a reporting unit basis. For those reporting units where a significant change or event has occurred, where potential impairment indicators exist, or for which we have not performed a quantitative assessment recently, we perform a quantitative assessment to testing goodwill for impairment. It tests for possible impairment by applying a fair value-based test by weighting the results from the income approach and the market approach. Refer to Note 4 of these Notes to the Consolidated Financial Statements for additional information. Intangible Assets and Other Long-Lived AssetsIntangible assets primarily represent rights acquired under technology licenses, patents, acquired intellectual property, trademarks and customer relationships and are subject to an annual impairment test. We currently amortize our intangible assets with definitive lives over periods ranging from three to ten years using a method that reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up or, if that pattern cannot be reliably determined, using a straight-line amortization method. Long-lived assets, such as property and equipment and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset, or asset group. If the carrying amount of an asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset or asset group exceeds the estimated fair value of the asset or asset group. Fair value is determined based on the estimated discounted future cash flows expected to be generated by the asset or asset group. Assets and liabilities to be disposed of would be separately presented in the Consolidated Balance Sheet and the assets would be reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated.Adoption of New and Recently Issued Accounting PronouncementsRecently Adopted Accounting PronouncementsIn October 2016, the Financial Accounting Standards Board, or FASB, issued an accounting standards update which requires the recognition of income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. We elected to early adopt this new guidance in the first quarter of fiscal year 2018, which required us to reflect any adjustments as of January 30, 2017. Upon adoption of this guidance, we recorded a cumulative-effect adjustment as of the first day of fiscal year 2018 to decrease retained earnings by $28 million, with a corresponding decrease to prepaid taxes that had not been previously recognized in income tax expense.In January 2017, the FASB issued an accounting standards update that simplifies the test for goodwill impairment. The update eliminates the second step in the goodwill impairment test that requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. We adopted this guidance in the fourth quarter of fiscal year 2018 and applied it prospectively, as permitted by the standard. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.Recent Accounting Pronouncements Not Yet Adopted In January 2016, the FASB issued an accounting standards update to amend certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the amendments is the requirement for changes in the fair value of our equity investments to be recognized through net income rather than other comprehensive income. The update will be effective for us beginning in our first quarter of fiscal year 2019. We anticipate the adoption of this accounting standard to increase the volatility of our other income or expense, net, due to the remeasurement of certain of our equity securities, primarily our investments in non-affiliates, for fair value changes. 52Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)In February 2016, the FASB issued an accounting standards update regarding the accounting for leases by which we will begin recognizing lease assets and liabilities on the balance sheet for leases with a lease term of more than 12 months. The update will require additional disclosures regarding key information about leasing arrangements. Under existing guidance, operating leases are not recorded as lease assets and lease liabilities on the balance sheet. The update will be effective for us beginning in our first quarter of fiscal year 2020, with early adoption permitted. We are currently evaluating the impact of the adoption of this accounting guidance on our consolidated financial statements. However, we expect the adoption of this accounting guidance to result in an increase in lease assets and a corresponding increase in lease liabilities on our Consolidated Balance Sheets.The FASB issued an accounting standards update that creates a single source of revenue guidance under U.S. GAAP for all companies, in all industries. We expect to adopt this guidance beginning in our first quarter of fiscal year 2019 using the modified retrospective approach. We have made progress in, and continue to assess changes in policies, processes, systems and controls necessary to meet the additional requirements of the guidance. While we are still finalizing our analysis to quantify the adoption impact of the provisions of the new revenue standard, we do not expect it to have a material impact on our consolidated financial statements. However, we do expect to provide additional disclosure under this guidance, including more information regarding estimates and judgments, practical expedients used, contract balances and performance obligations. Note 2 - Stock-Based CompensationOur stock-based compensation expense is associated with stock options, restricted stock units, or RSUs, performance stock units that are based on our corporate financial performance targets, or PSUs, performance stock units that are based on market conditions, or market-based PSUs, and our employee stock purchase plan, or ESPP.Our Consolidated Statements of Income include stock-based compensation expense, net of amounts capitalized as inventory, as follows: Year Ended January 28, 2018 January 29, 2017 January 31, 2016 (In millions)Cost of revenue$21 $15 $15Research and development219 134 115Sales, general and administrative151 98 74Total$391 $247 $204Stock-based compensation capitalized in inventories was not significant during fiscal years 2018, 2017, and 2016. The following is a summary of equity awards granted under our equity incentive plans: Year Ended January 28, 2018 January 29, 2017 January 31, 2016 (In millions, except per share data)RSUs, PSUs and Market-based PSUs Awards granted6 12 13Estimated total grant-date fair value$929 $591 $296Weighted average grant-date fair value (per share)$145.91 $50.57 $22.01 ESPP Shares purchased5 4 6Weighted average price (per share)$21.24 $18.51 $13.67Weighted average grant-date fair value (per share)$7.12 $5.80 $4.5353Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)Beginning fiscal year 2015, we shifted away from granting stock options and toward granting RSUs, PSUs and market-based PSUs to reflect changing market trends for equity incentives at our peer companies. As of January 28, 2018, there were 5 million stock options outstanding and the amount of unvested stock options was not significant. The number of PSUs that will ultimately vest is contingent on the Company’s level of achievement versus the corporate financial performance target established by our Compensation Committee in the beginning of each fiscal year. Of the total fair value of equity awards, we estimated that the stock-based compensation expense related to the equity awards that are not expected to vest for fiscal years 2018, 2017, and 2016 was $156 million, $98 million, and $46 million, respectively. January 28, 2018 January 29, 2017 (In millions)Aggregate unearned stock-based compensation expense$1,091 $627 Estimated weighted average remaining amortization period(In years)RSUs, PSUs and market-based PSUs2.3 2.6ESPP0.7 0.6The fair value of shares issued under our ESPP have been estimated with the following assumptions: Year Ended January 28, 2018 January 29, 2017 January 31, 2016 (Using the Black-Scholes model)ESPP Weighted average expected life (in years)0.5-2.0 0.5-2.0 0.5-2.0Risk-free interest rate0.8%-1.4% 0.5%-0.9% 0.1%-0.7%Volatility40%-54% 30%-39% 24%-34%Dividend yield0.3%-0.5% 0.7%-1.4% 1.5%-1.8%For ESPP shares, the expected term represents the average term from the first day of the offering period to the purchase date. The risk-free interest rate assumption used to value ESPP shares is based upon observed interest rates on Treasury bills appropriate for the expected term. Our expected stock price volatility assumption for ESPP is estimated using historical volatility. For awards granted, we use the dividend yield at grant date. Our RSU, PSU, and market-based PSU awards are not eligible for cash dividends prior to vesting; therefore, the fair values of RSUs, PSUs, and market-based PSUs are discounted for the dividend yield.Additionally, for employee stock option, RSU, PSU, and market-based PSU awards, we estimate forfeitures annually and revise the estimates of forfeiture in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.Equity Incentive ProgramWe grant or have granted stock options, RSUs, PSUs, market-based PSUs, and stock purchase rights under the following equity incentive plans.Amended and Restated 2007 Equity Incentive PlanIn 2007, our shareholders approved the NVIDIA Corporation 2007 Equity Incentive Plan, as most recently amended and restated, the 2007 Plan.The 2007 Plan authorizes the issuance of incentive stock options, non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance stock awards, performance cash awards, and other stock-based awards to employees, directors and consultants. Only our employees may receive incentive stock options. Up to 207 million shares of our common stock may be issued pursuant to stock awards granted under the 2007 Plan. Currently, we grant RSUs, 54Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)PSUs and market-based PSUs under the 2007 Plan, under which, as of January 28, 2018, there were 16 million shares available for future issuance.Stock options previously granted to employees, subject to certain exceptions, vest over a four year period, subject to continued service, with 25% vesting on the anniversary of the hire date in the case of new hires or the anniversary of the date of grant in the case of grants to existing employees and 6.25% vesting quarterly thereafter. These stock options generally expire ten years from the date of grant.Subject to certain exceptions, RSUs and PSUs granted to employees vest over a four year period, subject to continued service, with 25% vesting on a pre-determined date that is close to the anniversary of the date of grant and (i) for grants made prior to May 18, 2016, 12.5% vesting semi-annually thereafter, and (ii) for grants made on or after May 18, 2016, 6.25% vesting quarterly thereafter. Market-based PSUs vest 100% on approximately the three year anniversary of the date of grant. However, the number of shares subject to both PSUs and market-based PSUs that are eligible to vest is generally determined by the Compensation Committee based on achievement of pre-determined criteria.Unless terminated sooner, the 2007 Plan is scheduled to terminate on March 21, 2022. Our Board may suspend or terminate the 2007 Plan at any time. No awards may be granted under the 2007 Plan while the 2007 Plan is suspended or after it is terminated. The Board may also amend the 2007 Plan at any time. However, if legal, regulatory or listing requirements require shareholder approval, the amendment will not go into effect until the shareholders have approved the amendment.Amended and Restated 2012 Employee Stock Purchase PlanIn 2012, our shareholders approved the 2012 Employee Stock Purchase Plan, as most recently amended and restated, the 2012 Plan, as the successor to the 1998 Employee Stock Purchase Plan.Up to 75 million shares of our common stock may be issued pursuant to purchases under the 2012 Plan. As of January 28, 2018, we had issued 28 million shares and reserved 47 million shares for future issuance under the 2012 Plan.The 2012 Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. Under the current offerings adopted pursuant to the 2012 Plan, each offering period is approximately 24 months, which is generally divided into four purchase periods of six months.Employees are eligible to participate if they are employed by us or an affiliate of us as designated by the Board. Employees who participate in an offering may have up to 10% of their earnings withheld up to certain limitations and applied on specified dates determined by the Board to the purchase of shares of common stock. The Board may increase this percentage at its discretion, up to 15%. The price of common stock purchased under our 2012 Plan will be equal to 85% of the lower of the fair market value of the common stock on the commencement date of each offering period and the fair market value on each purchase date within the offering. Employees may end their participation in the 2012 Plan at any time during the offering period, and participation ends automatically on termination of employment with us. In each case, the employee’s contributions are refunded.55Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)The following is a summary of our equity award transactions under our equity incentive plans: RSUs, PSUs and Market-based PSUs Outstanding Number of Shares Weighted Average Grant-Date Fair Value (In millions, except years and per share data)Balances, January 29, 201727 $32.84Granted (1)(2)6 $145.91Vested restricted stock(11) $28.80Canceled and forfeited— $—Balances, January 28, 201822 $66.72Vested and expected to vest after January 28, 201818 $66.43(1)Includes PSUs that will be issued and eligible to vest based on the corporate financial performance maximum target level achieved for fiscal year 2018. (2)Includes market-based PSUs that will be issued and eligible to vest if the maximum target for total shareholder return, or TSR, over the 3-year measurement period is achieved. Depending on the ranking of our TSR compared to the respective TSRs of the companies comprising the Standard & Poor’s 500 Index during that period, the market-based PSUs issued could be up to 0.1 million shares.As of January 28, 2018 and January 29, 2017, there were 16 million and 22 million shares, respectively, of common stock reserved for future issuance under our equity incentive plans.The total intrinsic value of options exercised was $318 million, $246 million, and $75 million for fiscal years 2018, 2017, and 2016, respectively. Upon exercise of an option, we issue new shares of stock. The total fair value of options vested was $1 million, $8 million, and $17 million for fiscal years 2018, 2017, and 2016, respectively. Note 3 - Net Income Per ShareThe following is a reconciliation of the denominator of the basic and diluted net income per share computations for the periods presented: Year Ended January 28, 2018 January 29, 2017 January 31, 2016 (In millions, except per share data)Numerator: Net income$3,047 $1,666 $614Denominator: Basic weighted average shares599 541 543Dilutive impact of outstanding securities: Equity awards24 26 13 1.00% Convertible Senior Notes5 44 13 Warrants issued with the 1.00% Convertible Senior Notes4 38 —Diluted weighted average shares632 649 569Net income per share: Basic (1)$5.09 $3.08 $1.13Diluted (2)$4.82 $2.57 $1.08Equity awards excluded from diluted net income per share because their effect would have been anti-dilutive4 8 10(1)Calculated as net income divided by basic weighted average shares.(2)Calculated as net income divided by diluted weighted average shares.The 1.00% Convertible Senior Notes, or the Convertible Notes, are included in the calculation of diluted net income per share. The Convertible Notes have a dilutive impact on net income per share if our average stock price for the reporting period 56Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)exceeds the adjusted conversion price of $20.0350 per share. The warrants associated with our Convertible Notes, or the Warrants, outstanding are also included in the calculation of diluted net income per share. As of January 28, 2018, there were no warrants outstanding.For fiscal year 2018, our average stock price was $158.35, which exceeded both the adjusted conversion price and the adjusted strike price, causing the Convertible Notes and the Warrants to have a dilutive impact.The denominator for diluted net income per share does not include any effect from the convertible note hedge transactions, or the Note Hedges, that we entered into concurrently with the issuance of the Convertible Notes, as its effect would be anti-dilutive. In the event of conversion of the Convertible Notes, the shares delivered to us under the Note Hedges will offset the dilutive effect of the shares that we would issue under the Convertible Notes. Refer to Note 11 of these Notes to the Consolidated Financial Statements for additional discussion regarding the Convertible Notes, Note Hedges, and Warrants.Note 4 - GoodwillThe carrying amount of goodwill is from the following acquisitions: January 28, 2018 January 29, 2017 (In millions)Icera$271 $271PortalPlayer105 105Mental Images59 593dfx50 50MediaQ35 35ULi31 31Other67 67Total goodwill$618 $618The amount of goodwill allocated to our GPU and Tegra Processor reporting units was $210 million and $408 million, respectively, as of both January 28, 2018 and January 29, 2017. Refer to Note 16 of these Notes to the Consolidated Financial Statements for further discussion regarding segments.We completed our annual impairment test during the fourth quarter of fiscal year 2018 and concluded that there was no impairment, as the fair value of our reporting units exceeded their carrying values. The fair value was determined by weighing the results from the income approach and the market approach.These income and market valuation approaches consider a number of factors that include, but are not limited to, prospective financial information, growth rates, residual values, discount rates and comparable multiples from publicly traded companies in our industry and require us to make certain assumptions and estimates regarding industry economic factors and the future profitability of our business. When performing an income approach valuation, we incorporate the use of projected financial information and a discount rate that are developed using market participant based assumptions to our discounted cash flow model. Our estimates of discounted cash flow were based upon, among other things, certain assumptions about our expected future operating performance, such as revenue growth rates, operating margins, risk-adjusted discount rates, and future economic and market conditions. The market method of determining the fair value of our reporting units requires us to use judgment in the selection of appropriate market comparables.57Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)Note 5 - Amortizable Intangible AssetsThe components of our amortizable intangible assets are as follows: January 28, 2018 January 29, 2017 Gross CarryingAmount AccumulatedAmortization Net CarryingAmount Gross CarryingAmount AccumulatedAmortization Net CarryingAmount (In millions) (In millions)Acquisition-related intangible assets$195 $(180) $15 $193 $(167) $26Patents and licensed technology469 (432) 37 468 (390) 78Total intangible assets$664 $(612) $52 $661 $(557) $104Amortization expense associated with intangible assets for fiscal years 2018, 2017, and 2016 was $55 million, $68 million, and $73 million, respectively. Future amortization expense for the net carrying amount of intangible assets as of January 28, 2018 is estimated to be $26 million in fiscal year 2019, $17 million in fiscal year 2020, $8 million in fiscal year 2021, and $1 million in fiscal year 2022 and thereafter until fully amortized.Note 6 - Marketable SecuritiesAll of our cash equivalents and marketable securities are classified as “available-for-sale” securities. The following is a summary of cash equivalents and marketable securities as of January 28, 2018 and January 29, 2017: January 28, 2018 AmortizedCost UnrealizedGain UnrealizedLoss EstimatedFair Value Reported as Cash Equivalents Marketable Securities (In millions)Money market funds$3,789 $— $— $3,789 $3,789 $—Corporate debt securities1,304 — (9) 1,295 — 1,295Debt securities of United States government agencies822 — (7) 815 — 815Debt securities issued by the United States Treasury577 — (4) 573 — 573Asset-backed securities254 — (2) 252 — 252Mortgage-backed securities issued by United States government-sponsored enterprises128 2 — 130 — 130Foreign government bonds42 — (1) 41 — 41Total$6,916 $2 $(23) $6,895 $3,789 $3,10658Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) January 29, 2017 AmortizedCost UnrealizedGain UnrealizedLoss EstimatedFair Value Reported as Cash Equivalents Marketable Securities (In millions)Corporate debt securities$2,397 $1 $(10) $2,388 $33 $2,355Debt securities of United States government agencies1,193 — (5) 1,188 27 1,161Debt securities issued by the United States Treasury852 — (2) 850 55 795Asset-backed securities490 — (1) 489 — 489Money market funds321 — — 321 321 —Mortgage backed securities issued by United States government-sponsored enterprises161 2 (1) 162 — 162Foreign government bonds70 — — 70 — 70Total$5,484 $3 $(19) $5,468 $436 $5,032The following table provides the breakdown of unrealized losses as of January 28, 2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position: Less than 12 Months 12 Months or Greater Total Fair Value GrossUnrealizedLosses Fair Value GrossUnrealizedLosses Fair Value GrossUnrealizedLosses (In millions)Corporate debt securities$433 $(2) $801 $(7) $1,234 $(9)Debt securities issued by United States government agencies175 (1) 640 (6) 815 (7)Debt securities issued by the US Treasury170 (1) 404 (3) 574 (4)Asset-backed securities73 — 179 (2) 252 (2)Foreign government bonds— — 41 (1) 41 (1)Total$851 $(4) $2,065 $(19) $2,916 $(23)The gross unrealized losses related to fixed income securities and were primarily due to changes in interest rates, which we believe are temporary in nature. Currently, we have the intent and ability to hold our investments until maturity. For fiscal years 2018, 2017, and 2016, there were no other-than-temporary impairment losses and net realized gains were not significant.59Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)The amortized cost and estimated fair value of cash equivalents and marketable securities as of January 28, 2018 and January 29, 2017 are shown below by contractual maturity. January 28, 2018 January 29, 2017 AmortizedCost EstimatedFair Value AmortizedCost EstimatedFair Value (In millions)Less than one year$5,381 $5,375 $2,209 $2,209Due in 1 - 5 years1,500 1,485 3,210 3,194Mortgage-backed securities issued by government-sponsored enterprises not due at a single maturity date35 35 65 65Total$6,916 $6,895 $5,484 $5,468Note 7 - Fair Value of Financial Assets and LiabilitiesThe fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. We classify securities within Level 1 when the fair value is obtained from real time quotes in active markets involving identical securities. We classify securities within Level 2 when pricing is obtained from real time quotes of similar securities in active markets or alternative pricing sources and models utilizing market observable inputs to determine fair value. There were no significant transfers between Levels 1 and 2 for fiscal year 2018. Level 3 assets are based on unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances. We did not have any securities classified as Level 3 as of January 28, 2018. Fair Value at Pricing Category January 28, 2018 January 29, 2017 (In millions)Assets Cash equivalents and marketable securities: Money market fundsLevel 1 $3,789 $321Corporate debt securitiesLevel 2 $1,295 $2,388Debt securities of U.S. government agenciesLevel 2 $815 $1,188Debt securities issued by the United States TreasuryLevel 2 $573 $850Asset-backed securitiesLevel 2 $252 $489Mortgage-backed securities issued by United States government-sponsored enterprisesLevel 2 $130 $162Foreign government bondsLevel 2 $41 $70 Liabilities Current liability: 1.00% Convertible Senior Notes (1)Level 2 $189 $4,474Other noncurrent liabilities: 2.20% Notes Due 2021 (1)Level 2 $982 $9753.20% Notes Due 2026 (1)Level 2 $986 $961Interest rate swap (2)Level 2 $— $2(1)These liabilities are carried on our Consolidated Balance Sheets at their original issuance value, net of unamortized debt discount and issuance costs, and are not marked to fair value each period. Refer to Note 11 of these Notes to the Consolidated Financial Statements for additional information.(2)In January 2018, we terminated the interest rate swap. Refer to Note 9 of these Notes to Consolidated Financial Statements for additional information.60Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)Note 8 - Balance Sheet ComponentsCertain balance sheet components are as follows: January 28, 2018 January 29, 2017 (In millions)Inventories: Raw materials$227 $252Work in-process192 176Finished goods377 366Total inventories$796 $794 January 28, 2018 January 29, 2017 EstimatedUseful Life (In millions) (In years)Property and Equipment: Land$218 $218 (A)Building348 13 25-30 (B)Test equipment462 427 3-5Computer equipment285 188 3-5Leasehold improvements198 176 (C)Software and licenses88 63 3-5Office furniture and equipment79 49 5Capital leases28 28 (C)Construction in process31 29 (D)Total property and equipment, gross1,737 1,191 Accumulated depreciation and amortization(740) (670) Total property and equipment, net$997 $521 (A)Land is a non-depreciable asset.(B)In January 2018, we terminated the off-balance sheet, build-to-suit operating lease financing arrangement related to our new Santa Clara campus building and exercised our option to purchase the property for $335 million, which has been recorded as Property and Equipment, net in our Consolidated Balance Sheet.(C)Leasehold improvements and capital leases are amortized based on the lesser of either the asset’s estimated useful life or the remaining expected lease term.(D)Construction in process represents assets that are not available for their intended use as of the balance sheet date.Depreciation expense for fiscal years 2018, 2017, and 2016 was $144 million, $118 million, and $124 million, respectively.Accumulated amortization of leasehold improvements and capital leases was $178 million and $164 million as of January 28, 2018 and January 29, 2017, respectively. Amortization of leasehold improvements and capital leases is included in depreciation and amortization expense.61Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) January 28, 2018 January 29, 2017 (In millions)Accrued and Other Current Liabilities: Customer related liabilities (1)$181 $197Accrued payroll and related expenses172 137Deferred revenue (2)53 85Taxes payable33 4Coupon interest on debt obligations20 21Accrued royalties17 7Professional service fees15 13Warranty accrual (3)15 8Accrued restructuring and other charges7 13Leases payable5 4Contributions payable4 4Other20 14Total accrued and other current liabilities$542 $507(1)Customer related liabilities include accrued customer programs, such as rebates and marketing development funds.(2)Deferred revenue primarily includes customer advances and deferrals related to license and service arrangements.(3)Refer to Note 10 of these Notes to the Consolidated Financial Statements for a discussion regarding warranties. January 28, 2018 January 29, 2017 (In millions)Other Long-Term Liabilities: Income tax payable (1)$559 $96Deferred income tax liability18 141Deferred revenue15 4Employee benefits liability12 10Contributions payable9 9Deferred rent9 6Licenses payable8 1Other2 10Total other long-term liabilities$632 $277(1)Represents the long-term portion of the one-time transition tax payable of $369 million, as well as unrecognized tax benefits of $175 million and related interest and penalties of $15 million. Refer to Note 13 of these Notes to the Consolidated Financial Statements for additional information.Note 9 - Derivative Financial InstrumentsIn fiscal year 2016, we entered into an interest rate swap for a portion of the operating lease financing arrangement for our new Santa Clara campus building. In January 2018, we terminated the operating lease financing arrangement and purchased the property. Concurrently, the related interest rate swap was terminated.We enter into foreign currency forward contracts to mitigate the impact of foreign currency exchange rate movements on our operating expenses. We designate these contracts as cash flow hedges and assess the effectiveness of the hedge relationships on a spot to spot basis. Gains or losses on the contracts are recorded in accumulated other comprehensive income or loss and reclassified to operating expense when the related operating expenses are recognized in earnings or ineffectiveness should occur. The fair value of the contracts was not significant as of January 28, 2018 and January 29, 2017.62Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)We also enter into foreign currency forward contracts to mitigate the impact of foreign currency movements on monetary assets and liabilities that are denominated in currencies other than U.S. dollar. These forward contracts were not designated for hedge accounting treatment. Therefore, the change in fair value of these contracts is recorded in other income or expense and offsets the change in fair value of the hedged foreign currency denominated monetary assets and liabilities, which is also recorded in other income or expense.The table below presents the notional value of our foreign currency forward contracts outstanding as of January 28, 2018 and January 29, 2017: January 28, 2018 January 29, 2017 (In millions)Designated as cash flow hedges$104 $67Not designated for hedge accounting$94 $32As of January 28, 2018, the maturities of the designated foreign currency forward contracts were three months or less. We expect to realize all gains and losses deferred into accumulated other comprehensive income or loss related to these foreign currency forward contracts within the next twelve months.During fiscal years 2018 and 2017, the impact of derivative financial instruments designated for hedge accounting treatment on other comprehensive income or loss was not significant and all such instruments were determined to be highly effective. Therefore, there were no gains or losses associated with ineffectiveness.Note 10 - GuaranteesU.S. GAAP requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, U.S. GAAP requires disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities.Accrual for Product Warranty LiabilitiesWe record a reduction to revenue for estimated product returns at the time revenue is recognized primarily based on historical return rates. Cost of revenue includes the estimated cost of product warranties. Under limited circumstances, we may offer an extended limited warranty to customers for certain products. Additionally, we accrue for known warranty and indemnification issues if a loss is probable and can be reasonably estimated.The estimated product returns and estimated product warranty liabilities recorded in accrued and other current liabilities on our Consolidated Balance Sheets as of January 28, 2018 and January 29, 2017 are as follows: January 28, 2018 January 29, 2017 (In millions)Balance at beginning of period$8 $11Additions14 2Deductions(7) (5)Balance at end of period $15 $8In connection with certain agreements that we have entered into in the past, we have provided indemnities to cover the indemnified party for matters such as tax, product, and employee liabilities. We have included intellectual property indemnification provisions in our technology related agreements with third parties. Maximum potential future payments cannot be estimated because many of these agreements do not have a maximum stated liability. We have not recorded any liability in our Consolidated Financial Statements for such indemnifications. 63Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)Note 11 - DebtLong-Term Debt2.20% Notes Due 2021 and 3.20% Notes Due 2026In fiscal year 2017, we issued $1.00 billion of the 2.20% Notes Due 2021, and $1.00 billion of the 3.20% Notes Due 2026, collectively, the Notes. Interest on the Notes is payable on March 16 and September 16 of each year, beginning on March 16, 2017. Upon 30 days' notice to holders of the Notes, we may redeem the Notes for cash prior to maturity, at redemption prices that include accrued and unpaid interest, if any, and a make-whole premium. However, no make-whole premium will be paid for redemptions of the Notes Due 2021 on or after August 16, 2021, or for redemptions of the Notes Due 2026 on or after June 16, 2026. The net proceeds from the Notes were $1.98 billion, after deducting debt discount and issuance costs.The Notes are our unsecured senior obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated indebtedness. The Notes are structurally subordinated to the liabilities of our subsidiaries and are effectively subordinated to any secured indebtedness to the extent of the value of the assets securing such indebtedness. All existing and future liabilities of our subsidiaries will be effectively senior to the Notes.The carrying value of our long-term debt and the associated interest rates were as follows: ExpectedRemaining Term (years) EffectiveInterest Rate January 28, 2018 January 29, 2017 (In millions)2.20% Notes Due 2021 3.6 2.38% $1,000 $1,0003.20% Notes Due 2026 8.6 3.31% 1,000 1,000Unamortized debt discount and issuance costs (15) (17)Net carrying amount $1,985 $1,983Convertible Debt1.00% Convertible Senior Notes Due 2018In fiscal year 2014, we issued $1.50 billion of 1.00% Convertible Senior Notes due 2018. Through January 28, 2018, we had settled an aggregate of $1.48 billion of the Convertible Notes. The Convertible Notes are unsecured, unsubordinated obligations of the Company paying interest in cash semi-annually at a rate of 1.00% per annum and will mature on December 1, 2018 unless previously repurchased or converted. Upon conversion, we pay cash up to the aggregate principal amount and pay or deliver cash, shares of our common stock or a combination thereof, at our election, of our conversion obligation in excess of the aggregate principal amount being converted. Holders may convert all or any portion of their Convertible Notes at any time prior to August 1, 2018 under certain circumstances. For example, during any fiscal quarter, if the last reported sale price of the common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day, the Convertible Notes become convertible at the holders' option. As this condition has been met, all outstanding Convertible Notes are convertible at the holders’ option through April 29, 2018. During fiscal year 2018, we paid cash to settle $812 million in principal amount of the Convertible Notes and had $15 million in principal amount outstanding as of January 28, 2018. We also issued 33 million shares of our common stock for the excess conversion value and recognized a loss of $19 million on early conversions of the Convertible Notes. Based on the closing price of our common stock of $243.33 on the last trading day of fiscal year 2018, the if-converted value of the remaining outstanding Convertible Notes exceeded their principal amount by approximately $174 million. As of January 28, 2018, the conversion rate was 49.9127 shares of common stock per $1,000 principal amount of the Convertible Notes (equivalent to an adjusted conversion price of $20.0350 per share of common stock).We separately accounted for the liability and equity components of the Convertible Notes as our conversion obligation in excess of the aggregate principal could be fully or partially settled in cash. The liability component was assigned by estimating 64Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)the fair value of a similar debt without the conversion feature. The difference between the net cash proceeds and the liability component was assigned as the equity component. The initial liability component of the Convertible Notes was valued at $1.35 billion and the initial carrying value of the equity component recorded in additional paid-in-capital was valued at $126 million. This equity component, together with the $23 million purchaser's discount to the par value of the Convertible Notes, represented the initial aggregate unamortized debt discount of $148 million. The debt discount is amortized as interest expense over the contractual term of the Convertible Notes using the effective interest method and an interest rate of 3.15%.As of January 28, 2018, the carrying value of the Convertible Notes was classified as a current liability and the difference between the principal amount and the carrying value of the Convertible Notes was classified as convertible debt conversion obligation in the mezzanine equity section of our Consolidated Balance Sheet. The convertible debt conversion obligation as of January 28, 2018 was not significant.The following table presents the carrying value of the Convertible Notes: January 28, 2018 January 29, 2017 (In millions)1.00% Convertible Senior Notes$15 $827Unamortized debt discount (1)— (31)Net carrying amount$15 $796(1) As of January 28, 2018, the balance of unamortized debt discount was not significant and will be fully amortized in fiscal year 2019.The following table presents interest expense for the contractual interest and the accretion of debt discount and issuance costs related to the Convertible Notes: Year Ended January 28, 2018 January 29, 2017 January 31, 2016 (In millions)Contractual coupon interest expense$— $9 $15Amortization of debt discount2 24 29Total interest expense related to Convertible Notes$2 $33 $44Note Hedges and WarrantsConcurrently with the issuance of the Convertible Notes, we entered into a convertible note hedge transaction, or the Note Hedges. The Note Hedges have an adjusted strike price of $20.0350 per share and allow us to receive shares of our common stock and/or cash related to the excess conversion value that we would deliver and/or pay, respectively, to the holders of the Convertible Notes upon conversion. Through January 28, 2018, we had received 56 million shares of our common stock from the exercise of a portion of the Note Hedges related to the settlement of $1.48 billion in principal amount of the Convertible Notes. In addition, concurrent with the offering of the Convertible Notes and the purchase of the Note Hedges, we entered into a separate warrant transaction, or the Warrants. In fiscal year 2017, we entered into an agreement to terminate 63 million warrants and delivered a total of 48 million shares of common stock. In fiscal year 2018, we entered into a second agreement to terminate the remaining 12 million warrants outstanding and delivered a total of 10 million shares of common stock. Therefore, no warrants were outstanding as of January 28, 2018.Revolving Credit FacilityIn fiscal year 2017, we entered into a credit agreement, or the Credit Agreement, under which we may borrow, repay and re-borrow amounts from time to time, up to $575 million, for working capital and other general corporate purposes. The commitments under the Credit Agreement are available for a 5-year period ending on October 7, 2021. The Credit Agreement also permits us to obtain additional revolving loan commitments up to $425 million, subject to certain conditions. As of 65Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)January 28, 2018, we had not borrowed any amounts and were in compliance with all related covenants under the Credit Agreement.Commercial PaperIn December 2017, we established a commercial paper program to support general corporate purposes. Under the program, we can issue up to $575 million in commercial paper. As of January 28, 2018, there was no commercial paper outstanding.Note 12 - Commitments and ContingenciesInventory Purchase ObligationsAs of January 28, 2018, we had outstanding inventory purchase obligations totaling $1.33 billion.Capital Purchase ObligationsAs of January 28, 2018, we had outstanding capital purchase obligations totaling $135 million.Lease ObligationsOur headquarters complex is located in Santa Clara, California and includes ten buildings that are leased properties. Future minimum lease payments related to headquarters operating leases total $63 million over the remaining terms of the leases, including predetermined rent escalations, and are included in the future minimum lease payment schedule below.Additionally, we have other domestic and international office facilities, including datacenter space, under operating leases expiring through fiscal year 2027. We also include non-cancelable obligations under certain software licensing arrangements as operating leases.Future minimum lease payments under our non-cancelable operating leases as of January 28, 2018, are as follows: Future Minimum Lease Obligations (In millions)Fiscal Year: 2019$632020532021502022442023252024 and thereafter11Total$246Rent expense for fiscal years 2018, 2017, and 2016 was $54 million, $46 million, and $45 million, respectively.Operating Lease Financing Arrangement In January 2018, we exercised the option to terminate the off-balance sheet, build-to-suit operating lease financing arrangement related to our new Santa Clara campus building, and purchased the building for $335 million.LitigationPolaris Innovations LimitedOn May 16, 2016, Polaris Innovations Limited, or Polaris, a non-practicing entity and wholly-owned subsidiary of Quarterhill Inc. (formerly WiLAN Inc.), filed a complaint against NVIDIA for patent infringement in the United States District Court for the Western District of Texas. Polaris alleges that NVIDIA has infringed and is continuing to infringe six U.S. patents relating to the control of dynamic random-access memory, or DRAM: 6,532,505; 7,124,325; 7,405,993; 7,886,122; 8,161,344; and 8,207,976. The complaint seeks unspecified monetary damages, enhanced damages, interest, fees, expenses, and costs 66Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)against NVIDIA. On September 14, 2016, NVIDIA answered the Polaris Complaint and asserted various defenses including non-infringement and invalidity of the six Polaris patents.On December 5, 2016, the Texas Court granted NVIDIA’s motion to transfer and ordered the case transferred to the Northern District of California.Between December 7, 2016 and July 25, 2017, NVIDIA filed multiple petitions for inter partes review, or IPR, at the United States Patent and Trademark Office, or USPTO, challenging the validity of each of the patents asserted by Polaris in the U.S. litigation. The USPTO instituted IPRs for U.S. Patent Nos. 6,532,505; 7,405,993; 7,886,122; and 8,161,344. The USPTO declined to institute IPRs on U.S. Patent Nos. 7,124,325 and 8,207,976.On June 15, 2017, the California Court granted NVIDIA’s motion to stay the district court litigation pending resolution of the petitions for IPR. The California Court has not set a trial date.On December 30, 2016, Polaris filed a complaint against NVIDIA for patent infringement in the Regional Court of Düsseldorf, Germany. Polaris alleges that NVIDIA has infringed and is continuing to infringe three patents relating to control of DRAM: European Patent No. EP1428225, and German Patent Nos. DE 10223167 and DE 1020066043668. On July 14, 2017, NVIDIA filed defenses to the infringement allegations including non-infringement with respect to each of the three asserted patents. An oral hearing is scheduled for February 21, 2019.Between March 31, 2017 and June 12, 2017, NVIDIA filed nullity actions with the German Patent Court challenging the validity of each of the patents asserted by Polaris in the German litigation.ZiiLabs 1 Patents LawsuitOn October 2, 2017, ZiiLabs Inc., Ltd., or ZiiLabs, a non-practicing entity, filed a complaint in the United States District Court for the District of Delaware alleging that NVIDIA has infringed and is continuing to infringe four U.S. patents relating to GPUs: 6,683,615; 7,050,061; 7,710,425; and 9,098,943, or the ZiiLabs 1 Patents. ZiiLabs is a Bermuda corporation and a wholly-owned subsidiary of Creative Technology Asia Limited, a Hong Kong company which is itself is a wholly-owned subsidiary of Creative Technology Ltd. a publicly traded Singapore company. The complaint seeks unspecified monetary damages, enhanced damages, interest, costs, and fees against NVIDIA and an injunction against further direct or direct infringement of the ZiiLabs 1 Patents. On November 27, 2017, NVIDIA answered the ZiiLabs complaint and asserted various defenses including non-infringement and invalidity of the ZiiLabs 1 Patents. On January 10, 2018, ZiiLabs filed a first amended complaint asserting infringement of a fifth U.S. Patent No. 6,977,649.ZiiLabs 2 Patents LawsuitsOn December 27, 2017, ZiiLabs filed a second complaint in the United States District Court for the District of Delaware alleging that NVIDIA has infringed four additional U.S. Patents: 6,181,355; 6,900,800; 8,144,156; and 8,643,659, or the ZiiLabs 2 Patents. The second complaint also seeks unspecified monetary damages, enhanced damages, interest, costs, and fees against NVIDIA and an injunction against further direct or direct infringement of the ZiiLabs 2 Patents.On December 29, 2017, ZiiLabs filed a request with the U.S. International Trade Commission, or USITC, to commence an Investigation pursuant to Section 337 of the Tariff Act of 1930 relating to the unlawful importation of certain graphics processors and products containing the same. ZiiLabs alleges that the unlawful importation results from the infringement of the ZiiLabs 2 Patents by products from respondents NVIDIA, ASUSTeK Computer Inc., ASUS Computer International, EVGA Corporation, Gigabyte Technology Co., Ltd., G.B.T. Inc., Micro-Star International Co., Ltd., MSI Computer Corp., Nintendo Co., Ltd., Nintendo of America Inc., PNY Technologies Inc., Zotac International (MCO) Ltd., and Zotac USA Inc.Accounting for Loss ContingenciesWhile there can be no assurance of favorable outcomes, we believe the claims made by the other parties in the above ongoing matters are without merit and we intend to vigorously defend the actions. As of January 28, 2018, we have not recorded any accrual for contingent liabilities associated with the legal proceedings described above based on our belief that liabilities, while possible, are not probable. Further, any possible loss or range of loss in these matters cannot be reasonably estimated at this time. We are engaged in other legal actions not described above arising in the ordinary course of its business and, while there can be no assurance of favorable outcomes, we believe that the ultimate outcome of these actions will not have a material adverse effect on our operating results, liquidity or financial position. 67Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)Note 13 - Income TaxesThe income tax expense (benefit) applicable to income before income taxes consists of the following: Year Ended January 28,2018 January 29,2017 January 31,2016 (In millions)Current income taxes: Federal$464 $7 $(43)State1 1 1Foreign43 34 25Total current508 42 (17)Deferred taxes: Federal(376) 199 134State— — —Foreign17 (2) —Total deferred(359) 197 134Charge in lieu of taxes attributable to employer stock option plans— — 12Income tax expense$149 $239 $129Income before income tax consists of the following: Year Ended January 28,2018 January 29,2017 January 31,2016 (In millions)Domestic (1)$1,600 $600 $129Foreign1,596 1,305 614Income before income tax$3,196 $1,905 $743(1)The increase in domestic income is primarily due to jurisdictional allocation of stock-based compensation charges.68Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)The income tax expense differs from the amount computed by applying the blended U.S. federal statutory rate of 33.9% for fiscal year 2018 and U.S. federal statutory rate of 35% for fiscal years 2017 and 2016 to income before income taxes as follows: Year Ended January 28,2018 January 29,2017 January 31,2016 (In millions)Tax expense computed at federal statutory rate$1,084 $667 $260Expense (benefit) resulting from: State income taxes, net of federal tax effect10 4 1Foreign tax rate differential(545) (315) (95)Stock-based compensation (1)(181) (70) 13Tax Cuts and Jobs Act of 2017 (2)(133) — —U.S. federal R&D tax credit(87) (52) (38)Tax expense related to intercompany transaction— 10 10Restructuring and expiration of statute of limitations— — (21)Other1 (5) (1)Income tax expense$149 $239 $129 (1)We adopted an accounting standard related to stock-based compensation effective February 1, 2016, which required the excess tax benefit to be reflected in our provision for income taxes rather than in additional paid-in-capital. The total related excess tax benefit recognized for fiscal year 2018 and 2017 was $197 million and $82 million, respectively. (2)We recognized a provisional tax benefit of $133 million, which was included as a component of income tax expense.The tax effect of temporary differences that gives rise to significant portions of the deferred tax assets and liabilities are presented below: January 28,2018 January 29,2017 (In millions)Deferred tax assets: Net operating loss carryforwards$67 $199Accruals and reserves, not currently deductible for tax purposes24 40Property, equipment and intangible assets32 50Research and other tax credit carryforwards579 728Stock-based compensation24 34Convertible debt— 6Gross deferred tax assets726 1,057Less valuation allowance(469) (353)Total deferred tax assets257 704Deferred tax liabilities: Acquired intangibles(4) (11)Unremitted earnings of foreign subsidiaries(26) (827)Gross deferred tax liabilities(30) (838)Net deferred tax asset (liability)$227 $(134)We recognized income tax expense of $149 million, $239 million, and $129 million for fiscal years 2018, 2017, and 2016, respectively. Our annual effective tax rate was 4.7%, 12.5%, and 17.3% for fiscal years 2018, 2017, and 2016, respectively. In December 2017, the TCJA was enacted into law. The TCJA significantly changes U.S. tax law, including a reduction of the U.S. federal corporate income tax rate from 35% to 21%, a requirement for companies to pay a one-time transition tax on 69Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)the earnings of certain foreign subsidiaries that were previously tax deferred and the creation of new taxes on certain foreign-source earnings. As a fiscal year-end taxpayer, certain provisions of the TCJA began to impact us in the fourth quarter of fiscal year 2018, while other provisions will impact us beginning in fiscal year 2019. The corporate tax reduction is effective as of January 1, 2018. Since we operate on a fiscal year rather than a calendar year, we are subject to transitional tax rules. As a result, our fiscal year 2018 federal statutory rate is a blended rate of 33.9%. The change in the statutory tax rate from 35% to 33.9% for fiscal year 2018 did not have a significant impact on the effective tax rate.U.S. GAAP requires companies to recognize the effect of tax law changes in the period of enactment. However, the SEC also issued guidance that allows companies to record provisional amounts during a measurement period not to exceed one year. Accordingly, as of January 28, 2018, we recognized a provisional tax benefit of $133 million as a component of income tax expense, which is our reasonable estimate of the effects of the tax law changes on existing deferred tax balances and the calculation of the one-time transition tax. The one-time transition tax is based on the post-1986 earnings and profits, or E&P, of our foreign subsidiaries. We had previously accrued deferred taxes on a portion of these same earnings. We recorded a provisional one-time transition tax liability of $971 million and released the previously accrued deferred tax liabilities of $1.15 billion, resulting in a net decrease to income tax expense of $176 million.We have reasonably estimated, but not yet completed, the calculation of the total post-1986 E&P for our foreign subsidiaries. Our calculation of the transition tax may change with further analysis, additional guidance from the U.S. federal and state tax authorities and additional guidance for the associated income tax accounting.As a result of the reduction of the corporate income tax rate to 21%, companies were required to remeasure their deferred tax assets and liabilities as of the date of enactment. As a result, we recorded a provisional income tax expense of $43 million on the write-down of our deferred tax balance.The decrease in the effective tax rate in fiscal year 2018 as compared to fiscal years 2017 and 2016 was primarily due to the provisional impact of the tax law changes and the recognition of excess tax benefits related to stock-based compensation. The decrease in our effective tax rate in fiscal year 2017 as compared to fiscal year 2016 was primarily due to the recognition of excess tax benefits from our adoption of a new accounting standard in fiscal year 2017 related to the simplification of certain aspects of stock-based compensation accounting.Our effective tax rate for fiscal year 2018 was lower than the blended U.S. federal statutory rate of 33.9% due primarily to income earned in jurisdictions, including British Virgin Islands, Hong Kong, China, Taiwan and United Kingdom, where the tax rate was lower than the U.S. federal statutory tax rates, favorable recognition of the U.S. federal research tax credit, the provisional impact of the recent tax law changes in 2018, and excess tax benefits related to stock-based compensation. Our effective tax rate for fiscal years 2017 and 2016 was lower than U.S. federal statutory tax rate of 35% due primarily to income earned in jurisdictions, including British Virgin Islands, Hong Kong, China, Taiwan and United Kingdom, where the tax rate was lower than the U.S. federal statutory tax rates, favorable recognition in those fiscal years of the U.S. federal research tax credit, favorable discrete events primarily attributable to the tax benefit recognized upon the expiration of the applicable statutes of limitations, and adoption of an accounting standard related to stock-based compensation in fiscal year 2017.As of January 28, 2018 and January 29, 2017, we had a valuation allowance of $469 million and $353 million, respectively, related to state and certain foreign deferred tax assets that management determined not likely to be realized due, in part, to projections of future taxable income. To the extent realization of the deferred tax assets becomes more-likely-than-not, we would recognize such deferred tax asset as an income tax benefit during the period.As of January 28, 2018, we had federal, state and foreign net operating loss carryforwards of $74 million, $226 million and $281 million, respectively. The federal and state carryforwards will expire beginning in fiscal year 2023 and 2019, respectively. The foreign net operating loss carryforwards of $281 million may be carried forward indefinitely. As of January 28, 2018, we had federal research tax credit carryforwards of $361 million that will begin to expire in fiscal year 2032. We have state research tax credit carryforwards of $575 million, of which $554 million is attributable to the State of California and may be carried over indefinitely, and $21 million is attributable to various other states and will expire beginning in fiscal year 2019. Our tax attributes, net operating loss and tax credit carryforwards, remain subject to audit and may be adjusted for changes or modification in tax laws, other authoritative interpretations thereof, or other facts and circumstances. 70Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)Utilization of federal, state, and foreign net operating losses and tax credit carryforwards may also be subject to limitations due to ownership changes and other limitations provided by the Internal Revenue Code and similar state and foreign tax provisions. If any such limitations apply, the federal, states, or foreign net operating loss and tax credit carryforwards, as applicable, may expire or be denied before utilization.As of January 28, 2018, we had $447 million of gross unrecognized tax benefits, of which $413 million would affect our effective tax rate if recognized. However, approximately $58 million of the unrecognized tax benefits were related to state income tax positions taken, that, if recognized, would be in the form of a carryforward deferred tax asset that would likely attract a full valuation allowance. The $413 million of unrecognized tax benefits as of January 28, 2018 consisted of $175 million recorded in non-current income taxes payable and $238 million reflected as a reduction to the related deferred tax assets.A reconciliation of gross unrecognized tax benefits is as follows: January 28,2018 January 29,2017 January 31,2016 (In millions)Balance at beginning of period$224 $230 $254Increases in tax positions for prior years7 3 —Decreases in tax positions for prior years(1) — (1)Increases in tax positions for current year222 46 28Settlements— (48) —Lapse in statute of limitations(5) (7) (51)Balance at end of period$447 $224 $230The increase in the unrecognized tax benefit in fiscal year 2018 is primarily due to the one-time transition tax imposed on foreign earnings under the TCJA. We classify an unrecognized tax benefit as a current liability, or amount refundable, to the extent that we anticipate payment or receipt of cash for income taxes within one year. The amount is classified as a long-term liability, or reduction of long-term deferred tax assets or amount refundable if we anticipate payment or receipt of cash for income taxes during a period beyond a year.Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of January 28, 2018, January 29, 2017, and January 31, 2016, we had accrued $15 million, $13 million, and $11 million, respectively, for the payment of interest and penalties related to unrecognized tax benefits, which is not included as a component of our unrecognized tax benefits. As of January 28, 2018, unrecognized tax benefits of $175 million and the related interest and penalties of $15 million are included in non-current income taxes payable.While we believe that we have adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than our accrued position. Accordingly, our provisions on federal, state and foreign tax-related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved. As of January 28, 2018, we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.We are subject to taxation by a number of taxing authorities both in the United States and throughout the world. As of January 28, 2018, the significant tax jurisdictions that may be subject to examination include the United States, Hong Kong, Taiwan, China, United Kingdom, Germany, and India for fiscal years 2003 through 2017. As of January 28, 2018, the significant tax jurisdictions for which we are currently under examination include India, Taiwan, UK, and Germany for fiscal years 2003 through 2017.Note 14 - Shareholders’ EquityCapital Return ProgramBeginning August 2004, our Board of Directors authorized us to repurchase our stock.During fiscal year 2018, we repurchased a total of 6 million shares for $909 million and paid $341 million in cash dividends to our shareholders.71Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)Through January 28, 2018, we have repurchased an aggregate of 251 million shares under our share repurchase program for a total cost of $5.5 billion. All shares delivered from these repurchases have been placed into treasury stock. As of January 28, 2018, we were authorized, subject to certain specifications, to repurchase additional shares of our common stock up to $1.82 billion through December 2020. Preferred StockAs of January 28, 2018 and January 29, 2017, there were no shares of preferred stock outstanding.Common StockWe are authorized to issue up to 2.00 billion shares of our common stock at $0.001 per share par value.Note 15 - Employee Retirement PlansWe have a 401(k) retirement plan covering substantially all of our United States employees. Under the plan, participating employees may defer up to 80% of their pre-tax earnings, subject to the Internal Revenue Service annual contribution limits and we match a portion of the employee contributions. Our contribution expense for fiscal years 2018, 2017, and 2016 was $23 million, $12 million, and $8 million, respectively. We also have defined contribution retirement plans outside of the United States to which we contributed $25 million, $23 million, and $21 million for fiscal years 2018, 2017, and 2016, respectively.Note 16 - Segment Information Our Chief Executive Officer, who is considered to be our chief operating decision maker, or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. Our operating segments are equivalent to our reportable segments. We report our business in two primary reportable segments - the GPU business and the Tegra Processor business - based on a single underlying graphics architecture. While our GPU and CUDA architecture is unified, our GPU product brands are aimed at specialized markets including GeForce for gamers; Quadro for designers; Tesla and DGX for AI data scientists and big data researchers; and GRID for cloud-based visual computing users. Our Tegra brand integrates an entire computer onto a single chip, and incorporates GPUs and multi-core CPUs to drive supercomputing for autonomous robots, drones, and cars, as well as for consoles and mobile gaming and entertainment devices.Under the single unifying graphics architecture for our GPU and Tegra Processors, we leverage our visual computing expertise by charging the operating expenses of certain core engineering functions to the GPU business, while charging the Tegra Processor business for the incremental cost of the teams working directly for that business. In instances where the operating expenses of certain functions benefit both reportable segments, our CODM assigns 100% of those expenses to the reportable segment that benefits the most. The “All Other” category presented below represents the revenue and expenses that our CODM does not assign to either the GPU business or the Tegra Processor business for purposes of making operating decisions or assessing financial performance. The revenue includes primarily patent licensing revenue and the expenses include stock-based compensation expense, corporate infrastructure and support costs, acquisition-related costs, legal settlement costs, contributions, restructuring and other charges, product warranty charge, and other non-recurring charges and benefits that our CODM deems to be enterprise in nature. Our CODM does not review any information regarding total assets on a reportable segment basis. Reportable segments do not record intersegment revenue, and, accordingly, there is none to be reported. The accounting policies for segment reporting are the same as for NVIDIA as a whole. The table below presents details of our reportable segments and the “All Other” category.72Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) GPU Tegra Processor All Other Consolidated (In millions)Year Ended January 28, 2018: Revenue$8,137 $1,534 $43 $9,714Depreciation and amortization expense$123 $37 $39 $199Operating income (loss)$3,507 $303 $(600) $3,210Year Ended January 29, 2017: Revenue$5,822 $824 $264 $6,910Depreciation and amortization expense$116 $29 $42 $187Operating income (loss)$2,180 $(9) $(237) $1,934Year Ended January 31, 2016: Revenue$4,187 $559 $264 $5,010Depreciation and amortization expense$110 $43 $44 $197Operating income (loss)$1,344 $(239) $(358) $747 Year Ended January 28, 2018 January 29, 2017 January 31, 2016 (In millions)Reconciling items included in "All Other" category: Unallocated revenue$43 $264 $264Stock-based compensation(391) (247) (204)Unallocated cost of revenue and operating expenses(237) (215) (244)Acquisition-related costs(13) (16) (22)Contributions(2) (4) —Legal settlement costs— (16) —Restructuring and other charges— (3) (131)Product warranty charges— — (21)Total$(600) $(237) $(358)Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if our customers’ revenue is attributable to end customers that are located in a different location. The following table summarizes information pertaining to our revenue from customers based on the invoicing address by geographic regions: Year Ended January 28, 2018 January 29, 2017 January 31, 2016Revenue:(In millions)Taiwan$2,991 $2,546 $1,912Other Asia Pacific2,066 1,010 749China1,896 1,305 806United States1,274 904 643Europe768 659 482Other Americas719 486 418Total revenue$9,714 $6,910 $5,01073Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)The following table summarizes information pertaining to our revenue by each of the specialized markets we serve: Year Ended January 28, 2018 January 29, 2017 January 31, 2016Revenue:(In millions)Gaming$5,513 $4,060 $2,818Professional Visualization934 835 750Datacenter1,932 830 339Automotive558 487 320OEM & IP777 698 783Total revenue$9,714 $6,910 $5,010The following table presents summarized information for long-lived assets by geographic region. Long-lived assets consist of property and equipment and deposits and other assets, and exclude goodwill and intangible assets. January 28, 2018 January 29, 2017Long-lived assets:(In millions)United States$928 $440Taiwan58 52India40 47China33 34Europe11 9Other Asia Pacific1 1Total long-lived assets$1,071 $583No single customer represented more than 10% of total revenue for fiscal year 2018. In fiscal years 2017 and 2016, we had one customer that represented 12% and 11% of our total revenue, respectively. The revenue was attributable to the GPU business.Accounts receivable from significant customers, those representing 10% or more of total accounts receivable for the respective periods, is summarized as follows: January 28, 2018 January 29, 2017Accounts Receivable: Customer A17% 19%Customer B11% 1%74Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)Note 17 - Quarterly Summary (Unaudited)The following table sets forth our unaudited consolidated financial results, for the last eight fiscal quarters: Fiscal Year 2018Quarters Ended January 28, 2018 October 28, 2017 July 29, 2017 April 29, 2017 (In millions, except per share data)Statements of Income Data: Revenue$2,911 $2,636 $2,230 $1,937Cost of revenue$1,110 $1,067 $928 $787Gross profit$1,801 $1,569 $1,302 $1,150Net income (1)$1,118 $838 $583 $507Net income per share (1): Basic$1.84 $1.39 $0.98 $0.86Diluted$1.78 $1.33 $0.92 $0.79(1)In the fourth quarter of fiscal year 2018, we recorded a U.S. tax reform provisional net tax benefit of $133 million associated with the one-time transition tax on our historical foreign earnings and the adjustment of deferred tax balances to the lower corporate tax rate. Refer to Note 13 of these Notes to the Consolidated Financial Statements for a discussion regarding the U.S. tax reform. Fiscal Year 2017Quarters Ended January 29, 2017 October 30, 2016 July 31,2016 May 1, 2016 (In millions, except per share data)Statements of Income Data: Revenue$2,173 $2,004 $1,428 $1,305Cost of revenue$870 $821 $602 $554Gross profit$1,303 $1,183 $826 $751Net income (1)$655 $542 $261 $208Net income per share (1): Basic$1.18 $1.01 $0.49 $0.39Diluted$0.99 $0.83 $0.41 $0.35(1)In the third quarter of fiscal year 2017, we adopted an accounting standard related to stock-based compensation, which requires adjustments to be reflected beginning in fiscal year 2017. The adoption of the new accounting standard impacted our previously reported quarterly results for fiscal year 2017.75Table of ContentsNVIDIA CORPORATION AND SUBSIDIARIESSCHEDULE II – VALUATION AND QUALIFYING ACCOUNTSDescription Balance atBeginning of Period Additions Deductions Balance atEnd of Period (In millions)Fiscal year 2018 Allowance for doubtful accounts $3 $1(1)$—(1)$4Sales return allowance $10 $15(2)$(16)(4)$9Deferred tax valuation allowance $353 $116(3)$— $469Fiscal year 2017 Allowance for doubtful accounts $2 $1(1)$—(1)$3Sales return allowance $9 $9(2)$(8)(4)$10Deferred tax valuation allowance $272 $81(3)$— $353Fiscal year 2016 Allowance for doubtful accounts $3$—(1)$(1)(1)$2Sales return allowance $14$9(2)$(14)(4)$9Deferred tax valuation allowance $261$11(3)$— $272(1)Additions represent allowance for doubtful accounts charged to expense and deductions represent amounts recorded as reduction to expense upon reassessment of allowance for doubtful accounts at period end.(2)Represents allowance for sales returns estimated at the time revenue is recognized primarily based on historical return rates and is charged as a reduction to revenue.(3)Represents change in valuation allowance primarily related to state and certain foreign deferred tax assets that management has determined not likely to be realized due, in part, to projections of future taxable income of the respective jurisdictions. Refer to Note 13 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information. (4)Represents sales returns.76Table of ContentsEXHIBIT INDEX Incorporated by Reference Exhibit No. Exhibit Description Schedule/Form File Number Exhibit Filing Date3.1 Amended and Restated Certificate of Incorporation S-8 333-74905 4.1 3/23/19993.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation 10-Q 0-23985 3.1 8/21/20083.3 Certificate of Amendment of Amended and Restated Certificate of Incorporation 8-K 0-23985 3.1 5/24/20113.4 Bylaws of NVIDIA Corporation, Amended and Restated as of November 29, 2016 8-K 0-23985 3.1 12/1/20164.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4 4.2 Specimen Stock Certificate S-1/A 333-47495 4.2 4/24/19984.3 Indenture (including the form of Notes) dated December 2, 2013 between NVIDIA Corporation and Wells Fargo Bank, National Association 8-K 0-23985 4.1 12/2/20134.4 Form of 1.00% Convertible Senior Note due 2018 (included in Exhibit 4.1) 8-K 0-23985 4.1 12/2/20134.5 Indenture, dated as of September 16, 2016, by and between the Company and Wells Fargo Bank, National Association, as Trustee 8-K 0-23985 4.1 9/16/20164.6 Officers’ Certificate, dated as of September 16, 2016 8-K 0-23985 4.2 9/16/20164.7 Form of 2021 Note 8-K 0-23985 Annex A to Exhibit 4.2 9/16/20164.8 Form of 2026 Note 8-K 0-23985 Annex B to Exhibit 4.2 9/16/201610.1 Form of Indemnity Agreement between NVIDIA Corporation and each of its directors and officers 8-K 0-23985 10.1 3/7/200610.2+ Amended and Restated 2007 Equity Incentive Plan 8-K 0-23985 10.1 5/23/201610.3+ 2007 Equity Incentive Plan - Non-Statutory Stock Option (Annual Grant - Board Service (2011)) 10-Q 0-23985 10.41 5/27/201110.4+ 2007 Equity Incentive Plan - Non-Statutory Stock Option (Initial Grant - Board Service (2011)) 8-K 0-23985 10.1 12/14/201110.5+ Amended and Restated 2007 Equity Incentive Plan - Non-Employee Director Stock Option Grant (2012 Annual Board Retainer) 10-Q 0-23985 10.4 5/23/201210.6+ 2007 Equity Incentive Plan - Non Statutory Stock Option 8-K 0-23985 10.2 9/13/201010.7+ 2007 Equity Incentive Plan - Incentive Stock Option 8-K 0-23985 10.21 9/13/201010.8+ Amended and Restated 2007 Equity Incentive Plan - Non Statutory Stock Option 10-Q 0-23985 10.1 8/22/201210.9+ Amended and Restated 2007 Equity Incentive Plan - Incentive Stock Option 10-Q 0-23985 10.2 8/22/201277Table of Contents10.10+ Amended and Restated 2007 Equity Incentive Plan - Restricted Stock Unit Grant Notice and Restricted Stock Unit Purchase Agreement 10-Q 0-23985 10.3 8/22/201210.11+ Amended and Restated 2007 Equity Incentive Plan - Non-Employee Director Restricted Stock Unit (with deferral option) 10-Q 0-23985 10.3 5/23/201210.12+ Amended and Restated 2007 Equity Incentive Plan - Non Statutory Stock Option (Initial Grant - Board Service) 8-K 0-23985 10.1 7/23/201310.13+ Amended and Restated 2007 Equity Incentive Plan - Non-Employee Director Deferred Restricted Stock Unit Grant Notice and Deferred Restricted Stock Unit Agreement (2015) 10-K 0-23985 10.25 3/12/201510.14+ Amended and Restated 2007 Equity Incentive Plan - Non-Employee Director Deferred Restricted Stock Unit Grant Notice and Deferred Restricted Stock Unit Agreement (2016) 10-K 0-23985 10.26 3/12/201510.15+ Amended and Restated 2007 Equity Incentive Plan - Non-Employee Director Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (2016) 10-K 0-23985 10.27 3/12/201510.16+ Amended and Restated 2007 Equity Incentive Plan - Non-Employee Director Restricted Stock Unit (Initial Grant - with deferral options) 10-Q 0-23985 10.1 5/20/201510.17+ Amended and Restated 2007 Equity Incentive Plan - Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement & Performance-Based Restricted Stock Unit Grant Notice and Performance-Based Restricted Stock Unit Agreement (2015) 10-Q 0-23985 10.2 5/20/201510.18+* Amended and Restated 2012 Employee Stock Purchase Plan 10.19+ Fiscal Year 2017 Variable Compensation Plan 8-K 0-23985 10.1 3/14/201610.20+ Fiscal Year 2018 Variable Compensation Plan 8-K 0-23985 10.1 3/13/201710.21+ Offer Letter between NVIDIA Corporation and Colette Kress, dated September 13, 2013 8-K 0-23985 10.1 9/16/201310.22+ Offer Letter between NVIDIA Corporation and Tim Teter, dated December 16, 2016 8-K 0-23985 10.1 1/19/201710.23 Master Confirmation and Supplemental Confirmation between NVIDIA Corporation and Goldman, Sachs & Co., dated May 14, 2013 10-Q 0-23985 10.3 5/22/201310.24 Base Convertible Note Hedge Transaction Confirmation 8-K 0-23985 99.1 12/2/201310.25 Base Warrant Transaction Confirmation 8-K 0-23985 99.2 12/2/201310.26 Additional Convertible Note Hedge Transaction Confirmation 8-K 0-23985 99.3 12/2/201310.27 Additional Warrant Transaction Confirmation 8-K 0-23985 99.4 12/2/201310.28 Termination Agreement, dated as of December 12, 2016, by and between NVIDIA Corporation and Goldman, Sachs & Co. 8-K 0-23985 10.1 12/13/201610.29 Second Termination Agreement, dated as of June 2, 2017, by and between NVIDIA Corporation and Goldman Sachs & Co. LLC 8-K 0-23985 10.1 6/5/201778Table of Contents10.30^ Participation Agreement dated June 19, 2015 among NVIDIA Land Development, LLC, Wachovia Service Corporation, Wells Fargo Bank, National Association, and a syndicate of other institutions 10-Q 0-23985 10.1 8/19/201510.31 First Amendment to Participation Agreement dated February 17, 2016 among NVIDIA Land Development, LLC, Wachovia Service Corporation, and Wells Fargo Bank, N.A., and a syndicate of other institutions 10-Q 0-23985 10.1 5/25/201610.32 Second Amendment to Participation Agreement dated September 9, 2016 among NVIDIA Land Development, LLC, Wachovia Service Corporation, and Wells Fargo Bank, N.A., and a syndicate of other institutions 10-Q 0-23985 10.1 11/22/201610.33 Third Amendment to Participation Agreement dated January 27, 2017 among NVIDIA Land Development, LLC, Wachovia Service Corporation, and Wells Fargo Bank, N.A., and a syndicate of other institutions 10-K 0-23985 10.34 3/1/201710.34 Agency Agreement dated June 19, 2015 between NVIDIA Land Development, LLC and Wachovia Service Corporation 10-Q 0-23985 10.2 8/19/201510.35 Real Property Lease Agreement dated June 19, 2015 between Wachovia Service Corporation and NVIDIA Land Development, LLC 10-Q 0-23985 10.3 8/19/201510.36 Credit Agreement, dated as of October 7, 2016 by and among NVIDIA Corporation, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto 8-K 0-23985 1.1 10/13/201610.37 Form of Commercial Paper Dealer Agreement between NVIDIA Corporation, as Issuer, and the Dealer party thereto 8-K 0-23985 10.1 12/15/201721.1* List of Registrant's Subsidiaries 23.1* Consent of PricewaterhouseCoopers LLP 24.1* Power of Attorney (included in signature page) 31.1* Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 193431.2* Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 193432.1#* Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 193432.2#* Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* XBRL Taxonomy Extension Labels Linkbase Document 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document * Filed herewith.+ Management contract or compensatory plan or arrangement.^ Confidential treatment has been granted with respect to portions of this exhibit.# In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act 79Table of ContentsPeriodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.Copies of above exhibits not contained herein are available to any shareholder upon written request to:Investor Relations: NVIDIA Corporation, 2788 San Tomas Expressway, Santa Clara, CA 9505180Table of ContentsSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 28, 2018.NVIDIA CorporationBy:/s/ Jen-Hsun Huang Jen-Hsun Huang President and Chief Executive OfficerPOWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jen-Hsun Huang and Colette M. Kress, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-facts and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitutes, may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.81Table of ContentsSignatureTitleDate/s/ JEN-HSUN HUANG President, Chief Executive Officer and Director(Principal Executive Officer)February 28, 2018Jen-Hsun Huang /s/ COLETTE M. KRESS Executive Vice President and Chief Financial Officer(Principal Financial Officer)February 28, 2018Colette M. Kress /s/ MICHAEL J. BYRON Vice President and Chief Accounting Officer(Principal Accounting Officer)February 28, 2018Michael J. Byron /s/ ROBERT BURGESSDirectorFebruary 28, 2018Robert Burgess /s/ TENCH COXE DirectorFebruary 28, 2018Tench Coxe /s/ PERSIS DRELLDirectorFebruary 28, 2018Persis Drell /s/ JAMES C. GAITHERDirectorFebruary 28, 2018James C. Gaither /s/ DAWN HUDSONDirectorFebruary 28, 2018Dawn Hudson /s/ HARVEY C. JONES DirectorFebruary 28, 2018Harvey C. Jones /s/ MICHAEL MCCAFFERYDirectorFebruary 28, 2018Michael McCaffery /s/ MARK L. PERRY DirectorFebruary 28, 2018Mark L. Perry /s/ A. BROOKE SEAWELLDirectorFebruary 28, 2018A. Brooke Seawell /s/ MARK STEVENS DirectorFebruary 28, 2018Mark Stevens 82
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
February 28, 2024
Date of Report (Date of earliest event reported)
Apple Inc.
(Exact name of Registrant as specified in its charter)
California
001-36743
94-2404110
(State or other jurisdiction
of incorporation)
(Commission
File Number)
(I.R.S. Employer
Identification No.)
One Apple Park Way
Cupertino, California 95014
(Address of principal executive offices) (Zip Code)
(408) 996-1010
(Registrant’s telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the
following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $0.00001 par value per share
AAPL
The Nasdaq Stock Market LLC
0.000% Notes due 2025
—
The Nasdaq Stock Market LLC
0.875% Notes due 2025
—
The Nasdaq Stock Market LLC
1.625% Notes due 2026
—
The Nasdaq Stock Market LLC
2.000% Notes due 2027
—
The Nasdaq Stock Market LLC
1.375% Notes due 2029
—
The Nasdaq Stock Market LLC
3.050% Notes due 2029
—
The Nasdaq Stock Market LLC
0.500% Notes due 2031
—
The Nasdaq Stock Market LLC
3.600% Notes due 2042
—
The Nasdaq Stock Market LLC
Indicate by check mark whether the Registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter)
or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ☐
Item 5.07 Submission of Matters to a Vote of Security Holders.
The 2024 Annual Meeting of Shareholders (the “Annual Meeting”) of Apple
Inc. (“Apple”) was held on February 28,
2024. At the Annual Meeting, Apple’s shareholders voted on the following eight proposals and cast their votes as described below.
1.
The individuals listed below were elected at the Annual Meeting to serve as directors of Apple until the next annual meeting of shareholders
and until their successors are duly elected and qualified:
For
Against
Abstained
Broker Non-Vote
Wanda Austin
9,071,238,739
41,808,115
20,441,053
3,275,055,901
Tim Cook
8,981,334,503
138,150,021
14,003,383
3,275,055,901
Alex Gorsky
8,952,997,553
160,822,837
19,667,517
3,275,055,901
Andrea Jung
8,629,655,897
484,800,970
19,031,040
3,275,055,901
Art Levinson
8,552,669,663
561,437,085
19,381,159
3,275,055,901
Monica Lozano
9,039,170,194
74,381,943
19,935,770
3,275,055,901
Ron Sugar
8,787,482,632
325,339,831
20,665,444
3,275,055,901
Sue Wagner
8,957,887,476
155,887,705
19,712,726
3,275,055,901
2.
A management proposal to ratify the appointment of Ernst & Young LLP as
Apple’s independent registered public accounting firm for fiscal year 2024 was approved.
For
Against
Abstained
12,211,115,276
164,034,315
33,394,217
3.
An advisory resolution to approve executive compensation was approved.
For
Against
Abstained
Broker Non-Vote
8,385,653,963
702,309,882
45,524,062
3,275,055,901
4.
A shareholder proposal entitled “EEO Policy Risk Report” was not approved.
For
Against
Abstained
Broker Non-Vote
116,754,721
8,911,884,765
104,848,421
3,275,055,901
5.
A shareholder proposal entitled “Report on Ensuring Respect for Civil Liberties” was not approved.
For
Against
Abstained
Broker Non-Vote
164,816,396
8,853,955,511
114,716,000
3,275,055,901
6.
A shareholder proposal entitled “Racial and Gender Pay Gaps” was not approved.
For
Against
Abstained
Broker Non-Vote
2,817,465,452
6,248,518,245
67,504,210
3,275,055,901
7.
A shareholder proposal requesting a report on the use of AI was not approved.
For
Against
Abstained
Broker Non-Vote
3,333,209,334
5,549,219,868
251,058,705
3,275,055,901
8.
A shareholder proposal entitled “Congruency Report on Privacy and Human Rights” was not approved.
For
Against
Abstained
Broker Non-Vote
147,994,563
8,879,045,656
106,447,688
3,275,055,901
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date:
February 28, 2024
Apple Inc.
By:
/s/ Katherine Adams
Katherine Adams
Senior Vice President,
General Counsel and Secretary
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10-K_1326801_0001326801-23-000013.htm
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STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________________FORM 10-K __________________________ (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-35551 __________________________Meta Platforms, Inc. (Exact name of registrant as specified in its charter) __________________________Delaware20-1665019(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)1601 Willow Road, Menlo Park, California 94025 (Address of principal executive offices and Zip Code) (650) 543-4800 (Registrant's telephone number, including area code) __________________________Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading symbol(s)Name of each exchange on which registeredClass A Common Stock, $0.000006 par valueMETAThe Nasdaq Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer☒Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2022, the last business day of the registrant's most recently completed second fiscal quarter, was $378 billion based upon the closing price reported for such date on the Nasdaq Global Select Market. On January 27, 2023, the registrant had 2,225,763,078 shares of Class A common stock and 366,876,470 shares of Class B common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended December 31, 2022. Meta Platforms, Inc. Form 10-K TABLE OF CONTENTS PageNote About Forward-Looking Statements3Limitations of Key Metrics and Other Data4PART IItem 1.Business7Item 1A.Risk Factors14Item 1B.Unresolved Staff Comments48Item 2.Properties48Item 3.Legal Proceedings48Item 4.Mine Safety Disclosures51PART IIItem 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities52Item 6.[Reserved]53Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations54Item 7A.Quantitative and Qualitative Disclosures About Market Risk78Item 8.Financial Statements and Supplementary Data80Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure120Item 9A.Controls and Procedures120Item 9B.Other Information120Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections120PART IIIItem 10.Directors, Executive Officers and Corporate Governance121Item 11.Executive Compensation121Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters121Item 13.Certain Relationships and Related Transactions, and Director Independence121Item 14.Principal Accountant Fees and Services121PART IVItem 15.Exhibit and Financial Statement Schedules122Item 16.Form 10-K Summary124Signatures1252Table of ContentsNOTE ABOUT FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K contains forward-looking statements. All statements contained in this Annual Report on Form 10-K other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part I, Item 1A, "Risk Factors" in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Unless expressly indicated or the context requires otherwise, the terms "Meta," "company," "we," "us," and "our" in this document refer to Meta Platforms, Inc., a Delaware corporation, and, where appropriate, its subsidiaries. The term "Family" refers to our Facebook, Instagram, Messenger, and WhatsApp products. For references to accessing Meta's products on the "web" or via a "website," such terms refer to accessing such products on personal computers. For references to accessing Meta's products on "mobile," such term refers to accessing such products via a mobile application or via a mobile-optimized version of our websites such as m.facebook.com, whether on a mobile phone or tablet.3Table of ContentsLIMITATIONS OF KEY METRICS AND OTHER DATAThe numbers for our key metrics are calculated using internal company data based on the activity of user accounts. We report our estimates of the numbers of our daily active people (DAP), monthly active people (MAP), and average revenue per person (ARPP) (collectively, our "Family metrics") based on the activity of users who visited at least one of Facebook, Instagram, Messenger, and WhatsApp (collectively, our "Family" of products) during the applicable period of measurement. We have historically reported the numbers of our daily active users (DAUs), monthly active users (MAUs), and average revenue per user (ARPU) (collectively, our "Facebook metrics") based on user activity only on Facebook and Messenger and not on our other products. We believe our Family metrics better reflect the size of our community and the fact that many people are using more than one of our products. As a result, over time we intend to report our Family metrics as key metrics in place of DAUs, MAUs, and ARPU in our periodic reports filed with the Securities and Exchange Commission.While these numbers are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring usage of our products across large online and mobile populations around the world. The methodologies used to measure these metrics require significant judgment and are also susceptible to algorithm or other technical errors. In addition, we are continually seeking to improve our estimates of our user base, and such estimates may change due to improvements or changes in our methodology. We regularly review our processes for calculating these metrics, and from time to time we discover inaccuracies in our metrics or make adjustments to improve their accuracy, which can result in adjustments to our historical metrics. Our ability to recalculate our historical metrics may be impacted by data limitations or other factors that require us to apply different methodologies for such adjustments. We generally do not intend to update previously disclosed Family metrics for any such inaccuracies or adjustments that are within the error margins disclosed below.In addition, our Family metrics and Facebook metrics estimates will differ from estimates published by third parties due to differences in methodology.Family MetricsMany people in our community have user accounts on more than one of our products, and some people have multiple user accounts within an individual product. Accordingly, for our Family metrics, we do not seek to count the total number of user accounts across our products because we believe that would not reflect the actual size of our community. Rather, our Family metrics represent our estimates of the number of unique people using at least one of Facebook, Instagram, Messenger, and WhatsApp. We do not require people to use a common identifier or link their accounts to use multiple products in our Family, and therefore must seek to attribute multiple user accounts within and across products to individual people. To calculate these metrics, we rely upon complex techniques, algorithms and machine learning models that seek to count the individual people behind user accounts, including by matching multiple user accounts within an individual product and across multiple products when we believe they are attributable to a single person, and counting such group of accounts as one person. These techniques and models require significant judgment, are subject to data and other limitations discussed below, and inherently are subject to statistical variances and uncertainties. We estimate the potential error in our Family metrics primarily based on user survey data, which itself is subject to error as well. While we expect the error margin for our Family metrics to vary from period to period, we estimate that such margin generally will be approximately 3% of our worldwide MAP. At our scale, it is very difficult to attribute multiple user accounts within and across products to individual people, and it is possible that the actual numbers of unique people using our products may vary significantly from our estimates, potentially beyond our estimated error margins. As a result, it is also possible that our Family metrics may indicate changes or trends in user numbers that do not match actual changes or trends.To calculate our estimates of Family DAP and MAP, we currently use a series of machine learning models that are developed based on internal reviews of limited samples of user accounts and calibrated against user survey data. We apply significant judgment in designing these models and calculating these estimates. For example, to match user accounts within individual products and across multiple products, we use data signals such as similar device information, IP addresses, and user names. We also calibrate our models against data from periodic user surveys of varying sizes and frequency across our products, which are inherently subject to error. The timing and results of such user surveys have in the past contributed, and may in the future contribute, to changes in our reported Family metrics from period to period. In addition, our data limitations may affect our understanding of certain details of our business and increase the risk of error for our Family metrics estimates. Our techniques and models rely on a variety of data signals from different products, and we rely on more limited data signals for some products compared to others. For example, as a result of limited visibility into encrypted products, we have fewer 4Table of Contentsdata signals from WhatsApp user accounts and primarily rely on phone numbers and device information to match WhatsApp user accounts with accounts on our other products. Similarly, although Messenger Kids users are included in our Family metrics, we do not seek to match their accounts with accounts on our other applications for purposes of calculating DAP and MAP. Any loss of access to data signals we use in our process for calculating Family metrics, whether as a result of our own product decisions, actions by third-party browser or mobile platforms, regulatory or legislative requirements, or other factors, also may impact the stability or accuracy of our reported Family metrics, as well as our ability to report these metrics at all. Our estimates of Family metrics also may change as our methodologies evolve, including through the application of new data signals or technologies, product changes, or other improvements in our user surveys, algorithms, or machine learning that may improve our ability to match accounts within and across our products or otherwise evaluate the broad population of our users. In addition, such evolution may allow us to identify previously undetected violating accounts (as defined below).We regularly evaluate our Family metrics to estimate the percentage of our MAP consisting solely of "violating" accounts. We define "violating" accounts as accounts which we believe are intended to be used for purposes that violate our terms of service, including bots and spam. In the fourth quarter of 2022, we estimated that approximately 3% of our worldwide MAP consisted solely of violating accounts. Such estimation is based on an internal review of a limited sample of accounts, and we apply significant judgment in making this determination. For example, we look for account information and behaviors associated with Facebook and Instagram accounts that appear to be inauthentic to the reviewers, but we have limited visibility into WhatsApp user activity due to encryption. In addition, if we believe an individual person has one or more violating accounts, we do not include such person in our violating accounts estimation as long as we believe they have one account that does not constitute a violating account. From time to time, we disable certain user accounts, make product changes, or take other actions to reduce the number of violating accounts among our users, which may also reduce our DAP and MAP estimates in a particular period. We intend to disclose our estimates of the percentage of our MAP consisting solely of violating accounts on an annual basis. Violating accounts are very difficult to measure at our scale, and it is possible that the actual number of violating accounts may vary significantly from our estimates.The numbers of Family DAP and MAP discussed in this Annual Report on Form 10-K, as well as ARPP, do not include users on our other products, unless they would otherwise qualify as DAP or MAP, respectively, based on their other activities on our Family products.Facebook MetricsWe regularly evaluate our Facebook metrics to estimate the number of "duplicate" and "false" accounts among our MAUs. A duplicate account is one that a user maintains in addition to his or her principal account. We divide "false" accounts into two categories: (1) user-misclassified accounts, where users have created personal profiles for a business, organization, or non-human entity such as a pet (such entities are permitted on Facebook using a Page rather than a personal profile under our terms of service); and (2) violating accounts, which represent user profiles that we believe are intended to be used for purposes that violate our terms of service, such as bots and spam. The estimates of duplicate and false accounts are based on an internal review of a limited sample of accounts, and we apply significant judgment in making this determination. For example, to identify duplicate accounts we use data signals such as identical IP addresses and similar user names, and to identify false accounts we look for names that appear to be fake or other behavior that appears inauthentic to the reviewers. Any loss of access to data signals we use in this process, whether as a result of our own product decisions, actions by third-party browser or mobile platforms, regulatory or legislative requirements, or other factors, also may impact the stability or accuracy of our estimates of duplicate and false accounts. Our estimates also may change as our methodologies evolve, including through the application of new data signals or technologies or product changes that may allow us to identify previously undetected duplicate or false accounts and may improve our ability to evaluate a broader population of our users. Duplicate and false accounts are very difficult to measure at our scale, and it is possible that the actual number of duplicate and false accounts may vary significantly from our estimates.In the fourth quarter of 2022, we estimated that duplicate accounts may have represented approximately 11% of our worldwide MAUs. We believe the percentage of duplicate accounts is meaningfully higher in developing markets such as the Philippines and Vietnam, as compared to more developed markets. In the fourth quarter of 2022, we estimated that false accounts may have represented approximately 4-5% of our worldwide MAUs. Our estimation of false accounts can vary as a result of episodic spikes in the creation of such accounts, which we have seen originate more frequently in specific countries such as Indonesia, Nigeria, and Vietnam. From time to time, we disable certain user accounts, make product changes, or take other actions to reduce the number of duplicate or false accounts among our users, which may also reduce our DAU and 5Table of ContentsMAU estimates in a particular period. We intend to disclose our estimates of the number of duplicate and false accounts among our MAUs on an annual basis.The numbers of DAUs and MAUs discussed in this Annual Report on Form 10-K, as well as ARPU, do not include users on Instagram, WhatsApp, or our other products, unless they would otherwise qualify as DAUs or MAUs, respectively, based on their other activities on Facebook.User GeographyOur data regarding the geographic location of our users is estimated based on a number of factors, such as the user's IP address and self-disclosed location. These factors may not always accurately reflect the user's actual location. For example, a user may appear to be accessing Facebook from the location of the proxy server that the user connects to rather than from the user's actual location. The methodologies used to measure our metrics are also susceptible to algorithm or other technical errors, and our estimates for revenue by user location and revenue by user device are also affected by these factors. 6Table of ContentsPART IItem 1.Business OverviewOur mission is to give people the power to build community and bring the world closer together. All of our products, including our apps, share the vision of helping to bring the metaverse to life. We build technology that helps people connect and share, find communities, and grow businesses. Our useful and engaging products enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and wearables. We also help people discover and learn about what is going on in the world around them, enable people to share their experiences, ideas, photos and videos, and other activities with audiences ranging from their closest family members and friends to the public at large, and stay connected everywhere by accessing our products. Meta is moving our offerings beyond 2D screens toward immersive experiences like augmented and virtual reality to help build the metaverse, which we believe is the next evolution in social technology. Our vision for the metaverse does not center on any single product, but rather an entire ecosystem of experiences, devices, and new technologies. While the metaverse is in the very early stages of its development, we believe it will become the next computing platform and the future of social interaction.We report financial results for two segments: Family of Apps (FoA) and Reality Labs (RL). Currently, we generate substantially all of our revenue from selling advertising placements on our family of apps to marketers, which is reflected in FoA. Ads on our platforms enable marketers to reach people across a range of marketing objectives, such as generating leads or driving awareness. Marketers purchase ads that can appear in multiple places including on Facebook, Instagram, Messenger, and third-party applications and websites. RL reflects our efforts to develop the metaverse and generates revenue from sales of consumer hardware products, software and content. We invest in our business based on our company priorities, and the majority of our investments are directed toward developing our family of apps. In 2022, 82% of our total costs and expenses were recognized in FoA and 18% were recognized in RL. Our FoA investments were $71.79 billion in 2022 and include expenses relating to headcount, data centers and technical infrastructure as part of our efforts to develop our apps and our advertising services. We are also making significant investments in our metaverse efforts, including developing virtual and augmented reality devices, software for social platforms, neural interfaces, and other foundational technologies for the metaverse. Our total RL investments were $15.88 billion in 2022 and include expenses relating to headcount and technology development across these efforts. As these are fundamentally new technologies that we expect will evolve as the metaverse ecosystem develops, many products for the metaverse may only be fully realized in the next decade. Although it is inherently difficult to predict when and how the metaverse ecosystem will develop, we expect our RL segment to continue to operate at a loss for the foreseeable future, and our ability to support our metaverse efforts is dependent on generating sufficient profits from other areas of our business. We expect this will be a complex, evolving, and long-term initiative. We are investing now because we believe this is the next chapter of the internet and will unlock monetization opportunities for businesses, developers, and creators, including around advertising, hardware, and digital goods. Family of Apps Products•Facebook. Facebook helps give people the power to build community and bring the world closer together. It's a place for people to share life's moments and discuss what's happening, nurture and build relationships, discover and connect to interests, and create economic opportunity. They can do this through Feed, Reels, Stories, Groups, and more.•Instagram. Instagram brings people closer to the people and things they love. Instagram Feed, Stories, Reels, Video, Live, Shops, and messaging are places where people and creators can connect and express themselves through photos, video, and private messaging, and discover and shop from their favorite businesses. •Messenger. Messenger is a simple yet powerful messaging application for people to connect with friends, family, communities, and businesses across platforms and devices through text, audio and video calls. 7Table of Contents•WhatsApp. WhatsApp is a simple, reliable, and secure messaging application that is used by people and businesses around the world to communicate and transact in a private way.Reality Labs ProductsMany of our metaverse investments are directed toward long-term, cutting edge research and development for products that are not on the market today and may only be fully realized in the next decade. This includes exploring new technologies such as neural interfaces using electromyography, which lets people control their devices using neuromuscular signals, as well as innovations in artificial intelligence (AI) and hardware to help build next-generation interfaces. In the near term, we are continuing to develop early metaverse experiences through Reality Labs' augmented and virtual reality products that help people feel connected, anytime, anywhere. Our current product offerings include Meta Quest virtual reality devices, as well as software and content available through the Meta Quest Store, which enable a range of social experiences that allow people to defy physical distance, including gaming, fitness, entertainment, and more. For example, we have launched Horizon Worlds, a social platform where people can interact with friends, meet new people, play games, and attend virtual events, and Horizon Workrooms, a virtual reality space for teams to connect and collaborate at work. As part of our virtual reality initiatives, we have also introduced mixed reality capabilities through our Meta Reality system on Meta Quest Pro, which allows users to experience the immersion and presence of virtual reality while still being grounded in the physical world. As part of our augmented reality initiatives, we have introduced Ray-Ban Stories smart glasses, which let people stay more present through hands-free interaction, and Meta Spark, a platform that allows creators and businesses to build augmented reality experiences that bring the digital and physical worlds together in our apps. In general, while all of these investments are part of our long-term initiative to help build the metaverse, our virtual reality and social platform efforts also include notable shorter-term projects developing specific products and services to go to market, whereas our augmented reality efforts are primarily directed toward longer-term research and development projects. For example, in 2023, we expect to spend approximately 50% of our Reality Labs operating expenses on our augmented reality initiatives, approximately 40% on our virtual reality initiatives, and approximately 10% on social platforms and other initiatives. We apply significant judgment in estimating this expense breakdown as there are certain shared costs across product lines, and our expectations are subject to change, including as the metaverse ecosystem and our business strategies evolve. In particular, we regularly evaluate our product roadmaps and make significant changes as our understanding of the technological challenges and market landscape and our product ideas and designs evolve.CompetitionOur business is characterized by innovation, rapid change, and disruptive technologies. We compete with companies providing connection, sharing, discovery, and communication products and services to users online, as well as companies that sell advertising to businesses looking to reach consumers and/or develop tools and systems for managing and optimizing advertising campaigns. We face significant competition in every aspect of our business, including, but not limited to, companies that facilitate the ability of users to create, share, communicate, and discover content and information online or enable marketers to reach their existing or prospective audiences. We compete to attract, engage, and retain people who use our products, to attract and retain businesses that use our free or paid business and advertising services, and to attract and retain developers who build compelling applications that integrate with our products. We also compete with companies that develop and deliver consumer hardware and virtual and augmented reality products and services. As we introduce or acquire new products, as our existing products evolve, or as other companies introduce new products and services, including as part of efforts to develop the metaverse or innovate through the application of new technologies such as AI, we may become subject to additional competition.TechnologyOur product development philosophy centers on continuous innovation in creating and improving products that are social by design, which means that our products are designed to place people and their social interactions at the core of the product experience. As our user base grows, as engagement with products like video and virtual reality increases, and as we deepen our investment in new technologies, our computing needs continue to expand. We make significant investments in technology both to improve our existing products and services and to develop new ones, as well as for our marketers and developers. We are also investing in protecting the security, privacy, and integrity of our platform by investing in both people and technology to strengthen our systems against abuse. Across all of these efforts, we are making significant investments in AI and machine learning, including to recommend relevant unconnected content across our products through our AI-powered discovery engine, to enhance our advertising tools and improve our ad delivery, targeting, and measurement capabilities, and 8Table of Contentsto develop new product features using generative AI.Sales and Operations The majority of our marketers use our self-service ad platform to launch and manage their advertising campaigns. We also have a global sales force that is focused on attracting and retaining advertisers and providing support to them throughout the stages of the marketing cycle from pre-purchase decision-making to real-time optimizations to post-campaign analytics. We work directly with these advertisers, as well as through advertising agencies and resellers. We operate offices in more than 90 cities around the globe, the majority of which have a sales presence. We also invest in and rely on self-service tools to provide direct customer support to our users and partners.MarketingHistorically, our communities have generally grown organically with people inviting their friends to connect with them, supported by internal efforts to stimulate awareness and interest. In addition, we have invested and will continue to invest in marketing our products and services to grow our brand and help build community around the world. Intellectual Property To establish and protect our proprietary rights, we rely on a combination of patents, trademarks, copyrights, trade secrets, including know-how, license agreements, confidentiality procedures, non-disclosure agreements with third parties, employee disclosure and invention assignment agreements, and other contractual rights. In addition, to further protect our proprietary rights, from time to time we have purchased patents and patent applications from third parties. We do not believe that our proprietary technology is dependent on any single patent or copyright or groups of related patents or copyrights. We believe the duration of our patents is adequate relative to the expected lives of our products.Government Regulation We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, many of which are still evolving and being tested in courts, and could be interpreted in ways that could harm our business. These laws and regulations involve matters including privacy, data use, data protection and personal information, biometrics, encryption, rights of publicity, content, integrity, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, data localization and storage, data disclosure, artificial intelligence and machine learning, electronic contracts and other communications, competition, protection of minors, consumer protection, civil rights, accessibility, telecommunications, product liability, e-commerce, taxation, economic or other trade controls including sanctions, anti-corruption and political law compliance, securities law compliance, and online payment services. Foreign data protection, privacy, content, competition, consumer protection, and other laws and regulations can impose different obligations, or penalties or fines for non-compliance, or be more restrictive than those in the United States.These U.S. federal, state, and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate, and may be interpreted and applied inconsistently from jurisdiction to jurisdiction and inconsistently with our current policies and practices. For example, regulatory or legislative actions or litigation affecting the manner in which we display content to our users, moderate content, or obtain consent to various practices, or otherwise relating to content that is made available on our products, could adversely affect our financial results. In the United States, the U.S. Supreme Court recently agreed to review a matter in which the scope of the protections available to online platforms under Section 230 of the Communications Decency Act (Section 230) is at issue. In addition, there have been, and continue to be, various efforts to remove or restrict the scope of the protections available to online platforms under Section 230, and any such changes may increase our costs or require significant changes to our products, business practices, or operations, which could adversely affect our business and financial results.We are also subject to evolving laws and regulations that dictate whether, how, and under what circumstances we can transfer, process and/or receive certain data that is critical to our operations, including data shared between countries or regions in which we operate and data shared among our products and services. If we are unable to transfer data between and among countries and regions in which we operate, or if we are restricted from sharing data among our products and services, 9Table of Contentsit could affect our ability to provide our services, the manner in which we provide our services or our ability to target ads, which could adversely affect our financial results. For example, the Privacy Shield, a transfer framework we relied upon for data transferred from the European Union to the United States, was invalidated in July 2020 by the Court of Justice of the European Union (CJEU). In addition, the other bases upon which Meta relies to transfer such data, such as Standard Contractual Clauses (SCCs), have been subjected to regulatory and judicial scrutiny. On July 6, 2022, we received a draft decision from the Irish Data Protection Commission (IDPC) that preliminarily concluded that Meta Platforms Ireland's reliance on SCCs in respect of European Union/European Economic Area Facebook user data does not achieve compliance with the General Data Protection Regulation (GDPR) and preliminarily proposed that such transfers of user data from the European Union to the United States should therefore be suspended. Separately, on March 25, 2022, the European Union and United States announced that they had reached an agreement in principle on a new EU-U.S. Data Privacy Framework (EU-U.S. DPF). On October 7, 2022, President Biden signed the Executive Order on Enhancing Safeguards for United States Signals Intelligence Activities (E.O.), and on December 13, 2022, the European Commission published its draft adequacy decision on the proposed new EU-U.S. DPF. We believe a final decision in this inquiry may issue as early as the first quarter of 2023. Although the E.O. is a significant and positive step, if no adequacy decision is adopted by the European Commission and we are unable to continue to rely on SCCs or rely upon other alternative means of data transfers from the European Union to the United States, we will likely be unable to offer a number of our most significant products and services, including Facebook and Instagram, in Europe, which would materially and adversely affect our business, financial condition, and results of operations.We have been subject to other significant legislative and regulatory developments in the past, and proposed or new legislation and regulations could significantly affect our business in the future. For example, we have implemented a number of product changes and controls as a result of requirements under the GDPR, and may implement additional changes in the future. The GDPR also requires submission of personal data breach notifications to our lead European Union privacy regulator, the IDPC, and includes significant penalties for non-compliance with the notification obligation as well as other requirements of the regulation. The interpretation of the GDPR is still evolving and draft decisions in investigations by the IDPC are subject to review by other European privacy regulators as part of the GDPR's consistency mechanism, which may lead to significant changes in the final outcome of such investigations. As a result, the interpretation and enforcement of the GDPR, as well as the imposition and amount of penalties for non-compliance, are subject to significant uncertainty. In addition, Brazil, the United Kingdom, and other countries have enacted similar data protection regulations imposing data privacy-related requirements on products and services offered to users in their respective jurisdictions. The California Consumer Privacy Act, as amended by the California Privacy Rights Act, and similar laws recently enacted by other states also establish certain transparency rules and create certain data privacy rights for users. In addition, the European Union's ePrivacy Directive and national implementation laws impose additional limitations on the use of data across messaging products and include significant penalties for non-compliance. Changes to our products or business practices as a result of these or similar developments have in the past adversely affected, and may in the future adversely affect, our advertising business. Similarly, there are a number of legislative proposals or recently enacted laws in the European Union, the United States, at both the federal and state level, as well as other jurisdictions that could impose new obligations or limitations in areas affecting our business. For example, the Digital Markets Act (DMA) in the European Union imposes new restrictions and requirements on companies like ours, including in areas such as the combination of data across services, mergers and acquisitions, and product design. The DMA also includes significant penalties for non-compliance, and its key requirements will be enforceable against designated gatekeeper companies in early 2024. We expect the DMA will cause us to incur significant compliance costs and make additional changes to our products or business practices. The requirements under the DMA will likely be subject to further interpretation and regulatory engagement. Pending or future proposals to modify competition laws in the United States and other jurisdictions could have similar effects. Further, the Digital Services Act (DSA) in the European Union, which will apply to our business as early as June 2023, will impose new restrictions and requirements for our products and services and may significantly increase our compliance costs. The DSA also includes significant penalties for non-compliance. In addition, some countries, such as India and Turkey, are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services, cause us to cease the offering of our products and services in certain countries, or result in fines or other penalties. New legislation or regulatory decisions that restrict our ability to collect and use information about minors may also result in limitations on our advertising services or our ability to offer products and services to minors in certain jurisdictions.We are, and expect to continue to be, the subject of investigations, inquiries, data requests, requests for information, actions, and audits by government authorities and regulators in the United States, Europe, and around the world, particularly in the areas of privacy and data protection, including with respect to minors, law enforcement, consumer protection, civil 10Table of Contentsrights, content moderation, and competition. We are also currently, and may in the future be, subject to regulatory orders or consent decrees, including the modified consent order we entered into with the U.S. Federal Trade Commission (FTC), which took effect in April 2020 and, among other matters, requires us to maintain a comprehensive privacy program. Orders issued by, or inquiries or enforcement actions initiated by, government or regulatory authorities could cause us to incur substantial costs, expose us to civil and criminal liability (including liability for our personnel) or penalties (including substantial monetary remedies), interrupt or require us to change our business practices in a manner materially adverse to our business (including changes to our products or user data practices), result in negative publicity and reputational harm, divert resources and the time and attention of management from our business, or subject us to other structural or behavioral remedies that adversely affect our business.For additional information about government regulation applicable to our business, see Part I, Item 1A, "Risk Factors" in this Annual Report on Form 10-K.Human Capital At Meta, our mission is to give people the power to build community and bring the world closer together. People are at the heart of every connection we empower, and we are proud of our unique company culture. We strive to build diverse teams across engineering, product design, marketing, and other areas to further our mission. As we look forward, we expect the lasting effects of the global COVID-19 pandemic will change how we work and who we reach. We are proud of our response to the COVID-19 pandemic both internally and externally. Employee benefits were robust and established quickly: we implemented 15 days of subsidized backup care for child, adult, or eldercare; we paid emergency leave to help address short-term or transitional needs; and we established a temporary stipend to help employees work from home, to name just a few of the benefits. We are committed to fostering an enriching environment for our global workforce, and we are focused on supporting our people in doing the best work of their careers, no matter where they are located. For example:•Location is flexible but presence is essential. As of September 30, 2022, 83% of managers at Meta had direct reports in a different location, and 24% of our employees were fully remote. •Remote work has helped us reach new talent in a competitive tech landscape and broaden our representation. We have seen that candidates who accepted remote job offers were more often underrepresented people. •Beginning March 2023, we are permitting employees in eligible roles to transfer to any Meta office within their country of employment. We expect distributed teams to establish strong norms that support efficiency, including more predictable and coordinated in-person working time. At the start of the COVID-19 pandemic, the world rapidly moved online and the surge of online commerce led to accelerated revenue growth. Many people predicted this would be a permanent acceleration that would continue even after the pandemic ended. Instead, not only did online commerce return to prior trends, but the more challenging macroeconomic environment and limitations on our ad targeting and measurement tools, among other factors, contributed to a decline in our revenue. To address this new environment, we took a number of steps to become a more capital efficient company and, in November 2022, made one of the most difficult changes in Meta's history and announced a layoff of approximately 11,000 employees. The cost reduction efforts that we announced, including our plans to scale back budgets, reduce company perks, shrink our real estate footprint, and restructure teams to increase efficiency alone would not bring our expenses in line with our revenue growth and we had to implement the layoff. We made it a priority to treat outgoing employees with respect and announced a package for U.S. employees that included: •Severance: 16 weeks of base pay plus two additional weeks for every year of service.•Paid time off: payment for all remaining paid time off.11Table of Contents•Restricted stock unit vesting: receipt of November 2022 vesting for outstanding employee restricted stock unit awards.•Health insurance: coverage of the cost of healthcare for employees and their families for six months.•Career services: three months of career support with an external vendor, including early access to unpublished job leads.•Immigration support: dedicated immigration specialists to help guide employees based on their needs.We offered similar support for outgoing employees outside of the United States, taking into account local employment laws. Employee Learning and DevelopmentWe value our investment in growing and keeping a highly skilled and efficient workforce. In addition to permitting employees to seek education reimbursement, we offer career development opportunities and work experience programs that extend beyond the physical and virtual classroom. To do this, we utilize various learning modalities, such as live virtual and in-person learning experiences, on-demand e-learning, self-service resources, learning communities, and coaching engagements. The Pulse of Our WorkforceEach year, we conduct company-wide employee surveys to help understand how employees feel about working at Meta and what we can do to improve their experience. Our surveys help us measure company, manager, and personal experience over time. Further, our more frequent surveys, such as those that have been administered daily to an ongoing random sample of employees, allows us to measure real-time sentiment around emerging events and company changes. These surveys are designed to invite feedback and actionable suggestions, inform decisions, and drive change across the company.Health and Well-beingMeta's health and well-being programs are designed to give employees a choice of flexible benefits to help them reach their personal well-being goals. Our programs are tailored to help boost employee physical and mental health, create financial peace of mind, provide support for families, and help employees build a strong community. Programs are designed and funded to support needs like autism care, cancer care, transgender services, holistic well-being, and mental health programs, which represent a few of the ways we support our employees and their dependents.Diversity, Equity and InclusionWe work to build a diverse and inclusive workplace where we can leverage our collective cognitive diversity to build the best products and make the best decisions for the global community we serve.We offer full-time fully remote positions, including in locations where we do not have offices, which has deepened the diversity of our candidate pool. As published in our Diversity Report in July 2022, we saw that providing remote optionality increased the diversity of the overall composition of our workforce: U.S candidates who accepted remote job offers were substantially more likely to be Black, Hispanic, Native American, Alaskan Native, Pacific Islander, veterans and/or people with disabilities, and globally, candidates who accepted remote job offers were more likely to be women. As part of our 2022 Diversity Report, we published our global gender diversity and U.S. ethnic diversity workforce data. As of June 30, 2022, our global employee base was comprised of 37.1% females and 62.9% males, and our U.S. employee base was comprised of the following ethnicities: 46.5% Asian, 37.6% White, 6.7% Hispanic, 4.9% Black, 4.0% two or more ethnicities, and 0.3% additional groups (including American Indian or Alaska Native and Native Hawaiian or Other Pacific Islander).We want our products to work for the world and we need to grow and keep the best talent in order to do that. To aid in this effort, we have taken steps to reduce bias from our hiring processes and performance management systems. 12Table of ContentsWe have also invested in learning opportunities to identify and reduce inherent bias through Diversity, Equity and Inclusion trainings for our employees and enhanced learning and development courses. In addition, we offer career development programs to employees, including opportunities for women leaders at Meta to connect, support and grow together and programs to help ensure that we develop leaders of color, build a more diverse leadership pipeline and foster a culture of sponsorship through leader advocacy. Compensation and BenefitsWe offer competitive compensation to attract and retain the best people, and we help care for our people so they can focus on our mission. Our employees' total compensation package includes market-competitive salary, bonuses or sales incentives, and equity. We generally offer full-time employees equity at the time of hire and through annual equity grants because we want them to be owners of the company and committed to our long-term success. We have conducted pay equity analyses for many years, and continue to be committed to pay equity. In 2022, we announced that our analyses indicate that we continue to have pay equity across genders globally and race in the United States for people in similar jobs, accounting for factors such as location, role, and level.Through Life@ Meta, our holistic approach to benefits, we provide our employees and their dependents with resources to help them thrive. We offer a wide range of benefits across areas such as health, family, finance, community, and time away, including healthcare and wellness benefits, family building benefits, family care resources, retirement savings plans, access to tax and legal services, and Meta Resource Groups to build community at Meta.Corporate InformationWe were incorporated in Delaware in July 2004. We completed our initial public offering in May 2012 and our Class A common stock is currently listed on the Nasdaq Global Select Market under the symbol "META." Our principal executive offices are located at 1601 Willow Road, Menlo Park, California 94025, and our telephone number is (650) 543-4800.Meta, the Meta logo, Facebook, FB, Instagram, Oculus, WhatsApp, and our other registered or common law trademarks, service marks, or trade names appearing in this Annual Report on Form 10-K are the property of Meta Platforms, Inc. or its affiliates. Other trademarks, service marks, or trade names appearing in this Annual Report on Form 10‑K are the property of their respective owners.Available InformationOur Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), are filed with the U.S. Securities and Exchange Commission (SEC). We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements, and other information with the SEC. Such reports and other information filed by us with the SEC are available free of charge on our website at investor.fb.com when such reports are available on the SEC's website. We use our investor.fb.com and about.fb.com/news/ websites as well as Mark Zuckerberg's Facebook Page (www.facebook.com/zuck) and Instagram account (www.instagram.com/zuck) as means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.The contents of the websites referred to above are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only.13Table of ContentsItem 1A.Risk FactorsCertain factors may have a material adverse effect on our business, financial condition, and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of our Class A common stock could decline, and you could lose part or all of your investment.Summary Risk Factors Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows, and prospects. These risks are discussed more fully below and include, but are not limited to, risks related to: Risks Related to Our Product Offerings•our ability to add and retain users and maintain levels of user engagement with our products;•the loss of, or reduction in spending by, our marketers;•reduced availability of data signals used by our ad targeting and measurement tools;•ineffective operation with mobile operating systems or changes in our relationships with mobile operating system partners;•failure of our new products, or changes to our existing products, to attract or retain users or generate revenue;Risks Related to Our Business Operations and Financial Results•our ability to compete effectively; •fluctuations in our financial results; •unfavorable media coverage and other risks affecting our ability to maintain and enhance our brands; •the COVID-19 pandemic, including its impact on our advertising business;•acquisitions and our ability to successfully integrate our acquisitions;•our ability to build, maintain, and scale our technical infrastructure, and risks associated with disruptions in our service;•operating our business in multiple countries around the world; •litigation, including class action lawsuits; Risks Related to Government Regulation and Enforcement•government restrictions on access to Facebook or our other products, or other actions that impair our ability to sell advertising, in their countries;•complex and evolving U.S. and foreign privacy, data use and data protection, content, competition, consumer protection, and other laws and regulations; 14Table of Contents•the impact of government investigations, enforcement actions, and settlements, including litigation and investigations by privacy and competition authorities;•our ability to comply with regulatory and legislative privacy requirements, including our consent order with the Federal Trade Commission (FTC); Risks Related to Data, Security, and Intellectual Property•the occurrence of security breaches, improper access to or disclosure of our data or user data, and other cyber incidents or undesirable activity on our platform;•our ability to obtain, maintain, protect, and enforce our intellectual property rights; andRisks Related to Ownership of Our Class A Common Stock•limitations on the ability of holders of our Class A Common Stock to influence corporate matters due to the dual class structure of our common stock and the control of a majority of the voting power of our outstanding capital stock by our founder, Chairman, and CEO.Risks Related to Our Product OfferingsIf we fail to retain existing users or add new users, or if our users decrease their level of engagement with our products, our revenue, financial results, and business may be significantly harmed.The size of our user base and our users' level of engagement across our products are critical to our success. Our financial performance has been and will continue to be significantly determined by our success in adding, retaining, and engaging active users of our products that deliver ad impressions, particularly for Facebook and Instagram. We have experienced, and expect to continue to experience, fluctuations and declines in the size of our active user base in one or more markets from time to time, particularly in markets where we have achieved higher penetration rates. User growth and engagement are also impacted by a number of other factors, including competitive products and services, such as TikTok, that have reduced some users' engagement with our products and services, as well as global and regional business, macroeconomic, and geopolitical conditions. For example, the COVID-19 pandemic has led to increases and decreases in the size and engagement of our active user base from period to period at different points during the pandemic, and may continue to have a varied impact on the size and engagement of our active user base in the future. In addition, in connection with the war in Ukraine, access to Facebook and Instagram was restricted in Russia and these services were then prohibited by the Russian government, which contributed to slight declines on a quarter-over-quarter basis in the number of DAUs and MAUs on Facebook in Europe in the first quarter and the second quarter of 2022, as well as a slight decline on a quarter-over-quarter basis in the total number of MAUs on Facebook in the second quarter of 2022. Any future declines in the size of our active user base may adversely impact our ability to deliver ad impressions and, in turn, our financial performance.If people do not perceive our products to be useful, reliable, and trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their engagement. A number of other social networking companies that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee that we will not experience a similar erosion of our active user base or engagement levels. Our user engagement patterns have changed over time, and user engagement can be difficult to measure, particularly as we introduce new and different products and services. Any number of factors can negatively affect user retention, growth, and engagement, including if:•users increasingly engage with other competitive products or services;•we fail to introduce new features, products, or services that users find engaging or if we introduce new products or services, or make changes to existing products and services, that are not favorably received;•users feel that their experience is diminished as a result of the decisions we make with respect to the frequency, prominence, format, size, and quality of ads that we display;15Table of Contents•users have difficulty installing, updating, or otherwise accessing our products on mobile devices as a result of actions by us or third parties that we rely on to distribute our products and deliver our services;•user behavior on any of our products changes, including decreases in the quality and frequency of content shared on our products and services;•we are unable to continue to develop products for mobile devices that users find engaging, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance;•there are decreases in user sentiment due to questions about the quality or usefulness of our products or our user data practices, concerns about the nature of content made available on our products, or concerns related to privacy, safety, security, well-being, or other factors;•we are unable to manage and prioritize information to ensure users are presented with content that is appropriate, interesting, useful, and relevant to them;•we are unable to obtain or attract engaging third-party content;•we are unable to successfully maintain or grow usage of and engagement with applications that integrate with our products;•users adopt new technologies where our products may be displaced in favor of other products or services, or may not be featured or otherwise available;•there are changes mandated by legislation, government and regulatory authorities, or litigation that adversely affect our products or users;•we are unable to offer a number of our most significant products and services, including Facebook and Instagram, in Europe, or are otherwise limited in our business operations, as a result of European regulators, courts, or legislative bodies determining that our reliance on Standard Contractual Clauses (SCCs) or other legal bases we rely upon to transfer user data from the European Union to the United States is invalid;•there is decreased engagement with our products, or failure to accept our terms of service, as part of privacy-focused changes that we have implemented or may implement in the future, whether voluntarily, in connection with the General Data Protection Regulation (GDPR), the European Union's ePrivacy Directive, the California Privacy Rights Act (CPRA), or other laws, regulations, or regulatory actions, or otherwise;•technical or other problems prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user experience, such as security breaches or failure to prevent or limit spam or similar content, or users feel their experience is diminished as a result of our efforts to protect the security and integrity of our platform; •we adopt terms, policies, or procedures related to areas such as sharing, content, user data, or advertising, or we take, or fail to take, actions to enforce our policies, that are perceived negatively by our users or the general public, including as a result of decisions or recommendations from the independent Oversight Board regarding content on our platform;•we elect to focus our product decisions on longer-term initiatives that do not prioritize near-term user growth and engagement (for example, we have announced plans to focus product decisions on optimizing the young adult experience in the long term);•we make changes in our user account login or registration processes or changes in how we promote different products and services across our family of products;16Table of Contents•initiatives designed to attract and retain users and engagement, including the use of new technologies such as artificial intelligence, are unsuccessful or discontinued, whether as a result of actions by us, our competitors, or other third parties, or otherwise;•third-party initiatives that may enable greater use of our products, including low-cost or discounted data plans, are scaled back or discontinued, or the pricing of data plans otherwise increases;•there is decreased engagement with our products as a result of taxes imposed on the use of social media or other mobile applications in certain countries, internet shutdowns, or other actions by governments that affect the accessibility of our products in their countries (for example, beginning in the first quarter of 2022, our user growth and engagement were adversely affected by the war in Ukraine and service restrictions imposed by the Russian government);•we fail to provide adequate customer service to users, marketers, developers, or other partners;•we, developers whose products are integrated with our products, or other partners and companies in our industry are the subject of adverse media reports or other negative publicity, including as a result of our or their user data practices; or•our current or future products, such as our development tools and application programming interfaces that enable developers to build, grow, and monetize applications, reduce user activity on our products by making it easier for our users to interact and share on third-party applications.From time to time, certain of these factors have negatively affected user retention, growth, and engagement to varying degrees. If we are unable to maintain or increase our user base and user engagement, particularly for our significant revenue-generating products like Facebook and Instagram, our revenue and financial results may be adversely affected. Any significant decrease in user retention, growth, or engagement could render our products less attractive to users, marketers, and developers, which is likely to have a material and adverse impact on our ability to deliver ad impressions and, accordingly, our revenue, business, financial condition, and results of operations. As the size of our active user base fluctuates in one or more markets from time to time, we will become increasingly dependent on our ability to maintain or increase levels of user engagement and monetization in order to grow revenue.We generate substantially all of our revenue from advertising. The loss of marketers, or reduction in spending by marketers, could seriously harm our business.Substantially all of our revenue is currently generated from marketers advertising on Facebook and Instagram. As is common in the industry, our marketers do not have long-term advertising commitments with us. Many of our marketers spend only a relatively small portion of their overall advertising budget with us. Marketers will not continue to do business with us, or they will reduce the budgets they are willing to commit to us, if we do not deliver ads in an effective manner, if they do not believe that their investment in advertising with us will generate a competitive return relative to other alternatives, or if they are not satisfied for any other reason. We have implemented, and we will continue to implement, changes to our user data practices. Some of these changes reduce our ability to effectively target ads, which has to some extent adversely affected, and will continue to adversely affect, our advertising business. If we are unable to provide marketers with a suitable return on investment, the demand for our ads may not increase, or may decline, in which case our revenue and financial results may be harmed.Our advertising revenue can also be adversely affected by a number of other factors, including:•decreases in user engagement, including time spent on our products;•our inability to continue to increase user access to and engagement with our products;•product changes or inventory management decisions we may make that change the size, format, frequency, or relative prominence of ads displayed on our products or of other unpaid content shared by marketers on our products;17Table of Contents•our inability to maintain or increase marketer demand, the pricing of our ads, or both;•our inability to maintain or increase the quantity or quality of ads shown to users;•changes to the content or application of third-party policies that limit our ability to deliver, target, or measure the effectiveness of advertising, including changes by mobile operating system and browser providers such as Apple and Google;•adverse litigation, government actions, or legislative, regulatory, or other legal developments relating to advertising, including developments that may impact our ability to deliver, target, or measure the effectiveness of advertising;•user behavior or product changes that may reduce traffic to features or products that we successfully monetize, such as our feed and Stories products, including as a result of increased usage of our Reels or other video or messaging products;•reductions of advertising by marketers due to our efforts to implement or enforce advertising policies that protect the security and integrity of our platform;•the availability, accuracy, utility, and security of analytics and measurement solutions offered by us or third parties that demonstrate the value of our ads to marketers, or our ability to further improve such tools;•loss of advertising market share to our competitors, including if prices to purchase our ads increase or if competitors offer lower priced, more integrated, or otherwise more effective products; •limitations on our ability to offer a number of our most significant products and services, including Facebook and Instagram, in Europe as a result of European regulators, courts, or legislative bodies determining that our reliance on SCCs or other legal bases we rely upon to transfer user data from the European Union to the United States is invalid;•changes in our marketing and sales or other operations that we are required to or elect to make as a result of risks related to complying with foreign laws or regulatory requirements or other government actions;•decisions by marketers to reduce their advertising as a result of announcements by us or adverse media reports or other negative publicity involving us, our user data practices, our advertising metrics or tools, content on our products, our interpretation, implementation, or enforcement of policies relating to content on our products (including as a result of decisions or recommendations from the independent Oversight Board), developers with applications that are integrated with our products, or other companies in our industry;•reductions of advertising by marketers due to objectionable content made available on our products by third parties, questions about our user data practices or the security of our platform, concerns about brand safety or potential legal liability, or uncertainty regarding their own legal and compliance obligations;•the effectiveness of our ad targeting or degree to which users opt in or out of the use of data for ads, including as a result of product changes and controls that we have implemented or may implement in the future in connection with the GDPR, ePrivacy Directive, California Privacy Rights Act (CPRA), the Digital Markets Act (DMA), other laws, regulations, regulatory actions, or litigation, or otherwise, that impact our ability to use data for advertising purposes;•the degree to which users cease or reduce the number of times they engage with our ads;•changes in the way advertising on mobile devices or on personal computers is measured or priced;•the success of technologies designed to block the display of ads or ad measurement tools;•changes in the composition of our marketer base or our inability to maintain or grow our marketer base; and18Table of Contents•the impact of macroeconomic and geopolitical conditions, whether in the advertising industry in general, or among specific types of marketers or within particular geographies (for example, the war in Ukraine and service restrictions imposed by the Russian government have adversely affected our advertising business in Europe and other regions).From time to time, certain of these factors have adversely affected our advertising revenue to varying degrees. The occurrence of any of these or other factors in the future could result in a reduction in demand for our ads, which may reduce the prices we receive for our ads, or cause marketers to stop advertising with us altogether, either of which would negatively affect our revenue and financial results. Our ad targeting and measurement tools incorporate data signals from user activity on websites and services that we do not control, as well as signals generated within our products, and changes to the regulatory environment, third-party mobile operating systems and browsers, and our own products have impacted, and we expect will continue to impact, the availability of such signals, which will adversely affect our advertising revenue.Our ad targeting and measurement tools rely on data signals from user activity on websites and services that we do not control, as well as signals generated within our products, in order to deliver relevant and effective ads to our users, and any changes in our ability to use such signals will adversely affect our business. For example, legislative and regulatory developments, such as the GDPR, ePrivacy Directive, and California Consumer Privacy Act (CCPA), as amended by the CPRA, have impacted, and we expect will continue to impact, our ability to use such signals in our ad products. In particular, we have seen increases in the number of users opting to control certain types of ad targeting in Europe following product changes implemented in connection with our GDPR and ePrivacy Directive compliance, and we have introduced product changes that limit data signal use for certain users in California following adoption of the CCPA. Regulatory guidance, decisions, or new legislation in these or other jurisdictions, such as the DMA, may require us to make additional changes to our products in the future that further reduce our ability to use these signals, which has occurred in the past. For example, we expect to implement additional changes in response to the December 2022 decision by the IDPC regarding the legal basis for our delivery of behavioral advertising in Europe.In addition, mobile operating system and browser providers, such as Apple and Google, have implemented product changes and/or announced future plans to limit the ability of websites and application developers to collect and use these signals to target and measure advertising. For example, in 2021, Apple made certain changes to its products and data use policies in connection with changes to its iOS operating system that reduce our and other iOS developers' ability to target and measure advertising, which has negatively impacted, and we expect will continue to negatively impact, the size of the budgets marketers are willing to commit to us and other advertising platforms. In addition, we have implemented, and may continue to implement, product changes that give users the ability to limit our use of such data signals to improve ads and other experiences on our products and services, including changes implemented in connection with the GDPR and other regulatory frameworks. These developments have limited our ability to target and measure the effectiveness of ads on our platform and negatively impacted our advertising revenue. For example, our advertising revenue has been negatively impacted by marketer reaction to targeting and measurement challenges associated with iOS changes beginning in 2021. If we are unable to mitigate these developments as they take further effect in the future, our targeting and measurement capabilities will be materially and adversely affected, which would in turn significantly impact our advertising revenue.Our user growth, engagement, and monetization on mobile devices depend upon effective operation with mobile operating systems, networks, technologies, products, and standards that we do not control.The substantial majority of our revenue is generated from advertising on mobile devices. There is no guarantee that popular mobile devices will continue to feature our products, or that mobile device users will continue to use our products rather than competing products. We are dependent on the interoperability of our products with popular mobile operating systems, networks, technologies, products, and standards that we do not control, such as the Android and iOS operating systems and mobile browsers. Changes, bugs, or technical issues in such systems, or changes in our relationships with mobile operating system partners, handset manufacturers, browser developers, or mobile carriers, or in the content or application of their terms of service or policies (which they have made in the past and continue to seek to implement) that degrade our products' functionality, reduce or eliminate our ability to update or distribute our products, give preferential treatment to competitive products, limit our ability to deliver, target, or measure the effectiveness of ads, or charge fees related to the distribution of our products or our delivery of ads have in the past adversely affected, and could in the future adversely affect, 19Table of Contentsthe usage of our products and monetization on mobile devices. For example, Apple previously released an update to its Safari browser that limits the use of third-party cookies, which reduces our ability to provide the most relevant ads to our users and impacts monetization, and also released changes to iOS that limit our ability to target and measure ads effectively, while expanding their own advertising business. We expect that any similar changes to its, Google's, or other browser or mobile platforms will further limit our ability to target and measure the effectiveness of ads and impact monetization. Additionally, in order to deliver high quality mobile products, it is important that our products work well with a range of mobile technologies, products, systems, networks, and standards that we do not control, and that we have good relationships with handset manufacturers, mobile carriers, and browser developers. We may not be successful in maintaining or developing relationships with key participants in the mobile ecosystem or in developing products that operate effectively with these technologies, products, systems, networks, or standards. In the event that it is more difficult for our users to access and use our products on their mobile devices, or if our users choose not to access or use our products on their mobile devices or use mobile products that do not offer access to our products, our user growth and user engagement could be harmed. From time to time, we may also take actions regarding the distribution of our products or the operation of our business based on what we believe to be in our long-term best interests. Such actions may adversely affect our users and our relationships with the operators of mobile operating systems, handset manufacturers, mobile carriers, browser developers, other business partners, or advertisers, and there is no assurance that these actions will result in the anticipated long-term benefits. In the event that our users are adversely affected by these actions or if our relationships with such third parties deteriorate, our user growth, engagement, and monetization could be adversely affected and our business could be harmed. We have in the past experienced challenges in operating with mobile operating systems, networks, technologies, products, and standards that we do not control, and any such occurrences in the future may negatively impact our user growth, engagement, and monetization on mobile devices, which may in turn materially and adversely affect our business and financial results.Our new products and changes to existing products could fail to attract or retain users or generate revenue and profits, or otherwise adversely affect our business.Our ability to retain, increase, and engage our user base and to increase our revenue depends heavily on our ability to continue to evolve our existing products and to create successful new products, both independently and in conjunction with developers or other third parties. We may introduce significant changes to our existing products or acquire or introduce new and unproven products, including using technologies with which we have little or no prior development or operating experience. For example, we do not have significant experience with consumer hardware products or virtual or augmented reality technology, which may adversely affect our ability to successfully develop and market these products and technologies. We continue to incur substantial costs, and we may not be successful in generating profits, in connection with these efforts. We are also making significant investments in artificial intelligence (AI) initiatives, including to recommend relevant unconnected content across our products, enhance our advertising tools, and develop new product features using generative AI. These efforts, including the introduction of new products or changes to existing products, may result in new or enhanced governmental or regulatory scrutiny, litigation, ethical concerns, or other complications that could adversely affect our business, reputation, or financial results. We have also invested, and expect to continue to invest, significant resources in growing our messaging products to support increasing usage of such products. We have historically monetized messaging in only a limited fashion, and we may not be successful in our efforts to generate meaningful revenue or profits from messaging over the long term. In addition, we are moving forward with plans to implement end-to-end encryption across our messaging services, as well as facilitate cross-app communication between these platforms, which are subject to governmental and regulatory scrutiny in multiple jurisdictions. If our new products or changes to existing products fail to engage users, marketers, or developers, or if our business plans are unsuccessful, we may fail to attract or retain users or to generate sufficient revenue, operating margin, or other value to justify our investments, and our business may be adversely affected.We make product and investment decisions that may not prioritize short-term financial results and may not produce the long-term benefits that we expect.We frequently make product and investment decisions that may not prioritize short-term financial results if we believe that the decisions are consistent with our mission and benefit the aggregate user experience and will thereby improve our financial performance over the long term. For example, we have implemented, and we will continue to implement, changes to our user data practices. Some of these changes reduce our ability to effectively target ads, which has to some extent adversely affected, and will continue to adversely affect, our advertising business. For example, our Off-Facebook Activity tool enables users to place limits on our storage and use of information about their interactions with advertisers' apps and websites, which reduces our ability to deliver the most relevant and effective ads to our users. Similarly, from time to time we update our feed display and ranking algorithms or other product features to optimize the user experience, and these changes have had, and 20Table of Contentsmay in the future have, the effect of reducing time spent and some measures of user engagement with our products, which could adversely affect our financial results. From time to time, we also change the size, frequency, or relative prominence of ads as part of our product and monetization strategies. In addition, we have made, and we expect to continue to make, other changes to our products which may adversely affect the distribution of content of publishers, marketers, and developers, and could reduce their incentive to invest in their efforts on our products. We also may introduce new features or other changes to existing products, or introduce new stand-alone products, that attract users away from properties, formats, or use cases where we have more proven means of monetization, such as our feed products. In addition, as we focus on growing users and engagement across our family of products, from time to time these efforts have reduced, and may in the future reduce, engagement with one or more products and services in favor of other products or services that we monetize less successfully or that are not growing as quickly. For example, we plan to continue to promote Reels, which we do not currently monetize at the same rate as our feed or Stories products. These decisions may adversely affect our business and results of operations and may not produce the long-term benefits that we expect.We may not be successful in our metaverse strategy and investments, which could adversely affect our business, reputation, or financial results.We believe the metaverse, an embodied internet where people have immersive experiences beyond two-dimensional screens, is the next evolution in social technology. In 2021, we announced a shift in our business and product strategy to focus on helping to bring the metaverse to life. We expect this will be a complex, evolving, and long-term initiative that will involve the development of new and emerging technologies, continued investment in infrastructure as well as privacy, safety, and security efforts, and collaboration with other companies, developers, partners, and other participants. However, the metaverse may not develop in accordance with our expectations, and market acceptance of features, products, or services we build for the metaverse is uncertain. We regularly evaluate our product roadmaps and make significant changes as our understanding of the technological challenges and market landscape and our product ideas and designs evolve. In addition, we have limited experience with consumer hardware products and virtual and augmented reality technology, which may enable other companies to compete more effectively than us. We may be unsuccessful in our research and product development efforts, including if we are unable to develop relationships with key participants in the metaverse or develop products that operate effectively with metaverse technologies, products, systems, networks, or standards. Our metaverse efforts may also divert resources and management attention from other areas of our business. We expect to continue to make significant investments in virtual and augmented reality and other technologies to support these efforts, and our ability to support these efforts is dependent on generating sufficient profits from other areas of our business. In addition, as our metaverse efforts evolve, we may be subject to a variety of existing or new laws and regulations in the United States and international jurisdictions, including in the areas of privacy, safety, competition, content regulation, consumer protection, and e-commerce, which may delay or impede the development of our products and services, increase our operating costs, require significant management time and attention, or otherwise harm our business. As a result of these or other factors, our metaverse strategy and investments may not be successful in the foreseeable future, or at all, which could adversely affect our business, reputation, or financial results.If we are not able to maintain and enhance our brands, our ability to expand our base of users, marketers, and developers may be impaired, and our business and financial results may be harmed.We believe that our brands have significantly contributed to the success of our business. We also believe that maintaining and enhancing our brands is critical to expanding our base of users, marketers, and developers. Many of our new users are referred by existing users. Maintaining and enhancing our brands will depend largely on our ability to continue to provide useful, reliable, trustworthy, and innovative products, which we may not do successfully. We may introduce new products or terms of service or policies that users do not like, which may negatively affect our brands. Additionally, the actions of our developers or advertisers may affect our brands if users do not have a positive experience using third-party applications integrated with our products or interacting with parties that advertise through our products. We will also continue to experience media, legislative, or regulatory scrutiny of our actions or decisions regarding user privacy, data use, encryption, content, product design, algorithms, advertising, competition, and other issues, including actions or decisions in connection with elections, the COVID-19 pandemic, or geopolitical events, which has in the past adversely affected, and may in the future adversely affect, our reputation and brands. For example, beginning in September 2021, we became the subject of media, legislative, and regulatory scrutiny as a result of a former employee's allegations and release of internal company documents relating to, among other things, our algorithms, advertising and user metrics, and content enforcement practices, as well as misinformation and other undesirable activity on our platform, and user well-being. In addition, in March 2018, we announced developments regarding the misuse of certain data by a developer that shared such data with third parties in 21Table of Contentsviolation of our terms and policies. We also may fail to respond expeditiously or appropriately to the sharing of objectionable content on our services or objectionable practices by advertisers or developers, or to otherwise enforce our policies or address user concerns, which has occurred in the past and which could erode confidence in our brands. Our brands may also be negatively affected by the actions of users that are deemed to be hostile or inappropriate to other users, by the actions of users acting under false or inauthentic identities, by the use of our products or services to disseminate information that is deemed to be misleading (or intended to manipulate opinions), by perceived or actual efforts by governments to obtain access to user information for security-related purposes or to censor certain content on our platform, by the use of our products or services for illicit or objectionable ends, including, for example, any such actions around the pandemic, geopolitical events, or elections in the United States and around the world, by decisions or recommendations regarding content on our platform from the independent Oversight Board, by research or media reports concerning the perceived or actual impacts of our products or services on user well-being, or by our decisions regarding whether to remove content or suspend participation on our platform by persons who violate our community standards or terms of service. Maintaining and enhancing our brands will require us to make substantial investments and these investments may not be successful. Certain of our actions, such as the foregoing matter regarding developer misuse of data and concerns around our handling of political speech and advertising, hate speech, and other content, as well as user well-being issues, have eroded confidence in our brands and may continue to do so in the future. If we fail to successfully promote and maintain our brands or if we incur excessive expenses in this effort, our business and financial results may be adversely affected.We may not be able to continue to successfully maintain or grow usage of and engagement with applications that integrate with our products.We have made and are continuing to make investments to enable developers to build, grow, and monetize applications that integrate with our products. Such existing and prospective developers may not be successful in building, growing, or monetizing applications that create and maintain user engagement. Additionally, developers may choose to build on other platforms, including platforms controlled by third parties, rather than building products that integrate with our products. We are continuously seeking to balance the distribution objectives of our developers with our desire to provide an optimal user experience, and we may not be successful in achieving a balance that continues to attract and retain such developers. For example, from time to time, we have taken actions to reduce the volume of communications from these developers to users on our products with the objective of enhancing the user experience, and such actions have reduced distribution from, user engagement with, and our monetization opportunities from, applications integrated with our products. In addition, as part of our efforts related to privacy, safety, and security, we conduct investigations and audits of platform applications from time to time, and we also have announced several product changes that restrict developer access to certain user data. In some instances, these actions, as well as other actions to enforce our policies applicable to developers, have adversely affected, or will adversely affect, our relationships with developers. If we are not successful in our efforts to maintain or grow the number of developers that choose to build products that integrate with our products or if we are unable to continue to build and maintain good relations with such developers, our user growth and user engagement and our financial results may be adversely affected.Risks Related to Our Business Operations and Financial ResultsOur business is highly competitive. Competition presents an ongoing threat to the success of our business.We compete with companies providing connection, sharing, discovery, and communication products and services to users online, as well as companies that sell advertising to businesses looking to reach consumers and/or develop tools and systems for managing and optimizing advertising campaigns. We face significant competition in every aspect of our business, including, but not limited to, companies that facilitate the ability of users to create, share, communicate, and discover content and information online or enable marketers to reach their existing or prospective audiences. We compete to attract, engage, and retain people who use our products, to attract and retain businesses that use our free or paid business and advertising services, and to attract and retain developers who build compelling applications that integrate with our products. We also compete with companies that develop and deliver consumer hardware and virtual and augmented reality products and services. As we introduce or acquire new products, as our existing products evolve, or as other companies introduce new products and services, including as part of efforts to develop the metaverse or innovate through the application of new technologies such as artificial intelligence, we may become subject to additional competition.22Table of ContentsSome of our current and potential competitors may have greater resources, experience, or stronger competitive positions in certain product segments, geographic regions, or user demographics than we do. For example, some of our competitors may be domiciled in different countries and subject to political, legal, and regulatory regimes that enable them to compete more effectively than us. These factors may allow our competitors to respond more effectively than us to new or emerging technologies and changes in market conditions. We believe that some users, particularly younger users, are aware of and actively engaging with other products and services similar to, or as a substitute for, our products and services, and we believe that some users have reduced their use of and engagement with our products and services in favor of these other products and services. In the event that users increasingly engage with other products and services, we may experience a decline in use and engagement in key user demographics or more broadly, in which case our business would likely be harmed.Our competitors may develop products, features, or services that are similar to ours or that achieve greater acceptance, may undertake more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive pricing policies. Some competitors may gain a competitive advantage against us in areas where we operate, including: by making acquisitions; by limiting our ability to deliver, target, or measure the effectiveness of ads; by imposing fees or other charges related to our delivery of ads; by making access to our products more difficult or impossible; by making it more difficult to communicate with our users; or by integrating competing platforms, applications, or features into products they control such as mobile device operating systems, search engines, browsers, or e-commerce platforms. For example, each of Apple and Google have integrated competitive products with iOS and Android, respectively. In addition, Apple has released changes to iOS that limit our ability, and the ability of others in the digital advertising industry, to target and measure ads effectively. As a result, our competitors may, and in some cases will, acquire and engage users or generate advertising or other revenue at the expense of our own efforts, which would negatively affect our business and financial results. In addition, from time to time, we may take actions in response to competitive threats, but we cannot assure you that these actions will be successful or that they will not negatively affect our business and financial results.We believe that our ability to compete effectively depends upon many factors both within and beyond our control, including:•the popularity, usefulness, ease of use, performance, and reliability of our products compared to our competitors' products;•the size and composition of our user base;•the engagement of users with our products and competing products;•our ability to attract and retain businesses who use our free or paid business and advertising services;•the timing and market acceptance of products, including developments and enhancements to our or our competitors' products;•our safety and security efforts and our ability to protect user data and to provide users with control over their data;•our ability to distribute our products to new and existing users;•our ability to monetize our products;•the frequency, size, format, quality, and relative prominence of the ads displayed by us or our competitors;•customer service and support efforts;•marketing and selling efforts, including our ability to measure the effectiveness of our ads and to provide marketers with a compelling return on their investments;•our ability to establish and maintain developers' interest in building applications that integrate with our products;•our ability to establish and maintain publisher interest in integrating their content with our products;23Table of Contents•changes mandated by legislation, regulatory authorities, or litigation, some of which may have a disproportionate effect on us;•acquisitions or consolidation within our industry, which may result in more formidable competitors;•our ability to attract, retain, and motivate talented employees, particularly software engineers, designers, and product managers;•our ability to cost-effectively manage and grow our operations; and•our reputation and brand strength relative to those of our competitors.If we are not able to compete effectively, our user base, level of user engagement, and ability to deliver ad impressions may decrease, we may become less attractive to developers and marketers, and our revenue and results of operations may be materially and adversely affected.Our financial results will fluctuate from quarter to quarter and are difficult to predict.Our quarterly financial results have fluctuated in the past and will fluctuate in the future. Additionally, we have a limited operating history with the current scale of our business, which makes it difficult to forecast our future results. As a result, you should not rely upon our past quarterly financial results as indicators of future performance. You should take into account the risks and uncertainties frequently encountered by companies in rapidly evolving markets. Our financial results in any given quarter can be influenced by numerous factors, many of which we are unable to predict or are outside of our control, including:•our ability to maintain and grow our user base and user engagement, particularly for our products that deliver ad impressions;•our ability to attract and retain marketers in a particular period;•our ability to recognize revenue or collect payments from marketers in a particular period;•fluctuations in spending by our marketers due to seasonality, such as historically strong spending in the fourth quarter of each year, episodic regional or global events, including the COVID-19 pandemic, or other factors;•the frequency, prominence, size, format, and quality of ads shown to users;•the success of technologies designed to block the display of ads;•changes to the content or application of third-party policies that limit our ability to deliver, target, or measure the effectiveness of advertising, including changes by mobile operating system and browser providers such as Apple and Google;•the pricing of our ads and other products;•the diversification and growth of revenue sources beyond advertising on Facebook and Instagram;•our ability to generate revenue from Payments, or the sale of our consumer hardware products or other products we may introduce in the future;•changes to existing products or services or the development and introduction of new products or services by us or our competitors;•user behavior or product changes that may reduce traffic to features or products that we successfully monetize;24Table of Contents•increases in marketing, sales, and other operating expenses that we will incur to grow and expand our operations and to remain competitive, including costs related to our data centers and technical infrastructure;•costs related to our privacy, safety, security, and content review efforts, including as a result of implementing changes to our practices, whether voluntarily, in connection with laws, regulations, regulatory actions, or decisions or recommendations from the independent Oversight Board, or otherwise;•costs and expenses related to the development, manufacturing, and delivery of our consumer hardware products;•our ability to maintain gross margins and operating margins;•costs related to acquisitions, including costs associated with amortization and additional investments to develop the acquired technologies;•charges associated with impairment or abandonment of any assets on our balance sheet, including as a result of changes to our real property lease arrangements and data center assets;•our ability to obtain equipment, components, and labor for our data centers and other technical infrastructure in a timely and cost-effective manner;•system failures or outages or government blocking that prevent us from serving ads for any period of time;•breaches of security or privacy, and the costs associated with any such breaches and remediation;•changes in the manner in which we distribute our products or inaccessibility of our products due to third-party actions;•fees paid to third parties for content or the distribution of our products;•refunds or other concessions provided to advertisers;•share-based compensation expense, including acquisition-related expense;•adverse litigation judgments, settlements, or other litigation-related costs;•changes in the legislative or regulatory environment, including with respect to privacy, data protection, and content, or actions by governments or regulators, including fines, orders, or consent decrees;•the overall tax rate for our business, which is affected by the mix of income we earn in the U.S. and in jurisdictions with different tax rates, the effects of share-based compensation, the effects of integrating intellectual property from acquisitions, the effects of changes in our business or structure, and the effects of discrete items such as legal and tax settlements and tax elections;•the impact of changes in tax laws or judicial or regulatory interpretations of tax laws, which are recorded in the period such laws are enacted or interpretations are issued, and may significantly affect the effective tax rate of that period;•tax obligations that may arise from resolutions of tax examinations, including the examination we are currently under by the Internal Revenue Service (IRS), that materially differ from the amounts we have anticipated;•fluctuations in currency exchange rates and changes in the proportion of our revenue and expenses denominated in foreign currencies;•trading activity in our share repurchase program;25Table of Contents•fluctuations in the market values of our investments in marketable securities, in the valuation of our non-marketable equity securities, and in interest rates;•the incurrence of indebtedness or our ability to refinance existing indebtedness on acceptable terms;•changes in U.S. generally accepted accounting principles; and•changes in regional or global business, macroeconomic, or geopolitical conditions, including as a result of the COVID-19 pandemic, which may impact the other factors described above. Unfavorable media coverage negatively affects our business from time to time.We receive a high degree of media coverage around the world. Unfavorable publicity regarding, for example, our privacy practices, advertising policies, product decisions, product quality, litigation or regulatory activity, government surveillance, the actions of our advertisers, the actions of our developers whose products are integrated with our products, the use of our products or services for illicit or objectionable ends, the substance or enforcement of our community standards, terms of service, or other policies, the actions of our users, the quality and integrity of content shared on our platform, the perceived or actual impacts of our products or services on user well-being, or the actions of other companies that provide similar services to ours, has in the past, and could in the future, adversely affect our reputation. For example, we have been the subject of significant media coverage involving concerns around our handling of political speech and advertising, hate speech, and other content, as well as user well-being issues, and we continue to receive negative publicity related to these topics. Beginning in September 2021, we became the subject of significant media coverage as a result of allegations and the release of internal company documents by a former employee. In addition, we have been, and may in the future be, subject to negative publicity in connection with our handling of misinformation and other illicit or objectionable use of our products or services, including in connection with the COVID-19 pandemic, geopolitical events, and elections in the United States and around the world. Any such negative publicity could have an adverse effect on the size, engagement, and loyalty of our user base and marketer demand for advertising on our products, which could result in decreased revenue and adversely affect our business and financial results, and we have experienced such adverse effects to varying degrees from time to time.The COVID-19 pandemic has previously had, and may in the future have, a significant adverse impact on our advertising revenue and also exposes our business to other risks.We are subject to public health crises such as the COVID-19 pandemic, which has previously significantly impacted, and may in the future impact, our business and results of operations. For example, the COVID-19 pandemic resulted in authorities implementing numerous preventative measures from time to time to contain or mitigate the outbreak of the virus, such as travel bans and restrictions, limitations on business activity, quarantines, and shelter-in-place orders, which have previously caused, and may in the future cause, business slowdowns or shutdowns in certain affected countries and regions. These developments led to volatility in the demand for and pricing of our advertising services at various points throughout the pandemic, and we may experience similar effects in the future. In addition to the impact on our advertising business, the pandemic exposes our business, operations, and workforce to a variety of other risks, including:•volatility in the size of our user base and user engagement, particularly for our messaging products, whether as a result of shelter-in-place measures or other factors;•delays in product development or releases, or reductions in manufacturing production and sales of consumer hardware, as a result of inventory shortages, supply chain or labor shortages;•increased misuse of our products and services or user data by third parties, including improper advertising practices or other activity inconsistent with our terms, contracts, or policies, misinformation or other illicit or objectionable material on our platforms, election interference, or other undesirable activity; •significant volatility and disruption of global financial markets, which could cause fluctuations in currency exchange rates or negatively impact our ability to access capital in the future;•illnesses to key employees, or a significant portion of our workforce, which may result in inefficiencies, delays, and disruptions in our business; and26Table of Contents•increased volatility and uncertainty in the financial projections we use as the basis for estimates used in our financial statements.Any of these developments may adversely affect our business, harm our reputation, or result in legal or regulatory actions against us.Our costs are continuing to grow, and some of our investments, particularly our investments in virtual and augmented reality, have the effect of reducing our operating margin and profitability. If our investments are not successful longer-term, our business and financial performance will be harmed.Operating our business is costly, and we expect our expenses to continue to increase in the future as we broaden our user base, as users increase the amount and types of content they consume and the data they share with us, for example with respect to video, as we develop and implement new products, as we market new and existing products and promote our brands, as we continue to expand our technical infrastructure, as we continue to invest in new and unproven technologies, including artificial intelligence and machine learning, and as we continue our efforts to focus on privacy, safety, security, and content review. We have recently undertaken cost reduction measures in light of a more challenging operating environment, which may adversely affect these or other business initiatives, and some of these measures have involved, and may in the future involve, up-front charges and outlays of cash to reduce certain longer-term expenses. In addition, from time to time we are subject to settlements, judgments, fines, or other monetary penalties in connection with legal and regulatory developments that may be material to our business. We are also continuing to increase our investments in new platforms and technologies, including as part of our efforts related to building the metaverse. Some of these investments, particularly our significant investments in virtual and augmented reality, have generated only limited revenue and reduced our operating margin and profitability, and we expect the adverse financial impact of such investments to continue for the foreseeable future. For example, our investments in Reality Labs reduced our 2022 overall operating profit by approximately $13.72 billion, and we expect our investments to increase in the future. If our investments are not successful longer-term, our business and financial performance will be harmed.We plan to continue to make acquisitions and pursue other strategic transactions, which could impact our financial condition or results of operations and may adversely affect the price of our common stock.As part of our business strategy, we have made and intend to continue to make acquisitions to add specialized employees and complementary companies, products, or technologies, and from time to time may enter into other strategic transactions such as investments and joint ventures. We may not be able to find suitable acquisition candidates, and we may not be able to complete acquisitions or other strategic transactions on favorable terms, or at all, including as a result of regulatory challenges. For example, in 2022, the United Kingdom Competition and Markets Authority directed us to divest our Giphy acquisition. In addition, in 2022, the FTC filed lawsuits against us to enjoin our proposed acquisition of Within Unlimited. In some cases, the costs of such acquisitions or other strategic transactions may be substantial, and there is no assurance that we will realize expected synergies and potential monetization opportunities for our acquisitions or a favorable return on investment for our strategic investments.We may pay substantial amounts of cash or incur debt to pay for acquisitions or other strategic transactions, which has occurred in the past and could adversely affect our liquidity. The incurrence of indebtedness also results in increased fixed obligations and increased interest expense, and could also include covenants or other restrictions that would impede our ability to manage our operations. We may also issue equity securities to pay for acquisitions and we regularly grant RSUs to retain the employees of acquired companies, which could increase our expenses, adversely affect our financial results, and result in dilution to our stockholders. In addition, any acquisitions or other strategic transactions we announce could be viewed negatively by users, marketers, developers, or investors, which may adversely affect our business or the price of our Class A common stock.We may also discover liabilities, deficiencies, or other claims associated with the companies or assets we acquire that were not identified in advance, which may result in significant unanticipated costs. The effectiveness of our due diligence review and our ability to evaluate the results of such due diligence are dependent upon the accuracy and completeness of statements and disclosures made or actions taken by the companies we acquire or their representatives, as well as the limited amount of time in which acquisitions are executed. In addition, we may fail to accurately forecast the financial impact of an acquisition or other strategic transaction, including tax and accounting charges. Acquisitions or other strategic transactions 27Table of Contentsmay also result in our recording of significant additional expenses to our results of operations and recording of substantial finite-lived intangible assets on our balance sheet upon closing. Any of these factors may adversely affect our financial condition or results of operations.We may not be able to successfully integrate our acquisitions, and we incur significant costs to integrate and support the companies we acquire.The integration of acquisitions requires significant time and resources, particularly with respect to companies that have significant operations or that develop products where we do not have prior experience, and we may not manage these processes successfully. We continue to make substantial investments of resources to support our acquisitions, which has in the past resulted, and we expect will in the future result, in significant ongoing operating expenses and the diversion of resources and management attention from other areas of our business. We cannot assure you that these investments will be successful. If we fail to successfully integrate the companies we acquire, we may not realize the benefits expected from the transaction and our business may be harmed.Our business is dependent on our ability to maintain and scale our technical infrastructure, and any significant disruption in our service could damage our reputation, result in a potential loss of users and engagement, and adversely affect our financial results.Our reputation and ability to attract, retain, and serve our users is dependent upon the reliable performance of our products and our underlying technical infrastructure. We have in the past experienced, and may in the future experience, interruptions in the availability or performance of our products from time to time. Our systems may not be adequately designed or may not operate with the reliability and redundancy necessary to avoid performance delays or outages that could be harmful to our business. If our products are unavailable when users attempt to access them, or if they do not load as quickly as expected, users may not use our products as often in the future, or at all, and our ability to serve ads may be disrupted, any of which could adversely affect our business and financial performance. We have experienced such issues to varying degrees from time to time. For example, in October 2021, a combination of an error and a bug resulted in an approximately six-hour outage of our services. In addition, as the amount and types of information shared on our products continue to grow and evolve, as the usage patterns of our global community continue to evolve, and as our internal operational demands continue to grow, we will need an increasing amount of technical infrastructure, including network capacity and computing power, to continue to satisfy our needs. It is possible that we may fail to continue to effectively scale and grow our technical infrastructure to accommodate these increased demands, which may adversely affect our user engagement and advertising revenue. In addition, our business may be subject to interruptions, delays, or failures resulting from earthquakes, adverse weather conditions, other natural disasters, power loss, terrorism, geopolitical conflict, other physical security threats, cyber-attacks, or other catastrophic events. Global climate change could result in certain types of natural disasters occurring more frequently or with more intense effects. Any such events may result in users being subject to service disruptions or outages and we may not be able to recover our technical infrastructure and user data in a timely manner to restart or provide our services, which may adversely affect our financial results. We also have been, and may in the future be, subject to increased energy and/or other costs to maintain the availability or performance of our products in connection with any such events.A substantial portion of our network infrastructure is provided by third parties. Any disruption or failure in the services we receive from these providers could harm our ability to handle existing or increased traffic and could significantly harm our business. Any financial or other difficulties these providers face may adversely affect our business, and we exercise little control over these providers, which increases our vulnerability to problems with the services they provide. Due to the effects of the COVID-19 pandemic, we have experienced, and expect to continue to experience, supply and labor shortages and other disruptions in logistics and the supply chain for our technical infrastructure. As a result, we have had to make certain changes to our procurement practices, and in the future we may not be able to procure sufficient components, equipment, or services from third parties to satisfy our needs, or we may be required to procure such components, equipment, or services on unfavorable terms.Any of these developments may result in interruptions in the availability or performance of our products, require unfavorable changes to existing products, delay the introduction of future products, or otherwise adversely affect our business and financial results.28Table of ContentsWe could experience unforeseen difficulties in building and operating key portions of our technical infrastructure.We have designed and built our own data centers and key portions of our technical infrastructure through which we serve our products, and we plan to continue to significantly expand the size of our infrastructure primarily through data centers, subsea and terrestrial fiber optic cable systems, and other projects. The infrastructure expansion we are undertaking is complex and involves projects in multiple locations around the world, including in emerging markets that expose us to increased risks relating to anti-corruption compliance and political challenges, among others. We have in the past suspended, and may in the future suspend, certain of these projects as a result of the COVID-19 pandemic or other factors. Additional unanticipated delays or disruptions in the completion of these projects, including due to any shortage of labor necessary in building portions of such projects, or availability of components, challenges in obtaining required government or regulatory approvals, or other geopolitical challenges or actions by governments, whether as a result of the pandemic, trade disputes, or otherwise, may lead to increased project costs, operational inefficiencies, interruptions in the delivery or degradation of the quality or reliability of our products, or impairment of assets on our balance sheet. In addition, there may be issues related to this infrastructure that are not identified during the testing phases of design and implementation, which may only become evident after we have started to fully utilize the underlying equipment, that could further degrade the user experience or increase our costs. Further, much of our technical infrastructure is located outside the United States, and action by a foreign government, or our response to such government action, has resulted in the past, and may result in the future, in the impairment of a portion of our technical infrastructure, which may interrupt the delivery or degrade the quality or reliability of our products and lead to a negative user experience or increase our costs. Any of these events could adversely affect our business, reputation, or financial results.Real or perceived inaccuracies in our community and other metrics may harm our reputation and negatively affect our business.The numbers for our key metrics, which include our Family metrics (DAP, MAP, and average revenue per person (ARPP)) and Facebook metrics (DAUs, MAUs, and average revenue per user (ARPU)), are calculated using internal company data based on the activity of user accounts. While these numbers are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring usage of our products across large online and mobile populations around the world. The methodologies used to measure these metrics require significant judgment and are also susceptible to algorithm or other technical errors. In addition, we are continually seeking to improve our estimates of our user base, and such estimates may change due to improvements or changes in our methodology. We regularly review our processes for calculating these metrics, and from time to time we discover inaccuracies in our metrics or make adjustments to improve their accuracy, which can result in adjustments to our historical metrics. Our ability to recalculate our historical metrics may be impacted by data limitations or other factors that require us to apply different methodologies for such adjustments. We generally do not intend to update previously disclosed Family metrics for any such inaccuracies or adjustments that are within the error margins disclosed below.In addition, our Family metrics and Facebook metrics estimates will differ from estimates published by third parties due to differences in methodology.Many people in our community have user accounts on more than one of our products, and some people have multiple user accounts within an individual product. Accordingly, for our Family metrics, we do not seek to count the total number of user accounts across our products because we believe that would not reflect the actual size of our community. Rather, our Family metrics represent our estimates of the number of unique people using at least one of Facebook, Instagram, Messenger, and WhatsApp. We do not require people to use a common identifier or link their accounts to use multiple products in our Family, and therefore must seek to attribute multiple user accounts within and across products to individual people. To calculate these metrics, we rely upon complex techniques, algorithms and machine learning models that seek to count the individual people behind user accounts, including by matching multiple user accounts within an individual product and across multiple products when we believe they are attributable to a single person, and counting such group of accounts as one person. These techniques and models require significant judgment, are subject to data and other limitations discussed below, and inherently are subject to statistical variances and uncertainties. We estimate the potential error in our Family metrics primarily based on user survey data, which itself is subject to error as well. While we expect the error margin for our Family metrics to vary from period to period, we estimate that such margin generally will be approximately 3% of our worldwide MAP. At our scale, it is very difficult to attribute multiple user accounts within and across products to individual people, and it is possible that the actual numbers of unique people using our products may vary significantly from our estimates, 29Table of Contentspotentially beyond our estimated error margins. As a result, it is also possible that our Family metrics may indicate changes or trends in user numbers that do not match actual changes or trends.To calculate our estimates of Family DAP and MAP, we currently use a series of machine learning models that are developed based on internal reviews of limited samples of user accounts and calibrated against user survey data. We apply significant judgment in designing these models and calculating these estimates. For example, to match user accounts within individual products and across multiple products, we use data signals such as similar device information, IP addresses, and user names. We also calibrate our models against data from periodic user surveys of varying sizes and frequency across our products, which are inherently subject to error. The timing and results of such user surveys have in the past contributed, and may in the future contribute, to changes in our reported Family metrics from period to period. In addition, our data limitations may affect our understanding of certain details of our business and increase the risk of error for our Family metrics estimates. Our techniques and models rely on a variety of data signals from different products, and we rely on more limited data signals for some products compared to others. For example, as a result of limited visibility into encrypted products, we have fewer data signals from WhatsApp user accounts and primarily rely on phone numbers and device information to match WhatsApp user accounts with accounts on our other products. Similarly, although Messenger Kids users are included in our Family metrics, we do not seek to match their accounts with accounts on our other applications for purposes of calculating DAP and MAP. Any loss of access to data signals we use in our process for calculating Family metrics, whether as a result of our own product decisions, actions by third-party browser or mobile platforms, regulatory or legislative requirements, or other factors, also may impact the stability or accuracy of our reported Family metrics, as well as our ability to report these metrics at all. Our estimates of Family metrics also may change as our methodologies evolve, including through the application of new data signals or technologies, product changes, or other improvements in our user surveys, algorithms, or machine learning that may improve our ability to match accounts within and across our products or otherwise evaluate the broad population of our users. In addition, such evolution may allow us to identify previously undetected violating accounts (as defined below).We regularly evaluate our Family metrics to estimate the percentage of our MAP consisting solely of "violating" accounts. We define "violating" accounts as accounts which we believe are intended to be used for purposes that violate our terms of service, including bots and spam. In the fourth quarter of 2022, we estimated that approximately 3% of our worldwide MAP consisted solely of violating accounts. Such estimation is based on an internal review of a limited sample of accounts, and we apply significant judgment in making this determination. For example, we look for account information and behaviors associated with Facebook and Instagram accounts that appear to be inauthentic to the reviewers, but we have limited visibility into WhatsApp user activity due to encryption. In addition, if we believe an individual person has one or more violating accounts, we do not include such person in our violating accounts estimation as long as we believe they have one account that does not constitute a violating account. From time to time, we disable certain user accounts, make product changes, or take other actions to reduce the number of violating accounts among our users, which may also reduce our DAP and MAP estimates in a particular period. We intend to disclose our estimates of the percentage of our MAP consisting solely of violating accounts on an annual basis. Violating accounts are very difficult to measure at our scale, and it is possible that the actual number of violating accounts may vary significantly from our estimates.We also regularly evaluate our Facebook metrics to estimate the number of "duplicate" and "false" accounts among our MAUs. A duplicate account is one that a user maintains in addition to his or her principal account. We divide "false" accounts into two categories: (1) user-misclassified accounts, where users have created personal profiles for a business, organization, or non-human entity such as a pet (such entities are permitted on Facebook using a Page rather than a personal profile under our terms of service); and (2) violating accounts, which represent user profiles that we believe are intended to be used for purposes that violate our terms of service, such as bots and spam. The estimates of duplicate and false accounts are based on an internal review of a limited sample of accounts, and we apply significant judgment in making this determination. For example, to identify duplicate accounts we use data signals such as identical IP addresses and similar user names, and to identify false accounts we look for names that appear to be fake or other behavior that appears inauthentic to the reviewers. Any loss of access to data signals we use in this process, whether as a result of our own product decisions, actions by third-party browser or mobile platforms, regulatory or legislative requirements, or other factors, also may impact the stability or accuracy of our estimates of duplicate and false accounts. Our estimates also may change as our methodologies evolve, including through the application of new data signals or technologies or product changes that may allow us to identify previously undetected duplicate or false accounts and may improve our ability to evaluate a broader population of our users. Duplicate and false accounts are very difficult to measure at our scale, and it is possible that the actual number of duplicate and false accounts may vary significantly from our estimates.30Table of ContentsIn the fourth quarter of 2022, we estimated that duplicate accounts may have represented approximately 11% of our worldwide MAUs. We believe the percentage of duplicate accounts is meaningfully higher in developing markets such as the Philippines and Vietnam, as compared to more developed markets. In the fourth quarter of 2022, we estimated that false accounts may have represented approximately 4-5% of our worldwide MAUs. Our estimation of false accounts can vary as a result of episodic spikes in the creation of such accounts, which we have seen originate more frequently in specific countries such as Indonesia, Nigeria, and Vietnam. From time to time, we disable certain user accounts, make product changes, or take other actions to reduce the number of duplicate or false accounts among our users, which may also reduce our DAU and MAU estimates in a particular period. We intend to disclose our estimates of the number of duplicate and false accounts among our MAUs on an annual basis.Other data limitations also may affect our understanding of certain details of our business. For example, while user-provided data indicates a decline in usage among younger users, this age data may be unreliable because a disproportionate number of our younger users register with an inaccurate age. Accordingly, our understanding of usage by age group may not be complete.In addition, our data regarding the geographic location of our users is estimated based on a number of factors, such as the user's IP address and self-disclosed location. These factors may not always accurately reflect the user's actual location. For example, a user may appear to be accessing Facebook from the location of the proxy server that the user connects to rather than from the user's actual location. The methodologies used to measure our metrics are also susceptible to algorithm or other technical errors, and our estimates for revenue by user location and revenue by user device are also affected by these factors.In addition, from time to time we provide, or rely on, certain other metrics and estimates, including those relating to the reach and effectiveness of our ads. Many of our metrics involve the use of estimations and judgments, and our metrics and estimates are subject to software bugs, inconsistencies in our systems, and human error. Such metrics and estimates also change from time to time due to improvements or changes in our terminology or methodology, including as a result of loss of access to data signals we use in calculating such metrics and estimates. We have in the past been, and may in the future be, subject to litigation as well as marketer, regulatory, and other inquiries regarding the accuracy of such metrics and estimates. Where marketers, developers, or investors do not perceive our metrics or estimates to be accurate, or where we discover material inaccuracies in our metrics or estimates, we may be subject to liability, our reputation may be harmed, and marketers and developers may be less willing to allocate their budgets or resources to our products that deliver ad impressions, which could negatively affect our business and financial results.We cannot assure you that we will effectively manage our scale.Our employee headcount and the scale and complexity of our business have increased significantly over time. The scale of our business and breadth of our products create significant challenges for our management, operational, and financial resources, including managing multiple relationships with users, marketers, developers, and other third parties, and maintaining information technology systems and internal controls and procedures that support the scale and complexity of our business. In addition, some members of our management do not have significant experience managing a large global business operation, so our management may not be able to manage our scale effectively. To effectively manage our scale, we must maintain, and continue to adapt, our operational, financial, and management processes and systems, manage our headcount and facilities, and effectively train and manage our personnel. Many of our personnel work remotely, which may lead to challenges in productivity and collaboration. In addition, from time to time, we implement organizational changes to pursue greater efficiency and realign our business and strategic priorities. For example, in 2022, we announced a layoff of approximately 11,000 employees and initiated several measures to scale down our office facilities. As our organization continues to evolve, and we are required to implement and adapt complex organizational management structures, we may find it difficult to maintain the benefits of our corporate culture, including our ability to quickly develop and launch new and innovative products. This could negatively affect our business performance.We have significant international operations and plan to continue expanding our operations abroad where we have more limited operating experience, and this may subject us to increased business, economic, and legal risks that could affect our financial results.We have significant international operations and plan to continue the international expansion of our business operations and the translation of our products. We currently make Facebook available in more than 100 different languages, 31Table of Contentsand we have offices or data centers in approximately 40 different countries. We may enter new international markets where we have limited or no experience in marketing, selling, and deploying our products. Our products are generally available globally, but some or all of our products or functionality may not be available in certain markets due to legal and regulatory complexities. For example, several of our products are not generally available in China. We also outsource certain operational functions to third parties globally. If we fail to deploy, manage, or oversee our international operations successfully, our business may suffer. In addition, we are subject to a variety of risks inherent in doing business internationally, including:•political, social, or economic instability;•risks related to legal, regulatory, and other government scrutiny applicable to U.S. companies with sales and operations in foreign jurisdictions, including with respect to privacy, tax, law enforcement, content, trade compliance, supply chain, competition, consumer protection, intellectual property, environmental, health and safety, licensing, and infrastructure matters;•potential damage to our brand and reputation due to compliance with local laws, including potential censorship or requirements to provide user information to local authorities;•enhanced difficulty in reviewing content on our platform and enforcing our community standards across different languages and countries;•fluctuations in currency exchange rates and compliance with currency controls;•foreign exchange controls and tax and other regulations and orders that might prevent us from repatriating cash earned in countries outside the United States or otherwise limit our ability to move cash freely, and impede our ability to invest such cash efficiently;•higher levels of credit risk and payment fraud;•enhanced difficulties of integrating any foreign acquisitions;•burdens of complying with a variety of foreign laws, including laws related to taxation, content removal, content moderation, data localization, data protection, e-commerce and payments, and regulatory oversight;•reduced protection for intellectual property rights in some countries;•difficulties in staffing, managing, and overseeing global operations and the increased travel, infrastructure, and legal compliance costs associated with multiple international locations, including difficulties arising from personnel working remotely;•compliance with statutory equity requirements and management of tax consequences; and•geopolitical events affecting us, our marketers or our industry, including trade disputes, armed conflicts, and pandemics.In addition, we must manage the potential conflicts between locally accepted business practices in any given jurisdiction and our obligations to comply with laws and regulations, including anti-corruption laws or regulations applicable to us, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010. We also must manage our obligations to comply with laws and regulations related to import and export controls, trade restrictions, and sanctions, including regulations established by the U.S. Office of Foreign Assets Control. Government agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against companies for violations of anti-corruption laws or regulations, import and export controls, trade restrictions, sanctions, and other laws, rules, and regulations.If we are unable to expand internationally and manage the complexity of our global operations successfully, our financial results could be adversely affected. We also may be required to or elect to cease or modify our operations or the offering of our products and services in certain regions, including as a result of the risks described above, which could adversely affect our business, user growth and engagement, and financial results.32Table of ContentsWe face design, manufacturing, and supply chain risks that, if not properly managed, could adversely impact our financial results.We face a number of risks related to design, manufacturing, and supply chain management with respect to our consumer hardware products. For example, the consumer hardware products we sell from time to time have had, and in the future may have, quality issues resulting from the design or manufacture of the products, or from the software used in the products. Sometimes, these issues may be caused by components we purchase from other manufacturers or suppliers. Our brand and financial results could be adversely affected by any such quality issues, other failures to meet our customers' expectations, or findings of our consumer hardware products to be defective.We rely on third parties to manufacture and manage the logistics of transporting and distributing our consumer hardware products, which subjects us to a number of risks that have been exacerbated as a result of the COVID-19 pandemic. We have experienced, and may in the future experience, supply or labor shortages or other disruptions in logistics and the supply chain, which could result in shipping delays and negatively impact our operations, product development, and sales. We could be negatively affected if we are not able to engage third parties with the necessary capabilities or capacity on reasonable terms, or if those we engage with fail to meet their obligations (whether due to financial difficulties, manufacturing or supply constraints, or other reasons), or make adverse changes in the pricing or other material terms of such arrangements with them. The manufacturing, distribution, and sale of our consumer hardware products also may be negatively impacted by macroeconomic conditions, geopolitical challenges, trade disputes, or other actions by governments that subject us to supply shortages, increased costs, or supply chain or logistics disruptions.We also require the suppliers and business partners of our consumer hardware products to comply with laws and certain company policies regarding sourcing practices and standards on labor, trade compliance, health and safety, the environment, and business ethics, but we do not control them or their practices and standards. If any of them violates laws, fails to implement changes in accordance with newly enacted laws, or implements practices or standards regarded as unethical, corrupt, or non-compliant, we could experience supply chain disruptions, government action or fines, canceled orders, or damage to our reputation.We face inventory risk with respect to our consumer hardware products.We are exposed to inventory risks with respect to our consumer hardware products as a result of rapid changes in product cycles and pricing, unsafe or defective merchandise, supply chain disruptions, changes in consumer demand and consumer spending patterns, changes in consumer tastes with respect to our consumer hardware products, and other factors. The demand for our products can also change significantly between the time inventory or components are ordered and the date of sale. While we endeavor to accurately predict these trends and avoid overstocking or understocking consumer hardware products we may sell, from time to time we have experienced difficulties in accurately predicting and meeting the consumer demand for our products. In addition, when we begin selling or manufacturing a new consumer hardware product or enter new international markets, it may be difficult to establish vendor relationships, determine appropriate product or component selection, and accurately forecast demand. The acquisition of certain types of inventory or components may require significant lead-time and prepayment and they may not be returnable. Any one of the foregoing factors may adversely affect our operating results.We are involved in numerous class action lawsuits and other litigation matters that are expensive and time consuming, and, if resolved adversely, could harm our business, financial condition, or results of operations.We are involved in numerous lawsuits, including stockholder derivative lawsuits and putative class action lawsuits, many of which claim statutory damages and/or seek significant changes to our business operations, and we anticipate that we will continue to be a target for numerous lawsuits in the future. Because of the scale of our user, advertiser, and developer base, the plaintiffs in class action cases filed against us typically claim enormous monetary damages even if the alleged per-user or entity harm is small or non-existent. In addition, we have faced, currently face, and will continue to face additional class action and other lawsuits based on claims related to advertising, antitrust, privacy, security, biometrics, content, algorithms, user well-being, employment, activities on our platform, consumer protection, or product performance or other claims related to the use of consumer hardware and software, including virtual reality technology and products, which are new and unproven. For example, we are currently the subject of multiple putative class action suits in connection with our platform and user data practices and the misuse of certain data by a developer that shared such data with third parties in 33Table of Contentsviolation of our terms and policies; the disclosure of our earnings results for the second quarter of 2018; our acquisitions of Instagram and WhatsApp, as well as other alleged anticompetitive conduct; a former employee's allegations and release of internal company documents beginning in September 2021; the disclosure of our earnings results for the fourth quarter of 2021; and allegations that we inflated our estimates of the potential audience size for advertisements, resulting in artificially increased demand and higher prices. We are also the subject of multiple lawsuits related to our alleged recommendation of and/or failure to remove harmful content. The results of any such lawsuits and claims cannot be predicted with certainty, and any negative outcome from any such lawsuits could result in payments of substantial monetary damages or fines, or undesirable changes to our products or business practices, and accordingly our business, financial condition, or results of operations could be materially and adversely affected.There can be no assurances that a favorable final outcome will be obtained in all our cases, and defending any lawsuit is costly and can impose a significant burden on management and employees. Any litigation to which we are a party may result in an onerous or unfavorable judgment that may not be reversed upon appeal or in payments of substantial monetary damages or fines, or we may decide to settle lawsuits on similarly unfavorable terms, which has occurred in the past and which could adversely affect our business, financial conditions, or results of operations.We may have exposure to greater than anticipated tax liabilities.Our tax obligations, including income and non-income taxes, are based in part on our corporate operating structure and intercompany arrangements, including the manner in which we operate our business, develop, value, manage, protect, and use our intellectual property, and the valuations of our intercompany transactions. The tax laws applicable to our business, including the laws of the United States and other jurisdictions, are subject to interpretation and certain jurisdictions are aggressively interpreting their laws in new ways in an effort to raise additional tax revenue from companies such as Meta. We are subject to regular review and audit by U.S. federal, state, and foreign tax authorities. Tax authorities may disagree with certain positions we have taken, including our methodologies for valuing developed technology or intercompany arrangements, and any adverse outcome of such a review or audit could increase our worldwide effective tax rate, increase the amount of non-income taxes imposed on our business, and harm our financial position, results of operations, and cash flows. For example, in 2016 and 2018, the IRS issued formal assessments relating to transfer pricing with our foreign subsidiaries in conjunction with the examination of the 2010 through 2013 tax years. Although we disagree with the IRS's position and are litigating this issue, the ultimate resolution is uncertain and, if resolved in a manner unfavorable to us, may adversely affect our financial results.The determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain. Our provision for income taxes is determined by the manner in which we operate our business, and any changes to such operations or laws applicable to such operations may affect our effective tax rate. Although we believe that our provision for income taxes and estimates of our non-income tax liabilities are reasonable, the ultimate settlement may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.Our future income tax rates could be volatile and difficult to predict due to changes in jurisdictional profit split, changes in the amount and recognition of deferred tax assets and liabilities, or by changes in tax laws, regulations, or accounting principles.Changes in tax laws or tax rulings could materially affect our financial position, results of operations, and cash flows.The tax regimes we are subject to or operate under, including income and non-income taxes, are unsettled and may be subject to significant change. Changes in tax laws or tax rulings, or changes in interpretations of existing laws, could materially affect our financial position, results of operations, and cash flows. For example, the 2017 Tax Cuts and Jobs Act (Tax Act) enacted in December 2017 had a significant impact on our tax obligations and effective tax rate for the fourth quarter of 2017. The issuance of additional regulatory or accounting guidance related to the Tax Act, or other executive or Congressional actions in the United States or globally could materially increase our tax obligations and significantly impact our effective tax rate in the period such guidance is issued or such actions take effect, and in future periods. In addition, many countries have recently proposed or recommended changes to existing tax laws or have enacted new laws that could significantly increase our tax obligations in many countries where we do business or require us to change the manner in which we operate our business.34Table of ContentsOver the last several years, the Organization for Economic Cooperation and Development has been working on a Base Erosion and Profit Shifting Project that, if implemented, would change various aspects of the existing framework under which our tax obligations are determined in many of the countries in which we do business. In 2021, more than 140 countries tentatively signed on to a framework that imposes a minimum tax rate of 15%, among other provisions. As this framework is subject to further negotiation and implementation by each member country, the timing and ultimate impact of any such changes on our tax obligations are uncertain. Similarly, the European Commission and several countries have issued proposals that would apply to various aspects of the current tax framework under which we are taxed. These proposals include changes to the existing framework to calculate income tax, as well as proposals to change or impose new types of non-income taxes, including taxes based on a percentage of revenue. For example, several jurisdictions have proposed or enacted taxes applicable to digital services, which include business activities on digital advertising and online marketplaces, and which apply to our business.The European Commission has conducted investigations in multiple countries focusing on whether local country tax rulings or tax legislation provides preferential tax treatment that violates European Union state aid rules and concluded that certain member states, including Ireland, have provided illegal state aid in certain cases. These investigations may result in changes to the tax treatment of our foreign operations. Due to the large and expanding scale of our international business activities, many of these types of changes to the taxation of our activities described above could increase our worldwide effective tax rate, increase the amount of non-income taxes imposed on our business, and harm our financial position, results of operations, and cash flows. Such changes may also apply retroactively to our historical operations and result in taxes greater than the amounts estimated and recorded in our financial statements.Given our levels of share-based compensation, our tax rate may vary significantly depending on our stock price.The tax effects of the accounting for share-based compensation may significantly impact our effective tax rate from period to period. In periods in which our stock price varies from the grant price of the share-based compensation vesting in that period, we will recognize excess tax benefits or shortfalls that will impact our effective tax rate. For example, in 2022, tax shortfalls recognized from share-based compensation increased our provision for income taxes by $471 million and our effective tax rate by two percentage points as compared to the tax rate without such shortfalls. In future periods in which our stock price varies in comparison to the grant price of the share-based compensation vesting in that period, our effective tax rate may be inversely impacted. The amount and value of share-based compensation issued relative to our earnings in a particular period will also affect the magnitude of the impact of share-based compensation on our effective tax rate. These tax effects are dependent on our stock price, which we do not control, and a decline in our stock price could significantly increase our effective tax rate and adversely affect our financial results.If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.We review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable, such as a decline in stock price and market capitalization. We test goodwill for impairment at the reporting unit level at least annually. If such goodwill or intangible assets are deemed to be impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets would be recognized. We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or intangible assets is determined, which would negatively affect our results of operations.The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could harm our business.We currently depend on the continued services and performance of our key personnel, including Mark Zuckerberg. Although we have entered into an employment agreement with Mr. Zuckerberg, the agreement has no specific duration and constitutes at-will employment. In addition, many of our key technologies and systems are custom-made for our business by our personnel. The loss of key personnel, including members of management as well as key engineering, product development, marketing, and sales personnel, could disrupt our operations and have an adverse effect on our business.35Table of ContentsIn addition, we cannot guarantee we will continue to attract and retain the personnel we need to maintain our competitive position. In particular, we expect to continue to face significant challenges in hiring technical personnel, particularly for engineering talent, whether as a result of competition with other companies or other factors. As we continue to mature, the incentives to attract, retain, and motivate employees provided by our equity awards or by future arrangements may not be as effective as in the past, and if we issue significant equity to attract additional employees or to retain our existing employees, we would incur substantial additional share-based compensation expense and the ownership of our existing stockholders would be further diluted. Our ability to attract, retain, and motivate employees may also be adversely affected by stock price volatility. In addition, restrictive immigration policies or legal or regulatory developments relating to immigration may negatively affect our efforts to attract and hire new personnel as well as retain our existing personnel. If we do not succeed in attracting, hiring, and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to grow effectively.Our CEO has control over key decision making as a result of his control of a majority of the voting power of our outstanding capital stock.Mark Zuckerberg, our founder, Chairman, and CEO, is able to exercise voting rights with respect to a majority of the voting power of our outstanding capital stock and therefore has the ability to control the outcome of all matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. This concentrated control could delay, defer, or prevent a change of control, merger, consolidation, or sale of all or substantially all of our assets that our other stockholders support, or conversely this concentrated control could result in the consummation of such a transaction that our other stockholders do not support. This concentrated control could also discourage a potential investor from acquiring our Class A common stock, which has limited voting power relative to the Class B common stock, and might harm the trading price of our Class A common stock. In addition, Mr. Zuckerberg has the ability to control the management and major strategic investments of our company as a result of his position as our CEO and his ability to control the election or, in some cases, the replacement of our directors. In the event of his death, the shares of our capital stock that Mr. Zuckerberg owns will be transferred to the persons or entities that he has designated. As a board member and officer, Mr. Zuckerberg owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Zuckerberg is entitled to vote his shares, and shares over which he has voting control as governed by a voting agreement, in his own interests, which may not always be in the interests of our stockholders generally.We cannot guarantee that our share repurchase program will be fully consummated or that it will enhance long-term stockholder value. Share repurchases could also increase the volatility of the trading price of our stock and will diminish our cash reserves.Although our board of directors has authorized a share repurchase program that does not have an expiration date, the program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares of our Class A common stock. We cannot guarantee that the program will be fully consummated or that it will enhance long-term stockholder value. The program could affect the trading price of our stock and increase volatility, and any announcement of a termination of this program may result in a decrease in the trading price of our stock. In addition, this program will diminish our cash reserves.Risks Related to Government Regulation and EnforcementActions by governments that restrict access to Facebook or our other products in their countries, censor or moderate content on our products in their countries, or otherwise impair our ability to sell advertising in their countries, could substantially harm our business and financial results.Governments from time to time seek to censor or moderate content available on Facebook or our other products in their country, restrict access to our products from their country partially or entirely, or impose other restrictions that may affect the accessibility of our products in their country for an extended period of time or indefinitely. For example, user access to Facebook and certain of our other products has been or is currently restricted in whole or in part in China, Iran, and North Korea. In addition, government authorities in other countries may seek to restrict user access to our products if they consider us to be in violation of their laws or a threat to public safety or for other reasons, and certain of our products have been restricted by governments in other countries from time to time. For example, in 2020, Hong Kong adopted a National Security Law that provides authorities with the ability to obtain information, remove and block access to content, and suspend 36Table of Contentsuser services, and if we are found to be in violation of this law then the use of our products may be restricted. In addition, if we are required to or elect to make changes to our marketing and sales or other operations in Hong Kong as a result of the National Security Law or other legislation, our revenue and business in the region will be adversely affected. In addition, in connection with the war in Ukraine in the first quarter of 2022, access to Facebook and Instagram was restricted in Russia and the services were then prohibited by the Russian government, which has adversely affected, and will likely continue to adversely affect, our revenue and business in the region. It is also possible that government authorities could take action that impairs our ability to sell advertising, including in countries where access to our consumer-facing products may be blocked or restricted. For example, we generate meaningful revenue from a limited number of resellers serving advertisers based in China, and it is possible that the Chinese government could take action that reduces or eliminates our China-based advertising revenue, whether as a result of the trade dispute with the United States, in response to content issues or information requests in Hong Kong or elsewhere, or for other reasons, or take other action against us, such as imposing taxes or other penalties, which could adversely affect our financial results. Similarly, if we are found to be out of compliance with certain legal requirements for social media companies in Turkey, the Turkish government could take action to reduce or eliminate our Turkey-based advertising revenue or otherwise adversely impact access to our products. In the event that content shown on Facebook or our other products is subject to censorship, access to our products is restricted, in whole or in part, in one or more countries, we are required to or elect to make changes to our operations, or other restrictions are imposed on our products, or our competitors are able to successfully penetrate new geographic markets or capture a greater share of existing geographic markets that we cannot access or where we face other restrictions, our ability to retain or increase our user base, user engagement, or the level of advertising by marketers may be adversely affected, we may not be able to maintain or grow our revenue as anticipated, and our financial results could be adversely affected.Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data use and data protection, content, competition, safety and consumer protection, e-commerce, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our products and business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, including privacy, data use, data protection and personal information, biometrics, encryption, rights of publicity, content, integrity, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, data localization and storage, data disclosure, artificial intelligence and machine learning, electronic contracts and other communications, competition, protection of minors, consumer protection, civil rights, accessibility, telecommunications, product liability, e-commerce, taxation, economic or other trade controls including sanctions, anti-corruption and political law compliance, securities law compliance, and online payment services. The introduction of new products, expansion of our activities in certain jurisdictions, or other actions that we may take may subject us to additional laws, regulations, or other government scrutiny. In addition, foreign data protection, privacy, content, competition, consumer protection, and other laws and regulations can impose different obligations or be more restrictive than those in the United States.These U.S. federal, state, and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate, and may be interpreted and applied inconsistently from jurisdiction to jurisdiction and inconsistently with our current policies and practices. For example, regulatory or legislative actions or litigation affecting the manner in which we display content to our users, moderate content, or obtain consent to various practices could adversely affect user growth and engagement. Such actions could affect the manner in which we provide our services or adversely affect our financial results.We are also subject to evolving laws and regulations that dictate whether, how, and under what circumstances we can transfer, process and/or receive certain data that is critical to our operations, including data shared between countries or regions in which we operate and data shared among our products and services. For example, in 2016, the European Union and United States agreed to a transfer framework for data transferred from the European Union to the United States, called the Privacy Shield, but the Privacy Shield was invalidated in July 2020 by the Court of Justice of the European Union (CJEU). In addition, the other bases upon which Meta relies to transfer such data, such as Standard Contractual Clauses (SCCs), have been subjected to regulatory and judicial scrutiny. For example, the CJEU considered the validity of SCCs as a basis to transfer user data from the European Union to the United States following a challenge brought by the Irish Data Protection Commission (IDPC). Although the CJEU upheld the validity of SCCs in July 2020, our continued reliance on 37Table of ContentsSCCs will be the subject of future regulatory consideration. In particular, in August 2020, we received a preliminary draft decision from the IDPC that preliminarily concluded that Meta Platforms Ireland's reliance on SCCs in respect of European Union/European Economic Area Facebook user data does not achieve compliance with the GDPR and preliminarily proposed that such transfers should therefore be suspended. In February 2022, we received a revised preliminary draft decision in which the IDPC maintained its preliminary conclusion that these transfers should be suspended. The IDPC's draft decision was then further refined and shared on July 6, 2022 with other European data protection regulators (CSAs) as part of the GDPR's consistency mechanism. Separately, on March 25, 2022, the European Union and United States announced that they had reached an agreement in principle on a new EU-U.S. Data Privacy Framework (EU-U.S. DPF). On October 7, 2022, President Biden signed the Executive Order on Enhancing Safeguards for United States Signals Intelligence Activities (E.O.), and on December 13, 2022, the European Commission published its draft adequacy decision on the proposed new EU-U.S. DPF. On January 19, 2023, the IDPC referred the inquiry to a vote by the European Data Protection Board (EDPB), pursuant to the dispute resolution process under Article 65 GDPR, in respect of elements of the draft decision over which consensus could not be reached between concerned supervisory authorities. We believe a final decision in this inquiry may issue as early as the first quarter of 2023. Although the E.O. is a significant and positive step, if no adequacy decision is adopted by the European Commission and we are unable to continue to rely on SCCs or rely upon other alternative means of data transfers from the European Union to the United States, we will likely be unable to offer a number of our most significant products and services, including Facebook and Instagram, in Europe, which would materially and adversely affect our business, financial condition, and results of operations. In addition, we have been managing investigations and lawsuits in Europe, India, and other jurisdictions regarding the 2016 and 2021 updates to WhatsApp's terms of service and privacy policy and its sharing of certain data with other Meta products and services, including a lawsuit currently pending before the Supreme Court of India. If we are unable to transfer data between and among countries and regions in which we operate, or if we are restricted from sharing data among our products and services, it could affect our ability to provide our services, the manner in which we provide our services or our ability to target ads, which could adversely affect our financial results.We have been subject to other significant legislative and regulatory developments in the past, and proposed or new legislation and regulations could significantly affect our business in the future. For example, we have implemented a number of product changes and controls as a result of requirements under the European General Data Protection Regulation (GDPR), and may implement additional changes in the future. The GDPR also requires submission of personal data breach notifications to our lead European Union privacy regulator, the IDPC, and includes significant penalties for non-compliance with the notification obligation as well as other requirements of the regulation. The interpretation of the GDPR is still evolving and draft decisions in investigations by the IDPC are subject to review by other European privacy regulators as part of the GDPR's consistency mechanism, which may lead to significant changes in the final outcome of such investigations. As a result, the interpretation and enforcement of the GDPR, as well as the imposition and amount of penalties for non-compliance, are subject to significant uncertainty. In addition, Brazil, the United Kingdom, and other countries have enacted similar data protection regulations imposing data privacy-related requirements on products and services offered to users in their respective jurisdictions. The California Consumer Privacy Act (CCPA), as amended by the California Privacy Rights Act (CPRA), also establishes certain transparency rules and create new data privacy rights for users, including limitations on our use of certain sensitive personal information and more ability for users to control the purposes for which their data is shared with third parties. Other states have proposed or enacted similar comprehensive privacy laws that afford users with similar data privacy rights and controls. These laws and regulations are evolving and subject to interpretation, and resulting limitations on our advertising services, or reductions of advertising by marketers, have to some extent adversely affected, and will continue to adversely affect, our advertising business. For example, state regulators in California and Colorado are considering adopting regulations that could further limit how companies can use personal information for advertising purposes. In Europe, regulators continue to issue guidance concerning the ePrivacy Directive's requirements regarding the use of cookies and similar technologies, and may impose specific measures in the future which could directly impact our use of such technologies. In addition, the ePrivacy Directive and national implementation laws impose additional limitations on the use of data across messaging products and include significant penalties for non-compliance. Changes to our products or business practices as a result of these or similar developments have in the past adversely affected, and may in the future adversely affect, our advertising business. Similarly, there are a number of legislative proposals or recently enacted laws in the European Union, the United States, at both the federal and state level, as well as other jurisdictions that could impose new obligations or limitations in areas affecting our business. For example, the DMA in the European Union imposes new restrictions and requirements on companies like ours, including in areas such as the combination of data across services, mergers and acquisitions, and product design. The DMA also includes significant penalties for non-compliance, and its key requirements will be enforceable against designated gatekeeper companies in early 2024. We expect the DMA will cause us to incur significant compliance costs and make additional changes to our products or business practices. The requirements under the DMA will likely be subject to further interpretation and regulatory engagement. Pending or future proposals to 38Table of Contentsmodify competition laws in the United States and other jurisdictions could have similar effects. Further, the Digital Services Act (DSA) in the European Union, which will apply to our business as early as June 2023, will impose new restrictions and requirements for our products and services and may significantly increase our compliance costs. The DSA also includes significant penalties for non-compliance. In addition, some countries, such as India and Turkey, are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services, cause us to cease the offering of our products and services in certain countries, or result in fines or other penalties. New legislation or regulatory decisions that restrict our ability to collect and use information about minors may also result in limitations on our advertising services or our ability to offer products and services to minors in certain jurisdictions.These laws and regulations, as well as any associated claims, inquiries, or investigations or any other government actions, have in the past led to, and may in the future lead to, unfavorable outcomes including increased compliance costs, loss of revenue, delays or impediments in the development of new products, negative publicity and reputational harm, increased operating costs, diversion of management time and attention, and remedies that harm our business, including fines or demands or orders that we modify or cease existing business practices.We have been subject to regulatory and other government investigations, enforcement actions, and settlements, and we expect to continue to be subject to such proceedings and other inquiries in the future, which could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business. We receive formal and informal inquiries from government authorities and regulators regarding our compliance with laws and regulations, many of which are evolving and subject to interpretation. We are and expect to continue to be the subject of investigations, inquiries, data requests, requests for information, actions, and audits in the United States, Europe, and around the world, particularly in the areas of privacy and data protection, including with respect to minors, law enforcement, consumer protection, civil rights, content moderation, and competition. In addition, we are currently, and may in the future be, subject to regulatory orders or consent decrees. For example, data protection, competition, and consumer protection authorities in the European Union and other jurisdictions have initiated actions, investigations, or administrative orders seeking to restrict the ways in which we collect and use information, or impose sanctions, and other authorities may do the same. In addition, beginning in March 2018, we became subject to FTC, state attorneys general, and other government inquiries in the United States, Europe, and other jurisdictions in connection with our platform and user data practices as well as the misuse of certain data by a developer that shared such data with third parties in violation of our terms and policies. In July 2019, we entered into a settlement and modified consent order to resolve the FTC inquiry, which was approved by the federal court and took effect in April 2020. Among other matters, our settlement with the FTC required us to pay a penalty of $5.0 billion and to significantly enhance our practices and processes for privacy compliance and oversight. The state attorneys general inquiry and certain government inquiries in other jurisdictions remain ongoing. We also notify the IDPC, our lead European Union privacy regulator under the GDPR, and other regulators of certain other personal data breaches and privacy issues, and are subject to inquiries and investigations by the IDPC and other regulators regarding various aspects of our regulatory compliance. We have in the past been, and may in the future be, subject to fines and requirements to changes to our business practices as a result of such inquiries and investigations. In addition, we are subject to a lawsuit by the state of Texas in connection with the “tag suggestions” and other facial recognition features on our products.We are also subject to various litigation and formal and informal inquiries and investigations by competition authorities in the United States, Europe, and other jurisdictions, which relate to many aspects of our business, including with respect to users and advertisers, as well as our industry. Such inquiries, investigations, and lawsuits concern, among other things, our business practices in the areas of social networking or social media services, digital advertising, and/or mobile or online applications, as well as our acquisitions. For example, in June 2019 we were informed by the FTC that it had opened an antitrust investigation of our company. In addition, beginning in the third quarter of 2019, we became the subject of antitrust inquiries and investigations by the U.S. Department of Justice and state attorneys general. Beginning in December 2020, we also became subject to lawsuits by the FTC and the attorneys general from 46 states, the territory of Guam, and the District of Columbia in the U.S. District Court for the District of Columbia alleging that we violated antitrust laws, including by acquiring Instagram in 2012 and WhatsApp in 2014 and by maintaining conditions on access to our platform, among other things. The complaints of the FTC and attorneys general both sought a permanent injunction against our company's alleged violations of the antitrust laws, and other equitable relief, including divestiture or reconstruction of Instagram and WhatsApp. In addition, in December 2022, the European Commission issued a Statement of Objections alleging that we tie Facebook Marketplace to Facebook and use data in a manner that infringes European Union competition rules. We are also subject to other government inquiries and investigations relating to our business activities and disclosure practices. For example, 39Table of Contentsbeginning in September 2021, we became subject to government investigations and requests relating to allegations and the release of internal company documents by a former employee.Orders issued by, or inquiries or enforcement actions initiated by, government or regulatory authorities could cause us to incur substantial costs, expose us to civil and criminal liability (including liability for our personnel) or penalties (including substantial monetary remedies), interrupt or require us to change our business practices in a manner materially adverse to our business (including changes to our products or user data practices), result in negative publicity and reputational harm, divert resources and the time and attention of management from our business, or subject us to other structural or behavioral remedies that adversely affect our business, and we have experienced some of these adverse effects to varying degrees from time to time.Compliance with our FTC consent order, the GDPR, the CPRA, the ePrivacy Directive, the DMA, the DSA, and other regulatory and legislative privacy requirements require significant operational resources and modifications to our business practices, and any compliance failures may have a material adverse effect on our business, reputation, and financial results.We are engaged in ongoing privacy compliance and oversight efforts, including in connection with our modified consent order with the FTC, requirements of the GDPR, and other current and anticipated regulatory and legislative requirements around the world, such as the CPRA, ePrivacy Directive, DMA, and DSA. In particular, we are maintaining a comprehensive privacy program in connection with the FTC consent order that includes substantial management and board of directors oversight, stringent operational requirements and reporting obligations, prohibitions against making misrepresentations relating to user data, a process to regularly certify our compliance with the privacy program to the FTC, and regular assessments of our privacy program by an independent third-party assessor, which has been and will continue to be challenging and costly to maintain and enhance. These compliance and oversight efforts are increasing demand on our systems and resources, and require significant new and ongoing investments, including investments in compliance processes, personnel, and technical infrastructure. We are reallocating resources internally to assist with these efforts, and this has had, and will continue to have, an adverse impact on our other business initiatives. In addition, these efforts require substantial modifications to our business practices and make some practices such as product and ads development more difficult, time-consuming, and costly. As a result, we believe our ability to develop and launch new features, products, and services in a timely manner has been and will continue to be adversely affected. We also expect that our privacy compliance and oversight efforts will require significant time and attention from our management and board of directors. The requirements of the FTC consent order and other privacy-related laws and regulations are complex and apply broadly to our business, and from time to time we notify relevant authorities of instances where we are not in full compliance with these requirements or otherwise discover privacy issues, and we expect to continue to do so as any such issues arise in the future. In addition, regulatory and legislative privacy requirements are constantly evolving and can be subject to significant change and uncertain interpretation. For example, we will be subject to new restrictions and requirements under the DMA, including in areas such as the combination of data across services and product design, which will likely be subject to further interpretation and regulatory engagement. If we are unable to successfully implement and comply with the mandates of the FTC consent order, GDPR, CPRA, ePrivacy Directive, DMA, DSA, or other regulatory or legislative requirements, or if we are found to be in violation of the consent order or other applicable requirements, we may be subject to regulatory or governmental investigations or lawsuits, which may result in significant monetary fines, judgments, or other penalties, and we may also be required to make additional changes to our business practices. Any of these events could have a material adverse effect on our business, reputation, and financial results.We may incur liability as a result of information retrieved from or transmitted over the internet or published using our products or as a result of claims related to our products, and legislation regulating content on our platform may require us to change our products or business practices and may adversely affect our business and financial results.We have faced, currently face, and will continue to face claims relating to information or content that is published or made available on our products, including our policies, algorithms, and enforcement actions with respect to such information or content. In particular, the nature of our business exposes us to claims related to defamation, dissemination of misinformation or news hoaxes, discrimination, harassment, intellectual property rights, rights of publicity and privacy, personal injury torts, laws regulating hate speech or other types of content, online safety, products liability, consumer protection, and breach of contract, among others. For example, we have recently seen an increase in claims brought by younger users related to well-being issues based on allegedly harmful content that is shared on or recommended by our products. The potential risks relating to any of the foregoing types of claims are currently enhanced in certain jurisdictions 40Table of Contentsoutside the United States where our protection from liability for third-party actions may be unclear or where we may be less protected under local laws than we are in the United States. For example, in April 2019, the European Union passed a directive (the European Copyright Directive) expanding online platform liability for copyright infringement and regulating certain uses of news content online, which member states are currently implementing into their national laws. In addition, the European Union revised the European Audiovisual Media Service Directive to apply to online video-sharing platforms, which member states have begun to implement. In the United States, the U.S. Supreme Court recently agreed to review a matter in which the scope of the protections available to online platforms under Section 230 of the Communications Decency Act (Section 230) is at issue. In addition, there have been, and continue to be, various state and federal legislative and executive efforts to remove or restrict the scope of the protections under Section 230, as well as to impose new obligations on online platforms with respect to commerce listings, user content, counterfeit goods and copyright-infringing material, and our current protections from liability for third-party content in the United States could decrease or change. We could incur significant costs investigating and defending such claims and, if we are found liable, significant damages. We could also face fines, orders restricting or blocking our services in particular geographies, or other government-imposed remedies as a result of content hosted on our services. For example, legislation in Germany and India has resulted in the past, and may result in the future, in the imposition of fines or other penalties for failure to comply with certain content removal, law enforcement cooperation, and disclosure obligations. Numerous other countries in Europe, the Middle East, Asia-Pacific, and Latin America are considering or have implemented similar legislation imposing potentially significant penalties, including fines, service throttling, or advertising bans, for failure to remove certain types of content or follow certain processes. For example, we have been subject to fines and may in the future be subject to other penalties in connection with social media legislation in Turkey, and we have been subject to fines and service blocking and prohibition in Russia. Content-related legislation also has required us in the past, and may require us in the future, to change our products or business practices, increase our costs, or otherwise impact our operations or our ability to provide services in certain geographies. For example, the European Copyright Directive requires certain online services to obtain authorizations for copyrighted content or to implement measures to prevent the availability of that content, which may require us to make substantial investments in compliance processes. Member states' laws implementing the European Copyright Directive may also require online platforms to pay for content. In addition, our products and services will be subject to new restrictions and requirements, and our compliance costs may significantly increase, as a result of the Digital Services Act in the European Union, which will apply to our business as early as June 2023, and potentially other content-related legislative developments such as proposed online safety bills in Ireland and the United Kingdom. Certain countries have also proposed legislation that may require us to pay publishers for certain news content shared on our products. In the United States, changes to the protections available under Section 230 or the First Amendment to the U.S. Constitution or new state or federal content-related legislation may increase our costs or require significant changes to our products, business practices, or operations, which could adversely affect user growth and engagement. Any of the foregoing events could adversely affect our business and financial results.Payment transactions may subject us to additional regulatory requirements and other risks that could be costly and difficult to comply with or that could harm our business.Several of our products offer Payments functionality, including enabling our users to purchase tangible, virtual, and digital goods from merchants and developers that offer applications using our Payments infrastructure, send money to other users, and make donations to certain charitable organizations, among other activities. We are subject to a variety of laws and regulations in the United States, Europe, and elsewhere, including those governing anti-money laundering and counter-terrorist financing, money transmission, stored value, gift cards and other prepaid access instruments, electronic funds transfer, virtual currency, consumer protection, charitable fundraising, trade sanctions, and import and export restrictions. Depending on how our Payments products evolve, we may also be subject to other laws and regulations including those governing gambling, banking, and lending. In some jurisdictions, the application or interpretation of these laws and regulations is not clear. To increase flexibility in how our use of Payments may evolve and to mitigate regulatory uncertainty, we have received certain payments licenses in the United States, the European Economic Area, and other jurisdictions, which will generally require us to demonstrate compliance with many domestic and foreign laws in these areas. Our efforts to comply with these laws and regulations could be costly and result in diversion of management time and effort and may still not guarantee compliance. In the event that we are found to be in violation of any such legal or regulatory requirements, we may be subject to monetary fines or other penalties such as a cease and desist order, or we may be required to make product changes, any of which could have an adverse effect on our business and financial results.In addition, we are subject to a variety of additional risks as a result of Payments transactions, including: increased costs and diversion of management time and effort and other resources to deal with bad transactions or customer disputes; potential fraudulent or otherwise illegal activity by users, developers, employees, or third parties; restrictions on the 41Table of Contentsinvestment of consumer funds used to transact Payments; and additional disclosure and reporting requirements. We have also launched payments functionality on certain of our applications and may in the future undertake additional payments initiatives, including as part of our metaverse efforts, which may subject us to many of the foregoing risks and additional licensing requirements.Risks Related to Data, Security, and Intellectual PropertySecurity breaches, improper access to or disclosure of our data or user data, other hacking and phishing attacks on our systems, or other cyber incidents could harm our reputation and adversely affect our business.Our industry is prone to cyber-attacks by third parties seeking unauthorized access to our data or users' data or to disrupt our ability to provide service. Our products and services involve the collection, storage, processing, and transmission of a large amount of data. Any failure to prevent or mitigate security breaches and improper access to or disclosure of our data or user data, including personal information, content, or payment information from users, or information from marketers, could result in the loss, modification, disclosure, destruction, or other misuse of such data, which could harm our business and reputation and diminish our competitive position. In addition, computer malware, viruses, social engineering (such as spear phishing attacks), scraping, and general hacking continue to be prevalent in our industry, have occurred on our systems in the past, and will occur on our systems in the future. We also regularly encounter attempts to create false or undesirable user accounts, purchase ads, or take other actions on our platform for purposes such as spamming, spreading misinformation, or other objectionable ends. As a result of our prominence, the size of our user base, the types and volume of personal data and content on our systems, and the evolving nature of our products and services (including our efforts involving new and emerging technologies), we believe that we are a particularly attractive target for such breaches and attacks, including from nation states and highly sophisticated, state-sponsored, or otherwise well-funded actors, and we experience heightened risk from time to time as a result of geopolitical events. Our efforts to address undesirable activity on our platform also increase the risk of retaliatory attacks. Such breaches and attacks may cause interruptions to the services we provide, degrade the user experience, cause users or marketers to lose confidence and trust in our products, impair our internal systems, or result in financial harm to us. Our efforts to protect our company data or the information we receive, and to disable undesirable activities on our platform, may also be unsuccessful due to software bugs or other technical malfunctions; employee, contractor, or vendor error or malfeasance, including defects or vulnerabilities in our vendors' information technology systems or offerings; government surveillance; breaches of physical security of our facilities or technical infrastructure; or other threats that evolve. In addition, third parties may attempt to fraudulently induce employees or users to disclose information in order to gain access to our data or our users' data. Cyber-attacks continue to evolve in sophistication and volume, and inherently may be difficult to detect for long periods of time. Although we have developed systems and processes that are designed to protect our data and user data, to prevent data loss, to disable undesirable accounts and activities on our platform, and to prevent or detect security breaches, we cannot assure you that such measures will provide absolute security, that we will be able to react in a timely manner, or that our remediation efforts will be successful. The changes in our work environment as a result of certain personnel working remotely could also impact the security of our systems, as well as our ability to protect against attacks and detect and respond to them quickly.In addition, some of our developers or other partners, such as those that help us measure the effectiveness of ads, may receive or store information provided by us or by our users through mobile or web applications integrated with our products. We provide limited information to such third parties based on the scope of services provided to us. However, if these third parties or developers fail to adopt or adhere to adequate data security practices, or in the event of a breach of their networks, our data or our users' data may be improperly accessed, used, or disclosed. We experience such cyber-attacks and other security incidents of varying degrees from time to time, and we incur significant costs in protecting against or remediating such incidents. In addition, we are subject to a variety of laws and regulations in the United States and abroad relating to cybersecurity and data protection, as well as obligations under our modified consent order with the FTC. As a result, affected users or government authorities could initiate legal or regulatory actions against us in connection with any actual or perceived security breaches or improper access to or disclosure of data, which has occurred in the past and which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practices. Such incidents or our efforts to remediate such incidents may also result in a decline in our active user base or engagement levels. Any of these events could have a material and adverse effect on our business, reputation, or financial results.42Table of ContentsFor example, in September 2018, we announced our discovery of a third-party cyber-attack that exploited a vulnerability in Facebook's code to steal user access tokens, which were then used to access certain profile information from approximately 29 million user accounts on Facebook. The events surrounding this cyber-attack became the subject of Irish Data Protection Commission and other government inquiries. Any such inquiries could subject us to substantial fines and costs, require us to change our business practices, divert resources and the attention of management from our business, or adversely affect our business.We anticipate that our ongoing efforts related to privacy, safety, security, and content review will identify additional instances of misuse of user data or other undesirable activity by third parties on our platform.In addition to our efforts to mitigate cybersecurity risks, we are making significant investments in privacy, safety, security, and content review efforts to combat misuse of our services and user data by third parties, including investigations and audits of platform applications, as well as other enforcement efforts. As a result of these efforts we have discovered and announced, and anticipate that we will continue to discover and announce, additional incidents of misuse of user data or other undesirable activity by third parties. We may not discover all such incidents or activity, whether as a result of our data or technical limitations, including our lack of visibility over our encrypted services, the scale of activity on our platform, the allocation of resources to other projects, or other factors, and we may be notified of such incidents or activity by the independent privacy assessor required under our modified consent order with the FTC, the media, or other third parties. Such incidents and activities have in the past, and may in the future, include the use of user data or our systems in a manner inconsistent with our terms, contracts or policies, the existence of false or undesirable user accounts, election interference, improper advertising practices, activities that threaten people's safety on- or offline, or instances of spamming, scraping, data harvesting, unsecured datasets, or spreading misinformation. We may also be unsuccessful in our efforts to enforce our policies or otherwise remediate any such incidents. Consequences of any of the foregoing developments include negative effects on user trust and engagement, harm to our reputation and brands, changes to our business practices in a manner adverse to our business, and adverse effects on our business and financial results. Any such developments may also subject us to additional litigation and regulatory inquiries, which could subject us to monetary penalties and damages, divert management's time and attention, and lead to enhanced regulatory oversight.Our products and internal systems rely on software and hardware that is highly technical, and any errors, bugs, or vulnerabilities in these systems, or failures to address or mitigate technical limitations in our systems, could adversely affect our business.Our products and internal systems rely on software and hardware, including software and hardware developed or maintained internally and/or by third parties, that is highly technical and complex. In addition, our products and internal systems depend on the ability of such software and hardware to store, retrieve, process, and manage immense amounts of data. The software and hardware on which we rely has contained, and will in the future contain, errors, bugs, or vulnerabilities, and our systems are subject to certain technical limitations that may compromise our ability to meet our objectives. Some errors, bugs, or vulnerabilities inherently may be difficult to detect and may only be discovered after the code has been released for external or internal use. For example, in September 2018, we announced our discovery of a third-party cyber-attack that exploited a vulnerability in Facebook's code to steal user access tokens and access certain profile information from user accounts on Facebook. Errors, bugs, vulnerabilities, design defects, or technical limitations within the software and hardware on which we rely, or human error in using such systems, have in the past led to, and may in the future lead to, outcomes including a negative experience for users and marketers who use our products, compromised ability of our products to perform in a manner consistent with our terms, contracts, or policies, delayed product introductions or enhancements, targeting, measurement, or billing errors, compromised ability to protect the data of our users and/or our intellectual property or other data, or reductions in our ability to provide some or all of our services. For example, we make commitments to our users as to how their data will be collected, used, shared, and retained within and across our products, and our systems are subject to errors, bugs and technical limitations that may prevent us from fulfilling these commitments reliably. In addition, any errors, bugs, vulnerabilities, or defects in our systems or the software and hardware on which we rely, failures to properly address or mitigate the technical limitations in our systems, or associated degradations or interruptions of service or failures to fulfill our commitments to our users, have in the past led to, and may in the future lead to, outcomes including damage to our reputation, loss of users, loss of marketers, loss of revenue, regulatory inquiries, litigation, or liability for fines, damages, or other remedies, any of which could adversely affect our business and financial results.43Table of ContentsIf we are unable to protect our intellectual property, the value of our brands and other intangible assets may be diminished, and our business may be adversely affected.We rely and expect to continue to rely on a combination of confidentiality, assignment, and license agreements with our employees, consultants, and third parties with whom we have relationships, as well as trademark, copyright, patent, trade secret, and domain name protection laws, to protect our proprietary rights. In the United States and internationally, we have filed various applications for protection of certain aspects of our intellectual property, and we currently hold a significant number of registered trademarks and issued patents in multiple jurisdictions and have acquired patents and patent applications from third parties. Third parties may knowingly or unknowingly infringe our proprietary rights, third parties may challenge proprietary rights held by us, and pending and future trademark and patent applications may not be approved. In addition, effective intellectual property protection may not be available in every country in which we operate or intend to operate our business. In any or all of these cases, we may be required to expend significant time and expense in order to prevent infringement or to enforce our rights. Although we have generally taken measures to protect our proprietary rights, there can be no assurance that others will not offer products or concepts that are substantially similar to ours and compete with our business. In addition, we regularly contribute software source code under open source licenses and have made other technology we developed available under other open licenses, and we include open source software in our products. As a result of our open source contributions and the use of open source in our products, we may license or be required to license or disclose code and/or innovations that turn out to be material to our business and may also be exposed to increased litigation risk. If the protection of our proprietary rights is inadequate to prevent unauthorized use or appropriation by third parties, the value of our brands and other intangible assets may be diminished and competitors may be able to more effectively mimic our products, services, and methods of operations. Any of these events could have an adverse effect on our business and financial results.We are currently, and expect to be in the future, party to patent lawsuits and other intellectual property rights claims that are expensive and time consuming and, if resolved adversely, could have a significant impact on our business, financial condition, or results of operations.Companies in the internet, technology, and media industries own large numbers of patents, copyrights, trademarks, and trade secrets, and frequently enter into litigation based on allegations of infringement, misappropriation, or other violations of intellectual property or other rights. In addition, various "non-practicing entities" that own patents and other intellectual property rights often attempt to aggressively assert their rights in order to extract value from technology companies. Furthermore, from time to time we may introduce or acquire new products, including in areas where we historically have not competed, which could increase our exposure to patent and other intellectual property claims from competitors and non-practicing entities.From time to time, we receive notice from patent holders and other parties alleging that certain of our products and services, or user content, infringe their intellectual property rights. We presently are involved in a number of intellectual property lawsuits, and as we face increasing competition and develop new products and services, we expect the number of patent and other intellectual property claims against us to grow. Defending patent and other intellectual property litigation is costly and can impose a significant burden on management and employees, and there can be no assurances that favorable final outcomes will be obtained in all cases. In addition, plaintiffs may seek, and we may become subject to, preliminary or provisional rulings in the course of any such litigation, including potential preliminary injunctions requiring us to cease some or all of our operations. We may decide to settle such lawsuits and disputes on terms that are unfavorable to us. Similarly, if any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that may not be reversed upon appeal. The terms of such a settlement or judgment may require us to cease some or all of our operations or pay substantial amounts to the other party. In addition, we may have to seek a license to continue practices found to be in violation of a third party's rights, which may not be available on reasonable terms, or at all, and may significantly increase our operating costs and expenses. As a result, we may also be required to develop alternative non-infringing technology or practices or discontinue the practices. The development of alternative non-infringing technology or practices could require significant effort and expense, could result in less effective technology or practices or otherwise negatively affect the user experience, or may not be feasible. We have experienced unfavorable outcomes in such disputes and litigation in the past, and our business, financial condition, and results of operations could be adversely affected as a result of an unfavorable resolution of the disputes and litigation referred to above.44Table of ContentsRisks Related to Ownership of Our Class A Common StockThe trading price of our Class A common stock has been and will likely continue to be volatile.The trading price of our Class A common stock has been, and is likely to continue to be, volatile. Since shares of our Class A common stock were sold in our initial public offering in May 2012 at a price of $38.00 per share, our stock price has ranged from $17.55 to $384.33 through December 31, 2022. In addition to the factors discussed in this Annual Report on Form 10-K, the trading price of our Class A common stock has in the past fluctuated and may in the future fluctuate significantly in response to numerous factors, many of which are beyond our control, including:•actual or anticipated fluctuations in our revenue and other operating results for either of our reportable segments;•the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections;•actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;•additional shares of our stock being sold into the market by us, our existing stockholders, or in connection with acquisitions, or the anticipation of such sales;•investor sentiment with respect to our competitors, our business partners, and our industry in general;•announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;•announcements by us or estimates by third parties of actual or anticipated changes in the size of our user base, the level of user engagement, or the effectiveness of our ad products;•changes in operating performance and stock market valuations of technology companies in our industry, including our developers and competitors;•price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;•the inclusion, exclusion, or deletion of our stock from any trading indices, such as the S&P 500 Index;•media coverage of our business and financial performance;•lawsuits threatened or filed against us, or developments in pending lawsuits;•adverse government actions or legislative or regulatory developments relating to advertising, competition, content, privacy, or other matters, including interim or final rulings by tax, judicial, or regulatory bodies;•trading activity in our share repurchase program; and•other events or factors, including those resulting from war, incidents of terrorism, pandemics, and other disruptive external events, or responses to these events.In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. We are currently subject to securities litigation in connection with our platform and user data practices and the misuse of certain data by a developer that shared such data with third parties in violation of our terms and policies; the disclosure of our earnings results for the second quarter of 2018; a former employee's allegations and release of internal company documents beginning in September 2021; and the disclosure of our earnings results for the fourth quarter of 2021. We may experience more such litigation following future periods of volatility. Any securities litigation could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.45Table of ContentsWe do not intend to pay cash dividends for the foreseeable future.We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business and fund our share repurchase program, and we do not expect to declare or pay any cash dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Class A common stock if the trading price of your shares increases.The dual class structure of our common stock and a voting agreement between certain stockholders have the effect of concentrating voting control with our CEO and certain other holders of our Class B common stock; this will limit or preclude your ability to influence corporate matters.Our Class B common stock has ten votes per share and our Class A common stock has one vote per share. Holders of our Class B common stock, including our founder, Chairman, and CEO, together hold a majority of the combined voting power of our outstanding capital stock, and therefore are able to control the outcome of all matters submitted to our stockholders for approval so long as the shares of Class B common stock represent at least 9.1% of all outstanding shares of our Class A and Class B common stock. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future.Transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning or charitable purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If, for example, Mr. Zuckerberg retains a significant portion of his holdings of Class B common stock for an extended period of time, he could, in the future, continue to control a majority of the combined voting power of our outstanding capital stock.Our status as a "controlled company" could make our Class A common stock less attractive to some investors or otherwise harm our stock price.Because we qualify as a "controlled company" under the corporate governance rules for Nasdaq-listed companies, we are not required to have a majority of our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function. In the future we could elect not to have a majority of our board of directors be independent or not to have a compensation committee or an independent nominating function. Accordingly, should the interests of our controlling stockholder differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance rules for Nasdaq-listed companies. Our status as a controlled company could make our Class A common stock less attractive to some investors or otherwise harm our stock price.Delaware law and provisions in our certificate of incorporation and bylaws could make a merger, tender offer, or proxy contest difficult, thereby depressing the trading price of our Class A common stock.Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our current certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult, including the following:•until the first date on which the outstanding shares of our Class B common stock represent less than 35% of the combined voting power of our common stock, any transaction that would result in a change in control of our company requires the approval of a majority of our outstanding Class B common stock voting as a separate class;•we currently have a dual class common stock structure, which provides Mr. Zuckerberg with the ability to control the outcome of matters requiring stockholder approval, even if he owns significantly less than a majority of the shares of our outstanding Class A and Class B common stock;46Table of Contents•when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of common stock, certain amendments to our certificate of incorporation or bylaws will require the approval of two-thirds of the combined vote of our then-outstanding shares of Class A and Class B common stock;•when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock, vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders;•when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock, our board of directors will be classified into three classes of directors with staggered three-year terms and directors will only be able to be removed from office for cause;•when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock, our stockholders will only be able to take action at a meeting of stockholders and not by written consent;•only our chairman, our chief executive officer, our president, or a majority of our board of directors are authorized to call a special meeting of stockholders;•advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders;•our certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without stockholder approval; and•certain litigation against us can only be brought in Delaware.47Table of ContentsItem 1B.Unresolved Staff Comments None.Item 2.PropertiesOur corporate headquarters are located in Menlo Park, California. As of December 31, 2022, we owned and leased approximately 10 million square feet of office and building space for our corporate headquarters and in the surrounding areas. However, beginning in the third quarter of 2022, we made a decision to either sublease, early terminate, or abandon several office buildings under operating leases. We also owned and leased approximately 62 acres of land to be developed to accommodate anticipated future growth.In addition, we have offices in more than 90 cities across North America, Europe, the Middle East, Africa, Asia Pacific, and Latin America. We also own 21 data centers locations globally. See Note 3 — Restructuring in the notes to the consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information regarding our facilities consolidation efforts.We believe that our facilities are adequate for our current needs.Item 3.Legal ProceedingsBeginning on March 20, 2018, multiple putative class actions and derivative actions were filed in state and federal courts in the United States and elsewhere against us and certain of our directors and officers alleging violations of securities laws, breach of fiduciary duties, and other causes of action in connection with our platform and user data practices as well as the misuse of certain data by a developer that shared such data with third parties in violation of our terms and policies, and seeking unspecified damages and injunctive relief. Beginning on July 27, 2018, two putative class actions were filed in federal court in the United States against us and certain of our directors and officers alleging violations of securities laws in connection with the disclosure of our earnings results for the second quarter of 2018 and seeking unspecified damages. These two actions subsequently were transferred and consolidated in the U.S. District Court for the Northern District of California with the putative securities class action described above relating to our platform and user data practices. On September 25, 2019, the district court granted our motion to dismiss the consolidated putative securities class action, with leave to amend. On November 15, 2019, a second amended complaint was filed in the consolidated putative securities class action. On August 7, 2020, the district court granted our motion to dismiss the second amended complaint, with leave to amend. On October 16, 2020, a third amended complaint was filed in the consolidated putative securities class action. On December 20, 2021, the district court granted our motion to dismiss the third amended complaint, with prejudice. On January 17, 2022, the plaintiffs filed a notice of appeal of the order dismissing their case, and the appeal is now pending before the U.S. Court of Appeals for the Ninth Circuit. With respect to the multiple putative class actions filed against us beginning on March 20, 2018 alleging fraud and violations of consumer protection, privacy, and other laws in connection with the same matters, several of the cases brought on behalf of consumers in the United States were consolidated in the U.S. District Court for the Northern District of California. On September 9, 2019, the court granted, in part, and denied, in part, our motion to dismiss the consolidated putative consumer class action. On December 22, 2022, the parties entered into a settlement agreement to resolve the lawsuit, which provides for a payment of $725 million by us and is subject to court approval. In addition, our platform and user data practices, as well as the events surrounding the misuse of certain data by a developer, became the subject of U.S. Federal Trade Commission (FTC), state attorneys general, and other government inquiries in the United States, Europe, and other jurisdictions. We entered into a settlement and modified consent order to resolve the FTC inquiry, which took effect in April 2020 and required us to pay a penalty of $5.0 billion and to significantly enhance our practices and processes for privacy compliance and oversight. The state attorneys general inquiry and certain government inquiries in other jurisdictions remain ongoing and could subject us to additional substantial fines and costs, require us to change our business practices, divert resources and the attention of management from our business, or adversely affect our business. On July 16, 2021, a stockholder derivative action was filed in Delaware Chancery Court against certain of our directors and officers asserting breach of fiduciary duty and related claims relating to our historical platform and user data practices, as well as our settlement with the FTC. On July 20, 2021, other stockholders filed an amended derivative complaint in a related Delaware Chancery Court action, asserting breach of fiduciary duty and related claims against certain of our current and former directors and officers in connection with our historical platform and user data practices. On November 4, 2021, the lead 48Table of Contentsplaintiffs filed a second amended and consolidated complaint in the stockholder derivative action. We believe the lawsuits described above are without merit, and we are vigorously defending them.We also notify the Irish Data Protection Commission (IDPC), our lead European Union privacy regulator under the General Data Protection Regulation (GDPR), of certain other personal data breaches and privacy issues, and are subject to inquiries and investigations by the IDPC and other European regulators regarding various aspects of our regulatory compliance. For example, in August 2020, we received a preliminary draft decision from the IDPC that preliminarily concluded that Meta Platforms Ireland's reliance on Standard Contractual Clauses in respect of European Union/European Economic Area Facebook user data does not achieve compliance with the GDPR and preliminarily proposed that transfers of such user data from the European Union to the United States should therefore be suspended. In February 2022, we received a revised preliminary draft decision in which the IDPC maintained its preliminary conclusion that these transfers should be suspended. The IDPC's draft decision was then further refined and shared on July 6, 2022 with other European data protection regulators (CSAs) as part of the GDPR's consistency mechanism. Separately, on October 7, 2022, President Biden signed the Executive Order on Enhancing Safeguards for United States Signals Intelligence Activities, and on December 13, 2022, the European Commission published its draft adequacy decision on the proposed new European Union-U.S. Data Privacy Framework. On January 19, 2023, the IDPC referred the inquiry to a vote by the European Data Protection Board, pursuant to the dispute resolution process under Article 65 GDPR, in respect of elements of the draft decision over which consensus could not be reached between concerned supervisory authorities. We believe a final decision in this inquiry may issue as early as the first quarter of 2023. For additional information, see Part I, Item 1A, "Risk Factors—Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data use and data protection, content, competition, safety and consumer protection, e-commerce, and other matters" in this Annual Report on Form 10-K. Any such inquiries or investigations (including the IDPC proceeding) could subject us to substantial fines and costs, require us to change our business practices, divert resources and the attention of management from our business, or adversely affect our business.In addition, we are subject to various litigation and government inquiries and investigations, formal or informal, by competition authorities in the United States, Europe, and other jurisdictions. Such investigations, inquiries, and lawsuits concern, among other things, our business practices in the areas of social networking or social media services, digital advertising, and/or mobile or online applications, as well as our acquisitions. For example, in June 2019 we were informed by the FTC that it had opened an antitrust investigation of our company. On December 9, 2020, the FTC filed a complaint against us in the U.S. District Court for the District of Columbia alleging that we engaged in anticompetitive conduct and unfair methods of competition in violation of Section 5 of the Federal Trade Commission Act and Section 2 of the Sherman Act, including by acquiring Instagram in 2012 and WhatsApp in 2014 and by maintaining conditions on access to our platform. In addition, beginning in the third quarter of 2019, we became the subject of antitrust investigations by the U.S. Department of Justice and state attorneys general. On December 9, 2020, the attorneys general from 46 states, the territory of Guam, and the District of Columbia filed a complaint against us in the U.S. District Court for the District of Columbia alleging that we engaged in anticompetitive conduct in violation of Section 2 of the Sherman Act, including by acquiring Instagram in 2012 and WhatsApp in 2014 and by maintaining conditions on access to our platform. The complaint also alleged that we violated Section 7 of the Clayton Act by acquiring Instagram and WhatsApp. The complaints of the FTC and attorneys general both sought a permanent injunction against our company's alleged violations of the antitrust laws, and other equitable relief, including divestiture or reconstruction of Instagram and WhatsApp. On June 28, 2021, the court granted our motions to dismiss the complaints filed by the FTC and attorneys general, dismissing the FTC's complaint with leave to amend and dismissing the attorneys general's case without prejudice. On July 28, 2021, the attorneys general filed a notice of appeal of the order dismissing their case and that appeal is now pending before the U.S. Court of Appeals for the District of Columbia Circuit. On August 19, 2021, the FTC filed an amended complaint, and on October 4, 2021, we filed a motion to dismiss this amended complaint. On January 11, 2022, the court denied our motion to dismiss the FTC's amended complaint. Multiple putative class actions have also been filed in state and federal courts in the United States and in the United Kingdom against us alleging violations of antitrust laws and other causes of action in connection with these acquisitions and/or other alleged anticompetitive conduct, and seeking damages and injunctive relief. Several of the cases brought on behalf of certain advertisers and users in the United States were consolidated in the U.S. District Court for the Northern District of California. On January 14, 2022, the court granted, in part, and denied, in part, our motion to dismiss the consolidated actions. On March 1, 2022, a first amended consolidated complaint was filed in the putative class action brought on behalf of certain advertisers. On December 6, 2022, the court denied our motion to dismiss the first amended consolidated complaint filed in the putative class action brought on behalf of certain advertisers. In addition, on July 27, 2022, the FTC filed a complaint against us in the U.S. District Court for the Northern District of California seeking to preliminarily enjoin our proposed acquisition of Within Unlimited as an alleged violation of antitrust law. The FTC subsequently filed a related complaint in 49Table of Contentstheir administrative court seeking to permanently enjoin the transaction as a violation of Section 7 of the Clayton Act, and seeking other relief as well. We believe these lawsuits are without merit, and we are vigorously defending them. In December 2022, the European Commission issued a Statement of Objections alleging that we tie Facebook Marketplace to Facebook and use data in a manner that infringes European Union competition rules. The result of such litigation, investigations or inquiries could subject us to substantial monetary remedies and costs, interrupt or require us to change our business practices, divert resources and the attention of management from our business, or subject us to other structural or behavioral remedies that adversely affect our business.Beginning in January 2022, we became subject to litigation and other proceedings that were filed in various federal and California state courts alleging that Facebook and Instagram cause "social media addiction" in teenage users, resulting in various mental health and other harms. A putative class action alleging similar harms was also filed in California state court on behalf of users under the age of 13 and three school districts recently filed public nuisance claims based on similar allegations. On October 6, 2022, the federal cases were consolidated in the U.S. District Court for the Northern District of California. The state court proceedings are now pending before a trial judge from Los Angeles County Superior Court. We believe these lawsuits are without merit, and we are vigorously defending them. We are also subject to government investigations and requests from multiple regulators concerning the use of our products, and the related mental and physical health and safety impacts on teenage users.We are also subject to other government inquiries and investigations relating to our business activities and disclosure practices. For example, beginning in September 2021, we became subject to government investigations and requests relating to a former employee's allegations and release of internal company documents concerning, among other things, our algorithms, advertising and user metrics, and content enforcement practices, as well as misinformation and other undesirable activity on our platform, and user well-being. We have since received additional requests relating to these and other topics. Beginning on October 27, 2021, multiple putative class actions and derivative actions were filed in the U.S. District Court for the Northern District of California against us and certain of our directors and officers alleging violations of securities laws, breach of fiduciary duties, and other causes of action in connection with the same matters, and seeking unspecified damages. We believe these lawsuits are without merit, and we are vigorously defending them.On March 8, 2022, a putative class action was filed in the U.S. District Court for the Northern District of California against us and certain of our directors and officers alleging violations of securities laws in connection with the disclosure of our earnings results for the fourth quarter of 2021 and seeking unspecified damages. We believe this lawsuit is without merit, and we are vigorously defending it.Beginning on August 15, 2018, multiple putative class actions were filed against us alleging that we inflated our estimates of the potential audience size for advertisements, resulting in artificially increased demand and higher prices. The cases were consolidated in the U.S. District Court for the Northern District of California and seek unspecified damages and injunctive relief. In a series of rulings in 2019, 2021, and 2022, the court dismissed certain of the plaintiffs' claims, but permitted its fraud and unfair competition claims to proceed. On March 29, 2022, the court granted the plaintiffs' motion for class certification. On June 21, 2022, the U.S. Court of Appeals for the Ninth Circuit granted our petition for permission to appeal the district court's class certification order, and the district court subsequently stayed the case. We believe this lawsuit is without merit, and we are vigorously defending it.In July 2017, an individual filed an action in the U.S. District Court for the Northern District of California against us and other companies for allegedly violating the Anti-Terrorism Act by aiding, abetting, and providing material support to an organization that committed an international terrorist act, and seeking unspecified damages. In October 2018, the district court granted our motion to dismiss. In June 2021, the U.S. Court of Appeals for the Ninth Circuit reversed the judgment. On October 3, 2022, the U.S. Supreme Court agreed to review the judgment in this action, along with a companion case against another company in which the U.S. Supreme Court agreed to review the scope of protection available to online platforms under Section 230 of the Communications Decency Act (Section 230). We believe this lawsuit is without merit, and we are vigorously defending it. However, changes to the protections available under Section 230 may increase our costs or require significant changes to our products, business practices, or operations, which could adversely affect our business.On February 14, 2022, the State of Texas filed a lawsuit against us in Texas state court alleging that “tag suggestions" and other facial recognition features on our products violated the Texas Capture or Use of Biometric Identifiers Act and the Texas Deceptive Trade Practices-Consumer Protection Act, and seeking statutory damages and injunctive relief. The case is currently scheduled for trial in October 2023. We believe this lawsuit is without merit, and we are vigorously defending it.50Table of ContentsIn addition, we are subject to litigation and other proceedings involving law enforcement and other regulatory agencies, including in particular in Brazil, Russia, and other countries in Europe, in order to ascertain the precise scope of our legal obligations to comply with the requests of those agencies, including our obligation to disclose user information in particular circumstances. A number of such instances have resulted in the assessment of fines and penalties against us. We believe we have multiple legal grounds to satisfy these requests or prevail against associated fines and penalties, and we intend to vigorously defend such fines and penalties.We are also party to various other legal proceedings, claims, and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business, and we may in the future be subject to additional legal proceedings and disputes.Item 4.Mine Safety DisclosuresNot applicable.51Table of ContentsPART IIItem 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket Information for Common StockOn June 9, 2022, Meta's Class A common stock began trading on the Nasdaq Global Select Market under the ticker symbol 'META'. This replaced the ticker symbol 'FB,' which had been used since the company's initial public offering in 2012. Prior to that time, there was no public market for our stock.Our Class B common stock is not listed on any stock exchange nor traded on any public market.Holders of RecordAs of December 31, 2022, there were 3,204 stockholders of record of our Class A common stock, and the closing price of our Class A common stock was $120.34 per share as reported on the Nasdaq Global Select Market. Because many of our shares of Class A common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. As of December 31, 2022, there were 27 stockholders of record of our Class B common stock.Dividend PolicyWe have never declared or paid any cash dividend on our common stock. We intend to retain any future earnings to finance the operation and expansion of our business and fund our share repurchase program, and we do not expect to pay cash dividends in the foreseeable future. Purchases of Equity Securities by the Issuer and Affiliated PurchasersThe following table summarizes the share repurchase activity for the three months ended December 31, 2022:Total Number of Shares Purchased (1)Average Price Paid Per Share (2)Total Number of Shares Purchased as Part of Publicly Announced Programs (1)Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)(in thousands)(in thousands)(in millions)October 1 - 31, 202220,180 $126.03 20,180 $15,232 November 1 - 30, 202224,878 $105.28 24,878 $12,613 December 1 - 31, 202214,808 $117.87 14,808 $10,868 59,866 59,866 _________________________(1)Our board of directors has authorized a share repurchase program of our Class A common stock, which commenced in January 2017 and does not have an expiration date. In January 2023, an additional $40 billion of repurchases was authorized under this program. The timing and actual number of shares repurchased depend on a variety of factors, including price, general business and market conditions, and other investment opportunities, and shares may be repurchased through open market purchases or privately negotiated transactions, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act. See Note 14 — Stockholders' Equity in Part II, Item 8 of the Annual Report on Form 10-K for additional information related to share repurchases.(2)Average price paid per share includes costs associated with the repurchases.Recent Sale of Unregistered Securities and Use of ProceedsRecent Sale of Unregistered Securities None.52Table of ContentsStock Performance GraphThis performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Meta Platforms, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.The following graph shows a comparison of the cumulative total return for our Class A common stock, the Dow Jones Internet Composite Index (DJINET), the Standard & Poor's 500 Stock Index (S&P 500) and the Nasdaq Composite Index (Nasdaq Composite) for the five years ended December 31, 2022. The graph assumes that $100 was invested at the market close on the last trading day for the fiscal year ended December 31, 2017 in the Class A common stock of Meta Platforms, Inc., the DJINET, the S&P 500, and the Nasdaq Composite and data for the DJINET, the S&P 500, and the Nasdaq Composite assumes reinvestments of gross dividends. The stock price performance of the following graph is not necessarily indicative of future stock price performance.Item 6.[Reserved]53Table of ContentsItem 7.Management's Discussion and Analysis of Financial Condition and Results of OperationsYou should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. In addition to our historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Part I, Item 1A, "Risk Factors." For a discussion of limitations in the measurement of certain of our community metrics, see the section entitled "Limitations of Key Metrics and Other Data" in this Annual Report on Form 10-K.To supplement our consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States (GAAP), we present revenue on a constant currency basis and free cash flow, which are non-GAAP financial measures. Revenue on a constant currency basis is presented in the section entitled "—Revenue—Foreign Exchange Impact on Revenue." To calculate revenue on a constant currency basis, we translated revenue for the full year 2022 using 2021 monthly exchange rates for our settlement or billing currencies other than the U.S. dollar. For a full description of our free cash flow non-GAAP measure, see the section entitled "—Liquidity and Capital Resources—Free Cash Flow."These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. These measures may be different from non‑GAAP financial measures used by other companies, limiting their usefulness for comparison purposes. Moreover, presentation of revenue on a constant currency basis is provided for year-over-year comparison purposes, and investors should be cautioned that the effect of changing foreign currency exchange rates has an actual effect on our operating results. We believe these non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable comparison of financial results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to key metrics used by management in operating our business.Executive Overview of Full Year 2022 Results Our mission is to give people the power to build community and bring the world closer together. In 2022, we continued to focus on our main revenue growth priorities: (i) helping marketers use our products to connect with consumers and (ii) making our ads more relevant and effective. We also continued to invest in both our family of apps and our metaverse efforts based on our company priorities. Our financial results and key community metrics for 2022 are set forth below. Our total revenue for 2022 was $116.61 billion, a decrease of 1% compared to 2021, which reflects a $5.96 billion negative impact from the appreciation of the U.S. dollar relative to other foreign currencies. Revenue on a constant currency basis was $122.57 billion for 2022, an increase of 4% compared to 2021. Our advertising revenue was impacted by a reduction in advertising demand during 2022 compared to 2021, which we believe was primarily driven by reduced marketer spending as a result of a more challenging macroeconomic environment, as well as limitations on our ad targeting and measurement tools arising from changes to iOS and the regulatory environment. Our average price per ad decreased by 16% year-over-year in 2022, partially offset by an 18% year-over-year increase in ad impressions delivered across our Family of Apps.Income from operations for 2022 was $28.94 billion, a decrease of $17.81 billion, or 38%, compared to 2021, mainly due to an increase in payroll and related expenses associated with a 20% increase in employee headcount particularly in engineering and other technical functions and higher operational expenses related to our data centers and technical infrastructure. Starting in the third quarter of 2022, we began a series of cost management initiatives including facilities consolidation, a layoff of approximately 11,000 employees, and a pivot in our data center strategy, which resulted in total restructuring charges of $4.61 billion in 2022. We expect we may incur significant additional restructuring charges as we continue to focus on cost efficiency measures through 2023. 54Table of ContentsConsolidated and Segment ResultsWe report our financial results for our two reportable segments: Family of Apps (FoA) and Reality Labs (RL). FoA includes Facebook, Instagram, Messenger, WhatsApp, and other services. RL includes our augmented and virtual reality related consumer hardware, software, and content.Family of AppsReality LabsTotalYear EndedDecember 31,Year EndedDecember 31,Year EndedDecember 31,20222021% change20222021% change20222021% change(in millions, except percentages)Revenue$114,450 $115,655 (1)%$2,159 $2,274 (5)%$116,609 $117,929 (1)%Costs and expenses$71,789 $58,709 22%$15,876 $12,467 27%$87,665 $71,176 23%Income (loss) from operations$42,661 $56,946 (25)%$(13,717)$(10,193)(35)%$28,944 $46,753 (38)%Operating margin37 %49 %(635)%(448)%25 %40 % •Net income was $23.20 billion, with diluted earnings per share of $8.59 for the year ended December 31, 2022.•Capital expenditures, including principal payments on finance leases, were $32.04 billion for the year ended December 31, 2022.•Effective tax rate was 19.5% for the year ended December 31, 2022.•Cash, cash equivalents, and marketable securities were $40.74 billion as of December 31, 2022.•Long-term debt was $9.92 billion as of December 31, 2022.•Headcount was 86,482 as of December 31, 2022, an increase of 20% year-over-year. Our reported headcount includes a substantial majority of the approximately 11,000 employees impacted by the layoff we announced in November 2022, who will no longer be reflected in our headcount by the end of the first quarter of 2023.RestructuringIn 2022, we initiated several measures to pursue greater efficiency and to realign our business and strategic priorities. This includes a facilities consolidation strategy to sublease, early terminate, or abandon several office buildings under operating leases, a layoff of approximately 11,000 of our employees across the FoA and RL segments, and a pivot towards a next generation data center design, including cancellation of multiple data center projects.A summary of our restructuring charges for the year ended December 31, 2022 by major activity type is as follows (in millions):Facilities ConsolidationSeverance and Other Personnel CostsData Center AssetsTotalCost of revenue$154 $— $1,341 $1,495 Research and development1,311 408 — 1,719 Marketing and sales404 234 — 638 General and administrative426 333 — 759 Total$2,295 $975 $1,341 $4,611 Total restructuring charges recorded under our FoA segment were $4.10 billion and RL segment were $515 million. These charges lowered our operating margin by four percentage points and diluted earnings per share (EPS) by $1.34. The impact of severance and other personnel costs recorded in the fourth quarter of 2022 was not material after offsetting with the savings from the decreases in payroll, bonus and other benefits expenses.See Note 3 — Restructuring in the notes to the consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information regarding restructuring charges.55Table of ContentsFamily of Apps Metrics•Family daily active people (DAP) was 2.96 billion on average for December 2022, an increase of 5% year-over-year.•Family monthly active people (MAP) was 3.74 billion as of December 31, 2022, an increase of 4% year-over-year.•Facebook daily active users (DAUs) were 2.00 billion on average for December 2022, an increase of 4% year-over-year.•Facebook monthly active users (MAUs) were 2.96 billion as of December 31, 2022, an increase of 2% year-over-year.•Ad impressions delivered across our Family of Apps increased by 18% year-over-year in 2022, and the average price per ad decreased by 16% year-over-year in 2022.Developments in AdvertisingSubstantially all of our revenue is currently generated from advertising on Facebook and Instagram. We rely on targeting and measurement tools that incorporate data signals from user activity on websites and services that we do not control in order to deliver relevant and effective ads to our users. Our advertising revenue has been, and we expect will continue to be, adversely affected by reduced marketer spending as a result of limitations on our ad targeting and measurement tools arising from changes to the regulatory environment and third-party mobile operating systems and browsers.In particular, legislative and regulatory developments such as the General Data Protection Regulation, ePrivacy Directive, and California Privacy Rights Act have impacted our ability to use data signals in our ad products, and we expect these and other developments such as the Digital Markets Act will have further impact in the future. As a result, we have implemented, and we will continue to implement, changes to our products and user data practices, which reduce our ability to effectively target and measure ads. In addition, mobile operating system and browser providers, such as Apple and Google, have implemented product changes and/or announced future plans to limit the ability of websites and application developers to collect and use these signals to target and measure advertising. For example, in 2021, Apple made certain changes to its products and data use policies in connection with changes to its iOS operating system that reduce our and other iOS developers' ability to target and measure advertising, which has negatively impacted, and we expect will continue to negatively impact, the size of the budgets marketers are willing to commit to us and other advertising platforms.To mitigate these developments, we are working to evolve our advertising systems to improve the performance of our ad products. We are developing privacy enhancing technologies to deliver relevant ads and measurement capabilities while reducing the amount of personal information we process, including by relying more on anonymized or aggregated third-party data. In addition, we are developing tools that enable marketers to share their data into our systems, as well as ad products that generate more valuable signals within our apps. More broadly, we also continue to innovate our advertising tools to help marketers prepare campaigns and connect with consumers, including developing growing formats such as Reels ads and our business messaging ad products. Across all of these efforts, we are making significant investments in artificial intelligence and machine learning to improve our delivery, targeting, and measurement capabilities. We are also engaging with others across our industry to explore the possibility of new open standards for the private and secure processing of data for advertising purposes. We expect that some of these efforts will be long-term initiatives, and that the regulatory and platform developments described above will continue to adversely impact our advertising revenue for the foreseeable future.Other Business and Macroeconomic ConditionsOther global and regional business, macroeconomic, and geopolitical conditions also have had, and we believe will continue to have, an impact on our user growth and engagement and advertising revenue. In particular, we believe advertising budgets have been pressured by factors such as inflation, rising interest rates, and related market uncertainty, which has led to reduced marketer spending. In addition, competitive products and services have reduced some users' engagement with our products and services. In response to competitive pressures, we have introduced new features such as Reels and are investing in our artificial intelligence-powered discovery engine to recommend relevant unconnected content across our products. While Reels is growing in usage, it is not currently monetized at the same rate as our feed or Stories products. We also have seen fluctuations and declines in the size of our active user base in one or more markets from time to time. For example, in connection with the war in Ukraine, access to Facebook and Instagram was restricted in Russia and the services were then prohibited by the Russian government, which adversely affected user growth and engagement in 2022. These trends adversely affected advertising revenue in 2022, and we expect will continue to affect our advertising revenue in the foreseeable future.56Table of ContentsThe COVID-19 pandemic has also impacted our business and results of operations, with a varied impact on user growth and engagement, as well as the demand for and pricing of our ads from period to period. While we experienced a reduction in advertising demand and a related decline in pricing during the onset of the pandemic, we believe the pandemic subsequently contributed to an acceleration in the growth of online commerce, and we experienced increasing demand for advertising as a result of this trend. More recently, we believe this growth has declined, and we saw continued softening of advertising demand in 2022 as many activities that shifted online during COVID-19 related lockdowns resumed in person. We may experience similar volatility in the demand for and pricing of our advertising services as a result of the pandemic in the future.Although we regularly evaluate a variety of sources to understand trends in our advertising revenue, we do not have perfect visibility into the factors driving advertiser spending decisions and our assessments involve complex judgments about what is driving advertising decisions across a large and diversified advertiser base across the globe. Trends impacting advertising spend are also dynamic and interrelated. As a result, it is difficult to identify with precision which advertiser spending decisions are attributable to which trends, and we are unable to quantify the exact impact that each trend had on our advertising revenue during the periods presented.Investment PhilosophyIn 2022, we continued to invest based on the following company priorities: (i) continue making progress on the major social issues facing the internet and our company, including privacy, safety, and security; (ii) build new experiences that meaningfully improve people's lives today and set the stage for even bigger improvements in the future; (iii) keep building our business by supporting the millions of businesses that rely on our services to grow and create jobs; and (iv) communicate more transparently about what we're doing and the role our services play in the world.We anticipate that investments in our data center capacity, servers, network infrastructure, and headcount will continue to drive expense growth in 2023, which will adversely affect our operating margin and profitability. The majority of our investments are directed toward developing our family of apps. In 2022, 82% of our total costs and expenses were recognized in FoA and 18% were recognized in RL. Our FoA investments include expenses relating to headcount, data centers and technical infrastructure as part of our efforts to develop our apps and our advertising services. We are also making significant investments in our metaverse efforts, including developing virtual and augmented reality devices, software for social platforms, neural interfaces, and other foundational technologies for the metaverse. Our RL investments include expenses relating to headcount and technology development across these efforts. Many of our RL investments are directed toward long-term, cutting-edge research and development for products for the metaverse that are not on the market today and may only be fully realized in the next decade. Although it is inherently difficult to predict when and how the metaverse ecosystem will develop, we expect our RL segment to continue to operate at a loss for the foreseeable future, and our ability to support our metaverse efforts is dependent on generating sufficient profits from other areas of our business. We expect this will be a complex, evolving, and long-term initiative. We are investing now because we believe this is the next chapter of the internet and will unlock monetization opportunities for businesses, developers, and creators, including around advertising, hardware, and digital goods.57Table of ContentsTrends in Our Family MetricsThe numbers for our key Family metrics, our DAP, MAP, and average revenue per person (ARPP), do not include users on our other products unless they would otherwise qualify as DAP or MAP, respectively, based on their other activities on our Family products. Trends in the number of people in our community affect our revenue and financial results by influencing the number of ads we are able to show, the value of our ads to marketers, as well as our expenses and capital expenditures. Substantially all of our daily and monthly active people (as defined below) access our Family products on mobile devices.•Daily Active People (DAP). We define a daily active person as a registered and logged-in user of Facebook, Instagram, Messenger, and/or WhatsApp (collectively, our "Family" of products) who visited at least one of these Family products through a mobile device application or using a web or mobile browser on a given day. We do not require people to use a common identifier or link their accounts to use multiple products in our Family, and therefore must seek to attribute multiple user accounts within and across products to individual people. Our calculations of DAP rely upon complex techniques, algorithms, and machine learning models that seek to estimate the underlying number of unique people using one or more of these products, including by matching user accounts within an individual product and across multiple products when we believe they are attributable to a single person, and counting such group of accounts as one person. As these techniques and models require significant judgment, are developed based on internal reviews of limited samples of user accounts, and are calibrated against user survey data, there is necessarily some margin of error in our estimates. We view DAP, and DAP as a percentage of MAP, as measures of engagement across our products. For additional information, see the section entitled "Limitations of Key Metrics and Other Data" in this Annual Report on Form 10-K. DAP/MAP:79%79%79%78%79%79%79%79%79%Note: We report the numbers of DAP and MAP as specific amounts, but these numbers are estimates of the numbers of unique people using our products and are subject to statistical variances and errors. While we expect the error margin for these estimates to vary from period to period, we estimate that such margin generally will be approximately 3% of our worldwide MAP. At our scale, it is very difficult to attribute multiple user accounts within and across products to individual people, and it is possible that the actual numbers of unique people using our products may vary significantly from our estimates, potentially beyond our estimated error margins. For additional information, see the section entitled "Limitations of Key Metrics and Other Data" in this Annual Report on Form 10-K. In the first quarter of 2021, we updated our Family metrics calculations to maintain calibration of our models against recent user survey data, and we estimate such update contributed an aggregate of approximately 60 million DAP to our reported worldwide DAP in March 2021. In the third quarter of 2022, we updated our Family metrics calculations to maintain calibration of our models against recent user survey data, and we estimate such update contributed an aggregate of approximately 30 million DAP to our reported worldwide DAP in September 2022.Worldwide DAP increased 5% to 2.96 billion on average during December 2022 from 2.82 billion during December 2021. 58Table of Contents•Monthly Active People (MAP). We define a monthly active person as a registered and logged-in user of one or more Family products who visited at least one of these Family products through a mobile device application or using a web or mobile browser in the last 30 days as of the date of measurement. We do not require people to use a common identifier or link their accounts to use multiple products in our Family, and therefore must seek to attribute multiple user accounts within and across products to individual people. Our calculations of MAP rely upon complex techniques, algorithms, and machine learning models that seek to estimate the underlying number of unique people using one or more of these products, including by matching user accounts within an individual product and across multiple products when we believe they are attributable to a single person, and counting such group of accounts as one person. As these techniques and models require significant judgment, are developed based on internal reviews of limited samples of user accounts, and are calibrated against user survey data, there is necessarily some margin of error in our estimates. We view MAP as a measure of the size of our global active community of people using our products. For additional information, see the section entitled "Limitations of Key Metrics and Other Data" in this Annual Report on Form 10-K.Note: We report the numbers of DAP and MAP as specific amounts, but these numbers are estimates of the numbers of unique people using our products and are subject to statistical variances and errors. While we expect the error margin for these estimates to vary from period to period, we estimate that such margin generally will be approximately 3% of our worldwide MAP. At our scale, it is very difficult to attribute multiple user accounts within and across products to individual people, and it is possible that the actual numbers of unique people using our products may vary significantly from our estimates, potentially beyond our estimated error margins. For additional information, see the section entitled "Limitations of Key Metrics and Other Data" in this Annual Report on Form 10-K. In the first quarter of 2021, we updated our Family metrics calculations to maintain calibration of our models against recent user survey data, and we estimate such update contributed an aggregate of approximately 70 million MAP to our reported worldwide MAP in March 2021. In the third quarter of 2022, we updated our Family metrics calculations to maintain calibration of our models against recent user survey data, and we estimate such update contributed an aggregate of approximately 40 million MAP to our reported worldwide MAP in September 2022.As of December 31, 2022, we had 3.74 billion MAP, an increase of 4% from 3.59 billion as of December 31, 2021. 59Table of Contents•Average Revenue Per Person (ARPP). We define ARPP as our total revenue during a given quarter, divided by the average of the number of MAP at the beginning and end of the quarter. While ARPP includes all sources of revenue, the number of MAP used in this calculation only includes users of our Family products as described in the definition of MAP above. We estimate that the share of revenue from users who are not also MAP was not material. ARPP:$8.62$7.75$8.36$8.18$9.39$7.72$7.91$7.53$8.63 Note: Non-advertising revenue includes RL revenue generated from the delivery of consumer hardware products and FoA Other revenue, which consists of net fees we receive from developers using our Payments infrastructure and revenue from various other sources.Our annual worldwide ARPP in 2022, which represents the sum of quarterly ARPP during such period, was $31.79, a decrease of 6% from 2021.60Table of ContentsTrends in Our Facebook User MetricsThe numbers for our key Facebook metrics, our DAUs, MAUs, and average revenue per user (ARPU), do not include users on Instagram, WhatsApp, or our other products, unless they would otherwise qualify as DAUs or MAUs, respectively, based on their other activities on Facebook.Trends in the number of users affect our revenue and financial results by influencing the number of ads we are able to show, the value of our ads to marketers, as well as our expenses and capital expenditures. Substantially all of our daily and monthly active users (as defined below) access Facebook on mobile devices. •Daily Active Users (DAUs). We define a daily active user as a registered and logged-in Facebook user who visited Facebook through our website or a mobile device, or used our Messenger application (and is also a registered Facebook user), on a given day. We view DAUs, and DAUs as a percentage of MAUs, as measures of user engagement on Facebook. DAU/MAU:66%66%66%66%66%67%67%67%67% DAU/MAU:76%75%75%75%74%75%75%74%75%DAU/MAU:74%73%73%73%72%73%74%74%75% DAU/MAU:62%62%62%63%63%64%64%64%65%DAU/MAU:65%65%65%66%65%66%66%66%66%Note: For purposes of reporting DAUs, MAUs, and ARPU by geographic region, Europe includes all users in Russia and Turkey and Rest of World includes all users in Africa, Latin America, and the Middle East. 61Table of ContentsWorldwide DAUs increased 4% to 2.00 billion on average during December 2022 from 1.93 billion during December 2021. Users in India, the Philippines, and Bangladesh represented the top three sources of growth in DAUs during December 2022, relative to the same period in 2021.•Monthly Active Users (MAUs). We define a monthly active user as a registered and logged-in Facebook user who visited Facebook through our website or a mobile device, or used our Messenger application (and is also a registered Facebook user), in the last 30 days as of the date of measurement. MAUs are a measure of the size of our global active user community on Facebook. As of December 31, 2022, we had 2.96 billion MAUs, an increase of 2% from December 31, 2021. Users in India, Nigeria, and Bangladesh represented the top three sources of growth in 2022, relative to the same period in 2021.62Table of ContentsTrends in Our Monetization by Facebook User GeographyWe calculate our revenue by user geography based on our estimate of the geography in which ad impressions are delivered, virtual and digital goods are purchased, or consumer hardware products are shipped. We define ARPU as our total revenue in a given geography during a given quarter, divided by the average of the number of MAUs in the geography at the beginning and end of the quarter. While ARPU includes all sources of revenue, the number of MAUs used in this calculation only includes users of Facebook and Messenger as described in the definition of MAU above. While the share of revenue from users who are not also Facebook or Messenger MAUs has grown over time, we estimate that revenue from users who are Facebook or Messenger MAUs represents the substantial majority of our total revenue. See "Average Revenue Per Person (ARPP)" above for our estimates of trends in our monetization of our Family products. The geography of our users affects our revenue and financial results because we currently monetize users in different geographies at different average rates. Our revenue and ARPU in regions such as United States & Canada and Europe are relatively higher primarily due to the size and maturity of those online and mobile advertising markets. For example, ARPU in 2022 in the United States & Canada region was more than 11 times higher than in the Asia-Pacific region.ARPU:$10.14 $9.27 $10.12 $10.00$11.57$9.54$9.82$9.41$10.86 ARPU:$53.56 $48.03 $53.01 $52.34 $60.57 $48.29$50.25$49.13$58.77ARPU:$16.87$15.49$17.23$16.50$19.68$15.35$15.64$14.23$17.29 ARPU:$4.05$3.94$4.16$4.30$4.89$4.47$4.54$4.42$4.61ARPU:$2.77$2.64$3.05$3.14$3.43$3.14$3.35$3.21$3.52 Note: Non-advertising revenue includes RL revenue generated from the delivery of consumer hardware products and FoA Other revenue, which consists of net fees we receive from developers using our Payments infrastructure and revenue from various other sources.63Table of Contents Our revenue by user geography in the charts above is geographically apportioned based on our estimation of the geographic location of our users when they perform a revenue-generating activity. This allocation differs from our revenue disaggregated by geography disclosure in Note 2 — Revenue in our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplemental Data" where revenue is geographically apportioned based on the addresses of our customers. Our annual worldwide ARPU in 2022, which represents the sum of quarterly ARPU during such period, was $39.63, a decrease of 3% from 2021. For 2022, ARPU decreased by 9% in Europe and 4% in United States & Canada, and increased by 4% in Asia-Pacific and 8% in Rest of World. In addition, user growth was mostly in geographies with relatively lower ARPU, such as Asia‑Pacific and Rest of World. We expect that user growth in the future will be primarily concentrated in those regions where ARPU is relatively lower, such that worldwide ARPU may decrease at a higher rate, or increase at a slower rate, relative to ARPU in any geographic region in a particular period, or potentially decrease even if ARPU increases in each geographic region.64Table of ContentsCritical Accounting Policies and EstimatesOur consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Our actual results could differ from these estimates under different assumptions or conditions.An accounting policy is deemed to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the impact of the estimates and assumptions on our consolidated financial statements is material. We believe that the assumptions and estimates associated with gross vs. net in revenue recognition, valuation of non-marketable equity securities, income taxes, loss contingencies, and valuation of long-lived assets including goodwill, intangible assets, and property and equipment, and their associated estimated useful lives, when applicable, have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see Note 1 — Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.Gross vs. Net in Revenue RecognitionFor revenue generated from arrangements that involve third parties, there is significant judgment in evaluating whether we are the principal, and report revenue on a gross basis, or the agent, and report revenue on a net basis. In this assessment, we consider if we obtain control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price. The assessment of whether we are considered the principal or the agent in a transaction could impact our revenue and cost of revenue recognized on the consolidated statements of income. Valuation of Non-marketable Equity SecuritiesFor our non-marketable equity securities without readily determinable fair values accounted for using the measurement alternative, determining whether a non-marketable equity security issued by the same issuer is similar to the non-marketable equity security we hold may require judgment in (a) assessment of differences in rights and obligations associated with the instruments such as voting rights, distribution rights and preferences, and conversion features, and (b) adjustments to the observable price for differences such as, but not limited to, rights and obligations, control premium, liquidity, or principal or most advantageous markets. In addition, the identification of observable transactions will depend on the timely reporting of these transactions from our investee companies, which may occur in a period subsequent to when the transactions take place. Therefore, our fair value adjustment for these observable transactions may occur in a period subsequent to when the transaction actually occurred. For non-marketable equity securities, we perform a qualitative assessment at each reporting date to determine whether there are triggering events for impairment. The qualitative assessment considers factors such as, but not limited to, the investee's financial condition and business outlook; industry and sector performance; regulatory, economic or technological environment; operational and financing cash flows; and other relevant events and factors affecting the investee. When indicators of impairment exist, we estimate the fair value of our non-marketable equity securities using the market approach and/or the income approach and recognize impairment loss in the consolidated statements of income if the estimated fair value is less than the carrying value. Estimating fair value requires judgment and use of estimates such as discount rates, forecast cash flows, holding period, and market data of comparable companies, among others.Income TaxesWe are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws. We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. These uncertain tax positions include our estimates for transfer pricing that have been developed based upon analyses of appropriate 65Table of Contentsarms-length prices. Similarly, our estimates related to uncertain tax positions concerning research and development tax credits are based on an assessment of whether our available documentation corroborating the nature of our activities supporting the tax credits will be sufficient. Although we believe that we have adequately reserved for our uncertain tax positions (including net interest and penalties), we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves in accordance with the income tax accounting guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made, and could have a material impact on our financial condition and operating results.Loss ContingenciesWe are involved in legal proceedings, claims, and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business. Certain of these matters include speculative claims for substantial or indeterminate amounts of damages. Additionally, we are required to comply with various legal and regulatory obligations around the world, and we regularly become subject to new laws and regulations in the jurisdictions in which we operate. The requirements for complying with these obligations may be uncertain and subject to interpretation and enforcement by regulatory and other authorities, and any failure to comply with such obligations could eventually lead to asserted legal or regulatory action. With respect to these matters, asserted and unasserted, we evaluate the associated developments on a regular basis and accrue a liability when we believe that it is both probable that a loss has been incurred and the amount can be reasonably estimated. If we determine there is a reasonable possibility that we may incur a loss and the loss or range of loss can be reasonably estimated, we disclose the possible loss in the accompanying notes to the consolidated financial statements to the extent material.We review the developments in our contingencies that could affect the amount of the provisions that have been previously recorded, and the matters and related reasonably possible losses disclosed. We make adjustments to our provisions and changes to our disclosures accordingly to reflect the merits of our defenses and the impact of negotiations, settlements, regulatory proceedings, rulings, advice of legal counsel, and updated information. Significant judgment is required to determine the probability of loss and the estimated amount of loss, including when and if the probability and estimate has changed for asserted and unasserted matters. Certain factors, in particular, have resulted in significant changes to these estimates and judgments in prior quarters based on updated information available. For example, in certain jurisdictions where we operate, fines and penalties may be the result of new laws and preliminary interpretations regarding the basis of assessing damages, which may make it difficult to estimate what such fines and penalties would amount to if successfully asserted against us. In addition, certain government inquiries and investigations, such as matters before our lead European Union privacy regulator, the IDPC, are subject to review by other regulatory bodies before decisions are finalized, which can lead to significant changes in the outcome of an inquiry. As a result of these and other factors, we reasonably expect that our estimates and judgments with respect to our contingencies may continue to be revised in future quarters. The ultimate outcome of these matters, such as whether the likelihood of loss is remote, reasonably possible, or probable or if and when the reasonably possible range of loss is estimable, is inherently uncertain. Therefore, if one or more of these matters were resolved against us for amounts in excess of management's estimates of losses, our results of operations and financial condition, including in a particular reporting period in which any such outcome becomes probable and estimable, could be materially adversely affected. See Note 13 — Commitments and Contingencies and Note 16 — Income Taxes of the accompanying notes to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" and Part I, Item 3, "Legal Proceedings" of this Annual Report on Form 10-K for additional information regarding these contingencies.Valuation of Long-lived Assets including Goodwill, Intangible Assets, and Property and Equipment and Estimated Useful Lives We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill to reporting units based on the expected benefit from the business combination. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, estimated replacement costs and future expected cash flows from acquired users, acquired technology, acquired patents, and trade 66Table of Contentsnames from a market participant perspective, useful lives, and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas any indefinite-lived intangible assets, including goodwill, are not amortized. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.Goodwill is tested for impairment at the reporting unit level annually or more frequently if events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying value. We have two reporting units subject to goodwill impairment testing. As of December 31, 2022, no impairment of goodwill has been identified.Long-lived assets, including property and equipment and finite-lived intangible assets are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate from the use and eventual disposition. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value.The useful lives of our long-lived assets including property and equipment and finite-lived intangible assets are determined by management when those assets are initially recognized and are routinely reviewed for the remaining estimated useful lives. The current estimate of useful lives represents our best estimate based on current facts and circumstances, but may differ from the actual useful lives due to changes in future circumstances such as changes to our business operations, changes in the planned use of assets, and technological advancements. When we change the estimated useful life assumption for any asset, the remaining carrying amount of the asset is accounted for prospectively and depreciated or amortized over the revised remaining useful life. In connection with our periodic reviews of the estimated useful lives of property and equipment, we extended the estimated average useful lives of our servers and network assets category effective the second and the fourth quarters of 2022. The financial impact of the changes in estimates was a reduction in depreciation expense of $860 million and an increase in net income of $693 million, or $0.26 per diluted share for the year ended December 31, 2022. The impact from the changes in our estimates was calculated based on the servers and network assets existing as of the effective date of the change and applying the revised useful lives prospectively. See Note 1 — Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K, for additional information regarding the changes in the estimated useful lives of our servers and network assets.67Table of ContentsComponents of Results of OperationsRevenue Family of Apps (FoA)Advertising. We generate substantially all of our revenue from advertising. Our advertising revenue is generated by displaying ad products on Facebook, Instagram, Messenger, and third-party mobile applications. Marketers pay for ad products either directly or through their relationships with advertising agencies or resellers, based on the number of impressions delivered or the number of actions, such as clicks, taken by users. We recognize revenue from the display of impression-based ads in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad is displayed to a user. We recognize revenue from the delivery of action-based ads in the period in which a user takes the action the marketer contracted for. The number of ads we show is subject to methodological changes as we continue to evolve our ads business and the structure of our ads products. In particular, the number of ads we show may vary by product (for example, our video and Reels products are not currently monetized at the same rate as our feed or Stories products), and from time to time we increase or decrease the number or frequency of ads we show as part of our product and monetization strategies. We calculate average price per ad as total advertising revenue divided by the number of ads delivered, representing the average price paid per ad by a marketer regardless of their desired objective such as impression or action. For advertising revenue arrangements where we are not the principal, we recognize revenue on a net basis. Other revenue. Other revenue consists of net fees we receive from developers using our Payments infrastructure and revenue from WhatsApp Business Platform and various other sources.Reality Labs (RL)RL revenue is generated from the delivery of consumer hardware products, such as Meta Quest, wearables, and related software and content.Cost of Revenue and Operating Expenses Cost of revenue. Our cost of revenue consists mostly of expenses associated with the delivery and distribution of our products. These include expenses related to the operation of our data centers and technical infrastructure, such as depreciation expense from servers, network infrastructure and buildings, as well as payroll and related expenses which include share-based compensation for employees on our operations teams, and energy and bandwidth costs. Cost of revenue also includes costs associated with partner arrangements, including traffic acquisition costs and credit card and other fees related to processing customer transactions, and content costs. Additionally, cost of revenue includes RL inventory costs, which consist of cost of products sold and estimated losses on non-cancelable contractual commitments. Research and development. Research and development expenses consist primarily of payroll and related expenses which include share-based compensation, facilities-related costs for employees on our engineering and technical teams who are responsible for developing new products as well as improving existing products, RL technology development costs, and professional services. Marketing and sales. Marketing and sales expenses consist mostly of marketing and promotional expenses as well as payroll and related expenses which include share-based compensation for our employees engaged in sales, sales support, marketing, business development, and customer service functions. Our marketing and sales expenses also include professional services such as content reviewers to support our community and product operations.General and administrative. General and administrative expenses consist primarily of payroll and related expenses which include share-based compensation for certain of our executives as well as our legal, finance, human resources, corporate communications and policy, and other administrative employees; legal-related costs, which include estimated fines, settlements, or other losses in connection with legal and related matters, as well as other legal fees; professional services, and other taxes, such as digital services taxes, other tax levies.68Table of ContentsResults of OperationsIn this section, we discuss the results of our operations for the year ended December 31, 2022 compared to the year ended December 31, 2021. For a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021.The following table sets forth our consolidated statements of income data (in millions):Year Ended December 31,202220212020Revenue$116,609 $117,929 $85,965 Costs and expenses: Cost of revenue25,249 22,649 16,692 Research and development35,338 24,655 18,447 Marketing and sales15,262 14,043 11,591 General and administrative11,816 9,829 6,564 Total costs and expenses87,665 71,176 53,294 Income from operations28,944 46,753 32,671 Interest and other income (expense), net(125)531 509 Income before provision for income taxes28,819 47,284 33,180 Provision for income taxes5,619 7,914 4,034 Net income$23,200 $39,370 $29,146 The following table sets forth our consolidated statements of income data (as a percentage of revenue)(1):Year Ended December 31,202220212020Revenue100 %100 %100 %Costs and expenses:Cost of revenue22 19 19 Research and development30 21 21 Marketing and sales13 12 13 General and administrative10 8 8 Total costs and expenses75 60 62 Income from operations25 40 38 Interest and other income (expense), net— — 1 Income before provision for income taxes25 40 39 Provision for income taxes5 7 5 Net income20 %33 %34 %_________________________(1)Percentages have been rounded for presentation purposes and may differ from unrounded results.69Table of ContentsRevenueThe following table sets forth our revenue by source and by segment. For comparative purposes, amounts for the year ended December 31, 2020 have been recast: Year Ended December 31, 2022202120202022 vs 2021 % change2021 vs 2020 % change(in millions, except percentages)Advertising$113,642 $114,934 $84,169 (1)%37 %Other revenue808 721 657 12 %10 %Family of Apps114,450 115,655 84,826 (1)%36 %Reality Labs2,159 2,274 1,139 (5)%100 %Total revenue$116,609 $117,929 $85,965 (1)%37 %Family of AppsFoA revenue in 2022 decreased $1.21 billion, or 1%, compared to 2021. The decrease was mostly driven by advertising revenue.AdvertisingAdvertising revenue in 2022 decreased $1.29 billion, or 1%, compared to 2021 due to a decrease in the average price per ad, partially offset by an increase in the number of ads delivered. In 2022, the average price per ad decreased by 16%, as compared with an increase of 24% in 2021. The decrease in average price per ad was driven by an increase in the number of ads delivered, especially in geographies and in products such as video and Reels that monetize at lower rates, and an unfavorable foreign exchange impact. In addition, the decrease in average price per ad was impacted by a reduction in advertising demand, which we believe was primarily driven by reduced marketer spending as a result of a more challenging macroeconomic environment and limitations on our ad targeting and measurement tools arising from changes to iOS and the regulatory environment, as well as, to a lesser extent, the other factors discussed in the section entitled "—Executive Overview of Full Year 2022 Results." In 2022, the number of ads delivered increased by 18%, as compared with a 10% increase in 2021. Ads impressions grew in all regions during 2022, mostly driven by an increase in ads delivered in Asia-Pacific and Rest of World. The increase in the ads delivered during 2022 was driven by increases in the number and frequency of ads displayed across our products and an increase in users. We anticipate that future advertising revenue will be driven by a combination of price and the number of ads delivered.Reality LabsRL revenue in 2022 decreased $115 million, or 5%, compared to 2021. The decrease in RL revenue was driven by a decrease in the volume of Meta Quest sales.Revenue Seasonality and Customer ConcentrationRevenue is traditionally seasonally strong in the fourth quarter of each year due in part to seasonal holiday demand. We believe that this seasonality in both advertising revenue and RL consumer hardware sales affects our quarterly results, which generally reflect significant growth in revenue between the third and fourth quarters and a decline between the fourth and subsequent first quarters. For instance, our total revenue increased 16%, 16%, and 31% between the third and fourth quarters of 2022, 2021, and 2020, respectively, while total revenue for the first quarters of 2022, 2021, and 2020 declined 17%, 7%, and 16% compared to the fourth quarters of 2021, 2020, and 2019, respectively.No customer represented 10% or more of total revenue during the years ended December 31, 2022, 2021, and 2020.Foreign Exchange Impact on Revenue The general strengthening of the U.S. dollar relative to certain foreign currencies in the full year 2022 compared to the same period in 2021 had an unfavorable impact on revenue. If we had translated revenue for the full year 2022 using the prior 70Table of Contentsyear's monthly exchange rates for our settlement or billing currencies other than the U.S. dollar, our total revenue and advertising revenue would have been $122.57 billion and $119.54 billion, respectively. Using these constant rates, total revenue and advertising revenue would have been $5.96 billion and $5.90 billion higher than actual total revenue and advertising revenue, respectively, for the full year 2022. Using the same constant rates, full year 2022 total revenue and advertising revenue would have been $4.64 billion and $4.60 billion, respectively, higher than actual total revenue and advertising revenue for the full year 2021.Cost of revenueYear Ended December 31,2022202120202022 vs 2021 % change2021 vs 2020 % change(in millions, except percentages)Cost of revenue$25,249 $22,649 $16,692 11 %36 %Percentage of revenue22 %19 %19 %Cost of revenue in 2022 increased $2.60 billion, or 11%, compared to 2021. The increase was mainly due to an increase in operational expenses related to our data centers and technical infrastructure, adjusted for a decrease in the depreciation growth rate due to extensions in the useful lives of servers and network assets. In addition, we recorded $1.34 billion of abandonment charges related to data center assets. These increases were partially offset by a decrease in RL inventory cost including lower losses on purchase commitments.See Note 1 — Summary of Significant Accounting Policies and Note 3 — Restructuring in the notes to the consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information regarding changes in the estimated useful life of our servers and network assets as well as the abandonment charges related to data center assets, respectively.Research and developmentYear Ended December 31,2022202120202022 vs 2021 % change2021 vs 2020 % change(in millions, except percentages)Research and development$35,338 $24,655 $18,447 43 %34 %Percentage of revenue30 %21 %21 %Research and development expenses in 2022 increased $10.68 billion, or 43%, compared to 2021. The increase was mainly due to higher payroll and related expenses and $1.31 billion impairment charges to leases and leasehold improvements as part of our restructuring efforts. Our payroll and related expenses increased as a result of a 26% increase in employee headcount from December 31, 2021 to December 31, 2022 in engineering and other technical functions supporting our continued investment in our family of products and RL.Marketing and salesYear Ended December 31,2022202120202022 vs 2021 % change2021 vs 2020 % change(in millions, except percentages)Marketing and sales$15,262 $14,043 $11,591 9 %21 %Percentage of revenue13 %12 %13 %Marketing and sales expenses in 2022 increased $1.22 billion, or 9%, compared to 2021. The increase was mostly due to increases in payroll and related expenses and $404 million impairment charges to leases and leasehold improvements as part of our restructuring efforts. 71Table of ContentsGeneral and administrativeYear Ended December 31,2022202120202022 vs 2021 % change2021 vs 2020 % change(in millions, except percentages)General and administrative$11,816 $9,829 $6,564 20 %50 %Percentage of revenue10 %8 %8 % General and administrative expenses in 2022 increased $1.99 billion, or 20%, compared to 2021. The increase was primarily due to increases in payroll and related expenses and $426 million impairment charges to leases and leasehold improvements as part of our restructuring efforts. Our payroll and related expenses increased as a result of a 20% increase in employee headcount from December 31, 2021 to December 31, 2022 in our general and administrative functions.See Note 3 — Restructuring in the notes to the consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information regarding impairment charges to leases and leasehold improvements. Segment profitabilityThe following table sets forth income (loss) from operations by segment. For comparative purposes, amounts for the year ended December 31, 2020 have been recast:Year Ended December 31,2022202120202022 vs 2021 % change2021 vs 2020 % change(in millions, except percentages)Family of Apps$42,661 $56,946 $39,294 (25)%45 %Reality Labs(13,717)(10,193)(6,623)(35)%(54)%Total income from operations$28,944 $46,753 $32,671 (38)%43 %Family of AppsFoA income from operations in 2022 decreased $14.29 billion, or 25%, compared to 2021. The decrease was due to an increase in FoA total costs and expenses, primarily due to an increase in payroll and related expenses as a result of higher employee headcount, additional charges recorded related to our restructuring efforts and an increase in costs related to our data centers and technical infrastructure.See Note 3 — Restructuring in the notes to the consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information.Reality LabsRL loss from operations in 2022 increased $3.52 billion, or 35%, compared to 2021. The increase in loss from operations was mainly driven by increases in payroll and related expenses and research and development expenses, partially offset by a decrease in RL inventory cost including lower losses on purchase commitments.72Table of ContentsInterest and other income (expense), netYear Ended December 31,2022202120202022 vs 2021 % change2021 vs 2020 % change(in millions, except percentages)Interest income, net$276 $461 $672 (40)%(31)%Foreign currency exchange losses, net(81)(140)(129)42 %(9)%Other income (expense), net(320)210 (34)(252)%NMInterest and other income (expense), net$(125)$531 $509 (124)%4 % Interest and other income (expense), net in 2022 decreased $656 million, or 124%, compared to 2021. The decrease was mostly due to a decrease in other income (expense), net related to higher unrealized losses recognized for our equity investments and an increase in interest expense recognized on long-term debt. Provision for income taxesYear Ended December 31,2022202120202022 vs 2021 % change2021 vs 2020 % change(in millions, except percentages)Provision for income taxes$5,619 $7,914 $4,034 (29)%96 %Effective tax rate19.5 %16.7 %12.2 %Our provision for income taxes in 2022 decreased $2.29 billion, or 29%, compared to 2021, mostly due to a decrease in income from operations.Our effective tax rate in 2022 increased compared to 2021, mainly due to an increase in tax shortfalls recognized from share-based compensation and the effect of regulations issued by the U.S. Department of the Treasury in 2022 on foreign tax credits, partially offset by an increase in tax benefits from foreign-derived intangible income.Effective Tax Rate Items. Our effective tax rate in the future will depend upon the proportion between the following items and income before provision for income taxes: U.S. tax benefits from foreign-derived intangible income, tax effects from share-based compensation, research tax credit, tax effects of integrating intellectual property from acquisitions, settlement of tax contingency items, tax effects of changes in our business, and the effects of changes in tax law.The accounting for share-based compensation may increase or decrease our effective tax rate based upon the difference between our share-based compensation expense and the deductions taken on our tax return, which depend upon the stock price at the time of employee award vesting. If our stock price remains constant to the January 27, 2023 price, and absent any changes to U.S. tax law, we expect our effective tax rate for the full year 2023 to be in the low twenties. This includes the effects of the mandatory capitalization and amortization of research and development expenses incurred in 2022, as required by the 2017 Tax Cuts and Jobs Act (Tax Act). The mandatory capitalization requirement increased our 2022 cash tax liabilities materially but also decreased our effective tax rate due to increasing the foreign-derived intangible income deduction. If the mandatory capitalization requirement is deferred, our effective tax rate in 2023 could be higher when compared to current law and our cash tax liabilities could be several billion dollars lower.Integrating intellectual property from acquisitions into our business generally involves intercompany transactions that have the impact of increasing our provision for income taxes. Consequently, our provision for income taxes and our effective tax rate may initially increase in the period of an acquisition and integration. The magnitude of this impact will depend upon the specific type, size, and taxing jurisdictions of the intellectual property as well as the relative contribution to income in subsequent periods.On August 16, 2022, Congress passed the Inflation Reduction Act of 2022. The key tax provisions applicable to us are a 15% corporate minimum tax on book income and a 1% excise tax on stock repurchases effective January 1, 2023. We do 73Table of Contentsnot expect these tax law changes to have a material impact on our consolidated financial position; however, we will continue to evaluate their impact as further information becomes available.Unrecognized Tax Benefits. As of December 31, 2022, we had net uncertain tax positions of $5.49 billion which were accrued as other liabilities. These unrecognized tax benefits were predominantly accrued for uncertainties related to transfer pricing with our foreign subsidiaries, which includes licensing of intellectual property, providing services and other transactions, as well as for uncertainties regarding the utilization of our research tax credits. The ultimate settlement of the liabilities will depend upon resolution of tax audits, litigation, or events that would otherwise change the assessment of such items. Based upon the status of litigation described below and the current status of tax audits in various jurisdictions, we do not anticipate a material change to such amounts within the next 12 months.See Note 16 — Income Taxes in the notes to consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information regarding income tax contingencies.74Table of ContentsLiquidity and Capital ResourcesOur principal sources of liquidity are our cash and cash equivalents, marketable securities, and cash generated from operations. Cash and cash equivalents and marketable securities consist mostly of cash on deposit with banks, investments in money market funds, U.S. government securities, U.S. government agency securities, and investment grade corporate debt securities. Cash and cash equivalents and marketable securities were $40.74 billion as of December 31, 2022, a decrease of $7.26 billion from December 31, 2021. The majority of the decrease was due to $32.04 billion for capital expenditures, including principal payments on finance leases, $27.96 billion repurchases of our Class A common stock, $3.60 billion of taxes paid related to net share settlement of employee restricted stock unit (RSU) awards, and $1.31 billion for acquisitions of businesses and intangible assets. These decreases were partially offset by $50.48 billion of cash generated from operations and $9.92 billion of net proceeds from the issuance of fixed-rate senior notes (the "Notes") in August 2022. Cash paid for income taxes was $6.41 billion for the year ended December 31, 2022. As of December 31, 2022, our federal net operating loss carryforward was $196 million and our federal tax credit carryforward was $276 million. We anticipate the utilization of most of these net operating losses and credits within the next two years. Our board of directors has authorized a share repurchase program of our Class A common stock, which commenced in January 2017 and does not have an expiration date. In 2022, we repurchased and subsequently retired 161 million shares of our Class A common stock for an aggregate amount of $27.93 billion. As of December 31, 2022, $10.87 billion remained available and authorized for repurchases. In January 2023, an additional $40 billion of repurchases was authorized under this program.The following table presents our cash flows (in millions):Year Ended December 31,202220212020Net cash provided by operating activities$50,475 $57,683 $38,747 Net cash used in investing activities$(28,970)$(7,570)$(30,059)Net cash used in financing activities$(22,136)$(50,728)$(10,292)Cash Provided by Operating ActivitiesCash provided by operating activities during 2022 mostly consisted of net income adjusted for certain non-cash items, such as $11.99 billion of share-based compensation expense, $8.69 billion of depreciation and amortization, and $3.56 billion of impairment for leases, leasehold improvements, and abandonment charges for data center assets related to our restructuring efforts. The decrease in cash flows from operating activities during 2022 compared to 2021 was mainly due to a decrease in net income as adjusted for the aforementioned non-cash items, partially offset by changes in working capital.Cash Used in Investing ActivitiesCash used in investing activities during 2022 mostly consisted of $31.19 billion of net purchases of property and equipment as we continued to invest in servers, data centers, and network infrastructure, partially offset by $3.53 billion proceeds from net sales and maturities of marketable debt securities. The increase in cash used in investing activities during 2022 compared to 2021 was mostly due to an increase in net purchases of property and equipment, and a decrease in proceeds from net sales and maturities of marketable debt securities.We anticipate making capital expenditures of approximately $30 billion to $33 billion in 2023.Cash Used in Financing ActivitiesCash used in financing activities during 2022 mostly consisted of $27.96 billion for repurchases of our Class A common stock and $3.60 billion of taxes paid related to net share settlement of RSUs, partially offset by $9.92 billion proceeds from the issuance of the Notes. The decrease in cash used in financing activities during 2022 compared to 2021 was mostly due to a decrease in repurchases of our Class A common stock and proceeds from the issuance of the Notes.75Table of ContentsFree Cash Flow In addition to other financial measures presented in accordance with U.S. GAAP, we monitor free cash flow (FCF) as a non-GAAP measure to manage our business, make planning decisions, evaluate our performance, and allocate resources. We define FCF as net cash provided by operating activities reduced by net purchases of property and equipment and principal payments on finance leases.We believe that FCF is one of the key financial indicators of our business performance over the long term and provides useful information regarding how cash provided by operating activities compares to the property and equipment investments required to maintain and grow our business. We have chosen our definition for FCF because we believe that this methodology can provide useful supplemental information to help investors better understand underlying trends in our business. We use FCF in discussions with our senior management and board of directors.FCF has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities. FCF is not intended to represent our residual cash flow available for discretionary expenses. Some of the limitations of FCF are:•FCF does not reflect our future contractual commitments; and•other companies in our industry present similarly titled measures differently than we do, limiting their usefulness as comparative measures.Management compensates for the inherent limitations associated with using the FCF measure through disclosure of such limitations, presentation of our financial statements in accordance with GAAP, and reconciliation of FCF to the most directly comparable GAAP measure, net cash provided by operating activities, as presented below.The following is a reconciliation of FCF to the most comparable GAAP measure, net cash provided by operating activities (in millions):Year Ended December 31,202220212020Net cash provided by operating activities$50,475 $57,683 $38,747 Purchases of property and equipment, net(31,186)(18,567)(15,115)Principal payments on finance leases(850)(677)(604)Free Cash Flow$18,439 $38,439 $23,028 Material Cash RequirementsWe currently anticipate that our available funds and cash flow from operations and financing activities will be sufficient to meet our operational cash needs and fund our share repurchase program for at least the next 12 months and thereafter for the foreseeable future. We continuously evaluate our liquidity and capital resources, including our access to external capital, to ensure we can finance our future capital requirements.Leases and Contractual CommitmentsOur operating lease obligations mostly include, among others, offices, data centers, colocations, and land. Our finance lease obligations mostly include certain network infrastructure. Our restructuring efforts to sublease, early terminate or abandon several office buildings under operating leases did not materially change our operating lease obligations. Our contractual commitments are primarily related to our investments in network infrastructure, servers, and consumer hardware products in Reality Labs. 76Table of ContentsLong-term DebtIn August 2022, we issued an aggregate of $10.0 billion principal amount of the Notes. The Notes were issued in four series, which mature from 2027 through 2062. Short-term and long-term future interest payments obligations as of December 31, 2022 are $411 million and $7.69 billion, respectively. We intend to use the net proceeds from the offering for general corporate purposes, which may include, but are not limited to, capital expenditures, repurchases of outstanding shares of our common stock, acquisitions, or investments.TaxesAs of December 31, 2022, we had taxes payable of $1.51 billion related to a one-time transition tax payable incurred as a result of the Tax Act, of which $361 million is due within one year. As permitted by the Tax Act, we will pay the transition tax in annual interest-free installments through 2025. Our other liabilities also include $5.49 billion related to the uncertain tax positions as of December 31, 2022. Due to uncertainties in the timing of the completion of tax audits, the timing of the resolution of these positions is uncertain and we are unable to make a reasonably reliable estimate of the timing of payments.ContingenciesWe are involved in legal proceedings, claims, and regulatory, tax or government inquiries and investigations. We record a liability when we believe that it is both probable that a liability has been incurred, and that the amount can be reasonably estimated. If we determine there is a reasonable possibility that we may incur a loss and the loss or range of loss can be estimated, we disclose the possible loss in the accompanying notes to the consolidated financial statements to the extent material. Significant judgment is required to determine both probability and the estimated amount of loss. Such matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to be incorrect, it could have a material impact on our results of operations, financial position, and cash flows.See Note 9 — Leases, Note 11 — Long-term Debt, Note 13 — Commitments and Contingencies, and Note 16 — Income Taxes in the notes to the consolidated financial statements included in Part II, Item 8, and "Legal Proceedings" contained in Part I, Item 3 of this Annual Report on Form 10-K for additional information regarding leases and contractual commitments, long-term debt, taxes, and contingencies.Recently Issued Accounting Pronouncements For information on recently issued accounting pronouncements, see Note 1 — Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.77Table of ContentsItem 7A.Quantitative and Qualitative Disclosures About Market RiskWe are exposed to market risks, including changes to foreign currency exchange rates, interest rates, and equity price risk.Foreign Currency Exchange RiskWe have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the Euro. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, have negatively affected, and may continue to negatively affect, our revenue and other operating results as expressed in U.S. dollars. See Management's Discussion and Analysis of Financial Condition and Results of Operations — Foreign Exchange Impact on Revenue section included in Part II, Item 7 of this Annual Report on Form 10-K for additional information.We have experienced and will continue to experience fluctuations in our net income as a result of transaction gains or losses related to revaluing monetary asset and liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. At this time, we have not entered into, but in the future we may enter into, derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the effect hedging activities would have on our results of operations. Foreign currency exchange net losses of $81 million, $140 million, and $129 million were recognized in 2022, 2021, and 2020, respectively.Interest Rate SensitivityOur exposure to changes in interest rates relates primarily to interest income and market value of our cash equivalents, marketable debt securities, and the fair value of our long-term debt.Our cash, cash equivalents, and marketable debt securities consist of cash, certificates of deposit, time deposits, money market funds, U.S. government securities, U.S. government agency securities, and investment grade corporate debt securities. Our investment policy and strategy are focused on preservation of capital and supporting our liquidity requirements. Changes in U.S. interest rates affect the interest earned on our cash, cash equivalents, and marketable securities, and the market value of those securities. A hypothetical 100 basis point increase in market interest rates would have resulted in a decrease of $558 million and $714 million in the market value of our available-for-sale debt securities and cash equivalents as of December 31, 2022 and 2021, respectively. Any realized gains or losses resulting from such interest rate changes and from the current unrealized losses would only occur if we sold the investments prior to maturity.As of December 31, 2022, we also had $10.0 billion aggregate principal amount of fixed-rate senior notes (the "Notes") outstanding. Since our Notes bear interest at fixed rates and are carried at amortized cost, fluctuations in interest rates do not have any impact on our consolidated financial statements. However, the fair value of the Notes will fluctuate with movements in market interest rates, increasing in periods of declining interest rates and declining in periods of increasing interest rates. Equity Price RiskOur equity investments are substantially all in non-marketable equity securities and are subject to equity price risks that could have a material impact on the carrying value of our holdings.Our non-marketable equity securities are investments in privately-held companies without readily determinable fair values. We elected to account for most of our non-marketable equity securities using the measurement alternative, which is cost, less any impairment, adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the same issuer. We perform a qualitative assessment at each reporting date to determine whether there are triggering events for impairment. The qualitative assessment considers factors such as, but not limited to, the investee's financial condition and business outlook; industry and sector performance; economic or technological environment; and other relevant events and factors affecting the investee. Valuations of our non-marketable equity securities are complex due to the lack of readily available market data and observable transactions. Uncertainties in the global economic climate and financial markets could adversely impact the valuation of these companies we invest in and, therefore, result in a material impairment or downward adjustment in our investments. Our total non-marketable equity securities had a carrying value of $6.20 billion and $6.78 billion as of December 31, 2022 and 2021, respectively. 78Table of ContentsFor additional information, see Note 1 — Summary of Significant Accounting Policies, Note 6 — Non-marketable Equity Securities, Note 7 — Fair Value Measurements, and Note 11 — Long-term Debt in the notes to the consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" and Part II, Item 7, "Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Critical Accounting Policies and Estimates" contained in this Annual Report on Form 10-K. 79Table of ContentsItem 8.Financial Statements and Supplementary DataMETA PLATFORMS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReports of Independent Registered Public Accounting Firm (PCAOB ID No. 42)81Consolidated Financial Statements:Consolidated Balance Sheets85Consolidated Statements of Income86Consolidated Statements of Comprehensive Income87Consolidated Statements of Stockholders' Equity88Consolidated Statements of Cash Flows89Notes to Consolidated Financial Statements91 80Table of ContentsReport of Independent Registered Public Accounting FirmTo the Stockholders and the Board of Directors of Meta Platforms, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Meta Platforms, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 1, 2023, expressed an unqualified opinion thereon.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit MattersThe critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the Audit & Risk Oversight Committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.81Table of ContentsLoss ContingenciesDescription of the MatterAs described in Note 13 to the consolidated financial statements, the Company is party to various legal proceedings, claims, and regulatory or government inquiries and investigations. The Company accrues a liability when it believes a loss is probable and the amount can be reasonably estimated. In addition, the Company believes it is reasonably possible that it will incur a loss in some of these cases, actions or inquiries described above. When applicable, the Company discloses an estimate of the amount of loss or range of possible loss that may be incurred. However, for certain other matters, the Company discloses that the amount of such losses or a range of possible losses cannot be reasonably estimated at this time.Auditing the Company's accounting for, and disclosure of, these loss contingencies was especially challenging due to the significant judgment required to evaluate management's assessments of the likelihood of a loss, and their estimate of the potential amount or range of such losses.How We Addressed the Matter in Our AuditWe obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the identification and evaluation of these matters, including controls relating to the Company's assessment of the likelihood that a loss will be realized and their ability to reasonably estimate the potential range of possible losses. To test the Company's assessment of the probability of incurrence of a loss, whether the loss was reasonably estimable, and the conclusion and disclosure regarding any range of possible losses, including when the Company believes it cannot be reasonably estimated at this time, we read the minutes or a summary of the meetings of the committees of the board of directors, read the proceedings, claims, and regulatory, or government inquiries and investigations, or summaries as we deemed appropriate, requested and received internal and external legal counsel confirmation letters, met with internal and external legal counsel to discuss the nature of the various matters, and obtained representations from management. We also evaluated the appropriateness of the related disclosures included in Note 13 to the consolidated financial statements.82Table of ContentsUncertain Tax PositionsDescription of the MatterAs discussed in Note 16 to the consolidated financial statements, the Company has received certain notices from the Internal Revenue Service (IRS) related to transfer pricing agreements with the Company's foreign subsidiaries for certain periods examined. The IRS has stated that it will also apply its position to tax years subsequent to those examined. If the IRS prevails in its position, it could result in an additional federal tax liability, plus interest and any penalties asserted. The Company uses judgment to (1) determine whether a tax position's technical merits are more-likely-than-not to be sustained and (2) measure the amount of tax benefit that qualifies for recognition.Auditing the Company's accounting for, and disclosure of, these uncertain tax positions was especially challenging due to the significant judgment required to assess management's evaluation of technical merits and the measurement of the tax position based on interpretations of tax laws and legal rulings.How We Addressed the Matter in Our AuditWe obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's process to assess the technical merits of tax positions related to these transfer pricing agreements and to measure the benefit of those tax positions. As part of our audit procedures over the Company's accounting for these positions, we involved our tax professionals to assist with our assessment of the technical merits of the Company's tax positions. This included assessing the Company's correspondence with the relevant tax authorities, evaluating income tax opinions or other third-party advice obtained by the Company, and requesting and receiving confirmation letters from third-party advisors. We also used our knowledge of, and experience with, the application of international and local income tax laws by the relevant income tax authorities to evaluate the Company's accounting for those tax positions. We analyzed the Company's assumptions and data used to determine the amount of the federal tax liability recognized and tested the mathematical accuracy of the underlying data and calculations. We also evaluated the appropriateness of the related disclosures included in Note 16 to the consolidated financial statements in relation to these matters./s/ Ernst & Young LLP We have served as the Company's auditor since 2007.San Mateo, California February 1, 2023 83Table of ContentsReport of Independent Registered Public Accounting FirmTo the Stockholders and the Board of Directors of Meta Platforms, Inc.Opinion on Internal Control over Financial ReportingWe have audited Meta Platforms, Inc.'s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Meta Platforms, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated February 1, 2023 expressed an unqualified opinion thereon.Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ Ernst & Young LLP San Mateo, California February 1, 202384Table of ContentsMETA PLATFORMS, INC. CONSOLIDATED BALANCE SHEETS (In millions, except for number of shares and par value)December 31, 20222021Assets Current assets: Cash and cash equivalents$14,681 $16,601 Marketable securities26,057 31,397 Accounts receivable, net13,466 14,039 Prepaid expenses and other current assets5,345 4,629 Total current assets59,549 66,666 Non-marketable equity securities6,201 6,775 Property and equipment, net79,518 57,809 Operating lease right-of-use assets12,673 12,155 Intangible assets, net897 634 Goodwill20,306 19,197 Other assets6,583 2,751 Total assets$185,727 $165,987 Liabilities and stockholders' equity Current liabilities: Accounts payable$4,990 $4,083 Partners payable1,117 1,052 Operating lease liabilities, current1,367 1,127 Accrued expenses and other current liabilities19,552 14,873 Total current liabilities27,026 21,135 Operating lease liabilities, non-current15,301 12,746 Long-term debt9,923 — Other liabilities7,764 7,227 Total liabilities60,014 41,108 Commitments and contingenciesStockholders' equity: Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 2,247 million and 2,328 million shares issued and outstanding, as of December 31, 2022 and 2021, respectively; 4,141 million Class B shares authorized, 367 million and 413 million shares issued and outstanding, as of December 31, 2022 and 2021, respectively— — Additional paid-in capital64,444 55,811 Accumulated other comprehensive loss(3,530)(693)Retained earnings64,799 69,761 Total stockholders' equity125,713 124,879 Total liabilities and stockholders' equity$185,727 $165,987 See Accompanying Notes to Consolidated Financial Statements.85Table of ContentsMETA PLATFORMS, INC.CONSOLIDATED STATEMENTS OF INCOME(In millions, except per share amounts) Year Ended December 31, 202220212020Revenue$116,609 $117,929 $85,965 Costs and expenses: Cost of revenue25,249 22,649 16,692 Research and development35,338 24,655 18,447 Marketing and sales15,262 14,043 11,591 General and administrative11,816 9,829 6,564 Total costs and expenses87,665 71,176 53,294 Income from operations28,944 46,753 32,671 Interest and other income (expense), net(125)531 509 Income before provision for income taxes28,819 47,284 33,180 Provision for income taxes5,619 7,914 4,034 Net income$23,200 $39,370 $29,146 Earnings per share attributable to Class A and Class B common stockholders: Basic$8.63 $13.99 $10.22 Diluted$8.59 $13.77 $10.09 Weighted-average shares used to compute earnings per share attributable to Class A and Class B common stockholders:Basic2,687 2,815 2,851 Diluted2,702 2,859 2,888 Share-based compensation expense included in costs and expenses: Cost of revenue$768 $577 $447 Research and development9,361 7,106 4,918 Marketing and sales1,004 837 691 General and administrative859 644 480 Total share-based compensation expense$11,992 $9,164 $6,536 See Accompanying Notes to Consolidated Financial Statements.86Table of ContentsMETA PLATFORMS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In millions)Year Ended December 31, 202220212020Net income$23,200 $39,370 $29,146 Other comprehensive income (loss):Change in foreign currency translation adjustment, net of tax(1,184)(1,116)1,056 Change in unrealized gain (loss) on available-for-sale investments and other, net of tax(1,653)(504)360 Comprehensive income$20,363 $37,750 $30,562 See Accompanying Notes to Consolidated Financial Statements.87Table of ContentsMETA PLATFORMS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In millions)Class A and Class B Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Retained EarningsTotal Stockholders' EquitySharesPar ValueBalances at December 31, 20192,852 $— $45,851 $(489)$55,692 $101,054 Issuance of common stock38 — — — — — Shares withheld related to net share settlement(14)— (2,369)— (1,195)(3,564)Share-based compensation— — 6,536 — — 6,536 Share repurchases(27)— — — (6,298)(6,298)Other comprehensive income— — — 1,416 — 1,416 Net income— — — — 29,146 29,146 Balances at December 31, 20202,849 — 50,018 927 77,345 128,290 Issuance of common stock45 — — — — — Shares withheld related to net share settlement(17)— (3,371)— (2,144)(5,515)Share-based compensation— — 9,164 — — 9,164 Share repurchases(136)— — — (44,810)(44,810)Other comprehensive loss— — — (1,620)— (1,620)Net income— — — — 39,370 39,370 Balances at December 31, 20212,741 — 55,811 (693)69,761 124,879 Issuance of common stock54 — — — — — Shares withheld related to net share settlement(20)— (3,359)— (236)(3,595)Share-based compensation— — 11,992 — — 11,992 Share repurchases(161)— — — (27,926)(27,926)Other comprehensive loss— — — (2,837)— (2,837)Net income— — — — 23,200 23,200 Balances at December 31, 20222,614 $— $64,444 $(3,530)$64,799 $125,713 See Accompanying Notes to Consolidated Financial Statements.88Table of ContentsMETA PLATFORMS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In millions)Year Ended December 31, 202220212020Cash flows from operating activitiesNet income$23,200 $39,370 $29,146 Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization8,686 7,967 6,862 Share-based compensation11,992 9,164 6,536 Deferred income taxes(3,286)609 (1,192)Impairment charges for leases and leasehold improvements2,218 — — Abandonment charges for data center assets1,341 — — Fair value adjustments for non-marketable securities463 (232)33 Other178 105 85 Changes in assets and liabilities:Accounts receivable231 (3,110)(1,512)Prepaid expenses and other current assets162 (1,750)135 Other assets(106)(349)(34)Accounts payable210 1,436 (17)Partners payable90 (12)178 Accrued expenses and other current liabilities4,210 3,544 (946)Other liabilities886 941 (527)Net cash provided by operating activities50,475 57,683 38,747 Cash flows from investing activitiesPurchases of property and equipment(31,431)(18,690)(15,163)Proceeds relating to property and equipment245 123 48 Purchases of marketable debt securities(9,626)(30,407)(33,930)Sales of marketable debt securities11,083 31,671 11,787 Maturities of marketable debt securities2,075 10,915 13,984 Purchases of non-marketable equity securities(5)(47)(6,361)Acquisitions of businesses and intangible assets(1,312)(851)(388)Other investing activities1 (284)(36)Net cash used in investing activities(28,970)(7,570)(30,059)Cash flows from financing activitiesTaxes paid related to net share settlement of equity awards(3,595)(5,515)(3,564)Repurchases of Class A common stock(27,956)(44,537)(6,272)Proceeds from issuance of long-term debt, net9,921 — — Principal payments on finance leases(850)(677)(604)Other financing activities344 1 148 Net cash used in financing activities(22,136)(50,728)(10,292)Effect of exchange rate changes on cash, cash equivalents, and restricted cash(638)(474)279 Net decrease in cash, cash equivalents, and restricted cash(1,269)(1,089)(1,325)Cash, cash equivalents, and restricted cash at beginning of the period16,865 17,954 19,279 Cash, cash equivalents, and restricted cash at end of the period$15,596 $16,865 $17,954 Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheetsCash and cash equivalents$14,681 $16,601 $17,576 Restricted cash, included in prepaid expenses and other current assets294 149 241 Restricted cash, included in other assets621 115 137 Total cash, cash equivalents, and restricted cash$15,596 $16,865 $17,954 See Accompanying Notes to Consolidated Financial Statements.89Table of ContentsMETA PLATFORMS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In millions)Year Ended December 31, 202220212020Supplemental cash flow dataCash paid for income taxes, net$6,407 $8,525 $4,229 Non-cash investing and financing activities:Property and equipment in accounts payable and accrued expenses and other current liabilities$3,319 $3,404 $2,201 Acquisition of businesses in accrued expenses and other current liabilities and other liabilities$291 $73 $118 Other current assets through financing arrangement in accrued expenses and other current liabilities$16 $508 $— Repurchases of Class A common stock in accrued expenses and other current liabilities$310 $340 $68 See Accompanying Notes to Consolidated Financial Statements.90Table of ContentsMETA PLATFORMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting PoliciesOrganization and Description of Business We were incorporated in Delaware in July 2004. Our mission is to give people the power to build community and bring the world closer together. All of our products, including our apps, share the vision of helping to bring the metaverse to life.We report our financial results based on two reportable segments: Family of Apps (FoA) and Reality Labs (RL). The segment information aligns with how the chief operating decision maker (CODM), who is our Chief Executive Officer (CEO), reviews and manages the business. We generate substantially all of our revenue from advertising.Basis of PresentationWe prepared the consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP). The consolidated financial statements include the accounts of Meta Platforms, Inc., its subsidiaries where we have controlling financial interests, and any variable interest entities for which we are deemed to be the primary beneficiary. All intercompany balances and transactions have been eliminated.Use of EstimatesPreparation of consolidated financial statements in conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including, but not limited to, those related to revenue recognition, valuation of non-marketable equity securities, income taxes, loss contingencies, including the ultimate resolution of litigation, regulatory matters, and asserted and unasserted claims, valuation of long-lived assets including goodwill, intangible assets, and property and equipment, and their associated estimated useful lives, credit losses of available-for-sale (AFS) debt securities and accounts receivable, fair value of financial instruments, and fair value of leases. These estimates are based on management's knowledge about current events, interpretation of regulations, and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.In connection with our periodic reviews of the estimated useful lives of property and equipment, we extended the estimated average useful lives of a majority of the servers and network assets from four years to 4.5 years, effective the second quarter of 2022, and further extended the useful lives to five years effective the fourth quarter of 2022. The changes in estimated useful lives were due to expected longer refresh cycles in our data centers. The financial impact of the changes was a reduction in depreciation expense of $860 million and an increase in net income of $693 million, or $0.26 per diluted share for the year ended December 31, 2022. The impact from the changes in our estimates was calculated based on the servers and network assets existing as of the effective dates of the changes and applying the revised estimated useful lives prospectively.Revenue RecognitionRevenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We determine revenue recognition by applying the following steps:•identification of the contract, or contracts, with a customer;•identification of the performance obligations in the contract;•determination of the transaction price;•allocation of the transaction price to the performance obligations in the contract; and91Table of Contents•recognition of revenue when, or as, we satisfy a performance obligation.We expense sales commissions when incurred if the amortization period is one year or less. These costs are recorded within marketing and sales on our consolidated statements of income.We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.Revenue excludes sales and usage‑based taxes where it has been determined that we are acting as a pass‑through agent.AdvertisingAdvertising revenue is generated by displaying ad products on Facebook, Instagram, Messenger, and third-party mobile applications. Marketers pay for ad products either directly or through their relationships with advertising agencies or resellers, based on the number of impressions delivered or the number of actions, such as clicks, taken by our users.We recognize revenue from the display of impression-based ads in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad is displayed to users. We recognize revenue from the delivery of action-based ads in the period in which a user takes the action the marketer contracted for. In general, we report advertising revenue on a gross basis, since we control the advertising inventory before it is transferred to our customers. Our control is evidenced by our sole ability to monetize the advertising inventory before it is transferred to our customers. For revenue generated from arrangements that involve third-party publishers, we evaluate whether we are the principal or the agent, and for those advertising revenue arrangements where we are the agent, we recognize revenue on a net basis.We may accept lower consideration than the amount promised per the contract for certain revenue transactions and certain customers may receive cash-based incentives, credits, or refunds, which are accounted for as variable consideration when estimating the amount of revenue to recognize. We estimate these amounts and reduce revenue based on the amounts expected to be provided to customers. We believe that there will not be significant changes to our estimates of variable consideration.Reality Labs RevenueRL revenue is generated from the delivery of consumer hardware products, such as Meta Quest, wearables, and related software and content. Revenue is recognized at the time control of the products is transferred to customers, which is generally at the time of delivery, in an amount that reflects the consideration RL expects to be entitled to in exchange for the products.Other RevenueOther revenue consists of net fees we receive from developers using our Payments infrastructure and revenue from WhatsApp Business Platform and various other sources.Cost of RevenueOur cost of revenue consists mostly of expenses associated with the delivery and distribution of our products. These include expenses related to the operation of our data centers and technical infrastructure, such as depreciation expense from servers, network infrastructure and buildings, as well as payroll and related expenses which include share-based compensation for employees on our operations teams, and energy and bandwidth costs. Cost of revenue also includes costs associated with partner arrangements, including traffic acquisition costs and credit card and other fees related to processing customer transactions, and content costs. Additionally, cost of revenue includes RL inventory costs, which consist of cost of products sold and estimated losses on non-cancelable contractual commitments.Content CostsOur content costs are mostly related to payments to content providers from whom we license video and music to increase engagement on the platform. For licensed video, we expense the cost per title when the title is accepted and available 92Table of Contentsfor viewing if the capitalization criteria are not met. Video content costs that meet the criteria for capitalization were not material to date.For licensed music, we expense the license fees over the contractual license period. Expensed content costs are included in cost of revenue on the consolidated statements of income.Software Development CostsSoftware development costs, including costs to develop software products or the software component of products to be marketed or sold to external users, are expensed before the software or technology reach technological feasibility, which is typically reached shortly before the release of such products.Software development costs also include costs to develop software to be used solely to meet internal needs and applications used to deliver our services. These software development costs meet the criteria for capitalization once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended.Development costs that meet the criteria for capitalization were not material to date.Share-based CompensationShare-based compensation expense consists of the company's restricted stock units (RSUs) expense. RSUs granted to employees are measured based on the grant-date fair value. In general, our RSUs vest over a service period of four years. Share-based compensation expense is generally recognized based on the straight-line basis over the requisite service period. We account for forfeitures as they occur.Income TaxesWe are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred income tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We recognize the deferred income tax effects of a change in tax rates in the period of the enactment.We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance. We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. These uncertain tax positions include our estimates for transfer pricing that have been developed based upon analyses of appropriate arms-length prices. Similarly, our estimates related to uncertain tax positions concerning research tax credits are based on an assessment of whether our available documentation corroborating the nature of our activities supporting the tax credits will be sufficient. Although we believe that we have adequately reserved for our uncertain tax positions (including net interest and penalties), we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves in accordance with the income tax accounting guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made, and could have a material impact on our financial condition and operating results. 93Table of ContentsAdvertising ExpenseAdvertising costs are expensed when incurred and are included in marketing and sales expenses on the consolidated statements of income. We incurred advertising expenses of $2.65 billion, $2.99 billion, and $2.26 billion for the years ended December 31, 2022, 2021, and 2020, respectively.Cash and Cash Equivalents, Marketable Securities, and Restricted CashCash and cash equivalents consist of cash on deposit with banks and highly liquid investments with maturities of 90 days or less from the date of purchase.We hold investments in marketable securities, consisting mostly of U.S. government securities, U.S. government agency securities, and investment grade corporate debt securities. We classify our marketable securities as available-for-sale (AFS) investments in our current assets because they represent investments of cash available for current operations. Our AFS investments are carried at estimated fair value with any unrealized gains and losses, net of taxes, included in accumulated other comprehensive income (loss) in stockholders' equity. AFS debt securities with an amortized cost basis in excess of estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses. Allowance for credit losses on AFS debt securities are recognized as a charge in interest and other income (expense), net on our consolidated statements of income, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in stockholders' equity. The amounts of credit losses recorded for the years ended December 31, 2022, 2021, and 2020 were not material. We determine realized gains or losses on sale of marketable securities on a specific identification method and include such gains or losses in interest and other income (expense), net on the consolidated statements of income.We classify certain restricted cash balances, consisting mostly of cash related to insurance policies, and retention and indemnification holdback for our acquisitions, within prepaid expenses and other current assets and other assets on the consolidated balance sheets based upon the expected duration of the restrictions.Non-marketable Equity Securities Our non-marketable equity securities are investments in privately-held companies without readily determinable fair values. We elected to account for substantially all of our non-marketable equity securities using the measurement alternative, which is cost, less any impairment, adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the same issuer as of the respective transaction dates. The change in carrying value, if any, is recognized in interest and other income (expense), net on our consolidated statements of income. We periodically review our non-marketable equity securities for impairment. When indicators exist and the estimated fair value of an investment is below the carrying amount, we write down the investment to fair value. During the year ended December 31, 2022, losses resulted from such remeasurements were $447 million. Gains and losses recorded in the years ended December 31, 2021 and 2020 were immaterial. For additional information, see Note 6 — Non-marketable Equity Securities. In addition, we also held other non-marketable equity securities accounted for under the equity method which were immaterial as of December 31, 2022 and 2021. Fair Value MeasurementsWe apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:Level 1- Quoted prices in active markets for identical assets or liabilities.94Table of ContentsLevel 2- Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.Level 3- Inputs that are generally unobservable and typically reflect management's estimate of assumptions that market participants would use in pricing the asset or liability.Our cash equivalents and marketable debt securities are classified within Level 1 or Level 2 of the fair value hierarchy because their fair value is derived from quoted market prices or alternative pricing sources and models utilizing observable market inputs. Our marketable equity securities are publicly traded stocks measured at fair value and classified within Level 1 in the fair value hierarchy because we use quoted prices for identical assets in active markets to estimate their fair value. Certain other assets are classified within Level 3 because factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity.Our non-marketable equity securities accounted for using the measurement alternative are recorded at fair value on a non-recurring basis. When indicators of impairment exist or observable price changes of qualified transactions occur, the respective non-marketable equity security would be classified within Level 3 of the fair value hierarchy because the valuation methods include a combination of the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the securities we hold. Accounts Receivable and AllowancesAccounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. We make estimates of expected credit and collectibility trends for the allowance for credit losses and allowance for unbilled receivables based upon our assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect our ability to collect from customers. Expected credit losses are recorded as general and administrative expenses on our consolidated statements of income. As of December 31, 2022 and 2021, the allowances for accounts receivable were immaterial. Property and EquipmentProperty and equipment, which includes amounts recorded under finance leases, which are amortized, are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the remaining lease term, whichever is shorter.The estimated useful lives of property and equipment and amortization periods of finance lease right-of-use assets are described below: Property and Equipment Useful Life/ Amortization periodServers and network assetsFour to Five yearsBuildings25 to 30 yearsEquipment and otherOne to 25 yearsFinance lease right-of-use assetsThree to 20 yearsLeasehold improvementsLesser of estimated useful life or remaining lease termWe evaluate at least annually the recoverability of property and equipment for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of property and equipment assets is not recoverable, and the asset's fair value is less than the carrying amount, an impairment charge is recognized. During the year ended December 31, 2022, we recorded $1.34 billion of abandonment charges for data center construction in progress (CIP) assets under Accounting Standards Codification (ASC) Topic 360 related to our restructuring efforts. For additional information regarding our restructuring efforts, see Note 3 — Restructuring.95Table of ContentsThe useful lives of our property and equipment are determined by management when those assets are initially recognized and are routinely reviewed for the remaining estimated useful lives. Our current estimate of useful lives represents the best estimate of the useful lives based on current facts and circumstances, but may differ from the actual useful lives due to changes to our business operations, changes in the planned use of assets, and technological advancements. When we change the estimated useful life assumption for any asset, the remaining carrying amount of the asset is accounted for prospectively and depreciated or amortized over the revised estimated useful life. See section "Use of Estimates" above for additional information regarding changes in the estimated useful lives of our servers and network assets.Servers and network assets include property and equipment mostly in our data centers, which is used to support production traffic. Land and assets held within construction in progress are not depreciated. Construction in progress is related to the construction or development of property and equipment that have not yet been placed in service for their intended use.The cost of maintenance and repairs is expensed as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts, and any gain or loss on such sale or disposal is reflected in income from operations.Lease ObligationsWe have operating leases comprised of certain offices, data centers, colocations, land, network infrastructure, and other equipment. We also have finance leases for certain network infrastructure. We determine if an arrangement is a lease at inception. Most of our leases contain lease and non-lease components. Non-lease components include fixed payments for maintenance, utilities, real estate taxes, and management fees. We combine fixed lease and non-lease components and account for them as a single lease component. Our lease agreements may contain variable costs such as contingent rent escalations, common area maintenance, insurance, real estate taxes, or other costs. Such variable lease costs are expensed as incurred on the consolidated statements of income. For certain colocation and equipment leases, we apply a portfolio approach to effectively account for the operating lease right-of-use (ROU) assets and lease liabilities.For leases with a lease term greater than 12 months, ROU assets and lease liabilities are recognized on the consolidated balance sheets at the commencement date based on the present value of the remaining fixed lease payments and includes only payments that are fixed and determinable at the time of commencement. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. When determining the probability of exercising such options, we consider contract-based, asset-based, entity-based, and market-based factors.As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Our incremental borrowing rate is a hypothetical rate based on our understanding of what our credit rating would be in a similar economic environment.Operating leases are included in operating lease ROU assets, operating lease liabilities, current, and operating lease liabilities, non-current on our consolidated balance sheets. Finance leases are included in property and equipment, net, accrued expenses and other current liabilities, and other liabilities on our consolidated balance sheets.Operating lease costs are recognized on a straight-line basis over the lease terms. Finance lease assets are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease terms.During the year ended December 31, 2022, we recorded impairment losses of $2.22 billion in aggregate for operating lease ROU assets and leasehold improvements under ASC Topic 360 as a part of our facilities consolidation restructuring efforts. The fair values of the impaired assets were estimated using discounted cash flow models (income approach) based on market participant assumptions with Level 3 inputs. The assumptions used in estimating fair value include the expected downtime prior to the commencement of future subleases, projected sublease income over the remaining lease periods, and discount rates that reflect the level of risk associated with receiving future cash flows. For additional information regarding our restructuring efforts, see Note 3 — Restructuring.96Table of ContentsLoss ContingenciesWe are involved in legal proceedings, claims, and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business. Certain of these matters include speculative claims for substantial or indeterminate amounts of damages. Additionally, we are required to comply with various legal and regulatory obligations around the world, and we regularly become subject to new laws and regulations in the jurisdictions in which we operate. The requirements for complying with these obligations may be uncertain and subject to interpretation and enforcement by regulatory and other authorities, and any failure to comply with such obligations could eventually lead to asserted legal or regulatory action. With respect to these matters, asserted and unasserted, we evaluate the associated developments on a regular basis and accrue a liability when we believe that it is both probable that a loss has been incurred and the amount can be reasonably estimated. If we determine there is a reasonable possibility that we may incur a loss and the loss or range of loss can be reasonably estimated, we disclose the possible loss in the accompanying notes to the consolidated financial statements to the extent material. We review the developments in our contingencies that could affect the amount of the provisions that have been previously recorded, and the matters and related reasonably possible losses disclosed. We make adjustments to our provisions and changes to our disclosures accordingly to reflect the merits of our defenses and the impact of negotiations, settlements, regulatory proceedings, rulings, advice of legal counsel, and updated information. Significant judgment is required to determine the probability of loss and the estimated amount of loss, including when and if the probability and estimate has changed for asserted and unasserted matters. Certain factors, in particular, have resulted in significant changes to these estimates and judgments in prior quarters based on updated information available. For example, in certain jurisdictions where we operate, fines and penalties may be the result of new laws and preliminary interpretations regarding the basis of assessing damages, which may make it difficult to estimate what such fines and penalties would amount to if successfully asserted against us. In addition, certain government inquiries and investigations, such as matters before our lead European Union privacy regulator, the IDPC, are subject to review by other regulatory bodies before decisions can be finalized, which can lead to significant changes in the outcome of an inquiry. As a result of these and other factors, we reasonably expect that our estimates and judgments with respect to our contingencies may continue to be revised in future quarters. Business CombinationsWe allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill to reporting units based on the expected benefit from the business combination. Allocation of purchase consideration to identifiable assets and liabilities affects the amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas any indefinite-lived intangible assets, including goodwill, are not amortized. During the measurement period, which is not to exceed one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Acquisition-related expenses are recognized separately from business combinations and are expensed as incurred.Goodwill and Intangibles AssetsWe allocate goodwill to reporting units based on the expected benefit from business combinations. We evaluate our reporting units annually, as well as when changes in our operating segments occur. For changes in reporting units, we reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level annually or more frequently if events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying value. We have two reporting units subject to goodwill impairment testing. As of December 31, 2022, no impairment of goodwill has been identified.We evaluate the recoverability of finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation of these intangible assets are performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate from the use and eventual disposition. If such review indicates that the carrying amount of finite-lived intangible assets is not recoverable, and the assets fair value is less than the carrying amount, an impairment charge is recognized. We have not recorded any material impairment charges during the years presented.97Table of ContentsOur finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. Indefinite-lived intangible assets are not amortized. If an indefinite-lived intangible asset is subsequently determined to have a finite useful life, the asset will be tested for impairment and accounted for as a finite-lived intangible asset prospectively over its estimated remaining useful life. We routinely review the remaining estimated useful lives of finite-lived intangible assets. If we change the estimated useful life assumption for any asset, the remaining unamortized balance is amortized over the revised estimated useful life.Foreign CurrencyGenerally, the functional currency of our international subsidiaries is the local currency. We translate the financial statements of these subsidiaries to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenue, costs, and expenses. Translation gains and losses are recorded in accumulated other comprehensive income (loss) as a component of stockholders' equity. As of December 31, 2022 and 2021, we had cumulative translation losses, net of tax of $1.86 billion and $677 million, respectively. Foreign currency transaction gains and losses from transactions denominated in a currency other than the functional currency of the subsidiary involved are recorded within interest and other income (expense), net on our consolidated statements of income. Net losses resulting from foreign currency transactions were $81 million, $140 million, and $129 million for the years ended December 31, 2022, 2021, and 2020, respectively.Credit Risk and ConcentrationOur financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, marketable securities, and accounts receivable. Cash equivalents consists mostly of money market funds, that primarily invest in U.S. government and agency securities. Marketable securities consist of investments in U.S. government securities, U.S. government agency securities, and investment grade corporate debt securities. Our investment portfolio in corporate debt securities is highly liquid and diversified among individual issuers. The amount of credit losses recorded for the year ended December 31, 2022 was not material.Accounts receivable are typically unsecured and are derived from revenue earned from customers across different industries and countries. We generated 40%, 41%, and 42% of our revenue for the years ended December 31, 2022, 2021, and 2020, respectively, from marketers and developers based in the United States, with the majority of revenue outside of the United States coming from customers located in western Europe, China, Brazil, Canada, Australia and Japan.We perform ongoing credit evaluations of our customers and generally do not require collateral. We maintain an allowance for estimated credit losses, and bad debt expense on these losses was not material during the years ended December 31, 2022, 2021, or 2020. In the event that accounts receivable collection cycles deteriorate, our operating results and financial position could be adversely affected.No customer represented 10% or more of total revenue during the years ended December 31, 2022, 2021, and 2020.Recently Adopted Accounting PronouncementsOn January 1, 2022, we early adopted Accounting Standards Update (ASU) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08), which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. The adoption of this new standard did not have a material impact on our consolidated financial statements.On July 1, 2022, we early adopted ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (ASU 2022-03), which clarifies and amends the guidance of measuring the fair value of equity securities subject to contractual restrictions that prohibit the sale of the equity securities. The adoption of this new standard did not have a material impact on our consolidated financial statements.On October 1, 2022, we adopted ASU No. 2021-10, Government Assistance (Topic 832): Disclosure by Business Entities about Government Assistance (ASU 2021-10), which improves the transparency of government assistance received 98Table of Contentsby most business entities by requiring annual disclosures of: (1) the types of government assistance received; (2) the accounting for such assistance; and (3) the effect of the assistance on a business entity's financial statements. The adoption of this new standard did not have a material impact on our consolidated financial statements.Note 2. RevenueRevenue disaggregated by revenue source and by segment consists of the following (in millions). For comparative purposes, amounts for the year ended December 31, 2020 have been recast:Year Ended December 31, 202220212020Advertising$113,642 $114,934 $84,169 Other revenue808 721 657 Family of Apps114,450 115,655 84,826 Reality Labs2,159 2,274 1,139 Total revenue$116,609 $117,929 $85,965 Revenue disaggregated by geography, based on the addresses of our customers, consists of the following (in millions): Year Ended December 31, 202220212020United States and Canada (1)$50,150 $51,541 $38,433 Europe (2)26,681 29,057 20,349 Asia-Pacific27,760 26,739 19,848 Rest of World (2)12,018 10,592 7,335 Total revenue$116,609 $117,929 $85,965 _________________________(1)United States revenue was $47.20 billion, $48.38 billion, and $36.25 billion for the years ended December 31, 2022, 2021, and 2020, respectively. (2)Europe includes Russia and Turkey, and Rest of World includes Africa, Latin America, and the Middle East.Our total deferred revenue was $526 million and $596 million as of December 31, 2022 and 2021, respectively. As of December 31, 2022, we expect $482 million of our deferred revenue to be realized in less than a year. 99Table of ContentsNote 3. RestructuringDuring the year ended December 31, 2022, we initiated several measures to pursue greater cost efficiency and to realign our business and strategic priorities. Beginning in the third quarter of 2022, as a part of our facilities consolidation strategy, we made a decision to sublease, early terminate, or abandon several office buildings under operating leases to align our real property lease arrangements with our anticipated operating needs. As a result, we recorded impairment charges for the related operating lease right-of-use (ROU) assets and leasehold improvements.In November 2022, we announced a layoff of approximately 11,000 of our employees across the FoA and RL segments. As a result, we recorded severance and other personnel related expenses for the impacted employees.In December 2022, we reevaluated our data center investment strategy to improve efficiency and further advance our efforts around artificial intelligence. As a result, we decided to pivot several of our data center building projects to a next generation design while also canceling multiple existing data center projects. This strategy led to abandonment charges of the related data center assets.A summary of our restructuring charges for the year ended December 31, 2022 by major activity type is as follows (in millions):Facilities Consolidation (1)Severance and Other Personnel CostsData Center AssetsTotalCost of revenue$154 $— $1,341 $1,495 Research and development1,311 408 — 1,719 Marketing and sales404 234 — 638 General and administrative426 333 — 759 Total $2,295 $975 $1,341 $4,611 ________________________(1)Facilities consolidation includes impairment charges and accelerated expenses related to certain operating lease ROU assets and leasehold improvements.Total restructuring charges recorded under our FoA segment were $4.10 billion and RL segment were $515 million. The following table is a summary of the changes in the severance and other personnel liabilities, included within accrued expenses and other current liabilities on the consolidated balance sheets, related to the workforce reduction (in millions):Balance as of January 1, 2022$— Severance and other personnel costs975 Cash payments during the period(203)Balance as of December 31, 2022 (1)$772 __________________________(1)We expect the remaining severance and termination related liabilities to be substantially paid out in cash during the first half of 2023.100Table of ContentsNote 4. Earnings per ShareWe compute earnings per share (EPS) of Class A and Class B common stock using the two-class method. As the liquidation and dividend rights for both Class A and Class B common stock are identical, the undistributed earnings are allocated on a proportionate basis to the weighted-average number of common shares outstanding for the period. Basic EPS is computed by dividing net income by the weighted-average number of shares of our Class A and Class B common stock outstanding. For the calculation of diluted EPS, net income for basic EPS is adjusted by the effect of dilutive securities, including awards under our equity compensation plan.In addition, the computation of the diluted EPS of Class A common stock assumes the conversion of our Class B common stock to Class A common stock, while the diluted EPS of Class B common stock does not assume the conversion of those shares to Class A common stock. Diluted EPS is computed by dividing the resulting net income by the weighted-average number of fully diluted common shares outstanding.For the year ended December 31, 2022, approximately 95 million shares of Class A common stock equivalents of restricted stock units (RSUs) were excluded from the diluted EPS calculation as including them would have an anti-dilutive effect. RSUs with anti-dilutive effect were not material for the years ended December 31, 2021 and 2020.Basic and diluted EPS are the same for each class of common stock because they are entitled to the same liquidation and dividend rights.The numerators and denominators of the basic and diluted EPS computations for our common stock are calculated as follows (in millions, except per share amounts): Year Ended December 31, 202220212020 ClassAClassBClassAClassBClassAClassB Basic EPS: Numerator Net income$19,729 $3,471 $33,328 $6,042 $24,607 $4,539 Denominator Shares used in computation of basic earnings per share2,285 402 2,383 432 2,407 444 Basic EPS$8.63 $8.63 $13.99 $13.99 $10.22 $10.22 Diluted EPS: Numerator Net income$19,729 $3,471 $33,328 $6,042 $24,607 $4,539 Reallocation of net income as a result of conversion of Class B to Class A common stock3,471 — 6,042 — 4,539 — Reallocation of net income to Class B common stock— (19)— (93)— (58)Net income for diluted EPS$23,200 $3,452 $39,370 $5,949 $29,146 $4,481 Denominator Shares used in computation of basic earnings per share2,285 402 2,383 432 2,407 444 Conversion of Class B to Class A common stock402 — 432 — 444 — Weighted-average effect of dilutive RSUs15 — 44 — 37 — Shares used in computation of diluted earnings per share2,702 402 2,859 432 2,888 444 Diluted EPS$8.59 $8.59 $13.77 $13.77 $10.09 $10.09 101Table of ContentsNote 5. Cash, Cash Equivalent, Marketable Securities, and Restricted CashThe following table sets forth cash, cash equivalents, marketable securities and restricted cash (in millions):December 31,20222021Cash and cash equivalents:Cash$6,176 $7,308 Money market funds8,305 8,850 U.S. government securities— 25 U.S. government agency securities16 108 Certificates of deposit and time deposits156 250 Corporate debt securities28 60 Total cash and cash equivalents14,681 16,601 Marketable securities:Marketable debt securities:U.S. government securities8,708 10,901 U.S. government agency securities4,989 5,927 Corporate debt securities12,335 14,569 Total marketable debt securities26,032 31,397 Marketable equity securities25 — Total marketable securities26,057 31,397 Restricted cash:Restricted cash included in prepaid expenses and other current assets294 149 Restricted cash included in other assets621 115 Total restricted cash915 264 Total cash, cash equivalents, marketable securities, and restricted cash$41,653 $48,262 102Table of ContentsThe following table summarizes our available-for-sale marketable debt securities and cash equivalents with unrealized losses as of December 31, 2022 and 2021, aggregated by major security type and the length of time that individual securities have been in a continuous loss position (in millions):December 31, 2022Less than 12 months12 months or greaterTotalFair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized LossesU.S. government securities$5,008 $(234)$3,499 $(247)$8,507 $(481)U.S. government agency securities524 (17)4,415 (308)4,939 (325)Corporate debt securities4,555 (249)7,256 (634)11,811 (883)Total$10,087 $(500)$15,170 $(1,189)$25,257 $(1,689)December 31, 2021Less than 12 months12 months or greaterTotalFair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized LossesU.S. government securities$5,184 $(38)$30 $— $5,214 $(38)U.S. government agency securities5,029 (61)2 — 5,031 (61)Corporate debt securities10,041 (93)40 (1)10,081 (94)Total$20,254 $(192)$72 $(1)$20,326 $(193)The increase in the gross unrealized losses for the year ended December 31, 2022 is due to higher interest rates. The allowance for credit losses and the gross unrealized gains on our marketable debt securities was not material as of December 31, 2022 and 2021. The following table classifies our marketable debt securities by contractual maturities (in millions):December 31, 2022Due within one year$4,170 Due after one year to five years21,862 Total$26,032 103Table of ContentsNote 6. Non-marketable Equity SecuritiesOur non-marketable equity securities are investments in privately-held companies without readily determinable fair values. The following table summarizes our non-marketable equity securities that were measured using measurement alternative and equity method (in millions):December 31,20222021Non-marketable equity securities under measurement alternative:Initial cost$6,388$6,480Cumulative upward adjustments293311Cumulative impairment/downward adjustments(497)(50)Carrying value6,1846,741Non-marketable equity securities under equity method1734Total$6,201$6,775During the year ended December 31, 2022, we recorded $447 million of impairment and downward adjustments on our non-marketable equity securities that were measured using measurement alternative, which includes the impairment of our equity investment in Giphy due to a regulatory decision announced by the United Kingdom Competition and Markets Authority in October 2022. Note 7. Fair Value MeasurementsThe following table summarizes our assets measured at fair value on a recurring basis and the classification by level of input within the fair value hierarchy (in millions): Fair Value Measurement at Reporting Date UsingDescription December 31,2022Quoted Prices in Active Markets for Identical Assets(Level 1)Significant Other Observable Inputs(Level 2)Significant Unobservable Inputs (Level 3)Cash equivalents: Money market funds$8,305 $8,305 $— $— U.S. government agency securities16 16 — — Certificates of deposit and time deposits156 — 156 — Corporate debt securities28 — 28 — Marketable securities: U.S. government securities8,708 8,708 — — U.S. government agency securities4,989 4,989 — — Corporate debt securities12,335 — 12,335 — Marketable equity securities25 25 — — Restricted cash equivalents583 583 — — Other assets157 — — 157 Total$35,302 $22,626 $12,519 $157 104Table of Contents Fair Value Measurement at Reporting Date UsingDescriptionDecember 31,2021Quoted Prices in Active Markets for Identical Assets(Level 1)Significant Other Observable Inputs(Level 2)Significant Unobservable Inputs (Level 3)Cash equivalents: Money market funds$8,850 $8,850 $— $— U.S. government securities25 25 — — U.S. government agency securities108 108 — — Certificates of deposit and time deposits250 — 250 — Corporate debt securities60 — 60 — Marketable securities:U.S. government securities10,901 10,901 — — U.S. government agency securities5,927 5,927 — — Corporate debt securities14,569 — 14,569 — Restricted cash equivalents71 71 — — Other assets160 — — 160 Total$40,921 $25,882 $14,879 $160 We classify our cash equivalents and marketable debt securities within Level 1 or Level 2 because we use quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value. Our marketable equity securities are publicly traded stocks measured at fair value and classified within Level 1 in the fair value hierarchy because we use quoted prices for identical assets in active markets to estimate their fair value. Certain other assets are classified within Level 3 because factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. Our non-marketable equity securities accounted for using the measurement alternative are measured at fair value on a non-recurring basis and are classified within Level 3 of the fair value hierarchy because we use significant unobservable inputs to estimate their fair value. Assets remeasured at fair value within Level 3 during the years ended December 31, 2022 and 2021 were immaterial and $913 million, respectively. For additional information, see Note 6 — Non-marketable Equity Securities. Note 8. Property and EquipmentProperty and equipment, net consists of the following (in millions): December 31, 20222021Land$1,874 $1,688 Servers and network assets34,330 25,584 Buildings27,720 22,531 Leasehold improvements6,522 5,795 Equipment and other5,642 4,764 Finance lease right-of-use assets3,353 2,840 Construction in progress25,052 14,687 Property and equipment, gross104,493 77,889 Less: Accumulated depreciation(24,975)(20,080)Property and equipment, net$79,518 $57,809 105Table of ContentsConstruction in progress includes costs mostly related to construction of data centers, network infrastructure, servers, and office facilities. As of December 31, 2022, construction in progress also includes $2.18 billion of servers and network assets components stored by our suppliers until required by our design manufacturers to fulfill certain purchase orders.Depreciation expense on property and equipment was $8.50 billion, $7.56 billion, and $6.39 billion for the years ended December 31, 2022, 2021, and 2020, respectively. The majority of the property and equipment depreciation expense was from servers and network assets depreciation of $5.29 billion, $4.94 billion, and $4.38 billion for the years ended December 31, 2022, 2021, and 2020, respectively. For additional information regarding changes in the estimated useful life of our servers and network assets, see Note 1 — Summary of Significant Accounting Policies.During the year ended December 31, 2022, we recorded $1.34 billion abandonment charge and $508 million impairment loss for data center assets and leasehold improvements assets, respectively, as a result of our restructuring efforts. For additional information, see Note 3 — Restructuring. Note 9. LeasesWe have entered into various non-cancelable operating lease agreements mostly for certain of our offices, data centers, colocations, and land. We have also entered into various non-cancelable finance lease agreements mostly for certain network infrastructure. Our leases have original lease periods expiring between 2023 and 2093. Many leases include one or more options to renew. We do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably assured. Our lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.The components of lease costs are as follows (in millions):Year Ended December 31, 202220212020Finance lease cost:Amortization of right-of-use assets$380 $344 $259 Interest16 15 14 Operating lease cost1,857 1,540 1,391 Variable lease cost and other, net363 272 269 Total lease cost$2,616 $2,171 $1,933 During the year ended December 31, 2022, we also recorded $1.71 billion impairment loss for operating lease ROU assets as a part of our facilities consolidation restructuring efforts. For additional information, see Note 3 — Restructuring. Supplemental balance sheet information related to leases is as follows:December 31, 20222021Weighted-average remaining lease term:Finance leases14.4 years13.9 yearsOperating leases 12.5 years13.0 yearsWeighted-average discount rate:Finance leases3.1 %2.7 %Operating leases3.2 %2.8 %106Table of ContentsThe following is a schedule, by years, of maturities of lease liabilities as of December 31, 2022 (in millions):Operating LeasesFinance Leases2023$1,739 $146 20242,034 57 20251,771 57 20261,723 53 20271,699 52 Thereafter11,801 460 Total undiscounted cash flows20,767 825 Less: Imputed interest(4,099)(138)Present value of lease liabilities (1)$16,668 $687 Lease liabilities, current$1,367 $129 Lease liabilities, non current15,301 558 Present value of lease liabilities (1)$16,668 $687 _________________(1) Lease liabilities include those operating leases that we plan to sublease or abandon as a part of our facilities consolidation restructuring efforts. For additional information, see Note 3 — Restructuring.The table above does not include lease payments that were not fixed at commencement or lease modification. As of December 31, 2022, we have additional operating and finance leases, that have not yet commenced, with lease obligations of approximately $8.36 billion and $1.43 billion, respectively, mostly for data centers, offices, network infrastructure, and colocations. These operating and finance leases will commence between 2023 and 2028 with lease terms of greater than one year to 30 years. Supplemental cash flow information related to leases is as follows (in millions):Year Ended December 31, 202220212020Cash paid for amounts included in the measurement of lease liabilities:Operating cash flows for operating leases$1,654 $1,406 $1,208 Operating cash flows for finance leases$16 $15 $14 Financing cash flows for finance leases$850 $677 $604 Lease liabilities arising from obtaining right-of-use assets:Operating leases$4,366 $4,466 $1,158 Finance leases$223 $160 $121 Note 10. Acquisitions, Goodwill, and Intangible AssetsDuring the year ended December 31, 2022, we completed several business combinations with total cash consideration transferred of $1.23 billion, which in aggregate was allocated to $317 million of intangible assets, $1.14 billion of goodwill, and $223 million of net liabilities assumed. Goodwill generated from all business acquisitions completed was primarily attributable to expected synergies and potential monetization opportunities. The amount of goodwill generated that was deductible for tax purposes was not material. Acquisition-related costs were immaterial and were expensed as incurred. Pro forma historical results of operations related to these business acquisitions have not been presented because they are not significant to our consolidated financial statements, either individually or in aggregate. We have included the financial results of these acquired businesses in our consolidated financial statements from their respective dates of acquisition.107Table of ContentsChanges in the carrying amount of goodwill by reportable segment for the years ended December 31, 2022 and 2021 are as follows (in millions):Family of AppsReality LabsTotalGoodwill at December 31, 2020$19,050 Acquisitions210 Adjustments/transfer(191)Effect of currency translation adjustment(4)Segment allocation in the fourth quarter of 2021 (1)$18,455 $610 19,065 Acquisitions in the fourth quarter of 2021— 128 128 Effect of currency translation adjustment3 1 4 Goodwill at December 31, 202118,458 739 19,197 Acquisitions773 364 1,137 Adjustments19 (47)(28)Goodwill at December 31, 2022$19,250 $1,056 $20,306 _________________________(1)Represents reallocation of goodwill as a result of our change in segments in the fourth quarter of 2021. See Note 17 — Segment and Geographical Information for further details.The following table sets forth the major categories of the intangible assets and the weighted-average remaining useful lives for those assets that are not already fully amortized (in millions):December 31, 2022December 31, 2021Weighted-Average Remaining Useful Lives (in years)Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying AmountAcquired technology5.2$507 $(144)$363 $1,412 $(1,169)$243 Acquired patents3.0380 (289)91 827 (722)105 Trade names3.711 (3)8 644 (633)11 Other8.975 (22)53 176 (167)9 Total finite-lived assets973 (458)515 3,059 (2,691)368 Total indefinite-lived assetsN/A382 — 382 266 — 266 Total intangible assets$1,355 $(458)$897 $3,325 $(2,691)$634 Amortization expense of intangible assets for the years ended December 31, 2022, 2021, and 2020 was $185 million, $407 million, and $473 million, respectively.As of December 31, 2022, expected amortization expense for the unamortized finite-lived intangible assets for the next five years and thereafter is as follows (in millions):2023$153 2024126 202583 202644 202727 Thereafter82 Total$515 108Table of ContentsNote 11. Long-term DebtIn August 2022, we issued an aggregate of $10.0 billion principal amount of fixed-rate senior unsecured notes in four series (the “Original Notes”) in a private offering to qualified institutional buyers and certain non-U.S. persons. The proceeds from this offering, net of discounts and debt issuance costs, was $9.92 billion. We intend to use the net proceeds from the offering for general corporate purposes, which may include, but are not limited to, capital expenditures, repurchases of outstanding shares of our common stock, acquisitions, or investments. In connection with the offering, we entered into a registration rights agreement (the "Registration Rights Agreement") providing for the filing of a registration statement with the Securities and Exchange Commission in order to exchange the Original Notes for registered notes having substantially the same terms.On November 29, 2022, we commenced an offer to exchange (the "Exchange Offer") the Original Notes for new registered notes (the "Exchange Notes" and, together with the Original Notes, the "Notes") in order to fulfill our obligations under the Registration Rights Agreement. The Exchange Offer expired on December 28, 2022 and settled on December 29, 2022. We did not receive any proceeds from the Exchange Offer, and the aggregate principal amount of the Exchange Notes that were issued was equal to the aggregate principal amount of the Original Notes that were surrendered pursuant to the Exchange Offer. Each series of the Exchange Notes is part of the same series of the applicable series of the Original Notes and the terms of the Exchange Notes offered in the Exchange Offer are substantially identical to the terms of the respective series of the Original Notes, except that the Exchange Notes are registered under the Securities Act, and certain transfer restrictions, registration rights, and additional interest provisions relating to the Original Notes do not apply to the Exchange Notes. The Notes of each series rank equally with each other and we are not subject to any financial covenants. We may redeem each series of the Notes at any time in whole or in part, at specified redemption prices.The following table summarizes the Notes and the carrying amount of our debt as of December 31, 2022 (in millions, except percentages):MaturityStated Interest RateEffective Interest RateDecember 31, 20222027 Notes20273.50%3.63%$2,750 2032 Notes20323.85%3.92%3,000 2052 Notes20524.45%4.51%2,750 2062 Notes20624.65%4.71%1,500 Total face amount of long-term debt10,000 Unamortized discount and issuance costs, net(77)Long-term debt$9,923 Interest on each of the Notes is payable semi-annually in arrears in February and August of each year, commencing in February 2023. The effective interest rates include the interest rates stated on the Notes and amortization of the discounts and issuance costs. For the year ended December 31, 2022, interest expense recognized on the debt was $160 million.The total estimated fair value of our outstanding debt was $8.63 billion as of December 31, 2022. The fair value was determined based on the closing trading price per $100 of the Notes as of December 31, 2022 and is categorized accordingly as Level 2 in the fair value hierarchy.As of December 31, 2022, future principal payments for the Notes, by year, are as follows (in millions):2023 through 2026$— 20272,750 Thereafter7,250 Total outstanding debt$10,000 109Table of ContentsNote 12. LiabilitiesThe components of accrued expenses and other current liabilities are as follows (in millions):December 31,20222021Legal-related accruals (1)$4,795 $3,254 Accrued compensation and benefits4,591 3,152 Accrued property and equipment2,921 1,392 Accrued taxes2,339 1,256 Other current liabilities4,906 5,819 Accrued expenses and other current liabilities$19,552 $14,873 _________________________(1)Includes accruals for estimated fines, settlements, or other losses in connection with legal and related matters, as well as other legal fees. For further information, see Legal and Related Matters in Note 13 — Commitments and Contingencies.The components of other liabilities are as follows (in millions):December 31,20222021Income tax payable$6,645 $5,938 Other non-current liabilities1,119 1,289 Other liabilities$7,764 $7,227 Note 13. Commitments and ContingenciesGuaranteeIn 2018, we established a multi-currency notional cash pool for certain of our entities with a third-party bank provider, which was terminated on December 2, 2022. As a result, the parental guarantee by Meta Platforms, Inc. was no longer required. Contractual CommitmentsWe have $19.91 billion of non-cancelable contractual commitments as of December 31, 2022, which are primarily related to our investments in network infrastructure, servers, and consumer hardware products in Reality Labs. The following is a schedule, by years, of non-cancelable contractual commitments as of December 31, 2022 (in millions):2023$13,203 20242,295 20251,434 2026265 2027209 Thereafter2,504 Total$19,910 Additionally, as part of the normal course of business, we have entered into multi-year agreements to purchase renewable energy that do not specify a fixed or minimum volume commitment or to purchase certain server components that do not specify a fixed or minimum price commitment. We enter into these agreements in order to secure either volume or price. Using the projected market prices or expected volume consumption, the total estimated spend as of December 31, 2022 110Table of Contentsis approximately $10.34 billion, a majority of which is due beyond five years. The ultimate spend under these agreements may vary and will be based on prevailing market prices or actual volume purchased.In January 2023, we entered into multi-year agreements to purchase renewable energy in the amount of approximately $1.6 billion.Legal and Related MattersBeginning on March 20, 2018, multiple putative class actions and derivative actions were filed in state and federal courts in the United States and elsewhere against us and certain of our directors and officers alleging violations of securities laws, breach of fiduciary duties, and other causes of action in connection with our platform and user data practices as well as the misuse of certain data by a developer that shared such data with third parties in violation of our terms and policies, and seeking unspecified damages and injunctive relief. Beginning on July 27, 2018, two putative class actions were filed in federal court in the United States against us and certain of our directors and officers alleging violations of securities laws in connection with the disclosure of our earnings results for the second quarter of 2018 and seeking unspecified damages. These two actions subsequently were transferred and consolidated in the U.S. District Court for the Northern District of California with the putative securities class action described above relating to our platform and user data practices. On September 25, 2019, the district court granted our motion to dismiss the consolidated putative securities class action, with leave to amend. On November 15, 2019, a second amended complaint was filed in the consolidated putative securities class action. On August 7, 2020, the district court granted our motion to dismiss the second amended complaint, with leave to amend. On October 16, 2020, a third amended complaint was filed in the consolidated putative securities class action. On December 20, 2021, the district court granted our motion to dismiss the third amended complaint, with prejudice. On January 17, 2022, the plaintiffs filed a notice of appeal of the order dismissing their case, and the appeal is now pending before the U.S. Court of Appeals for the Ninth Circuit. With respect to the multiple putative class actions filed against us beginning on March 20, 2018 alleging fraud and violations of consumer protection, privacy, and other laws in connection with the same matters, several of the cases brought on behalf of consumers in the United States were consolidated in the U.S. District Court for the Northern District of California. On September 9, 2019, the court granted, in part, and denied, in part, our motion to dismiss the consolidated putative consumer class action. On December 22, 2022, the parties entered into a settlement agreement to resolve the lawsuit, which provides for a payment of $725 million by us and is subject to court approval. In addition, our platform and user data practices, as well as the events surrounding the misuse of certain data by a developer, became the subject of U.S. Federal Trade Commission (FTC), state attorneys general, and other government inquiries in the United States, Europe, and other jurisdictions. We entered into a settlement and modified consent order to resolve the FTC inquiry, which took effect in April 2020. Among other matters, our settlement with the FTC required us to pay a penalty of $5.0 billion which was paid in April 2020 upon the effectiveness of the modified consent order. The state attorneys general inquiry and certain government inquiries in other jurisdictions remain ongoing. On July 16, 2021, a stockholder derivative action was filed in Delaware Chancery Court against certain of our directors and officers asserting breach of fiduciary duty and related claims relating to our historical platform and user data practices, as well as our settlement with the FTC. On July 20, 2021, other stockholders filed an amended derivative complaint in a related Delaware Chancery Court action, asserting breach of fiduciary duty and related claims against certain of our current and former directors and officers in connection with our historical platform and user data practices. On November 4, 2021, the lead plaintiffs filed a second amended and consolidated complaint in the stockholder derivative action. We believe the lawsuits described above are without merit, and we are vigorously defending them.We also notify the Irish Data Protection Commission (IDPC), our lead European Union privacy regulator under the General Data Protection Regulation (GDPR), of certain other personal data breaches and privacy issues, and are subject to inquiries and investigations by the IDPC and other European regulators regarding various aspects of our regulatory compliance. For example, we are currently subject to an IDPC inquiry regarding Meta Platforms Ireland's ability to transfer European Union/European Economic Area Facebook user data to the United States, which is described further in "Legal Proceedings" contained in Part I, Item 3 of this Annual Report on Form 10-K. The interpretation of the GDPR is still evolving and draft decisions in investigations by the IDPC are subject to review by other European privacy regulators as part of the GDPR's consistency mechanism, which may lead to significant changes in the final outcome of such investigations. As a result, the interpretation and enforcement of the GDPR, as well as the imposition and amount of penalties for non-compliance, are subject to significant uncertainty. Although we are vigorously defending our regulatory compliance, we have accrued significant amounts for loss contingencies related to these inquiries and investigations in Europe, and we believe there is a reasonable possibility that additional accruals for losses related to these matters could be material in the aggregate.111Table of ContentsBeginning in January 2022, we became subject to litigation and other proceedings that were filed in various federal and California state courts alleging that Facebook and Instagram cause "social media addiction" in teenage users, resulting in various mental health and other harms. A putative class action alleging similar harms was also filed in California state court on behalf of users under the age of 13 and three school districts recently filed public nuisance claims based on similar allegations. On October 6, 2022, the federal cases were consolidated in the U.S. District Court for the Northern District of California. The state court proceedings are now pending before a trial judge from Los Angeles County Superior Court. We believe these lawsuits are without merit, and we are vigorously defending them. We are also subject to government investigations and requests from multiple regulators concerning the use of our products, and the related mental and physical health and safety impacts on teenage users.We are also subject to other government inquiries and investigations relating to our business activities and disclosure practices. For example, beginning in September 2021, we became subject to government investigations and requests relating to a former employee's allegations and release of internal company documents concerning, among other things, our algorithms, advertising and user metrics, and content enforcement practices, as well as misinformation and other undesirable activity on our platform, and user well-being. We have since received additional requests relating to these and other topics. Beginning on October 27, 2021, multiple putative class actions and derivative actions were filed in the U.S. District Court for the Northern District of California against us and certain of our directors and officers alleging violations of securities laws, breach of fiduciary duties, and other causes of action in connection with the same matters, and seeking unspecified damages. We believe these lawsuits are without merit, and we are vigorously defending them.On March 8, 2022, a putative class action was filed in the U.S. District Court for the Northern District of California against us and certain of our directors and officers alleging violations of securities laws in connection with the disclosure of our earnings results for the fourth quarter of 2021 and seeking unspecified damages. We believe this lawsuit is without merit, and we are vigorously defending it.Beginning on August 15, 2018, multiple putative class actions were filed against us alleging that we inflated our estimates of the potential audience size for advertisements, resulting in artificially increased demand and higher prices. The cases were consolidated in the U.S. District Court for the Northern District of California and seek unspecified damages and injunctive relief. In a series of rulings in 2019, 2021, and 2022, the court dismissed certain of the plaintiffs' claims, but permitted its fraud and unfair competition claims to proceed. On March 29, 2022, the court granted the plaintiffs' motion for class certification. On June 21, 2022, the U.S. Court of Appeals for the Ninth Circuit granted our petition for permission to appeal the district court's class certification order, and the district court subsequently stayed the case. We believe this lawsuit is without merit, and we are vigorously defending it. In addition, we are subject to litigation and other proceedings involving law enforcement and other regulatory agencies, including in particular in Brazil, Russia, and other countries in Europe, in order to ascertain the precise scope of our legal obligations to comply with the requests of those agencies, including our obligation to disclose user information in particular circumstances. A number of such instances have resulted in the assessment of fines and penalties against us. We believe we have multiple legal grounds to satisfy these requests or prevail against associated fines and penalties, and we intend to vigorously defend such fines and penalties. With respect to the cases, actions, and inquiries described above, we evaluate the associated developments on a regular basis and accrue a liability when we believe a loss is probable and the amount can be reasonably estimated. In addition, we believe there is a reasonable possibility that we may incur a loss in some of these matters. With respect to the matters described above that do not include an estimate of the amount of loss or range of possible loss, such losses or range of possible losses either cannot be estimated or are not individually material, but we believe there is a reasonable possibility that they may be material in the aggregate.We are also party to various other legal proceedings, claims, and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business. For example, we are subject to various litigation and government inquiries and investigations, formal or informal, by competition authorities in the United States, Europe, and other jurisdictions. Such investigations, inquiries, and lawsuits concern, among other things, our business practices in the areas of social networking or social media services, digital advertising, and/or mobile or online applications, as well as our acquisitions. For example, in June 2019 we were informed by the FTC that it had opened an antitrust investigation of our company. On December 9, 2020, the FTC filed a complaint against us in the U.S. District Court for the District of Columbia alleging that we engaged in anticompetitive conduct and unfair methods of competition in violation of Section 5 of the Federal Trade Commission Act and Section 2 of the Sherman Act, including by acquiring Instagram in 2012 and WhatsApp 112Table of Contentsin 2014 and by maintaining conditions on access to our platform. In addition, beginning in the third quarter of 2019, we became the subject of antitrust investigations by the U.S. Department of Justice and state attorneys general. On December 9, 2020, the attorneys general from 46 states, the territory of Guam, and the District of Columbia filed a complaint against us in the U.S. District Court for the District of Columbia alleging that we engaged in anticompetitive conduct in violation of Section 2 of the Sherman Act, including by acquiring Instagram in 2012 and WhatsApp in 2014 and by maintaining conditions on access to our platform. The complaint also alleged that we violated Section 7 of the Clayton Act by acquiring Instagram and WhatsApp. The complaints of the FTC and attorneys general both sought a permanent injunction against our company's alleged violations of the antitrust laws, and other equitable relief, including divestiture or reconstruction of Instagram and WhatsApp. On June 28, 2021, the court granted our motions to dismiss the complaints filed by the FTC and attorneys general, dismissing the FTC's complaint with leave to amend and dismissing the attorneys general's case without prejudice. On July 28, 2021, the attorneys general filed a notice of appeal of the order dismissing their case and that appeal is now pending before the U.S. Court of Appeals for the District of Columbia Circuit. On August 19, 2021, the FTC filed an amended complaint, and on October 4, 2021, we filed a motion to dismiss this amended complaint. On January 11, 2022, the court denied our motion to dismiss the FTC's amended complaint. Multiple putative class actions have also been filed in state and federal courts in the United States and in the United Kingdom against us alleging violations of antitrust laws and other causes of action in connection with these acquisitions and/or other alleged anticompetitive conduct, and seeking damages and injunctive relief. Several of the cases brought on behalf of certain advertisers and users in the United States were consolidated in the U.S. District Court for the Northern District of California. On January 14, 2022, the court granted, in part, and denied, in part, our motion to dismiss the consolidated actions. On March 1, 2022, a first amended consolidated complaint was filed in the putative class action brought on behalf of certain advertisers. On December 6, 2022, the court denied our motion to dismiss the first amended consolidated complaint filed in the putative class action brought on behalf of certain advertisers. In addition, on July 27, 2022, the FTC filed a complaint against us in the U.S. District Court for the Northern District of California seeking to preliminarily enjoin our proposed acquisition of Within Unlimited as an alleged violation of antitrust law. The FTC subsequently filed a related complaint in their administrative court seeking to permanently enjoin the transaction as a violation of Section 7 of the Clayton Act, and seeking other relief as well. We believe these lawsuits are without merit, and we are vigorously defending them. In December 2022, the European Commission issued a Statement of Objections alleging that we tie Facebook Marketplace to Facebook and use data in a manner that infringes European Union competition rules.On February 14, 2022, the State of Texas filed a lawsuit against us in Texas state court alleging that “tag suggestions" and other facial recognition features on our products violated the Texas Capture or Use of Biometric Identifiers Act and the Texas Deceptive Trade Practices-Consumer Protection Act, and seeking statutory damages and injunctive relief. The case is currently scheduled for trial in October 2023. We believe this lawsuit is without merit, and we are vigorously defending it.Additionally, we are required to comply with various legal and regulatory obligations around the world. The requirements for complying with these obligations may be uncertain and subject to interpretation and enforcement by regulatory and other authorities, and any failure to comply with such obligations could eventually lead to asserted legal or regulatory action. With respect to these other legal proceedings, claims, regulatory, tax, or government inquiries and investigations, and other matters, asserted and unasserted, we evaluate the associated developments on a regular basis and accrue a liability when we believe a loss is probable and the amount can be reasonably estimated. In addition, we believe there is a reasonable possibility that we may incur a loss in some of these other matters. We believe that the amount of losses or any estimable range of possible losses with respect to these other matters will not, either individually or in the aggregate, have a material adverse effect on our business and consolidated financial statements. The ultimate outcome of the legal and related matters described in this section, such as whether the likelihood of loss is remote, reasonably possible, or probable, or if and when the reasonably possible range of loss is estimable, is inherently uncertain. Therefore, if one or more of these matters were resolved against us for amounts in excess of management's estimates of loss, our results of operations and financial condition, including in a particular reporting period in which any such outcome becomes probable and estimable, could be materially adversely affected.For information regarding income tax contingencies, see Note 16 — Income Taxes.IndemnificationsIn the normal course of business, to facilitate transactions of services and products, we have agreed to indemnify certain parties with respect to certain matters. We have agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made by third parties. 113Table of ContentsThese agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our officers, directors, and certain employees, and our certificate of incorporation and bylaws contain similar indemnification obligations. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not had a material impact on our consolidated financial statements. In our opinion, as of December 31, 2022, there was not a reasonable possibility we had incurred a material loss with respect to indemnification of such parties. We have not recorded any liability for costs related to indemnification through December 31, 2022.Note 14. Stockholders' EquityCommon StockOur certificate of incorporation authorizes the issuance of Class A common stock and Class B common stock. As of December 31, 2022, we are authorized to issue 5,000 million shares of Class A common stock and 4,141 million shares of Class B common stock, each with a par value of $0.000006 per share. Holders of our Class A common stock and Class B common stock are entitled to dividends when, as, and if declared by our board of directors, subject to the rights of the holders of all classes of stock outstanding having priority rights to dividends. As of December 31, 2022, we have not declared any dividends. The holder of each share of Class A common stock is entitled to one vote, while the holder of each share of Class B common stock is entitled to ten votes. Shares of our Class B common stock are convertible into an equivalent number of shares of our Class A common stock and generally convert into shares of our Class A common stock upon transfer. Class A common stock and Class B common stock are collectively referred to as common stock throughout the notes to these financial statements, unless otherwise noted.As of December 31, 2022, there were 2,247 million shares of Class A common stock and 367 million shares of Class B common stock issued and outstanding.Share Repurchase ProgramOur board of directors has authorized a share repurchase program of our Class A common stock, which commenced in January 2017 and does not have an expiration date. As of December 31, 2021, $38.79 billion remained available and authorized for repurchases under this program. In 2022, we repurchased and subsequently retired 161 million shares of our Class A common stock for an aggregate amount of $27.93 billion. As of December 31, 2022, $10.87 billion remained available and authorized for repurchases. In January 2023, an additional $40 billion of repurchases was authorized under this program.The timing and actual number of shares repurchased under the repurchase program depend on a variety of factors, including price, general business and market conditions, and other investment opportunities, and shares may be repurchased through open market purchases or privately negotiated transactions, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. Share-based Compensation PlanWe have one active share-based employee compensation plan, the 2012 Equity Incentive Plan (Amended 2012 Plan), which was amended in each of June 2016, February 2018, and December 2022. Our Amended 2012 Plan provides for the issuance of incentive and nonqualified stock options, restricted stock awards, stock appreciation rights, RSUs, performance shares, and stock bonuses to qualified employees, directors, and consultants. Shares that are withheld in connection with the net settlement of RSUs or forfeited are added to the reserves of the Amended 2012 Plan.As of December 31, 2022, there were 66 million shares of our Class A common stock reserved for future issuance under our Amended 2012 Plan. Pursuant to the automatic increase provision under our Amended 2012 Plan, the number of shares reserved for issuance increases automatically on January 1 of each of the calendar years during the term of the Amended 2012 Plan, which will continue through April 2026, by a number of shares of Class A common stock equal to the lesser of (i) 2.5% of the total issued and outstanding shares of our Class A common stock as of the immediately preceding 114Table of ContentsDecember 31st or (ii) a number of shares determined by our board of directors. Pursuant to this automatic increase provision, our board of directors approved an increase of 56 million shares of Class A common stock reserved for issuance, effective January 1, 2023. In December 2022, our board of directors approved an amendment to our Amended 2012 Plan to increase the number of shares reserved for issuance under the Amended 2012 Plan by 425 million shares, effective March 1, 2023 (Plan Amendment). The Plan Amendment was also approved by holders of a majority of the voting power of our outstanding capital stock in December 2022.The following table summarizes the activities for our unvested RSUs for the year ended December 31, 2022: Number of SharesWeighted-Average Grant Date Fair Value Per Share(in thousands)Unvested at December 31, 202198,848 $244.32 Granted106,693 $195.66 Vested(54,013)$218.24 Forfeited(24,418)$231.98 Unvested at December 31, 2022127,110 $216.93 The weighted-average grant date fair value of RSUs granted in the years ended December 31, 2021 and 2020 was $305.40 and $188.73, respectively. The fair value as of the respective vesting dates of RSUs that vested during the years ended December 31, 2022, 2021, and 2020 was $9.44 billion, $14.42 billion, and $9.38 billion, respectively. The income tax benefit recognized related to awards vested during the years ended December 31, 2022, 2021, and 2020 was $2.0 billion, $3.08 billion, and $1.81 billion, respectively.As of December 31, 2022, there was $26.01 billion of unrecognized share-based compensation expense related to RSU awards. This unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately three years based on vesting under the award service conditions.Note 15. Interest and Other Income (Expense), NetThe following table presents the detail of interest and other income (expense), net (in millions): Year Ended December 31,202220212020Interest income, net$276 $461 $672 Foreign currency exchange losses, net(81)(140)(129)Other income (expense), net(320)210 (34)Interest and other income (expense), net$(125)$531 $509 115Table of ContentsNote 16. Income TaxesThe components of income before provision for income taxes are as follows (in millions): Year Ended December 31, 202220212020Domestic$25,025 $43,669 $24,233 Foreign3,794 3,615 8,947 Income before provision for income taxes$28,819 $47,284 $33,180 The provision for income taxes consists of the following (in millions): Year Ended December 31, 202220212020Current: Federal$6,094 $4,971 $3,297 State874 548 523 Foreign1,928 1,786 1,211 Total current tax expense8,896 7,305 5,031 Deferred: Federal(2,776)585 (859)State(405)43 (122)Foreign(96)(19)(16)Total deferred tax (benefits)/expense(3,277)609 (997)Provision for income taxes$5,619 $7,914 $4,034 A reconciliation of the U.S. federal statutory income tax rates to our effective tax rate is as follows (in percentages): Year Ended December 31, 202220212020U.S. federal statutory income tax rate21.0 %21.0 %21.0 %State income taxes, net of federal benefit1.0 1.0 0.8 Share-based compensation2.6 (1.7)(1.4)Research and development tax credits(2.4)(1.3)(1.3)Foreign-derived intangible income deduction(7.0)(3.5)(1.9)Effect of non-U.S. operations3.0 0.9 (2.4)Research and development capitalization— — (3.0)Other1.3 0.3 0.4 Effective tax rate19.5 %16.7 %12.2 %116Table of ContentsOur deferred tax assets (liabilities) are as follows (in millions): December 31, 20222021Deferred tax assets: Loss carryforwards$234 $2,443 Tax credit carryforwards1,576 1,385 Share-based compensation368 319 Accrued expenses and other liabilities1,627 1,195 Lease liabilities3,200 2,597 Capitalized research and development8,175 1,691 Unrealized losses in securities and investments489 — Other621 449 Total deferred tax assets16,290 10,079 Less: valuation allowance(2,493)(1,586)Deferred tax assets, net of valuation allowance13,797 8,493 Deferred tax liabilities: Depreciation and amortization(6,296)(4,425)Right-of-use assets(2,555)(2,339)Total deferred tax liabilities(8,851)(6,764)Net deferred tax assets$4,946 $1,729 The valuation allowance was approximately $2.49 billion and $1.59 billion as of December 31, 2022 and 2021, respectively, primarily related to U.S. state tax credit carryforwards, U.S. foreign tax credits, unrealized losses in securities and investments, and certain foreign tax attributes for which we do not believe a tax benefit is more likely than not to be realized.As of December 31, 2022, the U.S. federal and state net operating loss carryforwards were $196 million and $1.40 billion, which will begin to expire in 2035 and 2032, respectively, if not utilized. We have federal tax credit carryforwards of $276 million, which will begin to expire in 2029, if not utilized, and state tax credit carryforwards of $3.72 billion, most of which do not expire.Utilization of our net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the net operating loss and tax credit carryforwards before their utilization. The events that may cause ownership changes include, but are not limited to, a cumulative stock ownership change of greater than 50% over a three‑year period.The following table reflects changes in the gross unrecognized tax benefits (in millions): Year Ended December 31, 202220212020Gross unrecognized tax benefits ‑ beginning of period$9,807 $8,692 $7,863 Increases related to prior year tax positions210 328 356 Decreases related to prior year tax positions(172)(86)(253)Increases related to current year tax positions1,166 963 1,045 Decreases related to settlements of prior year tax positions(254)(90)(319)Gross unrecognized tax benefits ‑ end of period$10,757 $9,807 $8,692 117Table of ContentsThese unrecognized tax benefits were primarily accrued for the uncertainties related to transfer pricing with our foreign subsidiaries, which include licensing of intellectual property, providing services and other transactions, as well as for the uncertainties with our research tax credits. During all years presented, we recognized interest and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated statements of income. The amount of interest and penalties accrued as of December 31, 2022 and 2021 were $1.07 billion and $960 million, respectively.If the balance of gross unrecognized tax benefits of $10.76 billion as of December 31, 2022 were realized in a future period, this would result in a tax benefit of $6.49 billion within our provision of income taxes at such time.We are subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictions in which we are subject to potential examination include the United States and Ireland. We are under examination by the Internal Revenue Service (IRS) for our 2014 through 2019 tax years. Our 2020 and subsequent tax years remain open to examination by the IRS and the Irish Revenue Commissioners.In July 2016, we received a Statutory Notice of Deficiency (Notice) from the IRS related to transfer pricing with our foreign subsidiaries in conjunction with the examination of the 2010 tax year. While the Notice applies only to the 2010 tax year, the IRS stated that it will also apply its position for tax years subsequent to 2010 and has done so in years covered by the second Notice described below. We do not agree with the position of the IRS and have filed a petition in the Tax Court challenging the Notice. On January 15, 2020, the IRS's amendment to answer was filed stating that it planned to assert at trial an adjustment that is higher than the adjustment stated in the Notice. The first session of the trial was completed in March 2020 and the final trial session was completed in August 2022. We expect the Tax Court to issue an opinion in 2024. Based on the information provided, we believe that, if the IRS prevails in its updated position, this could result in an additional federal tax liability of an estimated, aggregate amount of up to approximately $9.0 billion in excess of the amounts in our originally filed U.S. return, plus interest and any penalties asserted. In March 2018, we received a second Notice from the IRS in conjunction with the examination of our 2011 through 2013 tax years. The IRS applied its position from the 2010 tax year to each of these years and also proposed new adjustments related to other transfer pricing with our foreign subsidiaries and certain tax credits that we claimed. If the IRS prevails in its position for these new adjustments, this could result in an additional federal tax liability of up to approximately $680 million in excess of the amounts in our originally filed U.S. returns, plus interest and any penalties asserted. We do not agree with the positions of the IRS in the second Notice and have filed a petition in the Tax Court challenging the second Notice. We have previously accrued an estimated unrecognized tax benefit consistent with the guidance in ASC 740, Income Taxes (ASC 740), that is lower than the potential additional federal tax liability from the positions taken by the IRS in the two Notices and its Pretrial Memorandum. In addition, if the IRS prevails in its positions related to transfer pricing with our foreign subsidiaries, the additional tax that we would owe would be partially offset by a reduction in the tax that we owe under the mandatory transition tax on accumulated foreign earnings from the 2017 Tax Cuts and Jobs Act. As of December 31, 2022, we have not resolved these matters and proceedings continue in the Tax Court.We believe that adequate amounts have been reserved in accordance with ASC 740 for any adjustments to the provision for income taxes or other tax items that may ultimately result from these examinations. The timing of the resolution, settlement, and closure of any audits is highly uncertain, and it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. Given the number of years remaining that are subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits. If the tax authorities prevail in the assessment of additional tax due, the assessed tax, interest, and penalties, if any, could have a material adverse impact on our financial position, results of operations, and cash flows.118Table of ContentsNote 17. Segment and Geographical InformationBeginning in the fourth quarter of 2021, we report our financial results for our two reportable segments: Family of Apps (FoA) and Reality Labs (RL). FoA includes Facebook, Instagram, Messenger, WhatsApp, and other services. RL includes augmented and virtual reality related consumer hardware, software, and content. Our operating segments are the same as our reportable segments.Our Chief Executive Officer is our chief operating decision maker (CODM), who allocates resources to and assesses the performance of each operating segment using information about the operating segment's revenue and income (loss) from operations. Our CODM does not evaluate operating segments using asset or liability information.Revenue and costs and expenses are generally directly attributed to our segments. These costs and expenses include certain product development related operating expenses, costs associated with partnership arrangements, consumer hardware product costs, content costs, and legal-related costs. Indirect costs are allocated to segments based on a reasonable allocation methodology, when such costs are significant to the performance measures of the operating segments. Indirect cost of revenue is allocated to our segments based on usage, such as costs related to the operation of our data centers and technical infrastructure. Indirect operating expenses, such as facilities, information technology, certain shared research and development activities, recruiting, and physical security expenses, are mostly allocated based on headcount.The following table sets forth our segment information of revenue and income (loss) from operations (in millions). For comparative purposes, amounts for the year ended December 31, 2020 have been recast: Year Ended December 31, 202220212020Revenue:Family of Apps$114,450 $115,655 $84,826 Reality Labs2,159 2,274 1,139 Total revenue$116,609 $117,929 $85,965 Income (loss) from operations:Family of Apps$42,661 $56,946 $39,294 Reality Labs(13,717)(10,193)(6,623)Total income from operations$28,944 $46,753 $32,671 For information regarding revenue disaggregated by geography, see Note 2 — Revenue.The following table sets forth our long-lived assets by geographic area, which consist of property and equipment, net and operating lease right-of-use assets (in millions): December 31, 20222021United States$76,334 $55,497 Rest of the world (1)15,857 14,467 Total long-lived assets$92,191 $69,964 _________________________(1)No individual country, other than disclosed above, exceeded 10% of our total long-lived assets for any period presented.119Table of ContentsItem 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A.Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our chief executive officer (CEO) and chief financial officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our CEO and CFO have concluded that as of December 31, 2022, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.Management's Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the assessment, management has concluded that its internal control over financial reporting was effective as of December 31, 2022 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. Our independent registered public accounting firm, Ernst & Young LLP, has issued an audit report with respect to our internal control over financial reporting, which appears in Part II, Item 8 of this Annual Report on Form 10-K.Changes in Internal ControlThere were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the fourth quarter of 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Limitations on Effectiveness of Controls and Procedures and Internal Control over Financial ReportingIn designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.Item 9B.Other InformationNone.Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent InspectionsNot Applicable.120Table of ContentsPART IIIItem 10.Directors, Executive Officers and Corporate GovernanceThe information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2022.Our board of directors has adopted a Code of Conduct applicable to all officers, directors, and employees, which is available on our website (investor.fb.com) under "Leadership & Governance." We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Conduct by posting such information on the website address and location specified above.Item 11.Executive CompensationThe information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2022.Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2022.Item 13.Certain Relationships and Related Transactions, and Director IndependenceThe information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2022.Item 14.Principal Accountant Fees and ServicesThe information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2022.121Table of ContentsPART IVItem 15. Exhibit and Financial Statement SchedulesWe have filed the following documents as part of this Form 10-K:1. Consolidated Financial Statements:PageReports of Independent Registered Public Accounting Firm (PCAOB ID No. 42)81Consolidated Balance Sheets85Consolidated Statements of Income86Consolidated Statements of Comprehensive Income87Consolidated Statements of Stockholders' Equity88Consolidated Statements of Cash Flows89Notes to Consolidated Financial Statements91 2. Financial Statement SchedulesAll schedules have been omitted because they are not required, not applicable, not present in amounts sufficient to require submission of the schedule, or the required information is otherwise included.3. ExhibitsExhibitIncorporated by ReferenceFiledHerewithNumberExhibit DescriptionFormFile No.ExhibitFiling Date3.1Amended and Restated Certificate of Incorporation.8-K001-355513.1October 28, 20213.2Amended and Restated Bylaws.8-K001-355513.2October 28, 20214.1Form of Class A Common Stock Certificate.10-K001-355514.1February 3, 20224.2Form of Class B Common Stock Certificate.10-K001-355514.2February 3, 20224.3Form of "Type 1" Holder Voting Agreement, between Registrant, Mark Zuckerberg, and certain parties thereto.S-1333-1792874.3February 8, 20124.4Indenture, dated as of August 9, 2022, between Meta Platforms, Inc. and U.S. Bank Trust Company, National Association, as trustee.8-K001-355514.1August 9, 20224.5First Supplemental Indenture, dated as of August 9, 2022, between Meta Platforms, Inc. and U.S. Bank Trust Company, National Association, as trustee.8-K001-355514.2August 9, 20224.6Description of Registrant's Capital Stock.X10.1+Form of Indemnification Agreement.8-K001-3555110.1April 15, 201910.2(A)+2012 Equity Incentive Plan, as amended.X10.2(B)+Third Amendment to the 2012 Equity Incentive Plan. X10.2(C)+2012 Equity Incentive Plan forms of award agreements. 10-Q001-3555110.2July 31, 201210.2(D)+2012 Equity Incentive Plan forms of award agreements (Additional Forms).10-Q001-3555110.1May 4, 201710.2(E)+2012 Equity Incentive Plan forms of award agreements (Additional Forms).10-Q001-3555110.1July 27, 2017122Table of ContentsExhibitIncorporated by ReferenceFiledHerewithNumberExhibit DescriptionFormFile No.ExhibitFiling Date10.2(F)+2012 Equity Incentive Plan forms of award agreements (Additional Forms).10-Q001-3555110.2April 26, 201810.2(G)+2012 Equity Incentive Plan forms of award agreements (Additional Forms).10-K001-3555110.3(G)January 31, 201910.2(H)+2012 Equity Incentive Plan forms of award agreements (Additional Forms).10-Q001-3555110.2April 25, 201910.2(I)+2012 Equity Incentive Plan forms of award agreements (Additional Forms).10-Q001-3555110.2April 30, 202010.2(J)+2012 Equity Incentive Plan forms of award agreements (Additional Forms).10-Q001-3555110.2July 29, 202110.2(K)+2012 Equity Incentive Plan forms of award agreements (Additional Forms).10-Q001-3555110.3April 28, 202210.3+Bonus Plan, effective January 1, 2022.10-K001-3555110.3February 3, 202210.4+Amended and Restated Offer Letter, dated January 27, 2012, between Registrant and Mark Zuckerberg.S-1333-17928710.6February 8, 201210.5+Offer Letter, dated November 15, 2022, between Registrant and David M. Wehner.X10.6+Offer Letter, dated June 5, 2020, between Registrant and Christopher K. Cox.10-Q001-3555110.1April 29, 202110.7+Amended and Restated Offer Letter, dated September 14, 2021, between Registrant and Marne L. Levine.10-Q001-3555110.2April 28, 202210.8+Offer Letter, dated December 22, 2022, between Registrant and Javier Olivan.X10.9+Form of Executive Officer Offer Letter.10-Q001-3555110.3July 25, 201910.10+Executive Sales Incentive Plan.10-Q001-3555110.4July 25, 201910.11+Director Compensation Policy, as amended.10-Q001-3555110.1July 29, 202110.12+Deferred Compensation Plan for Non-Employee Directors.X10.13+Indemnification Agreement Relating to Subsidiary Operations, dated March 14, 2021, between Registrant and Mark Zuckerberg.10-Q001-3555110.2April 29, 202121.1List of Subsidiaries.X23.1Consent of Independent Registered Public Accounting Firm.X31.1Certification of Mark Zuckerberg, Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.X31.2Certification of Susan Li, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.X32.1#Certification of Mark Zuckerberg, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.X123Table of ContentsExhibitIncorporated by ReferenceFiledHerewithNumberExhibit DescriptionFormFile No.ExhibitFiling Date32.2#Certification of Susan Li, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.X101.INSInline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).X101.SCHInline XBRL Taxonomy Extension Schema Document.X101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.X101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.X101.LABInline XBRL Taxonomy Extension Labels Linkbase Document.X101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document.X104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).X+ Indicates a management contract or compensatory plan. # This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.Item 16. Form 10-K SummaryNone.124Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Menlo Park, State of California, on this 1st day of February 2023.META PLATFORMS, INC.Date: February 1, 2023/s/ Susan Li Susan LiChief Financial Officer 125Table of ContentsPOWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Susan Li and Katherine R. Kelly, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: SignatureTitleDate/s/ Mark ZuckerbergChairman and Chief Executive Officer(Principal Executive Officer)February 1, 2023Mark Zuckerberg/s/ Susan LiChief Financial Officer(Principal Financial Officer)February 1, 2023Susan Li/S/ Susan J.S. TaylorChief Accounting Officer(Principal Accounting Officer)February 1, 2023Susan J.S. Taylor/s/ Peggy AlfordDirectorFebruary 1, 2023Peggy Alford/s/ Marc L. AndreessenDirectorFebruary 1, 2023Marc L. Andreessen/s/ Andrew W. HoustonDirectorFebruary 1, 2023Andrew W. Houston/s/ Nancy KilleferDirectorFebruary 1, 2023Nancy Killefer/s/ Robert M. KimmittDirectorFebruary 1, 2023Robert M. Kimmitt/s/ Sheryl K. SandbergDirectorFebruary 1, 2023Sheryl K. Sandberg/s/ Tracey T. TravisDirectorFebruary 1, 2023Tracey T. Travis/s/ Tony XuDirectorFebruary 1, 2023Tony Xu126
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8-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT
REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) January 17, 2017
BERKSHIRE HATHAWAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
001-14905
47-0813844
(STATE OR OTHER JURISDICTION
OF INCORPORATION)
(COMMISSION
FILE NUMBER)
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
3555 Farnam Street
Omaha, Nebraska
68131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(402) 346-1400
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE
Check the appropriate box below
if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Item 8.01 Other Events.
On January 17, 2017, Berkshire Hathaway Inc. (Berkshire) issued (i) 550,000,000 aggregate principal amount of its
0.250% Senior Notes due 2021 and (ii) 550,000,000 aggregate principal amount of its 0.625% Senior Notes due 2023 ((i) and (ii) collectively, the Notes) under a registration statement on Form
S-3 under the Securities Act of 1933, as amended (the Securities Act), filed with the Securities and Exchange Commission (the Commission) on January 26, 2016 (Registration No. 333-209122) (the Registration Statement). The Notes were sold pursuant to an underwriting agreement entered into on January 5, 2017, by and between (a) Berkshire and
(b) Goldman, Sachs & Co., J.P. Morgan Securities plc, Merrill Lynch International and Wells Fargo Securities, LLC. The
Notes are issued under an Indenture, dated as of January 26, 2016, by and among Berkshire, as issuer and guarantor, Berkshire Hathaway Finance Corporation, as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee (the
Indenture) and (a) an officers certificate dated as of January 17, 2017 by Berkshire with respect to its 0.250% Senior Notes due 2021 and (b) an officers certificate dated as of January 17, 2017 by
Berkshire with respect to its 0.625% Senior Notes due 2023 ((a) and (b) collectively, the Officers Certificates).
The relevant terms of the Notes and the Indenture are further described under the caption Description of the Notes in the
prospectus supplement relating to the Notes, dated January 5, 2017, filed with the Commission by Berkshire on January 6, 2017, pursuant to Rule 424(b)(2) under the Securities Act and in the section entitled Description of the
Debt Securities in the base prospectus relating to debt securities of Berkshire, dated January 26, 2016, included in the Registration Statement, which descriptions are incorporated herein by reference.
A copy of the Indenture is set forth in Exhibit 4.1 of the Registration Statement and is incorporated herein by reference. A copy of the
officers certificate with respect to Berkshires 0.250% Senior Notes due 2021 (including the form of Berkshires 0.250% Senior Notes due 2021) is attached hereto as Exhibit 4.2 and is incorporated herein by reference. A copy of the
officers certificate with respect to Berkshires 0.625% Senior Notes due 2023 (including the form of Berkshires 0.625% Senior Notes due 2023) is attached hereto as Exhibit 4.3 and is incorporated herein by reference. The
descriptions of the Indenture, the Officers Certificates and the Notes in this report are summaries and are qualified in their entirety by the terms of the Indenture, the Officers Certificates and the Notes, respectively.
Item 9.01 Financial Statements and Exhibits. (d)
Exhibits
1.1
Underwriting Agreement, dated January 5, 2017, by and between (a) Berkshire Hathaway Inc. and (b) Goldman, Sachs & Co., J.P. Morgan Securities plc, Merrill Lynch International and Wells Fargo Securities,
LLC.
4.1
Indenture, dated as of January 26, 2016, by and among Berkshire Hathaway Inc., Berkshire Hathaway Finance Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of
Berkshires Registration Statement on Form S-3 (Registration No. 333-209122) filed with the Commission on January 26, 2016).
4.2
Officers Certificate of Berkshire Hathaway Inc., dated as of January 17, 2017, including the form of Berkshire Hathaway Inc.s 0.250% Senior Notes due 2021.
4.3
Officers Certificate of Berkshire Hathaway Inc., dated as of January 17, 2017, including the form of Berkshire Hathaway Inc.s 0.625% Senior Notes due 2023.
5.1
Opinion of Munger, Tolles & Olson LLP, dated January 17, 2017, with respect to the Notes.
23.1
Consent of Munger, Tolles & Olson LLP (included in Exhibit 5.1).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
January 17, 2017
BERKSHIRE HATHAWAY INC.
/s/ Marc D. Hamburg
By: Marc D. Hamburg
Senior Vice President and Chief Financial Officer
Exhibit Index
1.1
Underwriting Agreement, dated January 5, 2017, by and between (a) Berkshire Hathaway Inc. and (b) Goldman, Sachs & Co., J.P. Morgan Securities plc, Merrill Lynch International and Wells Fargo Securities,
LLC.
4.1
Indenture, dated as of January 26, 2016, by and among Berkshire Hathaway Inc., Berkshire Hathaway Finance Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of
Berkshires Registration Statement on Form S-3 (Registration No. 333-209122) filed with the Commission on January 26, 2016).
4.2
Officers Certificate of Berkshire Hathaway Inc., dated as of January 17, 2017, including the form of Berkshire Hathaway Inc.s 0.250% Senior Notes due 2021.
4.3
Officers Certificate of Berkshire Hathaway Inc., dated as of January 17, 2017, including the form of Berkshire Hathaway Inc.s 0.625% Senior Notes due 2023.
5.1
Opinion of Munger, Tolles & Olson LLP, dated January 17, 2017, with respect to the Notes.
23.1
Consent of Munger, Tolles & Olson LLP (included in Exhibit 5.1).
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goog-20221025FALSE0001652044December 3100016520442022-10-252022-10-250001652044us-gaap:CommonClassAMember2022-10-252022-10-250001652044goog:CapitalClassCMember2022-10-252022-10-25UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 _________________________________________________FORM 8-K _____________________________________________________________CURRENT REPORTPursuant to Section 13 or 15(d) ofThe Securities Exchange Act of 1934Date of Report (Date of earliest event reported) October 25, 2022 ____________________________________________________________ALPHABET INC. (Exact name of registrant as specified in its charter) _______________________________________________________________Delaware001-3758061-1767919(State or other jurisdiction of incorporation)(Commission File Number)(IRS Employer Identification No.)1600 Amphitheatre Parkway Mountain View, CA 94043 (Address of principal executive offices, including zip code)(650) 253-0000 (Registrant’s telephone number, including area code)Not Applicable(Former name or former address, if changed since last report) ______________________________________________________________Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):☐Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredClass A Common Stock, $0.001 par valueGOOGLNasdaq Stock Market LLC(Nasdaq Global Select Market)Class C Capital Stock, $0.001 par valueGOOGNasdaq Stock Market LLC(Nasdaq Global Select Market)Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐Item 2.02. Results of Operations and Financial Condition.On October 25, 2022, Alphabet Inc. (“Alphabet”) is issuing a press release and holding a conference call regarding its financial results for the quarter ended September 30, 2022. A copy of the press release is furnished as Exhibit 99.1 to this Current Report on Form 8-K.This information shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.Alphabet is making reference to non-GAAP financial information in both the press release and the conference call. A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is contained in the attached press release.Item 5.03. Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.Alphabet Inc. Amended and Restated BylawsOn October 19, 2022, the Board of Directors (the “Board”) of Alphabet adopted amendments to its Amended and Restated Bylaws (as amended, the “Bylaws”) effective immediately, to:•clarify and further enhance procedural mechanics in connection with stockholder nominations of directors, including by requiring:◦a stockholder delivering a nomination notice pursuant to the advance notice provisions of the Bylaws to fully comply with Rule 14a-19 under the Securities Exchange Act of 1934, as amended, and certify that such stockholder has met the requirements of Rule 14a-19(a), and to update and supplement such notice, if necessary, to be true and correct both as of the record date of the stockholder meeting and ten business days prior to the date of the stockholder meeting;◦in connection with any nomination notice delivered by a stockholder, both the nominating stockholder and nominee to provide to the Board certain information in questionnaires, representations and agreements and other information and materials as the Board may reasonably request; and◦a stockholder directly or indirectly soliciting proxies from other stockholders to use a proxy card color other than white;•reflect updates to requirements about stockholder lists at stockholder meetings and meeting adjournment notices, consistent with recent amendments to the Delaware General Corporation Law; and•use gender neutral terms.The foregoing general description of the amendments to the Bylaws does not purport to be complete and is qualified in its entirety by reference to the full text of the Bylaws set forth in Exhibit 3.02 to this Form 8-K and incorporated in this Item by reference.Item 9.01.Financial Statements and Exhibits.(d)ExhibitsExhibit No.Description3.02Alphabet Inc. Amended and Restated Bylaws, as of October 19, 202299.1Press release of Alphabet Inc. dated October 25, 2022104Cover Page Interactive Data File (formatted as inline XBRL)SIGNATUREPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.ALPHABET INC.Date: October 25, 2022/s/ RUTH M. PORATRuth M. PoratSenior Vice President and Chief Financial Officer
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT
REPORT Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
April 11, 2019
Date of Report (Date of
earliest event reported)
AMAZON.COM, INC. (Exact
name of registrant as specified in its charter)
Delaware
000-22513
91-1646860
(State or other jurisdiction of
incorporation)
(Commission File Number)
(IRS Employer Identification No.)
410 Terry Avenue North, Seattle, Washington 98109-5210
(Address of principal executive offices, including Zip Code)
(206) 266-1000
(Registrants telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of
the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405
of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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.
☐
Table of Contents
TABLE OF CONTENTS
ITEM 7.01. REGULATION FD DISCLOSURE.
3
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
3
SIGNATURES
4
EXHIBIT 99.1
Table of Contents
ITEM 7.01.
REGULATION FD DISCLOSURE.
The Companys Letter to Shareholders, which accompanies its Annual Report for the Year Ended December 31, 2018, is attached as
Exhibit 99.1.
ITEM 9.01.
FINANCIAL STATEMENTS AND EXHIBITS.
(d) Exhibits.
Exhibit
Number
Description
99.1
2018 Letter to Shareholders.
3
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
AMAZON.COM, INC. (REGISTRANT)
By:
/s/ David A. Zapolsky
David A. Zapolsky
Senior Vice President
Dated: April 11, 2019
4
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Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 _________________________ FORM 8-K_________________________ CURRENT REPORTPursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934January 31, 2019 Date of Report(Date of earliest event reported) _________________________AMAZON.COM, INC.(Exact name of registrant as specified in its charter)_________________________ Delaware 000-22513 91-1646860(State or other jurisdiction ofincorporation) (Commission File Number) (IRS Employer Identification No.)410 Terry Avenue North, Seattle, Washington 98109-5210(Address of principal executive offices, including Zip Code)(206) 266-1000(Registrant’s telephone number, including area code)_________________________ Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:¨Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)¨Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)¨Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))¨Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).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.¨ Table of ContentsTABLE OF CONTENTS ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.3 ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.3 SIGNATURES4 EXHIBIT 99.1 EXHIBIT 99.2 Table of ContentsITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.On January 31, 2019, Amazon.com, Inc. announced its fourth quarter 2018 and year ended December 31, 2018 financial results. A copy of the press release containing the announcement is included as Exhibit 99.1 and additional information regarding the inclusion of non-GAAP financial measures in certain of Amazon.com, Inc.’s public disclosures, including its fourth quarter 2018 and year ended December 31, 2018 financial results announcement, is included as Exhibit 99.2. Both of these exhibits are incorporated herein by reference.ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.(d) Exhibits. ExhibitNumberDescription 99.1Press Release dated January 31, 2019 announcing Amazon.com, Inc.’s Fourth Quarter 2018 and Year Ended December 31, 2018 Financial Results. 99.2Information Regarding Non-GAAP Financial Measures.3Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AMAZON.COM, INC. (REGISTRANT) By:/s/ Brian T. Olsavsky Brian T. Olsavsky Senior Vice President andChief Financial OfficerDated: January 31, 2019 4
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false 0000789019 0000789019 2019-12-04 2019-12-04 0000789019 msft:CommonStock0.00000625ParValuePerShareMember 2019-12-04 2019-12-04 0000789019 msft:M2.125PercentNotesDue2021Member 2019-12-04 2019-12-04 0000789019 msft:M3.125PercentNotesDue2028Member 2019-12-04 2019-12-04 0000789019 us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember 2019-12-04 2019-12-04 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) December 4, 2019 Microsoft Corporation
Washington
001-37845
91-1144442
(State or Other Jurisdiction of Incorporation)
(Commission File Number)
(IRS Employer Identification No.)
One Microsoft Way, Redmond, Washington
98052-6399 (425) 882-8080 www.microsoft.com/investor Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
COMMON STOCK, $0.00000625 par value per share
MSFT
NASDAQ
2.125% Notes due 2021
MSFT
NASDAQ
3.125% Notes due 2028
MSFT
NASDAQ
2.625% Notes due 2033
MSFT
NASDAQ Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐ Item 5.07. Submission of Matters to a Vote of Security Holders On December 4, 2019, Microsoft Corporation (the “Company”) held its 2019 Annual Shareholders Meeting (the “Annual Meeting”). There were 7,632,138,696 shares of common stock entitled to be voted at the Annual Meeting, of which 6,610,123,128 were voted in person or by proxy. The results for each item submitted for a vote of shareholders are as follows. The shareholders: (1) Voted to elect each of the thirteen (13) nominees for director. (2) Approved, on an advisory basis, the compensation of the Company’s named executive officers. (3) Voted to ratify the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for fiscal year 2020. (4) Rejected a shareholder proposal concerning a report on employee representation on the Board of Directors. (5) Rejected a shareholder proposal concerning a report on gender pay gap. The Company’s inspector of election certified the following vote tabulations: Election of Directors
Director
Vote Results
% Votes For
For
Against
Abstain
Broker Non-Votes
William H. Gates III
Re-elected
99.72
%
5,379,317,204
14,898,746
254,359,793
961,547,385
Reid G. Hoffman
Re-elected
99.90
%
5,386,985,842
5,125,673
256,464,228
961,547,385
Hugh F. Johnston
Re-elected
99.84
%
5,383,610,459
8,444,864
256,520,420
961,547,385
Teri L. List-Stoll
Re-elected
98.69
%
5,318,471,023
70,806,007
259,298,713
961,547,385
Satya Nadella
Re-elected
99.91
%
5,388,999,838
4,730,329
254,845,576
961,547,385
Sandra E. Peterson
Re-elected
98.10
%
5,289,588,581
102,475,985
256,511,177
961,547,385
Penny S. Pritzker
Re-elected
99.82
%
5,380,036,421
9,870,113
258,669,209
961,547,385
Charles W. Scharf
Re-elected
98.37
%
5,303,524,956
87,939,453
257,111,334
961,547,385
Arne M. Sorenson
Re-elected
99.90
%
5,386,114,678
5,658,144
256,802,921
961,547,385
John W. Stanton
Re-elected
99.87
%
5,384,483,376
7,065,572
257,026,795
961,547,385
John W. Thompson
Re-elected
99.12
%
5,344,326,057
47,480,462
256,769,224
961,547,385
Emma N. Walmsley
Elected
99.89
%
5,385,958,687
6,049,602
256,567,454
961,547,385
Padmasree Warrior
Re-elected
99.12
%
5,344,344,109
47,377,833
256,853,801
961,547,385
Advisory Vote to Approve Named Executive Officer Compensation
Vote result
% Votes For
For
Against
Abstain
Broker Non-Votes
Approved
76.69
%
4,316,834,964
1,312,380,149
19,360,630
961,547,385
Ratification of Appointment of Independent Auditor
Vote result
% Votes For
For
Against
Abstain
Broker Non-Votes
Approved
96.48
%
6,111,769,376
222,719,362
275,634,390
0
Shareholder Proposal Concerning Report on Employee Representation on Board of Directors
Vote result
% Votes For
For
Against
Abstain
Broker Non-Votes
Rejected
4.42
%
237,810,952
5,137,678,850
273,085,941
961,547,385
Shareholder Proposal Concerning Report on Gender Pay Gap
Vote result
% Votes For
For
Against
Abstain
Broker Non-Votes
Rejected
29.55
%
1,581,396,964
3,769,301,747
297,877,032
961,547,385
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
MICROSOFT CORPORATION
(Registrant)
Date: December 5, 2019
/s/ Keith R. Dolliver
Keith R. Dolliver
Assistant Secretary
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8-K
NASDAQ --11-03 false 0001730168 0001730168 2019-09-24 2019-09-24 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): September 30, 2019 (September 24, 2019) BROADCOM INC. (Exact Name of Registrant as Specified in Charter)
Delaware
001-38449
35-2617337
(State or other jurisdictionof incorporation)
(CommissionFile Number)
(IRS EmployerIdentification No.)
1320 Ridder Park Drive, San Jose, California
95131
(Address of principal executive offices)
(Zip Code) (408) 433-8000 (Registrant’s telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value
AVGO
The Nasdaq Global Select Market Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). 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. ☐
Item 3.03
Material Modification to the Rights of Security Holders In connection with the public offering (the “Offering”) by Broadcom Inc., a Delaware corporation (the “Company”), of 3,250,000 shares, representing $3.25 billion aggregate liquidation preference (the “Firm Shares”), as well as an additional 487,500 shares, representing $487.5 million additional aggregate liquidation preference to cover over-allotments (the “Option Shares,” and, together with the Firm Shares, the “Shares”), of its 8.00% Mandatory Convertible Preferred Stock, Series A, par value $0.001 per share (the “Mandatory Convertible Preferred Stock”), the Company filed a Certificate of Designations (the “Certificate of Designations”) with the Secretary of State of the State of Delaware on September 30, 2019 to establish the designations, powers, preferences and rights of the Mandatory Convertible Preferred Stock and the qualifications, limitations and restrictions thereof, including the dividend rate, the amount payable with respect thereto in the event of the Company’s voluntary or involuntary liquidation, winding-up or dissolution, restrictions on the issuance of shares of the same series or of any other class or series, the terms and conditions of conversion of the Mandatory Convertible Preferred Stock and the voting rights of the Mandatory Convertible Preferred Stock. The Certificate of Designations became effective upon such acceptance of filing. Subject to certain exceptions, so long as any share of Mandatory Convertible Preferred Stock remains outstanding, no dividend or distribution will be declared or paid on shares of the Company’s common stock or any other class or series of stock ranking junior to the Mandatory Convertible Preferred Stock, and no common stock or any other class or series of stock ranking junior to the Mandatory Convertible Preferred Stock will be purchased, redeemed or otherwise acquired for consideration by the Company or any of its subsidiaries unless, in each case, all accumulated and unpaid dividends for all preceding dividend periods have been declared and paid, or a sufficient amount of cash or number of shares of the Company’s common stock has been set apart for the payment of such dividends, on all outstanding shares of Mandatory Convertible Preferred Stock. Unless earlier converted in accordance with the terms of the Certificate of Designations, each share of Mandatory Convertible Preferred Stock will automatically convert on the mandatory conversion date, which is expected to be September 30, 2022, into between 3.0303 and 3.5422 shares of the Company’s common stock, subject to customary anti-dilution adjustments. The number of shares of the Company’s common stock issuable upon conversion will be determined based on the average volume-weighted average price per share of the Company’s common stock over the 20 consecutive trading day period beginning on, and including, the 21st scheduled trading day immediately before September 30, 2022. Subject to the rights of holders of any class of the Company’s capital stock ranking senior to the Mandatory Convertible Preferred Stock with respect to dividends, holders of Mandatory Convertible Preferred Stock will be entitled to receive, when, as and if declared by the Company’s board of directors, or an authorized committee thereof, out of funds legally available for payment, cumulative dividends at the annual rate of 8.00% of the liquidation preference of $1,000 per share (equivalent to $80.00 annually per share), payable in cash or, subject to certain limitations, by delivery of shares of the Company’s common stock or any combination of cash and shares of the Company’s common stock, at the Company’s election. If declared, dividends on the Mandatory Convertible Preferred Stock will be payable quarterly on March 31, June 30, September 30 and December 31 of each year, commencing on December 31, 2019 to, and including, September 30, 2022, to the holders of record of the Mandatory Convertible Preferred Stock as they appear on the Company’s stock register at the close of business on the immediately preceding March 15, June 15 and September 15 and December 15, respectively. Upon the Company’s voluntary or involuntary liquidation, winding-up or dissolution, each holder of Mandatory Convertible Preferred Stock will be entitled to receive a liquidation preference in the amount of $1,000 per share of Mandatory Convertible Preferred Stock, plus an amount equal to accumulated and unpaid dividends on such shares to, but excluding, the date fixed for liquidation, winding-up or dissolution to be paid out of the Company’s assets legally available for distribution to its stockholders, after satisfaction of debt and other liabilities owed to the Company’s creditors and holders of shares of its stock ranking senior to the Mandatory Convertible Preferred Stock and before any payment or distribution is made to holders of any stock ranking junior to the Mandatory Convertible Preferred Stock (including the Company’s common stock). The above description of the Certificate of Designations is qualified in its entirety by reference to the Certificate of Designations, which is filed as Exhibit 3.1 to this Current Report on Form 8-K and is incorporated herein by reference.
Item 5.03
Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year On September 30, 2019, the Company filed the Certificate of Designations with the Secretary of State of the State of Delaware to establish the designations, powers, preferences and rights of the Mandatory Convertible Preferred Stock and the qualifications, limitations and restrictions thereof, including the dividend rate, the amount payable with respect thereto in the event of the Company’s voluntary or involuntary liquidation, winding-up or dissolution, the terms and conditions of conversion of the Mandatory Convertible Preferred Stock and the voting rights of the Mandatory Convertible Preferred Stock. The Certificate of Designations, a copy of which is incorporated by reference as Exhibit 3.1 to this Current Report on Form 8-K, became effective upon acceptance of such filing. The information set forth under Item 3.03 above is incorporated herein by reference.
Item 8.01
Other Events On September 24, 2019, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”), among the Company and BofA Securities, Inc., Citigroup Global Markets Inc., J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC, as representatives of the several underwriters named on Schedule A thereto (the “Underwriters”), pursuant to which the Company agreed to offer and sell to the Underwriters an aggregate of 3,250,000 shares of Mandatory Convertible Preferred Stock, in a registered public offering pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-225648). Pursuant to the Underwriting Agreement, the Company granted the Underwriters an option to purchase an additional 487,500 shares of Series A Preferred Stock to cover over-allotments, if any (the “Option”). On September 26, 2019, the Underwriters exercised the Option in full. The Underwriting Agreement contains customary representations, warranties and covenants by the Company, customary indemnification obligations of the Company and the Underwriters, including for liabilities under the Securities Act of 1933, as amended, and certain other obligations of the parties. On September 30, 2019, the Company closed the Offering, including the shares of Mandatory Convertible Preferred Stock issuable pursuant to the Option. We have applied to list the Mandatory Convertible Preferred Stock on The Nasdaq Global Select Market under the symbol “AVGOP.” For a description of the terms and conditions of the Underwriting Agreement, please refer to the Underwriting Agreement, a copy of which is filed as Exhibit 1.1 hereto, and is incorporated herein by reference. The foregoing description of the Underwriting Agreement does not purport to be complete and is qualified in its entirety by reference to the Underwriting Agreement so filed. A copy of the legal opinion and consent of Latham & Watkins LLP, counsel to the Company, relating to the Mandatory Convertible Preferred Stock issued and sold in the Offering is attached as Exhibit 5.1 hereto.
Item 9.01
Financial Statements and Exhibits. (d) Exhibits
ExhibitNo.
Description
1.1
Underwriting Agreement relating to the Mandatory Convertible Preferred Stock, dated September 24, 2019, by and among the Company and BofA Securities, Inc., Citigroup Global Markets Inc., J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC, as representatives of the several underwriters named on Schedule A thereto.
3.1
Certificate of Designations of the 8.00% Mandatory Convertible Preferred Stock, Series A, filed with the Secretary of State of the State of Delaware on September 30, 2019.
4.1
Specimen Certificate of the 8.00% Mandatory Convertible Preferred Stock, Series A (contained in Exhibit 3.1 above).
5.1
Opinion of Latham & Watkins LLP.
23.1
Consent of Latham & Watkins LLP (contained in Exhibit 5.1 above).
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
BROADCOM INC.
Date: September 30, 2019
By:
/s/ Mark Brazeal
Name:
Mark Brazeal
Title:
Chief Legal Officer
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8-K
1
form8-kq4fy19update.htm
FORM 8-K
Document
UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549______________FORM 8-KCURRENT REPORTPURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934Date of Report (Date of earliest event reported): January 28, 2019 NVIDIA CORPORATION(Exact name of registrant as specified in its charter)Delaware0-2398594-3177549(State or other jurisdiction(Commission(IRS Employerof incorporation)File Number)Identification No.) 2788 San Tomas Expressway, Santa Clara, CA95051 (Address of principal executive offices)(Zip Code)Registrant’s telephone number, including area code: (408) 486-2000 Not Applicable(Former name or former address, if changed since last report)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). Emerging Growth Company oIf 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. oItem 2.02 Results of Operations and Financial Condition.On January 28, 2019, NVIDIA Corporation, or the Company, issued a press release and shareholder letter updating its guidance for the quarter ended January 27, 2019. The press release is attached as Exhibit 99.1 and is incorporated herein by reference. The shareholder letter is attached as Exhibit 99.2, is incorporated herein by reference, and will be posted to http://investor.nvidia.com immediately after the filing of this Current Report.The press release and shareholder letter are furnished and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or subject to the liabilities of that Section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended. The information in this Current Report shall not be incorporated by reference in any filing with the U.S. Securities and Exchange Commission made by the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.Item 9.01 Financial Statements and Exhibits.(d) Exhibits Exhibit Description99.1 Press Release, dated January 28, 2019, entitled "NVIDIA Updates Financial Guidance for Fourth Quarter of Fiscal 2019"99.2 NVIDIA Corporation Shareholder Letter, dated January 28, 2019SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NVIDIA CorporationDate: January 28, 2019 By: /s/ Colette M. Kress Colette M. Kress Executive Vice President and Chief Financial Officer
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8-K
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d745761d8k.htm
8-K
8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 7, 2019
BROADCOM INC. (Exact
Name of Registrant as Specified in Charter)
Delaware
001-38449
35-2617337
(State or other jurisdiction
of incorporation)
(Commission
File Number)
(IRS Employer
Identification No.)
1320 Ridder Park Drive, San Jose, California
95131
(Address of principal executive offices)
(Zip Code)
(408) 433-8000
(Registrants telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of
the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this
chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
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. ☐ Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading
Symbol(s)
Name of Each Exchange
on Which Registered
Common Stock, $0.001 par value
AVGO
The Nasdaq Global Select Market
Item 1.01
Entry into Definitive Material Agreement.
On May 7, 2019 (the Closing Date), Broadcom Inc., a Delaware corporation (the Company), entered into a Credit
Agreement with the lenders and L/C Issuers named therein, Bank of America, N.A., as administrative agent, and the other parties from time to time party thereto (the Credit Agreement). The Credit Agreement provides for a $5.0 billion
unsecured revolving credit facility (the Revolving Facility), a $2.0 billion unsecured term A-3 facility (the Term A-3 Facility), a
$2.0 billion unsecured term A-5 facility (the Term A-5 Facility) and a $2.0 billion unsecured term A-7
facility (the Term A-7 Facility, and together with the Term A-3 Facility and Term A-5 Facility, the Term
Facilities). The Companys obligations under the Credit Agreement are guaranteed on an unsecured basis by Broadcom Corporation, a California corporation, Broadcom Cayman Finance Limited, an exempted company incorporated with limited
liability under the laws of the Cayman Islands, and Broadcom Technologies Inc., a Delaware corporation. The proceeds of the term loans under the Term Facilities were used to refinance the $6.0 billion of existing term loans outstanding under the
Companys Existing Credit Agreement (as defined in Item 1.02 below), which was terminated in connection with, and as a condition to, entering into the Credit Agreement, as discussed in more detail in Item 1.02 below. The Credit Agreement was
entered into on substantially the same terms and conditions as the Existing Credit Agreement, other than with respect to the maturity date of the facilities thereunder, as discussed in more detail below.
The term loans under each of the Term A-3 Facility, Term A-5
Facility and Term A-7 Facility were made in single borrowings on the Closing Date and will mature and be payable in full on the third, fifth or seventh anniversary, respectively, of the Closing Date. The
Revolving Facility is a five-year unsecured revolving facility. Initially, the aggregate commitment of all revolving lenders under the Credit Agreement is equal to $5.0 billion, of which up to $500 million may be utilized for the issuance
of multicurrency letters of credit. The issuance of letters of credit reduces the aggregate amount otherwise available under the Revolving Facility for the making of revolving loans. Subject to the terms of the Credit Agreement, the Company may
borrow, repay and reborrow revolving loans at any time prior to the earlier of (a) the fifth anniversary of the Closing Date, and (b) the date of termination in whole of the revolving lenders commitments under the Credit Agreement in
accordance with the terms thereof. The Company had no borrowings outstanding under the Revolving Facility on the Closing Date. Borrowings
under the Revolving Facility and Term Facilities will bear interest at a fluctuating rate per annum equal to, at the Companys option, the alternate base rate or the reserve adjusted Eurocurrency rate, in each case, plus an applicable margin
that varies by facility and is calculated based on the Companys credit ratings from time to time. In addition, the Company will also pay to the revolving lenders under the Credit Agreement certain customary fees, including a commitment fee on
the daily actual excess of each lenders revolving commitment over its outstanding revolving credit exposure under the Credit Agreement, calculated based on the Companys credit ratings from time to time.
Voluntary prepayments of the loans and voluntary reductions of the unutilized portion of the revolving commitments under the Credit Agreement
are permissible without penalty (other than customary Eurocurrency loan breakage), subject to certain conditions pertaining to minimum notice and minimum reduction amounts as described in the Credit Agreement.
The Credit Agreement contains representations and warranties and affirmative and negative covenants customary for unsecured financings of this
type, as well as a financial covenant requiring that, as of the last day of each fiscal quarter, commencing with the first quarter-end after the Closing Date, the Companys Consolidated Interest Coverage
Ratio (as defined in the Credit Agreement) shall not be less than 3.00:1.00, as more fully described in the Credit Agreement. The Credit
Agreement also contains various events of default (subject to grace periods, as applicable) including among others: nonpayment of principal, interest or fees; breach of covenant; payment default on, or acceleration under, certain other material
indebtedness; inaccuracy of the representations or warranties in any material respect; bankruptcy or insolvency; certain unsatisfied judgments; certain ERISA violations; the occurrence of a change of control; and the invalidity or unenforceability
of the Credit Agreement or certain other documents executed in connection therewith. The foregoing description of the Credit Agreement
does not purport to be complete and is qualified in its entirety by reference to the full text of the Credit Agreement attached hereto as Exhibit 10.1 and incorporated herein by reference.
Many of the lenders under the Credit Agreement and/or their affiliates have in the past
performed, and may in the future from time to time perform, investment banking, financial advisory, lending, hedging, cash management and/or commercial banking services, or other services in the ordinary course of business for the Company and its
subsidiaries (including in connection with the transactions described in this Current Report on Form 8-K), for which they have received, and may in the future receive, customary compensation and expense
reimbursement.
Item 1.02
Termination of a Definitive Material Agreement.
In connection with its entry into the Credit Agreement, on the Closing Date the Company terminated all outstanding commitments, and used the
proceeds of the Term Facilities, together with cash on hand, to repay all of its outstanding obligations, under the Credit Agreement, dated as of November 5, 2018 (the Existing Credit Agreement), among the Company, the lenders and
L/C Issuers named therein, Bank of America, N.A., as administrative agent, and the other parties from time to time party thereto. The
Existing Credit Agreement originally provided for a $5.0 billion unsecured revolving credit facility, a $9.0 billion unsecured term A-3 facility and a $9.0 billion unsecured term A-5 facility. Immediately prior to the repayment and termination of the Existing Credit Agreement, the Company had outstanding no borrowings under such revolving credit facility or such term A-3 facility and $6.0 billion in aggregate principal amount of term loans under such term A-5 facility. Absent termination, such revolving credit facility and term A-5 facility would have matured in November 2023. Borrowings under the Existing Credit Agreement bore interest at a fluctuating rate per annum equal to, at the Companys option, the alternate base rate or the
reserve adjusted Eurocurrency rate, in each case, plus an applicable margin that varied by facility and that was calculated based on the Companys credit ratings from time to time.
Many of the lenders under the Existing Credit Agreement and/or their affiliates have in the past performed, and may in the future from time to
time perform, investment banking, financial advisory, lending, hedging, cash management and/or commercial banking services, or other services in the ordinary course of business for the Company and its subsidiaries (including in connection with the
transactions described in this Current Report on Form 8-K), for which they have received, and may in the future receive, customary compensation and expense reimbursement.
Item 2.03
Creation of a Direct Financial Obligation or an Obligation under an
Off-Balance Sheet Arrangement of a Registrant. The description contained
under Item 1.01 above is hereby incorporated by reference in its entirety into this Item 2.03.
Item 9.01.
Financial Statements and Exhibits.
(d) Exhibits
Exhibit
No.
Description
10.1
Credit Agreement, dated as of May 7, 2019, among the Company, the lenders and other parties party thereto, and Bank of America, N.A., as Administrative Agent
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, hereunto duly authorized.
BROADCOM INC.
Date: May 7, 2019
By:
/s/ Thomas H. Krause, Jr.
Name:
Thomas H. Krause, Jr.
Title:
Chief Financial Officer
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8-K_1730168_0001193125-22-160371.htm
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8-K
false 0001730168 0001730168 2022-05-26 2022-05-26 0001730168 us-gaap:CommonStockMember 2022-05-26 2022-05-26 0001730168 us-gaap:SeriesAPreferredStockMember 2022-05-26 2022-05-26 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): May 26, 2022 Broadcom Inc. (Exact Name of Registrant as Specified in Charter)
Delaware
001-38449
35-2617337
(State or other jurisdiction of incorporation)
(Commission File Number)
(I.R.S. Employer Identification No.)
1320 Ridder Park Drive
San Jose, California 95131-2313
(Address of principal executive offices including zip code) (408) 433-8000 (Registrant’s telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☒
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value
AVGO
The NASDAQ Global Select Market
8.00% Mandatory Convertible Preferred Stock, Series A, $0.001 par value
AVGOP
The NASDAQ Global Select Market Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
Item 7.01
Regulation FD Disclosure. On May 26, 2022, Broadcom Inc., a Delaware corporation (the “Company”) and VMware, Inc., a Delaware corporation (“VMware”), issued a joint press release announcing the execution of an Agreement and Plan of Merger, dated May 26, 2022, by and among the Company, VMware, Verona Holdco, Inc. (“Holdco”), a Delaware corporation and a direct wholly owned subsidiary of VMware, Verona Merger Sub, Inc., a Delaware corporation and a direct wholly owned subsidiary of Holdco, Barcelona Merger Sub 2, Inc., a Delaware corporation and a direct wholly owned subsidiary of the Company, and Barcelona Merger Sub 3, LLC, a Delaware limited liability company and a direct wholly owned subsidiary of the Company, pursuant to which, upon the terms and subject to the conditions set forth therein, the Company will acquire all of the outstanding shares of VMware in a cash-and-stock transaction. In addition, on May 26, 2022, the Company made available an investor presentation regarding the proposed transaction. Copies of the press release and investor presentation are attached hereto as Exhibit 99.1 and Exhibit 99.2, respectively, and incorporated herein by reference. The information contained in Item 7.01 of this report, including Exhibit 99.1 and Exhibit 99.2, shall not be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing, unless expressly incorporated by specific reference to such filing. The information in this report, including the exhibit hereto, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section.
Item 9.01
Financial Statements and Exhibits. (d) Exhibits
ExhibitNo.
Description
99.1
Joint press release issued by Broadcom Inc. and VMware, Inc. dated May 26, 2022.
99.2
Investor Presentation dated May 26, 2022.
104
Cover Page Interactive Data File (formatted as Inline XBRL).
Cautionary Note Regarding Forward-Looking Statements This communication relates to a proposed business combination transaction between Broadcom Inc. (“Broadcom”) and VMware, Inc. (“VMware”). This communication includes forward-looking statements within the meaning of Section 21E of the U.S. Securities Exchange Act of 1934, as amended, and Section 27A of the U.S. Securities Act of 1933, as amended. These forward-looking statements include but are not limited to statements that relate to the expected future business and financial performance, the anticipated benefits of the proposed transaction, the anticipated impact of the proposed transaction on the combined business, the expected amount and timing of the synergies from the proposed transaction, and the anticipated closing date of the proposed transaction. These forward-looking statements are identified by words such as “will,” “expect,” “believe,” “anticipate,” “estimate,” “should,” “intend,” “plan,” “potential,” “predict,” “project,” “aim,” and similar words or phrases. These forward-looking statements are based on current expectations and beliefs of Broadcom management and current market trends and conditions. These forward-looking statements involve risks and uncertainties that are outside Broadcom’s control and may cause actual results to differ materially from those contained in forward-looking statements, including but not limited to: the effect of the proposed transaction on our ability to maintain relationships with customers, suppliers and other business partners or operating results and business; the ability to implement plans, forecasts and other expectations with respect to the business after the completion of the proposed transaction and realize expected
synergies; business disruption following the proposed transaction; difficulties in retaining and hiring key personnel and employees due to the proposed transaction and business combination; the satisfaction of the conditions precedent to consummation of the proposed transaction, including the ability to secure regulatory approvals on the terms expected, at all or in a timely manner; significant indebtedness, including indebtedness incurred in connection with the proposed transaction, and the need to generate sufficient cash flows to service and repay such debt; the disruption of current plans and operations; the outcome of any legal proceedings related to the transaction; the ability to consummate the proposed transaction on a timely basis or at all; the ability to successfully integrate VMware’s operations; the ability to implement plans, forecasts and other expectations with respect to the business after the completion of the proposed transaction and realize synergies; the impact of public health crises, such as pandemics (including COVID-19) and epidemics and any related company or government policies and actions to protect the health and safety of individuals or government policies or actions to maintain the functioning of national or global economies and markets; global political and economic conditions, including rising interest rates, the impact of inflation and challenges in manufacturing and the global supply chain; and other events and trends on a national, regional and global scale, including the cyclicality in the semiconductor industry and other target markets and those of a political, economic, business, competitive and regulatory nature. These risks, as well as other risks related to the proposed transaction, will be included in the registration statement on Form S-4 and proxy statement/prospectus that will be filed with the Securities and Exchange Commission (“SEC”) in connection with the proposed transaction. While the list of factors presented here is, and the list of factors to be presented in the registration statement on Form S-4 are, considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. For additional information about other factors that could cause actual results to differ materially from those described in the forward-looking statements, please refer to Broadcom’s and VMware’s respective periodic reports and other filings with the SEC, including the risk factors identified in Broadcom’s and VMware’s most recent Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K. The forward-looking statements included in this communication are made only as of the date hereof. Neither Broadcom nor VMware undertakes any obligation to update any forward-looking statements to reflect subsequent events or circumstances, except as required by law. No Offer or Solicitation This communication is not intended to and shall not constitute an offer to buy or sell or the solicitation of an offer to buy or sell any securities, or a solicitation of any vote or approval, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made, except by means of a prospectus meeting the requirements of Section 10 of the U.S. Securities Act of 1933, as amended. Additional Information about the Transaction and Where to Find It In connection with the proposed transaction, Broadcom intends to file with the SEC a registration statement on Form S-4 that will include a proxy statement of VMware and that also constitutes a prospectus of Broadcom. Each of Broadcom and VMware may also file other relevant documents with the SEC regarding the proposed transaction. This document is not a substitute for the proxy statement/prospectus or registration statement or any other document that Broadcom or VMware may file with the SEC. The definitive proxy statement/prospectus (if and when available) will be mailed to stockholders of VMware. INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE REGISTRATION STATEMENT, PROXY STATEMENT/PROSPECTUS AND ANY OTHER RELEVANT DOCUMENTS THAT MAY BE FILED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THESE DOCUMENTS, CAREFULLY AND IN THEIR ENTIRETY IF AND WHEN THEY BECOME AVAILABLE BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. Investors and security holders will be able to obtain free copies of the registration statement and proxy statement/prospectus (if and when available) and other documents containing important information about Broadcom, VMware and the proposed transaction, once such documents are filed with the SEC through the website maintained by the SEC at http://www.sec.gov. Copies of the documents filed with the SEC by Broadcom will be available free of charge on Broadcom’s website at https://investors.broadcom.com/. Copies of the documents filed with the SEC by VMware will be available free of charge on VMware’s website at ir.vmware.com.
Participants in the Solicitation Broadcom, VMware and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies in respect of the proposed transaction. Information about the directors and executive officers of Broadcom, including a description of their direct or indirect interests, by security holdings or otherwise, is set forth in Broadcom’s proxy statement for its 2022 Annual Meeting of Stockholders, which was filed with the SEC on February 18, 2022, and Broadcom’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021, which was filed with the SEC on December 17, 2021. Information about the directors and executive officers of VMware, including a description of their direct or indirect interests, by security holdings or otherwise, is set forth in VMware’s proxy statement for its 2021 Annual Meeting of Stockholders, which was filed with the SEC on May 28, 2021, VMware’s Annual Report on Form 10-K for the fiscal year ended January 28, 2022, which was filed with the SEC on March 24, 2022, a Form 8-K filed by VMware on April 22, 2022 and a Form 8-K filed by VMware on May 2, 2022. Other information regarding the participants in the proxy solicitations and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the proxy statement/prospectus and other relevant materials to be filed with the SEC regarding the proposed transaction when such materials become available. Investors should read the proxy statement/prospectus carefully when it becomes available before making any voting or investment decisions. You may obtain free copies of these documents from Broadcom or VMware using the sources indicated above.
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: May 26, 2022
Broadcom Inc.
By:
/s/ Kirsten Spears
Name:
Kirsten Spears
Title:
Chief Financial Officer and Chief Accounting Officer
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8-K_1730168_0001193125-20-133159.htm
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8-K
false 0001730168 0001730168 2020-05-05 2020-05-05 0001730168 us-gaap:CommonStockMember 2020-05-05 2020-05-05 0001730168 us-gaap:SeriesAPreferredStockMember 2020-05-05 2020-05-05 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): May 5, 2020 BROADCOM INC. (Exact Name of Registrant as Specified in Charter)
Delaware
001-38449
35-2617337
(State or other jurisdictionof incorporation)
(CommissionFile Number)
(IRS EmployerIdentification No.)
1320 Ridder Park Drive, San Jose, California
95131
(Address of principal executive offices)
(Zip Code) (408) 433-8000 (Registrant’s telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
AVGO
The NASDAQ Global Select Market
8.00% Mandatory Convertible Preferred Stock, Series A, $0.001 par value
AVGOP
The NASDAQ Global Select Market Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter). 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. ☐
Item 8.01
Other Events. Proposed Offering of Senior Notes and Commencement of Private Exchange Offers of Certain Outstanding Notes for New Notes In a press release issued on May 5, 2020, Broadcom Inc. (“Broadcom”) announced that it intends to offer senior notes (the “New Notes”) and, on or about the date hereof, commence exchange offers (the “Exchange Offers”) with respect to certain series of its outstanding notes maturing between 2021 and 2024 for one or more new series of senior notes maturing between 2026 and 2028 (the “Exchange Notes”), in each case subject to market conditions and other factors. The New Notes and the Exchange Notes are being sold in private placements to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to non-U.S. persons outside the United States under Regulation S under the Securities Act. The foregoing description is qualified in its entirety by reference to the press release dated May 5, 2020, a copy of which is attached hereto as Exhibit 99.1. This Current Report on Form 8-K is not an offer to purchase or sell or a solicitation of an offer to purchase or sell, with respect to any securities. Ranking Disclosure Update Below is supplemental disclosure that is intended to be in addition to, not a substitute for, the disclosure provided in our Form 10-Q filed on March 13, 2020. As of May 3, 2020, Broadcom, Broadcom Technologies Inc. and Broadcom Corporation had approximately $45.1 billion of aggregate unsecured indebtedness outstanding. As of May 3, 2020, Broadcom’s non-guarantor subsidiaries had $1.1 billion of unsecured indebtedness outstanding (excluding intercompany indebtedness and letters of credit). The foregoing data does not give effect to the issuance of any debt securities after May 3, 2020 or the use of proceeds with respect thereto.
COVID-19 Pandemic Update and Related Risks Below is supplemental disclosure that is intended to be in addition to, not a substitute for, the disclosure provided in our Form 10-Q filed on March 13, 2020. The global spread of COVID-19 and the efforts to control it have slowed global economic activity and disrupted, and reduced the efficiency of, normal business activities in much of the world. The pandemic has resulted in authorities around the world implementing numerous unprecedented measures such as travel restrictions, quarantines, shelter in place orders, and factory and office shutdowns. These measures have impacted and will continue to impact our workforce and operations, and those of our customers, contract manufacturers (“CMs”), suppliers and logistics providers, particularly if the restrictions on movement intensify or expand to additional countries. In particular, we are experiencing some disruption to parts of our global supply chain, and as a result, there is uncertainty about how the supply chain will perform if the pandemic worsens significantly or restrictive measures increase or remain in place for extended periods. Most of our employees and many of those of our CMs and suppliers around the world are working remotely, or on split or reduced shifts due to facility closures, shelter in place orders or other restrictions. Our primary warehouse and a number of our outsourced assembly and test service providers are in Malaysia, which has mandated the closure of all non-essential businesses. While our Malaysia warehouse is currently fully operational, pursuant to a critical industry exemption, many of the facilities of our suppliers and service providers are not. An extended closure of these facilities may require us to move assembly and test services to providers in other countries, and may, eventually, lead to a shortage of some components needed for our products. In the event restrictive measures in Malaysia are intensified and our warehouse is shut down or required to operate at a reduced capacity, our ability to deliver product to our customers would be severely limited. In addition, reductions in commercial airline and cargo flights, disruptions to ports and other shipping infrastructure resulting from the pandemic are resulting in increased transport times to deliver materials and components to our facilities and to transfer our products to our assembly and test service providers, and may also affect our ability to timely ship our products to customers. As a result of these supply chain disruptions, we have increased customer order lead times and may also have to place some products on allocation. The substantial majority of our semiconductor wafers are manufactured by Taiwan Semiconductor Manufacturing Company (“TSMC”), at their facilities in Taiwan. While the impact of COVID-19 has to date been limited in Taiwan, any increase in the severity of the outbreak or in government measures restricting movement there, may cause a substantial disruption to TSMC’s operations. This, in turn, would severely reduce our supply of wafers and adversely affect our ability to manufacture most of our products. While our Fort Collins, Colorado manufacturing facility is currently fully operational, any similar disruption there would severely impact our ability to manufacture our FBAR products and adversely affect our wireless business. While the demand environment for our semiconductor products was consistent with our expectations for our second fiscal quarter 2020, we believe that this was due, in part, to short-term demand to facilitate an increase in manufacture of end products and infrastructure needed to support a dramatic increase around the world in remote or tele-work and learning, as well as the result of some customers stocking up on parts in anticipation of potential future supply chain disruption due to COVID-19. However, our ability to predict the impact of COVID-19 on our business in future periods remains limited and the effects of the pandemic on our semiconductor business are unlikely to be fully realized, or reflected in our financial results, until future periods. To date, the impact of COVID-19 on the demand environment for our software products has been limited. In the longer-term, however, the COVID-19 pandemic is likely to adversely affect the economies and financial markets of many countries, resulting in a global economic downturn and a recession. This would likely adversely affect demand for our products and those of our customers, particularly consumer products such as smartphones, which may, in turn negatively impact our results of operations. However, there is a significant degree of uncertainty and lack of visibility as to the extent and duration of any such downturn or recession. We have modified our workplace practices globally as a result of governmental preventive and precautionary measures, which has resulted in most of our employees working remotely. Heightened government measures that restrict the ability of our employees to perform critical onsite functions at our facilities may adversely affect our business and results of operations. An extended period of mass remote work by our employees may reduce our employees’ efficiency and productivity, which may cause product development delays and other unforeseen adverse effects on our business. For those employees who are permitted to come onsite, while we have implemented
personal safety measures at all such locations, any actions we take with respect to our workforce may not be sufficient to mitigate the risk of infection by COVID-19. If a significant number of our employees, or employees performing key functions, become ill, our business may be further adversely impacted. The degree to which the pandemic ultimately impacts our business and results of operations will depend on future developments beyond our control, including the severity of the pandemic, the extent of actions to contain or treat the virus, how quickly and to what extent normal economic and operating conditions can resume, and the severity and duration of the global economic downturn that results from the pandemic. Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements (including within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act) concerning Broadcom. These statements include, but are not limited to, statements that address our expected future business and financial performance and other statements identified by words such as “will”, “expect”, “believe”, “anticipate”, “estimate”, “should”, “intend”, “plan”, “potential”, “predict”, “project”, “aim”, and similar words, phrases or expressions. These forward-looking statements are based on current expectations and beliefs of the management of Broadcom, as well as assumptions made by, and information currently available to, such management, current market trends and market conditions and involve risks and uncertainties, many of which are outside the Company’s and management’s control, and which may cause actual results to differ materially from those contained in forward-looking statements. Accordingly, you should not place undue reliance on such statements. Particular uncertainties that could materially affect future results include risks associated with: our acquisition of Symantec Corporation’s Enterprise Security business (“Symantec Business”), including (1) potential difficulties in employee retention, (2) unexpected costs, charges or expenses, and (3) our ability to successfully integrate the Symantec Business and achieve the anticipated benefits of the transaction; any loss of our significant customers and fluctuations in the timing and volume of significant customer demand; our dependence on contract manufacturing and outsourced supply chain; our dependency on a limited number of suppliers; global economic conditions and concerns; international political and economic conditions; any acquisitions we may make, such as delays, challenges and expenses associated with receiving governmental and regulatory approvals and satisfying other closing conditions, and with integrating acquired businesses with our existing businesses and our ability to achieve the benefits, growth prospects and synergies expected by such acquisitions, including our recent acquisition of the Symantec Business; government regulations and trade restrictions; our significant indebtedness and the need to generate sufficient cash flows to service and repay such debt; dependence on and risks associated with distributors and resellers of our products; dependence on senior management and our ability to attract and retain qualified personnel; involvement in legal or administrative proceedings; quarterly and annual fluctuations in operating results; our ability to accurately estimate customers’ demand and adjust our manufacturing and supply chain accordingly; cyclicality in the semiconductor industry or in our target markets; our competitive performance and ability to continue achieving design wins with our customers, as well as the timing of any design wins; prolonged disruptions of our or our contract manufacturers’ manufacturing facilities, warehouses or other significant operations; our ability to improve our manufacturing efficiency and quality; our dependence on outsourced service providers for certain key business services and their ability to execute to our requirements; our ability to maintain or improve gross margin; our ability to protect our intellectual property and the unpredictability of any associated litigation expenses; compatibility of our software products with operating environments, platforms or third-party products; our ability to enter into satisfactory software license agreements; sales to our government clients; availability of third party software used in our products; use of open source code sources in our products; any expenses or reputational damage associated with resolving customer product warranty and indemnification claims; market acceptance of the end products into which our products are designed; our ability to sell to new types of customers and to keep pace with technological advances; our compliance with privacy and data security laws; our ability to protect against a breach of security systems; changes in accounting standards; fluctuations in foreign exchange rates; our provision for income taxes and overall cash tax costs, legislation that may impact our overall cash tax costs and our ability to maintain tax concessions in certain jurisdictions; and other events and trends on a national, regional and global scale, including those of a political, economic, business, competitive and regulatory nature. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result.
Item 9.01
Financial Statements and Exhibits.
ExhibitNo.
Description
99.1
Press release, dated May 5, 2020, entitled “Broadcom Inc. Announces Private Offering of Senior Notes”
104
Cover Page Interactive Data File (formatted as Inline XBRL).
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
BROADCOM INC.
Date: May 5, 2020
By:
/s/ Thomas H. Krause, Jr.
Name:
Thomas H. Krause, Jr.
Title:
Chief Financial Officer
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8-K_1730168_0001193125-21-003380.htm
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8-K
false 0001730168 0001730168 2021-01-06 2021-01-06 0001730168 us-gaap:CommonStockMember 2021-01-06 2021-01-06 0001730168 us-gaap:SeriesAPreferredStockMember 2021-01-06 2021-01-06 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): January 6, 2021 Broadcom Inc. (Exact Name of Registrant as Specified in Charter)
Delaware
001-38449
35-2617337
(State or other jurisdiction of incorporation)
(Commission File Number)
(I.R.S. Employer Identification No.)
1320 Ridder Park Drive,
San Jose, California
95131-2313
(Address of principal executive offices)
(Zip Code) (408) 433-8000 (Registrant’s telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☒
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value
AVGO
The NASDAQ Global Select Market
8.00% Mandatory Convertible Preferred Stock, Series A, $0.001 par value
AVGOP
The NASDAQ Global Select Market Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
Item 8.01
Other Events. Beginning after the market closed on January 6, 2021, Broadcom Inc. (“Broadcom”) provided the attached presentation (the “Investor Presentation”) to certain investors. Broadcom expects to use the Investor Presentation, in whole or in part, in connection with presentations to additional investors. The Investor Presentation is attached hereto as Exhibit 99.1. The foregoing description is qualified in its entirety by reference to the full text of the Investor Presentation, which is incorporated herein by reference. Cautionary Note Regarding Forward-Looking Statements This communication contains forward-looking statements (including within the meaning of Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended) concerning Broadcom. These statements include, but are not limited to, statements that address our expected future business and financial performance and other statements identified by words such as “will”, “expect”, “believe”, “anticipate”, “estimate”, “should”, “intend”, “plan”, “potential”, “predict” “project”, “aim”, and similar words, phrases or expressions. These forward-looking statements are based on current expectations and beliefs of the management of Broadcom, as well as assumptions made by, and information currently available to, such management, current market trends and market conditions and involve risks and uncertainties, many of which are outside Broadcom’s and our management’s control, and which may cause actual results to differ materially from those contained in forward-looking statements. Accordingly, you should not place undue reliance on such statements. Particular uncertainties that could materially affect future results include risks associated with: the COVID-19 pandemic, which has, and will likely continue to, negatively impact the global economy and disrupt normal business activity, and which may have an adverse effect on our results of operations; any loss of our significant customers and fluctuations in the timing and volume of significant customer demand; our dependence on contract manufacturing and outsourced supply chain; our dependency on a limited number of suppliers; global economic conditions and concerns; global political and economic conditions; government regulations, trade restrictions and trade tensions; our significant indebtedness and the need to generate sufficient cash flows to service and repay such debt; dependence on and risks associated with distributors and resellers of our products; dependence on senior management and our ability to attract and retain qualified personnel; any acquisitions we may make, such as delays, challenges and expenses associated with receiving governmental and regulatory approvals and satisfying other closing conditions, and with integrating acquired businesses with our existing businesses and our ability to achieve the benefits, growth prospects and synergies expected by such acquisitions; involvement in legal or administrative proceedings; quarterly and annual fluctuations in operating results; our ability to accurately estimate customers’ demand and adjust our manufacturing and supply chain accordingly; cyclicality in the semiconductor industry or in our target markets; our competitive performance and ability to continue achieving design wins with our customers, as well as the timing of any design wins; prolonged disruptions of our or our contract manufacturers’ manufacturing facilities, warehouses or other significant operations; our ability to improve our manufacturing efficiency and quality; our dependence on outsourced service providers for certain key business services and their ability to execute to our requirements; our ability to maintain or improve gross margin; our ability to protect our intellectual property and the unpredictability of any associated litigation expenses; compatibility of our software products with operating environments, platforms or third-party products; our ability to enter into satisfactory software license agreements; availability of third party software used in our products; use of open source code sources in our products; any expenses or reputational damage associated with resolving customer product warranty and indemnification claims; market acceptance of the end products into which our products are designed; our ability to sell to new types of customers and to keep pace with technological advances; our compliance with privacy and data security laws; our ability to protect against a breach of security systems; fluctuations in foreign exchange rates; our provision for income taxes and overall cash tax costs, legislation that may impact our overall cash tax costs and our ability to maintain tax concessions in certain jurisdictions; and other events and trends on a national, regional and global scale, including those of a political, economic, business, competitive and regulatory nature. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result.
Our filings with the SEC, which you may obtain for free at the SEC’s website at http://www.sec.gov, discuss some of the important risk factors that may affect our business, results of operations and financial condition. Actual results may vary from the estimates provided. We undertake no intent or obligation to publicly update or revise any of the estimates and other forward-looking statements made in this announcement, whether as a result of new information, future events or otherwise, except as required by law. Important Additional Information and Where to Find It Broadcom, its directors and certain of its executive officers may be deemed to be participants in the solicitation of proxies from Broadcom’s stockholders in connection with the matters to be considered at Broadcom’s 2021 Annual Meeting of Stockholders. Information regarding the identity of Broadcom’s directors and executive officers and their respective direct or indirect interests in Broadcom, by security holdings or otherwise, can be found in Broadcom’s proxy statement for its 2020 Annual Meeting of Stockholders, filed with the SEC on February 18, 2020. To the extent holdings of Broadcom’s securities by such directors or executive officers have changed since the amounts set forth in Broadcom’s proxy statement for the 2020 Annual Meeting of Stockholders, such changes have been reflected on Initial Statements of Beneficial Ownership on Form 3 or Statements of Change in Ownership on Form 4 filed with the SEC. These documents are available free of charge at the SEC’s website at http://www.sec.gov. Broadcom intends to file a proxy statement with the SEC in connection with the solicitation of proxies from Broadcom stockholders in connection with the matters to be considered at Broadcom’s 2021 Annual Meeting of Stockholders. Additional information regarding the identity of potential participants and their direct or indirect interests, by security holdings or otherwise, will be set forth in the proxy statement and other materials to be filed with the SEC in connection with Broadcom’s 2021 Annual Meeting of Stockholders. INVESTORS AND STOCKHOLDERS ARE STRONGLY ENCOURAGED TO READ ANY SUCH PROXY STATEMENT, THE ACCOMPANYING PROXY CARD AND ANY AMENDMENTS AND SUPPLEMENTS THERETO AS WELL AS ANY OTHER DOCUMENTS FILED BY BROADCOM WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE AS THEY WILL CONTAIN IMPORTANT INFORMATION. Stockholders will be able to obtain copies of the proxy statement, any amendments or supplements to the proxy statement and other documents filed by Broadcom with the SEC for no charge at the SEC’s website at http://www.sec.gov. Copies will also be available at no charge at the Investor Relations section of Broadcom’s corporate website at https://investors.broadcom.com or by contacting Broadcom’s Investor Relations department at investor.relations@broadcom.com.
Item 9.01
Financial Statements and Exhibits. (d) Exhibits
ExhibitNo.
Description
99.1
Investor Presentation dated January 6, 2021
104
Cover Page Interactive Data File (formatted as Inline XBRL).
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: January 6, 2021
Broadcom Inc.
By:
/s/ Mark Brazeal
Name:
Mark Brazeal
Title:
Chief Legal Officer
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of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549Form 10-K (MARK ONE) ☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended October 31, 2021 OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Broadcom Inc.Delaware1320 Ridder Park Drive001-3844935-2617337(State or Other Jurisdiction ofIncorporation or Organization)San Jose,CA95131-2313(Commission File Number)(I.R.S. EmployerIdentification No.)(408) 433-8000(Exact Name of Registrant as Specified in Its CharterAddress of Principal Executive Offices, Including Zip Code Registrant’s Telephone Number, Including Area Code)Securities registered pursuant to Section 12(b) of the Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which RegisteredCommon Stock, $0.001 par valueAVGOThe NASDAQ Global Select Market8.00% Mandatory Convertible Preferred Stock, Series A, $0.001 par valueAVGOPThe NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Large accelerated filer☑Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑The aggregate market value of voting and non-voting common equity held by non-affiliates as of April 30, 2021, based upon the closing sale price of such shares on The Nasdaq Global Select Market on such date was approximately $182.8 billion.As of November 26, 2021, there were 412,873,968 shares of our common stock outstanding.Documents Incorporated by ReferencePortions of the registrant’s definitive Proxy Statement for its 2022 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.Table of ContentsBROADCOM INC. 2021 ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTS PagePART I.ITEM 1.BUSINESS3ITEM 1A.RISK FACTORS13ITEM 1B.UNRESOLVED STAFF COMMENTS31ITEM 2.PROPERTIES32ITEM 3.LEGAL PROCEEDINGS32ITEM 4.MINE SAFETY DISCLOSURES32PART II.ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES33ITEM 6.[RESERVED]34ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS35ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK48ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA49ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE95ITEM 9A.CONTROLS AND PROCEDURES95ITEM 9B.OTHER INFORMATION96ITEM 9C.DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS96PART III.ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE97ITEM 11.EXECUTIVE COMPENSATION97ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS97ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE97ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES97PART IV.ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES98ITEM 16.FORM 10-K SUMMARY105SIGNATURES1061Table of ContentsPART IThe following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws and particularly in Item 1: “Business,” Item 1A: “Risk Factors,” Item 3: “Legal Proceedings” and Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K. These statements are indicated by words or phrases such as “anticipate,” “expect,” “estimate,” “seek,” “plan,” “believe,” “could,” “intend,” “will,” and similar words or phrases. These forward-looking statements may include projections of financial information; statements about historical results that may suggest trends for our business; statements of the plans, strategies, and objectives of management for future operations; statements of expectation or belief regarding future events (including any acquisitions we may make), technology developments, our products, product sales, expenses, liquidity, cash flow and growth rates, or enforceability of our intellectual property rights; any backlog; and the effects of seasonality on our business. Such statements are based on current expectations, estimates, forecasts and projections of our industry performance and macroeconomic conditions, based on management’s judgment, beliefs, current trends and market conditions, and involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. We derive most of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Accordingly, we caution you not to place undue reliance on these statements. Material factors that could cause actual results to differ materially from our expectations are summarized and disclosed under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. Unless stated otherwise or the context otherwise requires, references to “Broadcom,” “we,” “our,” and “us” mean Broadcom Inc. and its consolidated subsidiaries. Our fiscal year ends on the Sunday closest to October 31 in a 52-week year and the first Sunday in November in a 53-week year. We refer to our fiscal years by the calendar year in which they end. For example, the fiscal year ended October 31, 2021 was a 52-week year. 2Table of ContentsITEM 1.BUSINESSOverviewWe are a global technology leader that designs, develops and supplies a broad range of semiconductor and infrastructure software solutions. Our over 50-year history of innovation dates back to our diverse origins from Hewlett-Packard Company, AT&T, LSI Corporation, Broadcom Corporation, Brocade Communications Systems LLC (“Brocade”), CA, Inc. and Symantec Enterprise Security. Over the years, we have assembled a large team of semiconductor and software design engineers around the world. We maintain design, product and software development engineering resources at locations in the U.S., Asia, Europe and Israel, providing us with engineering expertise worldwide. We strategically focus our research and development resources to address niche opportunities in our target markets and leverage our extensive portfolio of U.S. and other patents, and other intellectual property (“IP”) to integrate multiple technologies and create system-on-chip (“SoC”) component and software solutions that target growth opportunities. We design products and software that deliver high-performance and provide mission critical functionality.We develop semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor (“CMOS”) based devices and analog III-V based products. We have a history of innovation in the semiconductor industry and offer thousands of products that are used in end products such as enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. We differentiate ourselves through our high performance design and integration capabilities and focus on developing products for target markets where we believe we can earn attractive margins. Our infrastructure software solutions enable customers to plan, develop, automate, manage, and secure applications across mainframe, distributed, mobile, and cloud platforms. Many of the largest companies in the world, including most of the Fortune 500, and many government agencies rely on our software solutions to help manage and secure their on-premise and hybrid cloud environments. Our portfolio of industry-leading infrastructure and security software is designed to modernize, optimize, and secure the most complex hybrid environments, enabling scalability, agility, automation, insights, resiliency and security. We also offer mission critical fibre channel storage area networking (“FC SAN”) products and related software in the form of modules, switches and subsystems incorporating multiple semiconductor products. Business StrategyOur strategy is to combine best-of-breed technology leadership in semiconductor and infrastructure software solutions, with unmatched scale, on a common sales and administrative platform to deliver a comprehensive suite of infrastructure technology products to the world’s leading business and government customers. We seek to achieve this through responsibly financed acquisitions of category-leading businesses and technologies, as well as investing extensively in research and development, to ensure our products retain their technology leadership. This strategy results in a robust business model designed to drive diversified and sustainable operating and financial results.Products and MarketsSemiconductor SolutionsSemiconductors are made by imprinting a network of electronic components onto a semiconductor wafer. These devices are designed to perform various functions such as processing, amplifying and selectively filtering electronic signals, controlling electronic system functions and processing, and transmitting and storing data. Our digital and mixed signal products are based on silicon wafers with CMOS transistors offering fast switching speeds and low power consumption, which are both critical design factors for the markets we serve. We also offer analog products, which are based on III-V semiconductor materials that have higher electrical conductivity than silicon, and thus tend to have better performance characteristics in radio frequency (“RF”), and optoelectronic applications. III-V refers to elements from the 3rd and 5th groups in the periodic table of chemical elements. Examples of these materials used in our products are gallium arsenide (“GaAs”) and indium phosphide (“InP”). We provide semiconductor solutions for managing the movement of data in data center, telecom, enterprise and embedded networking applications. We provide a broad variety of RF semiconductor devices, wireless connectivity solutions and custom touch controllers for the wireless market. We also provide semiconductor solutions for enabling the set-top box and broadband access applications and for enabling secure movement of digital data to and from host machines, such as servers, personal computers and storage systems, to the underlying storage devices, such as hard disk drives and solid-state drives.Our product portfolio ranges from discrete devices to complex sub-systems that include multiple device types and may also incorporate firmware for interfacing between analog and digital systems. In some cases, our products include mechanical hardware that interfaces with optoelectronic or capacitive sensors. We focus on markets that require high quality and the 3Table of Contentstechnology leadership and integrated performance characteristic of our products. The table below presents our material semiconductor product families and their major end markets and applications during fiscal year 2021.Major End MarketsMajor ApplicationsMaterial Product FamiliesBroadband• Set-top Box (“STB”) and Broadband Access• STB SoCs• Cable, digital subscriber line (“DSL”) and passive optical networking (“PON”) central office/consumer premise equipment (“CO/CPE”) SoCs• Wireless local area network (“WLAN”) access point SoCsNetworking• Data center, Telecom, Enterprise and Embedded Networking• Ethernet switching and routing merchant silicon• Embedded processors and controllers • Serializer/Deserializer (“SerDes”), application specific integrated circuits (“ASICs”) • Optical and copper, physical layer (“PHYs”)• Fiber optic transmitter and receiver componentsWireless• Mobile Handsets• RF front end modules (“FEMs”), filters, power amplifiers• Wi-Fi, Bluetooth, global positioning system/global navigation satellite system (“GPS/GNSS”) SoCs• Custom touch controllersStorage• Servers and Storage Systems• Serial attached small computer system interface (“SAS”) and redundant array of independent disks (“RAID”) controllers and adapters• Peripheral component interconnect express (“PCIe”) switches• Fibre channel host bus adapters (“HBA”)• Hard Disk Drives (“HDD”); Solid-State Drives (“SSD”)• Read channel based SoCs; Custom flash controllers• PreamplifiersIndustrial• Power isolation, conversion and protection• Optocouplers• Factory automation, in-car infotainment and renewable energy systems• Industrial fiber optics• Motor Controls and Factory Automation, In-car Infotainment Automation• Motion control encoders and subsystemsSet-Top Box Solutions: We offer complete SoC platform solutions for cable, satellite, Internet Protocol television, over-the-top and terrestrial STBs. Our products enable global service providers to introduce new and enhanced technologies and services in STBs, including transcoding, digital video recording functionality, higher definition video processing, increased networking capabilities, and more tuners to enable faster channel change and more simultaneous recordings. We are also enabling service providers in deploying High Efficiency Video Coding (“HEVC”), a video compression format that is a successor to the H.264/MPEG-4 format. HEVC enables ultra-high definition (“Ultra HD”), services by effectively doubling the capacity of existing networks to deploy new or existing content. Our families of STB solutions support the complete range of resolutions, from standard definition, to high definition, and Ultra HD.Broadband Access Solutions: We offer complete SoC platform solutions for DSL, cable, PON and WLAN for both CPE and CO deployments. Our CPE devices are used in broadband modems, residential gateways and Wi-Fi access points and routers. Our CO devices, including DSL Access Multiplexer, cable modem termination systems and PON optical line termination medium access controller, are empowering modern operator broadband infrastructure. Our products enable global service providers to continue to deploy next generation broadband access technologies across multiple standards, including DOCSIS, G.Fast, data over cable service interface specification, PON and Wi-Fi to provide more bandwidth and faster speeds to consumers. Ethernet Switching & Routing: Ethernet is a ubiquitous interconnection technology that enables high performance and cost effective networking infrastructure. We offer a broad set of Ethernet switching and routing products that are optimized for data center, service provider network, enterprise network, and embedded network applications. In the data center market, our high capacity, low latency, switching silicon supports advanced protocols around virtualization and multi-pathing. Our Ethernet switching fabric technologies provide the ability to build highly scalable flat networks supporting tens of thousands of servers. Our service provider switch portfolio enables carrier/service provider networks to support a large number of services in the wireless backhaul, access, aggregation and core of their networks. For enterprise networks and embedded Ethernet applications, we offer product families that combine multi-layer switching capabilities and support lower power modes that comply with industry standards around energy efficient Ethernet.Embedded Processors & Controllers: Our embedded processors leverage our ARM central processing unit and Ethernet switching technology to deliver SoCs for high performance embedded applications in a wide range of communication products such as voice-over-internet-protocol, telephony, point-of-sale devices and enterprise and retail access points and gateways. We offer a range of knowledge-based processors to enable high-performance decision-making for packet processing in a 4Table of Contentsvariety of advanced devices in the enterprise, metro, access, edge and core networking spaces. We also offer a range of Ethernet controllers for servers and storage systems supporting multiple generations of Ethernet technology. SerDes ASICs: For data center and enterprise networking, and high performance computing applications, we supply high speed SerDes technology integrated into ASICs. These ASICs are custom products built to individual customers specifications. Our ASICs are designed on advanced CMOS process technologies, focused primarily on leading edge geometries.Physical Layer Devices: These devices, also referred to as PHYs, are transceivers that enable the reception and transmission of Ethernet data packets over a physical medium such as copper wire or optical fibers. Our high performance Ethernet transceivers are built upon a proprietary digital signal processing communication architecture optimized for high-speed network connections and support the latest standards and advanced features, such as energy efficient Ethernet, data encryption and time synchronization. We also offer a range of automotive Ethernet products to meet growing consumer demand for in-vehicle connectivity.Fiber Optic Components: We supply a wide array of optical components to the Ethernet networking, storage, and access, metro- and long-haul telecommunication markets. Our optical components enable the high speed reception and transmission of data through optical fibers. RF Semiconductor Devices: Our RF semiconductor devices selectively filter, as well as amplify, RF signals. Filters enable modern wireless communication systems to support a large number of subscribers simultaneously by ensuring that the multiple transmissions and receptions of voice and data streams do not interfere with each other. We were among the first to deliver commercial film bulk acoustic resonator (“FBAR”) filters that offer technological advantages over competing filter technologies, to allow mobile handsets to function more efficiently in today's congested RF spectrum. FBAR technology has a significant market share within the cellular handset market. Our RF products include FEMs that incorporate multiple die into multi-function RF devices, duplexers and multiplexers, which are a combination of two or more transmit and receive filters in a single device, using our proprietary FBAR technology, discrete filters and discrete power amplifiers.Our expertise in FBAR technology, amplifier design, and module integration enables us to offer industry-leading performance in cellular RF transceiver applications. Our proprietary GaAs wafer manufacturing processes are critical to the production of power amplifier and low noise amplifier products. Connectivity Solutions: Our connectivity solutions include discrete and integrated Wi-Fi and Bluetooth solutions, and satellite-based GPS/GNSS mobile navigation receivers.Wi-Fi allows devices on a local area network to communicate wirelessly, adding the convenience of mobility to the utility of high-speed data networks. We offer a family of high performance, low power Wi-Fi chipsets. Bluetooth is a low power technology that enables direct connectivity between devices. We offer a complete family of Bluetooth silicon and software solutions that enable manufacturers to easily and cost-effectively add Bluetooth functionality to virtually any device. These solutions include combination chips that offer integrated Wi-Fi and Bluetooth functionality, which provides significant performance advantages over discrete solutions.We also offer a family of GPS, assisted-GPS and GNSS semiconductor products, software and data services. These products are part of a broader location platform that leverages a broad range of communications technologies, including Wi-Fi, Bluetooth and GPS, to provide more accurate location and navigation capabilities.Custom Touch Controllers: Our touch controllers process signals from touch screens in mobile handsets and tablets.SAS, RAID & PCIe Products: We provide SAS and RAID controller and adapter solutions to server and storage system original equipment manufacturers (“OEMs”). These solutions enable secure and high speed data transmission between a host computer, such as a server, and storage peripheral devices, such as HDD, SSD and optical disk drives and disk and tape-based storage systems. Some of these solutions are delivered as stand-alone semiconductors, typically as a controller. Other solutions are delivered as circuit boards, known as adapter products, which incorporate our semiconductors onto a circuit board with other features. RAID technology is a critical part of our server storage connectivity solutions as it provides protection against the loss of critical data resulting from HDD failures.We also provide interconnect semiconductors that support the PCI and PCIe communication standards. PCIe is the primary interconnection mechanism inside computing systems today. Fibre Channel Products: We provide Fibre Channel HBAs, which connect host computers such as servers to FC SANs. HDD & SSD Products: We provide read channel-based SoCs and preamplifiers to HDD OEMs. These are the critical chips required to read, write and protect data. An HDD SoC is an integrated circuit that combines the functionality of a read channel, serial interface, memory and a hard disk controller in a small, high-performance, low-power and cost-effective package. Read channels convert analog signals that are generated by reading the stored data on the physical media into 5Table of Contentsdigital signals. In addition, we sell preamplifiers, which are used to amplify the initial signal to and from the drive disk heads so the signal can be processed by the read channel.We also provide custom flash controllers to SSD OEMs. An SSD stores data in flash memory instead of on a hard disk, providing high speed access to the data. Flash controllers manage the underlying flash memory in SSDs, performing critical functions such as reading and writing data to and from the flash memory and performing error correction, wear leveling and bad block management.Industrial End Markets: We also provide a broad variety of products for the general industrial and automotive markets. We offer optocouplers, which provide electrical insulation and signal isolation for signaling systems that are susceptible to electrical noise or interference. Optocouplers are used in a diverse set of applications, including industrial motors, automotive systems including those used in hybrid engines, power generation and distribution systems, switching power supplies, motion sensors, telecommunications equipment, computers and office equipment, plasma displays, and military electronics. We also provide industrial fiber optics, Ethernet, motion encoders and LED products.Infrastructure Software Our mainframe software provides market-leading DevOps, AIOps, Security and Data Management Systems solutions. We help enterprises embrace open tools and technologies, integrate their mainframe into their cloud infrastructures, and increase the value of their mainframe investments. By partnering with our customers and providing creative value-added programs, we help customers overcome challenges related to skills development, technical education, strategy and planning, and the need for cloud-like pricing flexibility to support their overall business success with the platform.Our distributed software solutions enable global enterprises to optimize the planning, development and delivery of software, powering their business critical digital services. Our solutions are designed to enable customers to innovate, improve customer experience, and drive profitability by aligning business, development, and operational teams. Our products, organized in the domains of ValueOps, DevOps, and AIOps, deliver end-to-end visibility across all stages of the digital lifecycle and help our customers realize better business outcomes and better experiences for their customers. Our Symantec cyber security software solutions help organizations and governments secure against threats and compliance risks by protecting their users and data on any app, device, or network. Our integrated cyber defense approach simplifies cyber security with comprehensive solutions designed to secure critical business assets across on-premises and cloud infrastructures. Our Symantec solutions utilize rich threat intelligence from a global network of security engineers, threat analyst and researchers, as well as advanced AI and machine-learning engines, enabling customers to protect data, connect authorized users with trusted applications, and detect and respond to the most advanced targeted attacks. We also offer mission critical FC SAN products designed to help customers reduce the cost and complexity of managing business information within a shared data storage environment, enabling high levels of availability of mission critical applications in the form of modules, switches and subsystems incorporating multiple semiconductor products. We deliver reliable and simplified management of these FC SAN products through our software-based management tools designed to maximize uptime, dramatically simplify storage area networking deployment and management, and provide high levels of visibility and insight into the storage network.6Table of ContentsThe table below presents our software portfolios and their material offerings during fiscal year 2021.Software PortfolioPortfolio DescriptionMajor Portfolio OfferingsMainframe Software• Solutions for DevOps, AIOps, Security and Database Management Systems • Operational Analytics & management• Automation• Database & Database Management • Application Development & Testing• Identity & Access Management• Compliance & Data Protection• Security InsightsDistributed Software• Solutions that optimize the planning, development and delivery of business critical services• ValueOps• DevOps• AIOpsSymantec Cyber Security• Comprehensive threat protection and compliance solutions that secure against threats and compliance risks by protecting users and data on any app, device, or network• Endpoint Security• Network Security• Information Security• Identity SecurityFC SAN Management• Solutions that transforms current storage networks with autonomous SAN capabilities• Fibre Channel switch Payment Authentication• Software designed to reduce Card Not Present• Payment Security SuiteOperational Analytics & Management: These solutions combine big data, machine learning and artificial intelligence (“AI”) with mainframe expertise to deliver meaningful and actionable insights to augment and automate day-to-day operations and deliver exceptional customer experiences.Automation: These solutions reduce manual effort by enabling customers to proactively optimize resources and orchestrate automation across enterprise applications and systems.Databases & Database Management: These high-performance databases and management tools store, organize, and manage mainframe data to ensure optimal performance, efficient administration, and reliability of critical systems.Application Development & Testing: These solutions enable customers to accelerate software delivery while increasing code quality through the use of our agile processes and tools, and DevOps solutions. Our open-first strategy helps customers modernize their mainframe environment through the use of open source and open application programming technologies across people, process, tooling and applications, resulting in greater synergy and alignment with their corporate information technology (“IT”).Identity & Access Management: These solutions manage mainframe access and elevate it with modern practices such as multi-factor authentication, managing access for privileged users, and supporting all external security managers.Compliance & Data Protection: These solutions locate and protect sensitive mainframe data to ensure compliance and identify risk, identify and proactively respond to potential risks and bad actors, and reduce risk and lighten security management load with automated identification and authorization cleanup.Security Insights Platform: This solution helps ensure a trusted environment for customers and their employees by quickly interpreting and assessing mainframe security posture, identifying risks and developing remediation steps on an ongoing and ad hoc basis. This data is available for use with in-house tools for security information and event management.ValueOps: This solution delivers value stream management capabilities that enable customers to schedule, track, and manage work throughout its lifecycle from investment planning to execution. It aligns business and development teams across the enterprise, increasing transparency, reducing inefficiencies, and improving time to value.DevOps: This solution offers capabilities that empower users of our agile processes and tools to track development progress and deploy releases confidently with assurance of feature completeness, high-quality and reduced risk. Key stakeholders have a single view of key insights into release progress, health, quality, and defect trends, and metrics that drive focus, gauge readiness, and help to ensure successful, quality releases.AIOps: This solution combines application, infrastructure and network monitoring and correlation with intelligent remediation capabilities to help customers create more resilient production environments and improve customer experience.7Table of ContentsEndpoint Security: Endpoints are the critical last line of defense against cyber attackers. Our Symantec endpoint security solutions prevent, detect and respond to emerging threats across all devices and operating systems including laptops, desktops, tablets, mobile phones, servers and cloud workloads through an intelligent AI driven security console and single agent.Network Security: Email and web access are the lifeblood and essential communication means for every modern organization. We have a full array of network security solutions, as well as a shared set of advanced threat protection technologies to stop inbound and outbound threats targeting end users, information and key infrastructure. Information Security: Information protection and compliance is critical to managing risk. We offer integrated information security solutions, based on an efficient, single-policy that can be applied across the entire environment, to help organizations identify and protect risky users, applications and their most sensitive data everywhere across endpoints, on-premises networks, cloud services and private applications.Identity Security: User identities are under attack by cyber criminals hoping to exploit their access and privileges and do harm. We mitigate these attacks by enforcing granular security policies to stop unauthorized access to sensitive resources and data.Fibre Channel Switch Products: Our Brocade Fibre Channel switch products provide interconnection, bandwidth and high-speed switching between servers and storage devices which are in a FC SAN. FC SANs are networks dedicated to mission critical storage traffic, and enable simultaneous high speed and secure connections among multiple host computers and multiple storage arrays.Payment Security Suite: This is a software as a service (“SaaS”)-based payment authentication service to help banks protect against fraud and ensure a hassle-free online shopping experience for their customers.Research and DevelopmentWe are committed to continuous investment in product development and enhancement, with a focus on rapidly introducing new, proprietary products and releases. Many of our products have grown out of our own research and development efforts, and have given us competitive advantages in certain target markets due to performance differentiation. However, we opportunistically seek to enhance our capabilities through the acquisition of engineers with complementary research and development skills and complementary technologies and businesses. We focus our research and development efforts on the development of mission critical, innovative, sustainable and higher value product platforms and those that improve the quality and stability in our broadly deployed products. We leverage our design capabilities in markets where we believe our innovation and reputation will allow us to earn attractive margins by developing high value-add products.We plan to continue investing in product development, both organically and through acquisitions, to drive growth in our business. We also invest in process development and improvements to product features and functions, as well as fabrication capabilities to optimize processes for devices that are manufactured internally. Our field application engineers, design engineers, and product and software development engineers are located in many places around the world, and in many cases near our top customers. This enhances our customer reach and our visibility into new product opportunities and, in the case of our semiconductor customers, enables us to support our customers in each stage of their product development cycle, from the early stages of production design to volume manufacturing and future growth. By collaborating with our customers, we have opportunities to develop high value-added, customized products for them that leverage our existing technologies. We anticipate that we will continue to make significant research and development expenditures in order to maintain our competitive position, and to ensure a continuous flow of innovative and sustainable product platforms. Customers, Sales and DistributionWe sell our products through our direct sales force and a select network of distributors and channel partners globally. Distributors and OEMs, or their contract manufacturers, typically account for the substantial majority of our semiconductor sales. A relatively small number of customers account for a significant portion of our net revenue. Sales to distributors accounted for 53% and 42% of our net revenue for fiscal years 2021 and 2020, respectively. We believe aggregate sales to our top five end customers, through all channels, accounted for more than 35% and 30% of our net revenue for each of our fiscal years 2021 and 2020, respectively. We believe aggregate sales to Apple Inc., through all channels, accounted for approximately 20% and 15% of our net revenue for fiscal years 2021 and 2020, respectively. We expect to continue to experience significant customer concentration in future periods. The loss of, or significant decrease in demand from, any of our top five end customers could have a material adverse effect on our business, results of operations and financial condition.Many of our semiconductor customers design products in North America or Europe that are then manufactured in Asia. To serve customers around the world, we have strategically developed relationships with large global electronic component distributors, complemented by a number of regional distributors with customer relationships based on their respective product ranges. We also sell our products to a wide variety of OEMs or their contract manufacturers. We have established 8Table of Contentsstrong relationships with leading OEM customers across multiple target markets. Our direct sales force focuses on supporting our large OEM customers, and has specialized product and service knowledge that enables us to sell specific offerings at key levels throughout a customer’s organization. Certain customers require us to contract with them directly and with specified intermediaries, such as contract manufacturers. Many of our major customer relationships have been in place for many years and are often the result of years of collaborative product development. This has enabled us to build our extensive IP portfolio and develop critical expertise regarding our customers’ requirements, including substantial system-level knowledge. This collaboration has provided us with key insights into our customers' businesses and has enabled us to be more efficient and productive and to better serve our target markets and customers. Many of our customers and their contract manufacturers often require time critical delivery of our products to multiple locations around the world. With sales offices located in various countries, our primary warehouse in Malaysia, and dedicated regional customer support call centers, where we address customer issues and handle logistics and other order fulfillment requirements, we believe we are well-positioned to support our customers throughout the design, technology transfer and manufacturing stages across all geographies.Our software customers are in most major industries worldwide, including banks, insurance companies, other financial services providers, government agencies, global IT service providers, telecommunication providers, transportation companies, manufacturers, technology companies, retailers, educational organizations and health care institutions. Our customers generally consist of large enterprises that have computing environments from multiple vendors and are highly complex. We remain focused on strengthening relationships and increasing penetration within our existing core, mainframe-centric, and Symantec endpoint customers and expanding the adoption of our enterprise software offerings with these customers. We believe our enterprise-wide license model will continue to offer our customers reduced complexity, more flexibility and an easier renewal process that will help drive revenue growth.Manufacturing OperationsWe focus on maintaining an efficient global supply chain and a variable, low-cost operating model. Accordingly, we outsource a majority of our manufacturing operations, utilizing third-party foundry and assembly and test capabilities, as well as some of our corporate infrastructure functions. The majority of our front-end wafer manufacturing operations is outsourced to external foundries, including Taiwan Semiconductor Manufacturing Company Limited (“TSMC”). We use third-party contract manufacturers for a significant majority of our assembly and test operations, including Advanced Semiconductor Engineering, Inc., Foxconn Technology Group, Amkor Technology, Inc. and Siliconware Precision Industries Co., Ltd. We use our internal fabrication facilities for products utilizing our innovative and proprietary processes, such as our FBAR filters for wireless communications and our vertical-cavity surface emitting laser and side emitting lasers-based on GaAs and InP lasers for fiber optic communications, while outsourcing commodity processes such as standard CMOS. By doing so, we can protect our IP and accelerate time to market for our products. The majority of our internal III-V semiconductor wafer fabrication is done in the U.S. and Singapore. We also have a long history of operating in Asia where we manufacture and source the majority of our products and materials. We store the majority of our product inventory in our warehouse in Malaysia and our presence in Asia places us in close proximity to many of our customers’ manufacturing facilities.Manufacturing Materials and SuppliersOur manufacturing operations employ a wide variety of semiconductors, electromechanical components and assemblies and raw materials. We purchase materials from hundreds of suppliers on a global basis. These purchases are generally on a purchase order basis and some parts are not readily available from alternate suppliers due to their unique design or the length of time and cost necessary for re-design or qualification. To address the potential disruption in our supply chain, we may use a number of techniques, including redesigning products for alternative components, making incremental or “lifetime” purchases, or qualifying more than one source of supply. Our long-term relationships with our suppliers allow us to proactively manage our technology development and product discontinuance plans, and to monitor our suppliers' financial health. Some suppliers may, nonetheless, extend their lead times, limit supplies, increase prices or cease to produce necessary parts for our products. If these are unique or highly specialized components, we may not be able to find a substitute quickly, or at all.CompetitionThe markets in which we participate are highly competitive. Our competitors range from large, international companies offering a wide range of products to smaller companies specializing in narrow markets. The competitive landscape is changing as a result of a trend toward consolidation within many industries, as some of our competitors have merged with or been acquired by other competitors, while others have begun collaborating with each other. We expect this consolidation trend to continue. We expect competition in the markets in which we participate to continue to increase as existing competitors improve or expand their product offerings and as new companies enter the market. Additionally, our ability to compete effectively depends on a number of factors, including: quality, technical performance, price, product features, product system 9Table of Contentscompatibility, system-level design capability, engineering expertise, responsiveness to customers, new product innovation, product availability, delivery timing and reliability, and customer sales and technical support.In the semiconductor market, we compete with integrated device manufacturers, fabless semiconductor companies, as well as the internal resources of large, integrated OEMs. Our primary competitors are Amlogic Inc., Analog Devices, Inc., Advanced Micro Devices, Inc., Cisco Systems, Inc., Cree, Inc., GlobalFoundries, Hamamatsu Photonics K.K., Heidenhain Corporation, HiSilicon Technologies Co. Ltd., iC-Haus Gmbh, Intel Corp., Lumentum Holdings Inc., MACOM Technology Solutions Holdings, Inc., MaxLinear, Inc., Marvell Technology Inc., Mediatek Inc., NVIDIA Corporation, Microchip Technology Incorporated, Mitsubishi Electric Corporation, Murata Manufacturing Co., Ltd., NXP Semiconductors N.V., ON Semiconductor Corporation, OSRAM, Qorvo, Inc., Qualcomm Inc., Realtek Semiconductor Corp., Renesas Electronics Corporation, Skyworks Solutions, Inc., ST Microelectronics N.V., Sumitomo Corporation, Synaptics Incorporated, TDK-EPC Corporation, Toshiba Corporation, Texas Instruments, Inc. and II-VI Incorporated. We compete based on the strength and expertise of our high speed proprietary design expertise, FBAR technology, amplifier design, module integration, proprietary materials processes, multiple storage protocols and mixed-signal design, our broad product portfolio, support of key industry standards, reputation for quality products, and our customer relationships.In the infrastructure software market, we compete with large enterprise software vendors who continue to expand their product and service offerings and consolidate offerings into broad product lines, and smaller, niche players focused on specific markets. Our primary competitors are Atlassian Corporation, Plc, BMC Software Inc., BeyondTrust Corporation, Cisco Systems, Inc., CrowdStrike Holdings, Inc., CyberArk Software, Ltd., International Business Machines Corporation, Micro Focus International Plc, Microsoft Corporation, New Relic, Inc., Oracle Corporation, Proofpoint, Inc., Rocket Software, Inc., SailPoint, Inc., Salesforce.com, Inc., ServiceNow, Inc., SolarWinds, Inc., Splunk, Inc. and Zscaler, Inc. We compete based on our breadth of portfolio of enterprise management tools, breadth and synergy of offerings, our platform and hardware independence, our global reach, and our deep customer relationships and industry experience.Intellectual PropertyOur success depends in part upon our ability to protect our IP. To accomplish this, we rely on a combination of IP rights, including patents, copyrights, trademarks, service marks, trade secrets and similar IP, as well as customary contractual protections with our customers, suppliers, employees and consultants, and through security measures to protect our trade secrets. We believe our current product expertise, key engineering talent and IP portfolio provide us with a strong platform from which to develop application specific products in key target markets.As of October 31, 2021, we had 19,170 U.S. and other patents and 511 U.S. and other pending patent applications. The expiration dates of our patents range from 2020 to 2039, with a small number of patents expiring in the near future, none of which are expected to be material to our IP portfolio. We are not substantially dependent on any single patent or group of related patents.We focus our patent application program to a greater extent on those inventions and improvements that we believe are likely to be incorporated into our products, as contrasted with more basic research. However, we do not know how many of our pending patent applications will result in the issuance of patents or the extent to which the examination process could require us to narrow our claims.We and our predecessors have also entered into a variety of IP licensing and cross-licensing arrangements that have both benefited our business and enabled some of our competitors. A portion of our revenue comes from IP licensing royalty payments and from litigation settlements relating to such IP. We also license third-party technologies that are incorporated into some elements of our design activities, products and manufacturing processes. Historically, licenses of the third-party technologies used by us have generally been available to us on acceptable terms.The industries in which we compete are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by the vigorous pursuit, protection and enforcement of IP rights, including by patent holding companies that do not make or sell products. Some of our customer agreements require us to indemnify our customers for third-party IP infringement claims arising from our products. Claims of this sort could harm our relationships with our customers and might deter future customers from doing business with us. With respect to any IP rights claims against us or our customers or distributors, we may be required to defend ourselves or our customers or distributors in litigation, cease manufacture the infringing products, pay damages, expend resources to develop non-infringing technology, seek a license which may not be available on commercially reasonable terms or at all, or relinquish patents or other IP rights.With respect to our infrastructure software, the proprietary portions of our source code for our products are protected both as a trade secret and as copyrighted works. Except with respect to software components that are subject to open source licenses, our customers do not generally have access to the source code for our products. Rather, on-premise customers typically access only the executable code for our products, and SaaS customers access only the functionality of our SaaS offerings. Under certain contingent circumstances, some of our customers are beneficiaries of a source code escrow 10Table of Contentsarrangement that would enables them to obtain a limited right to access and use our source code if specific conditions are met.EmployeesOur success depends on our continued ability to attract, motivate and retain our workforce. As the source of our technological and product innovations, our engineering and technical personnel are a significant asset. Competition for these and other talented employees is significant in many locations where we operate, such as Silicon Valley and Southeast Asia. We measure our employees’ engagement by our voluntary attrition rate and employee feedback. Our global voluntary attrition rate in fiscal year 2021 was approximately 7%, below the technology industry benchmark (AON, 2021 Salary Increase and Turnover Study — Second Edition, September 2021). We also track the portion of our workforce in research and development roles. As of October 31, 2021, we had approximately 20,000 employees worldwide, with approximately 63% in research and development roles. By geography, approximately 54% of our employees are located in North America, 35% in Asia, and 11% in Europe, the Middle East and Africa. Governmental RegulationOur semiconductor manufacturing operations and research and development involve the use of hazardous substances and are regulated under international, federal, state and local laws governing health, safety and the environment. These regulations include limitations on discharge of pollutants to air, water, and soil; remediation requirements; product chemical content limitations; manufacturing chemical use and handling restrictions; pollution control requirements; waste minimization considerations; and treatment, transport, storage and disposal of solid and hazardous wastes. We are also subject to regulation by the U.S. Occupational Safety and Health Administration and similar health and safety laws in other jurisdictions.We believe that our properties and operations at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws. However, the risk of environmental liabilities cannot be completely eliminated and there can be no assurance that the application of environmental, health and safety laws to our business will not require us to incur significant expenditures.We are also regulated under a number of international, federal, state and local laws regarding recycling, product packaging and product content requirements, including legislation enacted in the U.S., European Union and China, among a growing number of jurisdictions, which have placed greater restrictions on the use of lead, among other substances, in electronic products, which affects materials composition and semiconductor packaging. In addition, our business is subject to various import/export regulations, such as the U.S. Export Administration Regulations, and applicable executive orders, and rules of industrial standards bodies, like the International Standards Organization, as well as regulation by other agencies, such as the U.S. Federal Trade Commission (“FTC”). These laws, regulations and orders are complex, may change frequently and with limited notice, have generally and may continue to become more stringent over time. We may incur significant expenditures in future periods as a result. SeasonalityHistorically, our net revenue has typically been higher in the second half of the fiscal year than in the first half, primarily due to seasonality in our wireless communications products. These products have historically experienced seasonality due to launches of new mobile handsets manufactured by our OEM customers. However, from time to time, typical seasonality and industry cyclicality are overshadowed by other factors such as wider macroeconomic effects, the timing of significant product transitions and launches by large OEMs, particularly with our wireless communications products. We have a diversified business portfolio and we believe that our overall revenue is less susceptible to seasonal variations as a result of this diversification.Other InformationOur website is www.broadcom.com. You may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports (and amendments thereto) filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) with the Securities and Exchange Commission (the “SEC”), as well as proxy statements filed by Broadcom, free of charge at the “Investor Center - SEC Filings” section of our website at www.broadcom.com, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Such periodic reports, proxy statements and other information are also available at the SEC’s website at http://www.sec.gov. The reference to our website address does not constitute incorporation by reference of the information contained on or accessible through our website.11Table of ContentsInformation About Our Executive OfficersThe following table provides information regarding our executive officers as of December 17, 2021: Name and TitleAgePosition and OfficesHock E. Tan70President, Chief Executive Officer and DirectorKirsten M. Spears57Chief Financial Officer and Chief Accounting OfficerMark D. Brazeal53Chief Legal and Corporate Affairs OfficerCharlie B. Kawwas, Ph.D.51Chief Operating OfficerThomas H. Krause, Jr.44President, Broadcom Software GroupHock E. Tan has served as our President and Chief Executive Officer since March 2006. He was President and Chief Executive Officer at Integrated Circuit Systems, Inc., a publicly traded timing solutions IC company, from 1999 until its acquisition by Integrated Device Technology, Inc. in 2005, Chief Operating Officer from 1996 to 1999 and Senior Vice President and Chief Financial Officer from 1995 to 1999. He was Vice President of Finance at Commodore International, Ltd. from 1992 to 1994, and held senior management positions at PepsiCo, Inc. and General Motors Corporation. He was also managing director of Pacven Investment, Ltd., a venture capital fund in Singapore, from 1988 to 1992, and was managing director of Hume Industries Ltd. in Malaysia from 1983 to 1988.Kirsten M. Spears has served as our Chief Financial Officer and Chief Accounting Officer since December 2020. She served as our Principal Accounting Officer from March 2016 to December 2020 and Vice President and Corporate Controller from May 2014 to December 2020. She was Vice President and Corporate Controller at LSI Corporation from 2007 until its acquisition by us in 2014. She held several management positions in accounting and reporting at LSI from 1997 to 2007. She also worked for PriceWaterhouseCoopers prior to joining LSI.Mark D. Brazeal has served as our Chief Legal and Corporate Affairs Officer since December 2021. He served as our Chief Legal Officer from March 2017 to December 2021. He was Chief Legal Officer and Senior Vice President, IP Licensing for SanDisk Corporation from 2014 until its acquisition by Western Digital Corporation in 2016. He held several senior legal positions at Broadcom Corporation from 2000 to 2014, most recently as the Senior Vice President and Senior Deputy General Counsel in charge of all commercial, operational, IP licensing and litigation matters. He was also an attorney in the transactional and IP groups at the law firms of Wilson Sonsini Goodrich & Rosati, Yuasa & Hara and Howrey & Simon prior to joining Broadcom Corporation.Charlie B. Kawwas has served as our Chief Operating Officer since December 2020. He served as our Senior Vice President and Chief Sales Officer from June 2015 to December 2020 and Senior Vice President, Worldwide Sales from May 2014 to June 2015. He was head of worldwide sales at LSI Corporation from 2010 until its acquisition by us in 2014. He held several executive leadership positions at LSI from 2007 to 2010, including Vice President of Sales and Marketing for the networking division and Vice President of Marketing for the networking and storage products group. He was also the leader of Product Line Management for the Optical Ethernet and Multi-service Edge portfolio at Nortel Networks Corporation prior to joining LSI.Thomas H. Krause, Jr. has served as our President, Broadcom Software Group since December 2020. He served as our Chief Financial Officer from October 2016 to December 2020, Vice President and acting Chief Financial Officer from March 2016 to October 2016 and Vice President of Corporate Development from January 2012 to March 2016. He founded a financial advisory firm where he represented public and private technology companies from 2010 to 2012. He was Vice President of Business Development at Techwell, Inc. from 2007 until its acquisition by Intersil Corporation in 2010. He also held several roles at Technology Crossover Ventures and Robertson Stephens prior to joining Techwell.12Table of ContentsITEM 1A. RISK FACTORSOur business, operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock and preferred stock. Many of the following risks and uncertainties are, and will continue to be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. The following material factors, among others, could cause our actual results to differ materially from historical results and those expressed in forward-looking statements made by us or on our behalf in filings with the SEC, press releases, communications with investors and oral statements.Risk Factors SummaryThe following is a summary of the principal risks that could adversely affect our business, operations and financial results.Risks Related to Our Business•The ongoing COVID-19 pandemic has disrupted and will likely continue to disrupt normal business activity.•The majority of our sales come from a small number of customers and a reduction in demand or loss of one or more of our significant customers may adversely affect our business.•Dependence on contract manufacturing and suppliers of critical components within our supply chain may adversely affect our ability to bring products to market.•We purchase a significant amount of the materials used in our products from a limited number of suppliers.•Our business is subject to various governmental regulations and trade restrictions. Compliance with these regulations may cause us to incur significant expense and, if we fail to maintain compliance, we may be forced to cease manufacture and distribution of certain products or subjected to administrative proceedings and civil or criminal penalties.•Adverse global economic conditions could have a negative effect on us.•We operate in the highly cyclical semiconductor industry.•Global political and economic conditions and other factors related to our international operations could adversely affect us.•We are subject to risks associated with our distributors and other channel partners, including product inventory levels and product sell-through.•Our dependence on senior management and if we are unable to attract and retain qualified personnel, we may not be able to execute our business strategy effectively.•We may pursue acquisitions, investments, joint ventures and dispositions, which could adversely affect our results of operations.•We may be involved in legal proceedings, including IP, securities litigation, and employee-related claims.•Our operating results are subject to substantial quarterly and annual fluctuations.•Failure to adjust our manufacturing and supply chain to accurately meet customer demand could adversely affect our results of operations.•Winning business in the semiconductor solutions industry is subject to a lengthy process that often requires us to incur significant expense, from which we may ultimately generate no revenue.•Competition in our industries could prevent us from growing our revenue.•A prolonged disruption of our manufacturing facilities, research and development facilities, warehouses or other significant operations, or those of our suppliers, could have a material adverse effect on us.•We may be unable to maintain appropriate manufacturing capacity or product yields at our own manufacturing facilities.•Any failure of our IT systems or one or more of our corporate infrastructure vendors to provide necessary services could have a material adverse effect on our business.•Our ability to maintain or improve gross margin.•Our ability to protect the significant amount of IP in our business. •Incompatibility of our software products with operating environments, platforms, or third-party products, demand for our products and services could decrease.•Failure to enter into software license agreements on a satisfactory basis could adversely affect us.13Table of Contents•Licensed third party software used in our products may not be available to us in the future, which may delay product development and production or cause us to incur additional expense.•Use of open source code sources, which, under certain circumstances could materially adversely affect us.•We are subject to warranty claims, product recalls and product liability.•The complexity of our products could result in unforeseen delays or expense or undetected defects or bugs.•We make substantial investments in research and development and unsuccessful investments could materially adversely affect our business, financial condition and results of operations.•We collect, use, store, or otherwise process personal information, which subjects us to privacy and data security laws and contractual commitments, and our actual or perceived failure to comply with such laws and commitments could harm our business.•We are subject to environmental, health and safety laws, which could increase our costs, restrict our operations and require expenditures.•Social and environmental responsibility regulations, policies and provisions, as well as customer and investor demands, may make our supply chain more complex and may adversely affect our relationships with customers and investors.•The average selling prices of semiconductor products in our markets have often decreased rapidly and may do so in the future.•A breach of our security systems may have a material adverse effect on our business.•Fluctuations in foreign exchange rates could result in losses.Risks Relating to Taxes•Changes in tax legislation or policies could materially impact our financial position and results of operations.•Our corporate income taxes could significantly increase if we are unable to maintain our tax concessions or if our assumptions and interpretations regarding tax laws and concessions prove to be incorrect.•Our income taxes and overall cash tax costs are affected by a number of factors that could materially, adversely affect financial results.Risks Relating to Our Indebtedness•Our substantial indebtedness could adversely affect our financial health and our ability to execute our business strategy.•The instruments governing our indebtedness impose certain restrictions on our business.•Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flows from our business to pay our substantial debt.Risks Relating to Owning Our Common Stock•Volatility of our stock price could result in substantial losses for our investors as well as class action litigation against us and our management.•The amount and frequency of our stock repurchases may fluctuate.•A substantial amount of our stock is held by a small number of large investors.•There can be no assurance that we will continue to declare cash dividends.For a more complete discussion of the material risks facing our business, see below.Risks Related to Our BusinessThe ongoing COVID-19 pandemic has disrupted and will likely continue to disrupt normal business activity, which may have an adverse effect on our results of operations.The global spread of COVID-19 and the efforts to control it have disrupted, and reduced the efficiency of, normal business activities in much of the world. The pandemic has resulted in authorities around the world implementing numerous unprecedented measures such as travel restrictions, quarantines, shelter in place orders, factory and office shutdowns and vaccine mandates. These measures have impacted, and will likely continue to impact our workforce and operations, and those of our customers, contract manufacturers (“CMs”), suppliers and logistics providers. 14Table of ContentsWe have been, and expect to continue, experiencing some disruption to parts of our global semiconductor supply chain, including procuring necessary components and inputs, such as wafers and substrates, in a timely fashion, with suppliers increasing lead times or placing products on allocation and raising prices. In addition, our primary warehouse and a number of our key suppliers, particularly assembly and test service providers, are in Malaysia. While our Malaysia warehouse has remained fully operational, many of the facilities of our key suppliers and other service providers were shut down or operated at reduced capacity for extended periods. This resulted in significant logistical challenges and product delays, which could recur in the event of any future closures of, or periods of reduced operations at, our warehouse or the facilities of our suppliers and providers. Any similar disruption at our Fort Collins, Colorado manufacturing facility would severely impact our ability to manufacture our FBAR products and adversely affect our wireless business. In addition, disruptions to commercial transportation infrastructure have increased delivery times for materials and components to our facilities, transfers of our products to our key suppliers and, in some cases, our ability to timely ship our products to customers. As a result of these supply chain disruptions, we have increased customer order lead times and placed some products on allocation. We are also largely building semiconductor products to order as demand continues to outpace supply. This has limited and may continue to limit our ability to fulfill orders and satisfy all of the demand for our products, which may adversely affect our relationships with our customers.In response to governmental directives and recommended safety measures, we modified our workplace practices globally, which has resulted in many of our employees working remotely for extended periods of time. Working remotely for extended periods may reduce our employees’ efficiency and productivity, which may cause product development delays, hamper new product innovation and have other unforeseen adverse effects on our business. In addition, if a significant number of our employees, or employees and third parties performing key functions, including our Chief Executive Officer and members of our board of directors, become ill, our business may be further adversely impacted. While we have implemented personal safety measures at all of our facilities where our employees are working onsite, we may need to modify our business practices and policies in a manner that may adversely impact our business, especially if the spread of COVID-19 (including any variants) worsen significantly, and existing and new precautionary measures could negatively impact our operations. In addition, any actions we take may not be sufficient to mitigate the risk of infection and could result in a significant number of COVID-19-related claims. Changes to state workers’ compensation laws, such as those in California, may increase our potential liability for such claims.While we continue to see robust demand in our semiconductor solutions segment and record profitability driven by the supply imbalance, and have seen little impact to our software business from the COVID-19 pandemic, the macroeconomic environment remains uncertain and it may not be sustainable over the longer term. The degree to which the pandemic ultimately impacts our business and results of operations will depend on future developments beyond our control, including the extent of actions to contain the virus (including any variants), availability and efficacy of the vaccines or other treatments, public acceptance of the vaccines (including boosters), and how quickly and to what extent normal economic and operating conditions resume. The majority of our sales come from a small number of customers and a reduction in demand or loss of one or more of our significant customers may adversely affect our business.We are dependent on a small number of end customers, OEMs, their respective CMs, and certain distributors for a majority of our business, revenue and results of operations. For fiscal year 2021, sales to distributors accounted for 53% of our net revenue. We believe aggregate sales, through all channels, to Apple and our top five end customers, accounted for approximately 20% and more than 35% of our net revenue for fiscal year 2021, respectively. This customer concentration increases the risk of quarterly fluctuations in our operating results and our sensitivity to any material, adverse developments experienced by our significant customers.The terms and conditions under which we do business with most of our semiconductor customers generally do not include commitments to purchase any specific quantities of products. Even in those instances where we have an arrangement under which a customer agrees to source an agreed portion of its product needs from us (provided we meet our contractual obligations), the arrangement often includes pricing schedules or methodologies that apply regardless of the volume of products purchased, and those customers may not purchase the amount of product we expect. As a result, we may not generate the amount of revenue or achieve the level of profitability we expect under such arrangements. Moreover, our top customers’ purchasing power has, in some cases, given them the ability to make greater demands on us with regard to pricing and contractual terms in general. We expect this trend to continue, which may adversely affect our gross margin on certain products and, should we fail to perform under these arrangements, we could also be liable for significant monetary damages.The loss of, or any substantial reduction in sales to, any of our major customers could have a material adverse effect on our business, financial condition, results of operations and cash flows.15Table of ContentsDependence on contract manufacturing and suppliers of critical components within our supply chain may adversely affect our ability to bring products to market, damage our reputation and adversely affect our results of operations.We operate a primarily outsourced manufacturing business model that principally utilizes CMs, such as third-party wafer foundries and module assembly and test capabilities. Our semiconductor products require wafer manufacturers with state-of-the-art fabrication equipment and techniques, and most of our products are designed to be manufactured in a specific process, typically at one particular fab or foundry, either our own or with a particular CM.We depend on our CMs to allocate sufficient manufacturing capacity to meet our needs, to produce products of acceptable quality at acceptable yields, and to deliver those products to us on a timely basis. We do not generally have long-term capacity commitments with our CMs and substantially all of our manufacturing services are on a purchase order basis with no minimum quantities. Further, our CMs may fail to timely develop new, advanced manufacturing processes, including transitions to smaller geometry process technologies or, from time to time, will cease to, or will become unable to, manufacture a component for us. As lead times to identify, qualify and establish reliable production at acceptable yields with a new CM is typically lengthy, there is often no readily available alternative source and there may be other constraints on our ability to change CMs. In addition, qualifying such CMs is often expensive, and they may not produce products as cost-effectively as our current suppliers. TSMC, one of our CMs, manufactured approximately 89% of the wafers manufactured by our CMs during fiscal year 2021. Our wafer requirements represent a significant portion of the total production capacity of TSMC. However, TSMC also fabricates wafers for other companies, including certain of our competitors, and could choose or be required to prioritize capacity for other customers or reduce or eliminate deliveries to us on short notice. In addition, TSMC has, and may in the future, raise their prices to us. If any of the foregoing circumstances occur, we may be unable to meet our customer demand, or to the same extent as our competitors, fail to meet our contractual obligations or forgo revenue opportunities. This has in the past damaged, and may in the future damage, our relationships with our customers. This could also result in litigation for alleged failure to meet our obligations, payment of significant damages, and our net revenue could decline, adversely affecting our business, financial condition, results of operations, and gross margin. Further, any substantial disruption in the contract manufacturing services that we utilize, including TSMC’s supply of wafers to us, as a result of a natural disaster, climate change, water shortages, political unrest, military conflicts, geopolitical turmoil, trade tensions, government orders, medical epidemics, such as the COVID-19 pandemic, economic instability, equipment failure or other cause, could materially harm our business, customer relationships and results of operations.We purchase a significant amount of the materials used in our products from a limited number of suppliers.Our manufacturing processes and those of our CMs rely on many materials, including silicon, GaAs and InP wafers, copper lead frames, precious and rare earth metals, mold compound, ceramic packages and various chemicals and gases. We purchase a significant portion of our materials, components and finished goods used in our products from a few materials providers, some of which are single source suppliers. As certain materials are highly specialized, the lead time needed to identify and qualify a new supplier is typically lengthy and there is often no readily available alternative source. During fiscal year 2021, we purchased approximately two-thirds of our manufacturing materials from five materials providers. We do not generally have long-term contracts with our materials providers and substantially all of our purchases are on a purchase order basis. Suppliers may extend lead times, limit supplies, place products on allocation or increase prices due to commodity price increases, capacity constraints, inflation, or other factors, any of which could lead to interruption of supply or increased demand in the industry. For example, due to the COVID-19 pandemic, we have experienced some supply constraints and increases in prices, including with respect to wafers and substrates. Additionally, the supply of these materials may be negatively impacted by increased trade tensions between the U.S. and its trading partners, particularly China. These supply constraints have had, and may continue to have, a negative impact on our customer relationships. Further, continued supply constraints for these or any other reasons could result in loss of revenue opportunities and adversely impact our business, financial condition and results of operations.Our business is subject to various governmental regulations, and compliance with these regulations may cause us to incur significant expense. If we fail to maintain compliance with applicable regulations, we may be forced to cease the manufacture and distribution of certain products, and we could be subject to administrative proceedings and civil or criminal penalties.Our business is subject to various domestic and international laws and other legal requirements, including anti-competition and import/export regulations, such as the U.S. Export Administration Regulations, and applicable executive orders. These laws, regulations and orders are complex, may change frequently and with limited notice, have generally and may continue to become more stringent over time. We may be required to incur significant expense to comply with, or to remedy violations of, these regulations. In addition, if our customers fail to comply with these regulations, we may be 16Table of Contentsrequired to suspend sales to these customers, which could damage our reputation and negatively impact our results of operations. The U.S. government may also add companies to its restricted entity list and/or technologies to its list of prohibited exports to specific countries, which have had and will continue to have an adverse effect on our ability to sell our products and our revenue. For example, Huawei Technologies Co., Ltd., one of our customers, is subject to certain U.S. export restrictions, which has required us to suspend sales to Huawei until we obtain licenses from the U.S. Department of Commerce. We may be unable to obtain or maintain the necessary licenses to allow us to export products to them. These restrictive governmental actions and any similar measures that may be imposed on U.S. companies by other governments, especially in light of ongoing trade tensions with China, will likely limit or prevent us from doing business with certain of our customers or suppliers and harm our ability to compete effectively or otherwise negatively affect our ability to sell our products, and adversely affect our business and results of operations. Our products and operations are also subject to regulation by U.S. and non-U.S. regulatory agencies, such as the U.S. Federal Trade Commission (“FTC”). From time to time, we may also be involved or required to participate in regulatory investigations or inquiries, such as the ongoing investigation by the Korean Fair Trade Commission into certain of our contracting and business practices, which may evolve into legal or other administrative proceedings. Growing public concern over concentration of economic power in corporations is likely to result in increased anti-competition legislation, regulation, administrative rule making, and enforcement activity. Involvement in regulatory investigations or inquiries, can be costly, lengthy, complex and time consuming, diverting the attention and energies of our management and technical personnel.If any pending or future governmental investigations result in an unfavorable resolution, we could be required to cease the manufacture and sale of the subject products or technology, pay fines or disgorge profits or other payments, and/or cease certain conduct and/or modify our contracting or business practices, which could have a material adverse effect on our business, financial condition and results of operations. We may be obligated to indemnify our current or former directors or employees, or former directors or employees of companies that we have acquired, in connection with regulatory investigations. These liabilities could be substantial and may include, among other things, the cost of government, law enforcement or regulatory investigations and civil or criminal fines and penalties.In addition, the manufacture and distribution of our semiconductors must comply with various laws and adapt to changes in regulatory requirements as they occur. For example, if a country in which our products are manufactured or sold sets technical standards that are not widely shared, it may require us to stop distributing our products commercially until they comply with such new standards, lead certain of our customers to suspend imports of their products into that country, require manufacturers in that country to manufacture products with different technical standards and disrupt cross-border manufacturing relationships, any of which could have a material adverse effect on our business, financial condition and results of operations. If we fail to comply with these requirements, we could also be required to pay civil penalties or face criminal prosecution. Adverse global economic conditions could have a negative effect on our business, results of operations and financial condition and liquidity.A general slowdown in the global economy or in a particular region or industry, an increase in trade tensions with U.S. trading partners, inflation or a tightening of the credit markets could negatively impact our business, financial condition and liquidity. Adverse global economic conditions have from time to time caused or exacerbated significant slowdowns in the industries and markets in which we operate, which have adversely affected our business and results of operations. Macroeconomic weakness and uncertainty also make it more difficult for us to accurately forecast revenue, gross margin and expenses, and may make it more difficult to raise or refinance debt. An escalation of trade tensions between the U.S. and China has resulted in trade restrictions and increased tariffs that harm our ability to participate in Chinese markets or compete effectively with Chinese companies. Sustained uncertainty about, or worsening of, current global economic conditions and further escalation of trade tensions between the U.S. and its trading partners, especially China, and possible decoupling of the U.S. and China economies, could result in a global economic slowdown and long-term changes to global trade. Such events may also (i) cause our customers and consumers to reduce, delay or forgo technology spending, (ii) result in customers sourcing products from other suppliers not subject to such restrictions or tariffs, (iii) lead to the insolvency or consolidation of key suppliers and customers, and (iv) intensify pricing pressures. Any or all of these factors could negatively affect demand for our products and our business, financial condition and results of operations.We operate in the highly cyclical semiconductor industry.The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change and price erosion, evolving technical standards, frequent new product introductions, short product life cycles (for semiconductors and for many of the end products in which they are used) and wide fluctuations in product supply and demand. From time to time, these factors, together with changes in general economic conditions, cause significant upturns and downturns in the industry in general, and in our business in particular. The industry has experienced a significant upturn due to the supply imbalance resulting in record profitability and increases in average selling prices, which may not be sustainable in the longer term. 17Table of ContentsConversely, periods of industry downturns have been characterized by diminished demand for end-user products, high inventory levels and periods of inventory adjustment, under-utilization of manufacturing capacity, changes in revenue mix and accelerated erosion of average selling prices. We expect our business to continue to be subject to cyclical downturns even when overall economic conditions are relatively stable. If we cannot offset industry or market downturns, our net revenue may decline and our financial condition and results of operations may suffer.Global political and economic conditions and other factors related to our international operations could adversely affect our business, financial condition and results of operations.A majority of our products are produced, sourced and sold internationally and our international revenue represents a significant percentage of our overall revenue. In addition, as of October 31, 2021, approximately 48% of our employees were located outside the U.S. Multiple factors relating to our international operations and to particular countries in which we operate could have a material adverse effect on our business, financial condition and results of operations. These factors include:•changes in political, regulatory, legal or economic conditions or geopolitical turmoil, including terrorism, war or political or military coups, or civil disturbances or political instability foreign and domestic;•restrictive governmental actions, such as restrictions on the transfer or repatriation of funds and foreign investments, data privacy regulations, imposition of climate change regulations, and trade protection measures, including increasing protectionism, import/export restrictions, import/export duties and quotas, trade sanctions and customs duties and tariffs, all of which have increased in recent years;•difficulty in obtaining product distribution and support, and transportation delays;•potential inability to localize software products for a significant number of international markets;•difficulty in conducting due diligence with respect to business partners in certain international markets;•public health or safety concerns, medical epidemics or pandemics, such as COVID-19, and other natural- or man-made disasters;•nationalization of businesses and expropriation of assets; and•changes in U.S. and foreign tax laws.A significant legal risk associated with conducting business internationally is compliance with the various and differing laws and regulations of the many countries in which we do business. In addition, the laws in various countries are constantly evolving and may, in some cases, conflict with each other. Although our policies prohibit us, our employees and our agents from engaging in unethical business practices, there can be no assurance that all of our employees, distributors or other agents will refrain from acting in violation of our related anti-corruption or other policies and procedures. Any such violation could have a material adverse effect on our business.We are subject to risks associated with our distributors and other channel partners, including product inventory levels and product sell-through.We sell our products through a direct sales force and a select network of distributors and other channel partners globally. Sales to distributors accounted for 53% of our net revenue in the fiscal year ended October 31, 2021 and are subject to a number of risks, including:•fluctuations in demand based on our distributors’ product inventory levels and end customer demand in a given quarter;•our distributors and other channel partners are generally not subject to minimum sales requirements or any obligation to market our products to their customers;•our distributors and other channel partners agreements are generally nonexclusive and may be terminated at any time without cause;•our lack of control over the timing of delivery of our products to end customers; and•our distributors and other channel partners may market and distribute competing products and may place greater emphasis on the sale of these products.In addition, we are selling our semiconductor products through an increasingly limited number of distributors, which exposes us to additional customer concentration and related credit risks. 18Table of ContentsWe do not always have a direct relationship with the end customers of our products. As a result, our semiconductor products may be used in applications for which they were not necessarily designed or tested, including, for example, medical devices, and they may not perform as anticipated in such applications. In such event, failure of even a small number of parts could result in significant liabilities to us, damage our reputation and harm our business and results of operations.Our business would be adversely affected by the departure of existing members of our senior management team.Our success depends, in large part, on the continued contributions of our senior management team, and in particular, the services of Mr. Hock E. Tan, our President and Chief Executive Officer. Effective succession planning is also important for our long-term success. Failure to ensure effective transfers of knowledge and smooth transitions involving senior management could hinder our strategic planning and execution. None of our senior management is bound by written employment contracts. In addition, we do not currently maintain key person life insurance covering our senior management. The loss of any of our senior management could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate.If we are unable to attract and retain qualified personnel, especially our engineering and technical personnel, we may not be able to execute our business strategy effectively.Our future success depends on our ability to attract, retain and motivate qualified personnel. As the source of our technological and product innovations, our engineering and technical personnel (including cyber security experts) are a significant asset. Competition for these employees is significant in many areas of the world in which we operate, particularly in Silicon Valley and Southeast Asia where qualified engineers are in high demand. In addition, current or future immigration laws may make it more difficult to hire or retain qualified engineers, further limiting the pool of available talent. Further, our employees may decide not to continue working for us and may leave with little or no notice. We believe equity awards provide a powerful long-term retention incentive and have historically granted these awards to the substantial majority of our employees. However, the amendments to our 2012 Stock Incentive Plan approved by our stockholders at our 2021 Annual Meeting of Stockholders significantly reduced the number of shares available for equity awards. As a result, we may need to change our current equity granting philosophy, which could impair our efforts to attract and retain necessary personnel. Any inability to retain, attract or motivate such personnel could have a material adverse effect on our business, financial condition and results of operations.We may pursue acquisitions, investments, joint ventures and dispositions, which could adversely affect our results of operations.Our growth strategy includes acquiring or investing in businesses that offer complementary products, services and technologies, or enhance our market coverage or technological capabilities. Any acquisitions we may undertake and their integration involve risks and uncertainties, such as:•unexpected delays, challenges and related expenses, and disruption of our business;•diversion of management’s attention from daily operations and the pursuit of other opportunities;•incurring significant restructuring charges and amortization expense, assuming liabilities (some of which may be unexpected) and ongoing or new lawsuits related to the transaction or otherwise, potential impairment of acquired goodwill and other intangible assets, and increasing our expenses and working capital requirements; •the potential for deficiencies in internal controls at the acquired business, as well as implementing our own management information systems, operating systems and internal controls for the acquired operations;•our due diligence process may fail to identify significant issues with the acquired company’s products, financial disclosures, accounting practices, legal, tax and other contingencies, compliance with local laws and regulations (and interpretations thereof) in the U.S. and multiple international jurisdictions;•additional acquisition-related debt, which could increase our leverage and potentially negatively affect our credit ratings resulting in more restrictive borrowing terms or increased borrowing costs thereby limiting our ability to borrow; •dilution of stock ownership of existing stockholders;•difficulties integrating the acquired business or company and in managing and retaining acquired employees, vendors and customers; and •inaccuracies in our original estimates and assumptions used to assess a transaction, which may result in us not realizing the expected financial or strategic benefits of any such transaction. 19Table of ContentsIn addition, the current and the proposed changes to the U.S. and foreign regulatory approval process and requirements in connection with an acquisition may cause approvals to take longer than anticipated to obtain, not be forthcoming or contain burdensome conditions, which may jeopardize, delay or reduce the anticipated benefits of the transaction to us and could impede the execution of our business strategy. From time to time, we may also seek to divest or wind down portions of our business, either acquired or otherwise, or we may exit minority investments, any of which could materially affect our cash flows and results of operations. Such dispositions involve risks and uncertainties, including our ability to sell such businesses on terms acceptable to us, or at all, disruption to other parts of our business, potential loss of employees or customers, or exposure to unanticipated liabilities or ongoing obligations to us following any such dispositions. In addition, dispositions may include the transfer of technology and/or the licensing of certain IP rights to third-party purchasers, which could limit our ability to utilize such IP rights or assert these rights against such third-party purchasers or other third parties.We may be involved in legal proceedings, including IP, securities litigation, and employee-related claims, which could, among other things, divert efforts of management and result in significant expense and loss of our IP rights.We are often involved in legal proceedings, including cases involving our IP rights and those of others, commercial matters, acquisition-related suits, securities class action suits, employee-related claims and other actions. Litigation or settlement of such actions, regardless of their merit, can be costly, lengthy, complex and time consuming, diverting the attention and energies of our management and technical personnel.The industries in which we operate are characterized by companies holding large numbers of patents, copyrights, trademarks and trade secrets and by the vigorous pursuit, protection and enforcement of IP rights, including actions by patent-holding companies that do not make or sell products. From time to time, third parties assert against us and our customers and distributors their IP rights to technologies that are important to our business. For example, in August 2020 judgment was entered against Broadcom and Apple for infringement of certain patents pursuant to which California Institute of Technology was awarded past damages of $270.2 million from Broadcom and $837.8 million from Apple, for which Apple is seeking indemnification from Broadcom. Although we are appealing this judgment, there are no assurances that we will be successful. Many of our customer agreements, and in some cases our asset sale agreements, and/or the laws of certain jurisdictions may require us to indemnify our customers or purchasers for third-party IP infringement claims, including costs to defend those claims, and payment of damages in the case of adverse rulings. However, our CMs and suppliers may or may not be required to indemnify us should we or our customers be subject to such third-party claims. Claims of this sort could also harm our relationships with our customers and might deter future customers from doing business with us. If any pending or future proceedings result in an adverse outcome, we could be required to:•cease the manufacture, use or sale of the infringing products, processes or technology and/or make changes to our processes or products;•pay substantial damages for past, present and future use of the infringing technology, including up to treble damages if willful infringement is found;•expend significant resources to develop non-infringing technology;•license technology from the third-party claiming infringement, which license may not be available on commercially reasonable terms, or at all;•enter into cross-licenses with our competitors, which could weaken our overall IP portfolio and our ability to compete in particular product categories;•pay substantial damages to our direct or end customers to discontinue use or replace infringing technology with non-infringing technology; or•relinquish IP rights associated with one or more of our patent claims.Any of the foregoing results could have a material adverse effect on our business, financial condition and results of operations.In addition, we may be obligated to indemnify our current or former directors or employees, or former directors or employees of companies that we have acquired, in connection with such litigation. These liabilities could be substantial and may include, among other things, the cost of defending lawsuits against these individuals, as well as stockholder derivative suits; civil or criminal fines and penalties; legal and other expenses; and expenses associated with the remedial measure, if any, which may be imposed.20Table of ContentsOur operating results are subject to substantial quarterly and annual fluctuations.Our operating results have fluctuated in the past and are likely to fluctuate in the future. These fluctuations may occur on a quarterly and annual basis and are due to a number of factors, many of which are beyond our control. In addition to many of the risks described elsewhere in this “Risk Factors” section, these factors include, among others:•the timing of launches by our customers of new product in which our products are included and changes in end-user demand for our customers’ the products;•fluctuations in the levels of component or product inventories held by our customers;•the shift to cloud-based IT solutions and services, such as hyperscale computing, which may adversely affect the timing and volume of sales of our products for use in traditional enterprise data centers;•the timing of new software contracts and renewals, as well as the timing of any terminations of software contracts that require us to refund to customers any pre-paid amounts under the contract;•our ability to timely develop, introduce and market new products and technologies;•the timing and extent of our software license and subscription revenue, and other non-product revenue;•new product announcements and introductions by us or our competitors;•seasonality or other fluctuations in demand in our markets;•timing and amount of research and development and related new product expenditures, and the timing of receipt of any research and development grant monies; and•timing of any regulatory changes, particularly with respect to trade sanctions and customs duties and tariffs, and tax reform.The foregoing factors are often difficult to predict, and these, as well as other factors, could materially adversely affect our quarterly or annual operating results. In addition, a significant amount of our operating expenses are relatively fixed in nature. Any failure to adjust spending quickly enough to compensate for a revenue shortfall could magnify the adverse impact of such revenue shortfall on our results of operations. As a result, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be meaningful or a reliable indicator of our future performance. If our operating results in one or more future quarters fail to meet the expectations of securities analysts or investors, a significant decline in the trading price of our common stock may occur, which may happen immediately or over time.Failure to adjust our manufacturing and supply chain to accurately meet customer demand could adversely affect our results of operations.We make significant decisions, including determining the levels of business that we will seek and accept, production schedules, levels of reliance on contract manufacturing and outsourcing, internal fabrication utilization and other resource requirements, based on our estimates of customer requirements, which may not be accurate. During the COVID-19 pandemic, we have moved largely to a build to order model and have extended customer lead times substantially in light of supply chain challenges. More typically, however, to ensure the availability of our semiconductor products we start manufacturing based on customer forecasts, which are not binding. As a result, we incur inventory and manufacturing costs in advance of anticipated sales that may be substantially lower than expected. If actual demand for our products is lower than forecast, we may also experience higher inventory carrying and operating costs and product obsolescence. Because certain of our sales, research and development, and internal manufacturing overhead expenses are relatively fixed, a reduction in customer demand may also decrease our gross margin and operating income.Conversely, customers often require rapid increases in production on short notice. If we are unable to meet such increases in demand, this could damage our customer relationships, reduce revenue growth and margins, subject us to additional liabilities, harm our reputation, and prevent us from taking advantage of opportunities.Winning business in the semiconductor solutions industry is subject to a lengthy process that often requires us to incur significant expense, from which we may ultimately generate no revenue.Our semiconductor business is dependent on us winning competitive bid selection processes, known as “design wins”. These selection processes are typically lengthy and can require us to dedicate significant development expenditures and scarce engineering resources in pursuit of a single customer opportunity. Failure to obtain a particular design win may prevent us from obtaining design wins in subsequent generations of a particular product. This can result in lost revenue and can weaken our position in future selection processes.21Table of ContentsWinning a product design does not guarantee sales to a customer. A delay or cancellation of a customer’s plans could materially and adversely affect our financial results, as we incur significant expense in the design process and may generate little or no revenue from it. In addition, the timing of design wins is unpredictable and implementing production for a major design win, or multiple design wins at the same time, may strain our resources and those of our CMs. In such event, we may be forced to dedicate significant additional resources and incur additional costs and expenses. Further, often customers will only purchase limited numbers of evaluation units until they qualify the products and/or the manufacturing line for those products. The qualification process can take significant time and resources. Delays in qualification or failure to qualify our products may cause a customer to discontinue use of our products and result in a significant loss of revenue. Finally, customers could choose at any time to stop using our products or could fail to successfully market and sell their products, which could reduce demand for our products, and cause us to hold excess inventory, materially adversely affecting our business, financial condition and results of operations. These risks are exacerbated by the fact that many of our products, and the end products into which our products are incorporated, often have very short life cycles.Competition in our industries could prevent us from growing our revenue.The industries in which we operate are highly competitive and characterized by rapid technological changes, evolving industry standards, changes in customer requirements, often aggressive pricing practices and, in some cases, new delivery methods. We expect competition in these industries to continue to increase as existing competitors improve or expand their product offerings or as new competitors enter our markets. Some of our competitors have longer operating histories, greater name recognition, a larger installed customer base, larger technical staffs, more established relationships with vendors or suppliers, or greater manufacturing, distribution, financial, research and development, technical and marketing resources than us. We also face competition from numerous smaller companies that specialize in specific aspects of the highly fragmented software industry, open source authors who provide software and IP for free, competitors who offer their products through try-and-buy or freemium models, and customers who develop competing products.In addition, the trend toward consolidation is changing the competitive landscape. We expect this trend to continue, which may result in combined competitors having greater resources than us. Some of our competitors may also receive financial and other support from their home country government or may have a greater presence in key markets, a larger customer base, a more comprehensive IP portfolio or better patent protection than us. The actions of our competitors, in the areas of pricing and product bundling in particular, could have a substantial adverse impact on us. Further, competitors may leverage their superior market position, as well as IP or other proprietary information, including interface, interoperability or technical information, in new and emerging technologies and platforms that may inhibit our ability to compete effectively. If we are unable to compete successfully, we may lose market share for our products or incur significant reduction in our gross margins, either of which could have a material adverse effect on our business and results of operations.A prolonged disruption of our manufacturing facilities, research and development facilities, warehouses or other significant operations, or those of our suppliers, could have a material adverse effect on our business, financial condition and results of operations.Although we operate a primarily outsourced manufacturing business model, we also rely on our own manufacturing facilities, in particular in Fort Collins, Colorado, Singapore, and Breinigsville, Pennsylvania. We use these internal fabrication facilities for products utilizing our innovative and proprietary processes. Our Fort Collins and Breinigsville facilities are the sole sources for the FBAR components used in many of our wireless devices and for the indium phosphide-based wafers used in our fibre optics products, respectively. Many of our facilities, and those of our CMs and suppliers, are located in California and the Pacific Rim region, which have above average seismic activity and severe weather activity. In addition, a significant majority of our research and development personnel are located the Czech Republic, India, Israel, Singapore and the U.S., with the expertise of the personnel at each such location tending to be focused on one or two specific areas, and our primary warehouse is in Malaysia.A prolonged disruption at or shut-down of one or more of our manufacturing facilities or warehouses, especially our Colorado, Singapore, Malaysia and Pennsylvania facilities, or those of our CMs or suppliers, due to natural- or man-made disasters or other events outside of our control, such as equipment malfunction or widespread outbreaks of acute illness, including COVID-19, or for any other reason, would limit our capacity to meet customer demands and delay new product development until a replacement facility and equipment, if necessary, were found. Any such event would likely disrupt our operations, delay production, shipments and revenue, result in us being unable to timely satisfy customer demand, expose us to claims by our customers, result in significant expense to repair or replace our affected facilities, and, in some instances, could significantly curtail our research and development efforts in a particular product area or target market. As a result, we could forgo revenue opportunities, potentially lose market share, damage our customer relationships and be subject to 22Table of Contentslitigation and additional liabilities, all of which could materially and adversely affect our business. Although we purchase insurance to mitigate certain losses, such insurance often carries a high deductible amount and any uninsured losses could negatively affect our operating results. In addition, even if we were able to promptly resume production of our affected products, if our customers cannot timely resume their own manufacturing following such an event, they may cancel or scale back their orders from us and this may in turn adversely affect our results of operations. Such events could also result in increased fixed costs relative to the revenue we generate and adversely affect our results of operations.We may be unable to maintain appropriate manufacturing capacity or product yields at our own manufacturing facilities, which could adversely affect our relationships with our customers, and our business, financial condition and results of operations.We must maintain appropriate capacity and product yields at our own manufacturing facilities to meet anticipated customer demand. From time to time, this requires us to invest in expansion or improvements of those facilities, which often involves substantial cost and other risks. Such expanded manufacturing capacity may still be insufficient, or may not come online soon enough, to meet customer demand and we may have to put customers on product allocation, forgo sales or lose customers as a result. Conversely, if we overestimate customer demand, we would experience excess capacity and fixed costs at these facilities will not be fully absorbed, all of which could adversely affect our results of operations. Similarly, reduced product yields, due to design or manufacturing issues or otherwise, may involve significant time and cost to remedy and cause delays in our ability to supply product to our customers, all of which could cause us to forgo sales, incur liabilities or lose customers, and harm our results of operations.In addition, current and future government restrictions imposed as a result of the COVID-19 pandemic that limit our manufacturing capabilities could severely impact our ability to manufacture our proprietary products, adversely affecting our wireless business.Any failure of our IT systems or one or more of our corporate infrastructure vendors to provide necessary services could have a material adverse effect on our business.Our business depends on various IT systems and outsourced IT services. We rely on third-party vendors to provide critical corporate infrastructure services and to adequately address cyber security threats to their own systems. Services provided by these third parties include services related to financial reporting, product orders and shipping, human resources, benefit plan administration, IT network development and network monitoring. While we may be entitled to damages if our vendors fail to perform under their agreements with us, any award may be insufficient to cover the actual costs incurred by us and, as a result of a vendor’s failure to perform, we may be unable to collect any damages.Any failure of these internal or third-party systems and services to operate effectively could disrupt our operations and could have a material adverse effect on our business, financial condition and results of operations.Our gross margin is dependent on a number of factors, including our product mix, price erosion, acquisitions we may make, level of capacity utilization and commodity prices.Our gross margin is highly dependent on product mix, which is susceptible to seasonal and other fluctuations in our markets. A shift in sales mix away from our higher margin products, as well as the timing and amount of our software licensing and non-product revenue, could adversely affect our future gross margin percentages. In addition, increased competition and the existence of product alternatives, more complex engineering requirements, lower demand or reductions in our technological lead compared to our competitors, and other factors have in the past and may in the future lead to further price erosion, lower revenue and lower margin. Conversely, periods of robust demand that create a supply imbalance, as we have seen recently, can lead to higher gross margins that may not be sustainable over the longer-term.In addition, semiconductor manufacturing requires significant capital investment, leading to high fixed costs, including depreciation expense. If we are unable to utilize our owned manufacturing facilities at a high level, the fixed costs associated with these facilities will not be fully absorbed, resulting in higher average unit costs and a lower gross margin. Furthermore, we do not hedge our exposure to commodity prices, some of which are very volatile, and sudden or prolonged increases in commodities prices may adversely affect our gross margin.Our gross margin may also be adversely affected if businesses or companies that we acquire have different gross margin profiles and by expenses related to such acquisitions.We utilize a significant amount of IP in our business. If we are unable or fail to protect our IP, our business could be adversely affected.Our success depends in part upon protecting our IP. To accomplish this, we rely on a combination of IP rights, including patents, copyrights, trademarks and trade secrets, as well as customary contractual protections with our customers, suppliers, employees and consultants. We spend significant resources to monitor and protect our IP rights, including the unauthorized 23Table of Contentsuse of our products, usage rates of the software seat licenses and subscriptions that we sell, and even with significant expenditures, we may not be able to protect the IP rights that are valuable to our business. We are unable to predict or assure that:•our IP rights will not lapse or be invalidated, circumvented, challenged, or, in the case of third-party IP rights licensed to us, be licensed to others;•our IP rights will provide competitive advantages to us;•rights previously granted by third parties to IP licensed or assigned to us, including portfolio cross-licenses, will not hamper our ability to assert our IP rights or hinder the settlement of currently pending or future disputes;•any of our pending or future patent, trademark or copyright applications will be issued or have the coverage originally sought;•our IP rights will be enforced in certain jurisdictions where competition is intense or where legal protection may be weak; or•we have sufficient IP rights to protect our products or our business.Effective IP protection may be unavailable or more limited in other jurisdictions, relative to those protections available in the U.S., and may not be applied for or may be abandoned in one or more relevant jurisdictions. In addition, when patents expire, we lose the protection and competitive advantages they provided to us.We also generate revenue from licensing royalty payments and from technology claim settlements relating to certain of our IP. Licensing of our IP rights, particularly exclusive licenses, may limit our ability to assert those IP rights against third parties, including the licensee of those rights. In addition, we may acquire companies with IP that is subject to licensing obligations to other third parties. These licensing obligations may extend to our own IP following any such acquisition and may limit our ability to assert our IP rights. From time to time, we pursue litigation to assert our IP rights, including, in some cases, against our customers and suppliers. Claims of this sort could also harm our relationships with our customers and might deter future customers from doing business with us. Conversely, third parties have and may in the future pursue IP litigation against us, including as a result of our IP licensing business. An adverse decision in such types of legal action could limit our ability to assert our IP rights and limit the value of our technology, including the loss of opportunities to sell or license our technology to others or to collect royalty payments, which could otherwise negatively impact our business, financial condition and results of operations.From time to time, we may need to obtain additional IP licenses or renew existing license agreements. We are unable to predict whether these license agreements can be obtained or renewed on acceptable terms or at all.If our software products do not remain compatible with ever-changing operating environments, platforms, or third-party products, demand for our products and services could decrease, which could materially adversely affect our business.We may be required to make substantial modification of our products to maintain compatibility with operating systems, systems software and computer hardware used by our customers or to provide our customers with desired features or capabilities. We must also continually address the challenges of dynamic and accelerating market trends and competitive developments, such as the emergence of advanced persistent threats in the security space to compete effectively. There can be no assurance that we will be able to adapt our products in response to these developments.Further, our software solutions interact with a variety of software and hardware developed by third parties. If we lose access to third-party code and specifications for the development of code, this could negatively impact our ability to develop compatible software. In addition, if software providers and hardware manufacturers, including some of our largest vendors, adopt new policies restricting the use or availability of their code or technical documentation for their operating systems, applications, or hardware, or otherwise impose unfavorable terms and conditions for such access, this could result in higher research and development costs for the enhancement and modification of our existing products or development of new products. Any additional restrictions could materially adversely affect our business, financial condition and operating results and cash flow.Failure to enter into software license agreements on a satisfactory basis could materially adversely affect our business.Many of our existing customers have multi-year enterprise software license agreements, some of which involve substantial aggregate fee amounts. Customer renewal rates may decline or fluctuate as a result of a number of factors, including the level of customer satisfaction with our solutions or customer support, customer budgets and the pricing of our solutions as compared with the solutions offered by our competitors, any of which may cause our revenue to grow more slowly than expected, if at all. The failure to renew customer agreements of similar scope, on terms that are commercially attractive to us, could materially adversely affect our business, financial condition and operating results and cash flow.24Table of ContentsCertain software that we use in our products is licensed from third parties and may not be available to us in the future, which may delay product development and production or cause us to incur additional expense.Some of our solutions contain software licensed from third parties, some of which may not be available to us in the future on terms that are acceptable to us or allow our products to remain competitive. The loss of these licenses or the inability to maintain any of them on commercially acceptable terms could delay development of future products or the enhancement of existing products. Certain software we use is from open source code sources, which, under certain circumstances could materially adversely affect our business, financial condition, operating results and cash flow.Some of our products contain software from open source code sources, the use of which may subject us to certain conditions, including the obligation to offer such products for no cost or to make the proprietary source code of those products publicly available. Further, although some open source vendors provide warranty and support agreements, it is common for such software to be available “as-is” with no warranty, indemnity or support. Although we monitor our use of such open source code to avoid subjecting our products to unintended conditions, such use, under certain circumstances, could materially adversely affect our business, financial condition and operating results and cash flow, including if we are required to take remedial action that may divert resources away from our development efforts.We are subject to warranty claims, product recalls and product liability.From time to time, we may be subject to warranty or product liability claims that may lead to significant expense. Our customer contracts typically contain warranty and indemnification provisions, and in certain cases may also contain liquidated damages provisions, relating to product quality issues. The potential liabilities associated with such provisions are significant, and in some cases, including in agreements with some of our largest customers, are potentially unlimited. Any such liabilities may greatly exceed any revenue we receive from the relevant products. Costs, payments or damages incurred or paid by us in connection with warranty and product liability claims and product recalls could materially adversely affect our financial condition and results of operations. We may also be exposed to such claims as a result of any acquisition we may undertake in the future.Product liability insurance is subject to significant deductibles and there is no guarantee that such insurance will be available or adequate to protect against all such claims, or we may elect to self-insure with respect to certain matters. For example, it is possible for one of our customers to recall a product containing one of our semiconductor devices. In such an event, we may incur significant costs and expenses, including among others, replacement costs, contract damage claims from our customers and reputational harm. Although we maintain reserves for reasonably estimable liabilities and purchase product liability insurance, our reserves may be inadequate to cover the uninsured portion of such claims. Conversely, in some cases, amounts we reserve may ultimately exceed our actual liability for particular claims and may need to be reversed.The complexity of our products could result in unforeseen delays or expense or undetected defects or bugs, which could adversely affect the market acceptance of new products, damage our reputation with current or prospective customers, and materially and adversely affect our operating costs.Highly complex products, such as those we offer, may contain defects and bugs when they are first introduced or as new versions, software documentation or enhancements are released, or their release may be delayed due to unforeseen difficulties during product development. If any of our products or third-party components used in our products, contain defects or bugs, or have reliability, quality or compatibility problems, we may not be able to successfully design workarounds. Furthermore, if any of these problems are not discovered until after we have commenced commercial production or deployment of a new product, we may be required to incur additional development costs and product recall, repair or replacement costs. Significant technical challenges also arise with our software products because our customers license and deploy our products across a variety of computer platforms and integrate them with a number of third-party software applications and databases. As a result, if there is system-wide failure or an actual or perceived breach of information integrity, security or availability occurs in one of our end-user customer’s system, it can be difficult to determine which product is at fault and we could ultimately be harmed by the failure of another supplier’s product. Consequently, our reputation may be damaged and customers may be reluctant to buy our products, which could materially and adversely affect our ability to retain existing customers and attract new customers. To resolve these problems, we may have to invest significant capital and other resources and we would likely lose, or experience a delay in, market acceptance of the affected product or products. These problems may also result in claims against us by our customers or others. For example, if a delay in the manufacture and delivery of our products causes the delay of a customer’s end-product delivery, we may be required, under the terms of our agreement with that customer, to compensate the customer for the adverse effects of such delays. As a result, our financial results could be materially adversely affected.25Table of ContentsWe make substantial investments in research and development and unsuccessful investments could materially adversely affect our business, financial condition and results of operations.The industries in which we compete are characterized by rapid technological change, changes in customer requirements, frequent new product introductions and enhancements, short product cycles and evolving industry standards, and new delivery methods. In addition, semiconductor products transition over time to increasingly smaller line width geometries and failure to successfully transition to smaller geometry process technologies could impair our competitive position. In order to remain competitive, we have made, and expect to continue to make, significant investments in research and development. If we fail to develop new and enhanced products and technologies, if we focus on technologies that do not become widely adopted, or if new competitive technologies that we do not support become widely accepted, demand for our products may be reduced. Increased investments in research and development or unsuccessful research and development efforts could cause our cost structure to fall out of alignment with demand for our products, which would have a negative impact on our financial results.We collect, use, store, or otherwise process personal information, which subjects us to privacy and data security laws and contractual commitments, and our actual or perceived failure to comply with such laws and commitments could harm our business.We collect, use and store (collectively, “process”) a high volume, variety and velocity of certain personal information in connection with the operation of our business. This creates various levels of privacy risks across different parts of our business, depending on the type of personal information, the jurisdiction in question and the purpose of their processing. The personal information we process is subject to an increasing number of federal, state, local, and foreign laws and regulations regarding privacy and data security, as well as contractual commitments. Privacy legislation and other data protection regulations, enforcement and policy activity in this area are expanding rapidly in many jurisdictions and creating a complex regulatory compliance environment. Sectoral legislation, certification requirements and technical standards applying to certain categories of our customers, such as those is the financial services or public sector, are likely to further exacerbate this trend. The cost of complying with and implementing these privacy-related and data governance measures could be significant as they may create additional burdensome security, business process, business record or data localization requirements. Concerns about government interference, sovereignty, expanding privacy, cyber security and data governance legislation could adversely affect our customers and our products and services, particularly in cloud computing, artificial intelligence and our own data management practices. The theft, loss or misuse of personal data collected, used, stored or transferred by us to run our business could result in significantly increased business and security costs or costs related to defending legal claims. Any inadvertent failure or perceived failure by us to comply with privacy, data governance or cyber security obligations may result in governmental enforcement actions, litigation, substantial fines and damages, and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.We are subject to environmental, health and safety laws, which could increase our costs, restrict our operations and require expenditures that could have a material adverse effect on our results of operations and financial condition.We are subject to a variety of international laws and regulations relating to the use, disposal, clean-up of and human exposure to hazardous materials. Compliance with environmental, health and safety requirements could, among other things, require us to modify our manufacturing processes, restrict our ability to expand our facilities, or require us to acquire pollution control equipment, all of which can be very costly. Any failure by us to comply with such requirements could result in the limitation or suspension of the manufacture of our products and could result in litigation against us and the payment of significant fines and damages by us in the event of a significant adverse judgment. In addition, complying with any cleanup or remediation obligations for which we are or become responsible could be costly and have a material adverse effect on our business, financial condition and results of operations.Changing requirements relating to the materials composition of our semiconductor products, including the restrictions on lead and certain other substances in electronic products sold in various countries, including the U.S., China and Japan, and in the European Union, increase the complexity and costs of our product design and procurement operations and may require us to re-engineer our products. Such re-engineering may result in excess inventory or other additional costs and could have a material adverse effect on our results of operations. We may also experience claims from employees from time to time with regard to exposure to hazardous materials or other workplace related environmental claims.Social and environmental responsibility regulations, policies and provisions, as well as customer and investor demands, may make our supply chain more complex and may adversely affect our relationships with customers and investors.There is an increasing focus on corporate social and environmental responsibility in the semiconductor industry, particularly with OEMs that manufacture consumer electronics. A number of our customers have adopted, or may adopt, procurement policies that include social and environmental responsibility provisions or requirements that their suppliers should comply with, or they may seek to include such provisions or requirements in their procurement terms and conditions. 26Table of ContentsAn increasing number of investors are also requiring companies to disclose corporate social and environmental policies, practices and metrics. In addition, various jurisdictions are developing climate change-based laws or regulations that could cause us to incur additional direct costs for compliance, as well as indirect costs resulting from our customers, suppliers, or both incurring additional compliance costs that are passed on to us. These legal and regulatory requirements, as well as investor expectations, on corporate environmental and social responsibility practices and disclosure, are subject to change, can be unpredictable, and may be difficult and expensive for us to comply with, given the complexity of our supply chain and our significant outsourced manufacturing. If we are unable to comply, or are unable to cause our suppliers or CMs to comply, with such policies or provisions or meet the requirements of our customers and investors, a customer may stop purchasing products from us or an investor may sell their shares, and may take legal action against us, which could harm our reputation, revenue and results of operations.In addition, as part of their corporate social and environmental responsibility programs, an increasing number of OEMs are seeking to source products that do not contain minerals sourced from areas where proceeds from the sale of such minerals are likely to be used to fund armed conflicts, such as in the Democratic Republic of Congo. This could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of semiconductor devices, including our products. As a result, we may face difficulties in satisfying these customers’ demands, which may harm our sales and operating results.The average selling prices of semiconductor products in our markets have often decreased rapidly and may do so in the future, which could harm our revenue and gross profit.The semiconductor products we develop and sell are used for high volume applications. As a result, the prices of those products have often decreased rapidly. Gross profit on our products may be negatively affected by, among other things, pricing pressures from our customers. In the past, we have reduced the average selling prices of our products in anticipation of future competitive pricing pressures, new product introductions by us or our competitors and other factors. In addition, some of our customer agreements provide for volume-based pricing and product pricing roadmaps, which can also reduce the average selling prices of our products over time. Our margins and financial results will suffer if we are unable to offset any reductions in our average selling prices by increasing our sales volumes, reducing manufacturing costs, or developing new and higher value-added products on a timely basis.A breach of our security systems may have a material adverse effect on our business.Our security systems are designed to protect and secure our facilities and our customers’, suppliers’ and employees’ confidential information, as well as our own proprietary information. However, we are also dependent on a number of third-party cloud-based and other service providers of critical corporate infrastructure services relating to, among other things, human resources, electronic communication services and certain finance functions, and we are, out of necessity, dependent on the security systems of these providers. In addition, all software, including the security technologies produced by us have had occasionally in the past and may have in the future, vulnerabilities that, if left unmanaged could reduce the overall level of security.Accidental or willful security breaches or other unauthorized access of our facilities, our information systems or the systems of our service providers, or the existence of computer viruses or malware (such as ransomware) in our or their data or software could expose us to a risk of information loss, business disruption, and misappropriation of proprietary and confidential information, including information relating to our products or customers and the personal information of our employees. We have, from time to time, been subject to or there have been attempts of unauthorized network intrusions and malware on our own IT networks. As a result of the COVID-19 pandemic, remote access to our networks and systems has increased substantially. While we have taken steps to secure our networks and systems, we may be more vulnerable to a successful cyber-attack or information security incident when our workforce works remotely.Certain aspects of our software products are intended to manage and secure IT infrastructures and environments, and as a result, we expect these products to be ongoing targets of cyber security attacks. Open source code or other third-party software used in these products could also be targeted. Additionally, we use third-party data centers, which may also be subject to hacking or accidental incidents. Although we continually seek to improve our countermeasures to prevent such incidents, we may be unable to anticipate every scenario and it is possible that certain cyber threats or vulnerabilities will be undetected or unmitigated in time to prevent an attack or an accidental incident on us and our customers. Cyber security attacks could require significant expenditures of our capital and diversion of our resources. Additionally, efforts by malicious cyber actors or others could cause interruptions, delays or cessation of our product licensing, or modification of our software, which could cause us to lose existing or potential customers. A successful cyber security attack involving our products and IT infrastructure could also negatively impact the market perception of their effectiveness and adversely affect our reputation, relationship with our customers and our financial results. Any theft, accidental loss or misuse of confidential, personally identifiable or proprietary information could disrupt our business and result in, among other things, unfavorable publicity, damage to our reputation, loss of our trade secrets and 27Table of Contentsother competitive information, difficulty in marketing our products, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties and possible financial obligations for liabilities and damages related to the theft or misuse of such information, as well as fines and other sanctions resulting from any related breaches of data privacy regulations (such as the General Data Protection Regulation), any of which could have a material adverse effect on our business, profitability and financial condition. Interruptions in our operations and services or disruptions to the functionality provided by our software could adversely impact our revenues or cause customers to cease doing business with us. In addition, our business would be harmed if any of the events of this nature caused our customers and potential customers to believe our services are unreliable. Our operations are dependent upon our ability to protect our technology infrastructure against damage from business continuity events that could have a significant disruptive effect on our operations. Since the techniques used to obtain unauthorized access to systems or to otherwise sabotage them, change frequently and are often not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.Fluctuations in foreign exchange rates could result in losses.We operate global businesses and our consolidated financial results are reported in U.S. dollars. However, some of the revenue and expenses of our foreign subsidiaries are denominated in local currencies. Fluctuations in foreign exchange rates against the U.S. dollar could result in substantial changes in reported revenues and operating results due to the foreign exchange impact of translating these transactions into U.S. dollars.In the normal course of business, we employ various hedging strategies to partially mitigate these risks, including the use of derivative instruments. These strategies may not be effective in protecting us against the effects of fluctuations in foreign exchange rates. As a result, fluctuations in foreign exchange rates could result in financial losses.Risks Related to Our TaxesChanges in tax legislation or policies could materially impact our financial position and results of operations.Corporate tax reform, anti-base-erosion rules and tax transparency continue to be high priorities in many jurisdictions. As a result, policies regarding corporate income and other taxes in numerous jurisdictions are under heightened scrutiny and tax reform legislation has been, and will likely continue to be, proposed or enacted in a number of jurisdictions in which we operate. After enactment of the U.S. Tax Cuts and Jobs Act (the “2017 Tax Reform Act”), most of our income is taxable in the U.S. with a significant portion taxable under the Global Intangible Low-Taxed Income (“GILTI”) regime. Beginning in fiscal year 2027, the deduction allowable under the GILTI regime will decrease from 50% to 37.5%, which will increase the effective tax rate imposed on our income. If the U.S. tax rate increases or the deduction allowable under the GILTI regime is further reduced or eliminated, or additional limitations are put on our ability to deduct interest expense, our provision for income taxes, net income, and cash flows would be adversely impacted. In addition, many countries are implementing legislation and other guidance to align their international tax rules with the Organisation for Economic Co-operation and Development’s (“OECD”) Base Erosion and Profit Shifting recommendations and action plan that aim to standardize and modernize global corporate tax policy, including changes to cross-border tax, transfer pricing documentation rules, and nexus-based tax incentive practices. The OECD is also continuing discussions surrounding fundamental changes in allocation of profits among tax jurisdictions in which companies do business, as well as the implementation of a global minimum tax (namely the “Pillar One” and “Pillar Two” proposals). As a result of this heightened scrutiny, prior decisions by tax authorities regarding treatments and positions of corporate income taxes could be subject to enforcement activities, and legislative investigation and inquiry, which could also result in changes in tax policies or prior tax rulings. Any such changes may also result in the taxes we previously paid being subject to change. Further, many jurisdictions have passed, and may pass additional legislation, intended to alleviate the economic burdens of COVID-19 and to fund economic recovery and growth, including various temporary tax incentives or relief and restricted tax measures, which could result in future tax increases. We cannot predict the extent to which the COVID-19 pandemic will impact our tax liabilities and are continuing to evaluate the impact of the new legislation to our financial statements. Any substantial changes in domestic or international corporate tax policies, regulations or guidance, enforcement activities or legislative initiatives may materially adversely affect our business, the amount of taxes we are required to pay and our financial condition and results of operations generally.28Table of ContentsIf the tax incentives or tax holiday arrangements we have negotiated change or cease to be in effect or applicable for any reason, or if our assumptions and interpretations regarding tax laws and incentives or holiday arrangements prove to be incorrect, our corporate income taxes could significantly increase.Our operations are currently structured to benefit from the various tax incentives extended to us in various jurisdictions to encourage investment or employment. For example, absent our principal tax incentives from the Singapore Economic Development Board, which is scheduled to expire in 2025, the corporate income tax rate that would apply to our Singapore taxable income would be 17%. We also have a tax holiday on our qualifying income in Malaysia, which is scheduled to expire in fiscal year 2028. Each tax incentive and tax holiday is subject to our compliance with various operating and other conditions and may, in some instances, be amended or terminated prior to their scheduled termination date by the relevant governmental authority. If we cannot, or elect not to, comply with the operating conditions included in any particular tax incentive or tax holiday, we could, in some instances, be required to refund previously realized material tax benefits, or if such tax incentive or tax holiday is terminated prior to its expiration absent a new incentive applying, we will lose the related tax benefits earlier than scheduled. In addition, we may be required, or elect, to modify our operational structure and tax strategy in order to keep an incentive, which could result in a decrease in the benefits of the incentive. Our tax incentives and tax holiday, before taking into consideration U.S. foreign tax credits, decreased the provision for income taxes by approximately $1,156 million in the aggregate and increased diluted net income per share by $2.69 for fiscal year 2021.Our interpretations and conclusions regarding the tax incentives are not binding on any taxing authority, and if our assumptions about tax and other laws are incorrect or if these tax incentives are substantially modified or rescinded, we could suffer material adverse tax and other financial consequences, which would increase our expenses, reduce our profitability and adversely affect our cash flows.Our income taxes and overall cash tax costs are affected by a number of factors that could materially, adversely affect financial results.Significant judgment is required in determining our worldwide income taxes. In the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain. Additionally, our calculations of income taxes payable currently and on a deferred basis are based on our interpretations of applicable tax laws in the jurisdictions in which we are required to file tax returns. Although we believe our tax estimates are reasonable, there is no assurance that the final determination of our income tax liability will not be materially different than what is reflected in our income tax provisions and accruals. Our income taxes are subject to volatility and could be adversely affected by numerous factors including:•reorganization or restructuring of our businesses, tangible and intangible assets, outstanding indebtedness and corporate structure;•jurisdictional mix of our income and assets;•changes in the allocation of income and expenses, including adjustments related to changes in our corporate structure, acquisitions or tax law;•changes in U.S and foreign tax laws and regulations, changes to the taxation of earnings of foreign subsidiaries, taxation of U.S. income generated from foreign sources, the deductibility of expenses attributable to income and foreign tax credit rules;•tax effects of increases in non-deductible employee compensation; and•changes in tax accounting rules or principles and in the valuation of deferred tax assets and liabilities.We have adopted transfer pricing policies that call for the provision of services, the sale of products, the arrangement of financing and the grant of licenses from one affiliate to another at prices that we believe are negotiated on an arm’s length basis. Our taxable income is dependent upon acceptance by local authorities that our operational practices and intercompany transfer pricing are on an arm’s length basis. Due to inconsistencies in application of the arm’s length standard among taxing authorities, as well as lack of comprehensive treaty-based protection, transfer pricing challenges by tax authorities could, if successful, result in adjustments for prior or future years. The effects of any such changes could subject us to higher taxes and our earnings, results of operations and cash flow would be adversely affected.In addition, we are subject to, and are under, tax audit in various jurisdictions, and such jurisdictions may assess additional income tax against us. Although we believe our tax positions are reasonable, the final determination of tax audits could be materially different from our income tax provisions and accruals. The ultimate result of an audit could have a material adverse effect on our results of operations and cash flows in the period or periods for which that determination is made.29Table of ContentsRisks Related to Our IndebtednessOur substantial indebtedness could adversely affect our financial health and our ability to execute our business strategy.As of October 31, 2021, the aggregate indebtedness under our senior notes was $41,499 million. We expect to maintain significant levels of indebtedness going forward.Our substantial indebtedness could have important consequences including:•increasing our vulnerability to adverse general economic and industry conditions;•exposing us to interest rate risk due to our variable rate term facilities, which we do not typically hedge against;•limiting our flexibility in planning for, or reacting to, changes in the economy and the semiconductor industry;•placing us at a competitive disadvantage compared to our competitors with less indebtedness; •making it more difficult to borrow additional funds in the future to fund growth, acquisitions, working capital, capital expenditures and other purposes; and•potentially requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund our other business needs.We receive debt ratings from the major credit rating agencies in the U.S. Factors that may impact our credit ratings include debt levels, planned asset purchases or sales and near-term and long-term production growth opportunities. Liquidity, asset quality, cost structure, reserve mix and commodity pricing levels could also be considered by the rating agencies. While we are focused on maintaining investment grade ratings from these agencies, we may be unable to do so. Any downgrade in our credit rating or the ratings of our indebtedness, or adverse conditions in the debt capital markets, could:•adversely affect the trading price of, or market for, our debt securities;•increase interest expense under our term facilities;•increase the cost of, and adversely affect our ability to refinance, our existing debt; and•adversely affect our ability to raise additional debt.The instruments governing our indebtedness impose certain restrictions on our business.The instruments governing our indebtedness contain certain covenants imposing restrictions on our business. These restrictions may affect our ability to operate our business, to plan for, or react to, changes in the market conditions or our capital needs and may limit our ability to take advantage of potential business opportunities as they arise. The restrictions placed on us include maintenance of an interest coverage ratio and limitations on our ability to incur certain secured debt, enter into certain sale and lease-back transactions and consolidate, merge, sell or otherwise dispose of all or substantially all of our assets. In addition, the instruments contain customary events of default upon the occurrence of which, after any applicable grace period, the indebtedness could be declared immediately due and payable. In such event, we may not have sufficient available cash to repay such debt at the time it becomes due, or be able to refinance such debt on acceptable terms or at all. Any of the foregoing could materially adversely affect our business, financial condition and results of operations.Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.Our ability to make scheduled payments of the principal of, to pay interest on, and to refinance our debt, depends on our future performance, which is subject to economic, financial, competitive and other factors. Our business may not continue to generate cash flow from operations in the future sufficient to satisfy our obligations under our current indebtedness and any future indebtedness we may incur and to make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our outstanding indebtedness or future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms when needed, which could result in a default on our indebtedness.30Table of ContentsRisks Related to Owning Our Common StockAt times, our stock price has been volatile and it may fluctuate substantially in the future, which could result in substantial losses for our investors as well as class action litigation against us and our management which could cause us to incur substantial costs and divert our management’s attention and resources.The trading price of our common stock has, at times, fluctuated significantly and could be subject to wide fluctuations in response to any of the risk factors listed in this “Risk Factors” section, and others, including:•issuance of new or updated research or other reports by securities analysts;•fluctuations in the valuation and results of operations of our significant customers as well as companies perceived by investors to be comparable to us;•announcements of proposed acquisitions by us or our competitors;•announcements of, or expectations of, additional debt or equity financing transactions;•stock price and volume fluctuations attributable to inconsistent trading volume levels of our common stock;•issuance, and subsequent sale, of common stock upon conversion of our 8.00% Mandatory Convertible Preferred Stock, Series A (“Mandatory Convertible Preferred Stock”);•hedging or arbitrage trading activity involving our Mandatory Convertible Preferred Stock or common stock; and•unsubstantiated news reports or other inaccurate publicity regarding us or our business.These fluctuations are often unrelated or disproportionate to our operating performance. Broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or currency fluctuations, may negatively impact the market price of our common stock. You may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. We are also the subject of a number of lawsuits stemming from our acquisitions. Securities litigation against us, including the lawsuits related to such transactions, could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.The amount and frequency of our stock repurchases may fluctuate.The amount, timing and execution of our stock repurchase program may fluctuate based on our priorities for the use of cash for other purposes. These purposes include operational spending, capital spending, acquisitions, repayment of debt and returning cash to our stockholders as dividend payments. Changes in cash flows, tax laws and our stock price could also impact our stock repurchase program. We are not obligated to repurchase any specific amount of shares of common stock, and the stock repurchase program may be suspended or terminated at any time.A substantial amount of our stock is held by a small number of large investors and significant sales of our common stock by one or more of these holders could cause our stock price to fall.As of September 30, 2021, we believe 10 of our 20 largest holders of common stock were active institutional investors who held approximately 31% of our outstanding shares of common stock in the aggregate, with Capital World Investors being our largest stockholder with approximately 9% of our outstanding shares of common stock. These investors may sell their shares at any time for a variety of reasons and such sales could depress the market price of our common stock. In addition, any such sales of our common stock by these entities could also impair our ability to raise capital through the sale of additional equity securities.There can be no assurance that we will continue to declare cash dividends.Our Board of Directors has adopted a dividend policy pursuant to which we currently pay a cash dividend on our common stock on a quarterly basis. The declaration and payment of any dividend is subject to the approval of our Board of Directors and our dividend may be discontinued or reduced at any time. Because we are a holding company, our ability to pay cash dividends is also limited by restrictions or limitations on our ability to obtain sufficient funds through dividends from subsidiaries. In addition, any payment of dividends on our common stock is subject to and conditioned upon our payment of quarterly dividends on our Mandatory Convertible Preferred Stock. There can be no assurance that we will declare cash dividends in the future in any particular amounts, or at all.ITEM 1B.UNRESOLVED STAFF COMMENTSNone. 31Table of ContentsITEM 2.PROPERTIESWe are headquartered in San Jose, California and our primary warehouse is located in Malaysia. We conduct our administration, manufacturing, research and development, sales and marketing in both owned and leased facilities. We believe that our owned and leased facilities are adequate for our present operations. We do not identify or allocate assets by operating segment.As of October 31, 2021, our owned and leased facilities in excess of 100,000 square feet consisted of:(In square feet)United StatesOther CountriesTotalOwned facilities 12,477,165 928,888 3,406,053 Leased facilities 2901,198 1,309,369 2,210,567 Total facilities3,378,363 2,238,257 5,616,620 _______________1 Includes 318,000 square feet and 153,000 square feet of property owned in Malaysia subject to a 60-year land lease with the state authority expiring in May 2051 and March 2077, respectively, subject to renewal at our option.2 Building leases expire on varying dates through February 2046 and generally include renewals at our option. ITEM 3. LEGAL PROCEEDINGSThe information set forth under Note 14. “Commitments and Contingencies” included in Part II, Item 8. of this Annual Report on Form 10-K, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see “Risk Factors” above.ITEM 4. MINE SAFETY DISCLOSURESNone.32Table of ContentsPART IIITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESMarket InformationBroadcom common stock is listed on The Nasdaq Global Select Market under the symbol “AVGO”. HoldersAs of November 26, 2021, there were 971 holders of record of our common stock. A substantially greater number of stockholders are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.Issuer Purchases of Equity Securities During the fiscal quarter ended October 31, 2021, we paid approximately $266 million in employee withholding taxes due upon the vesting of net settled equity awards. We withheld approximately 1 million shares of common stock from employees in connection with such net share settlement at an average price of $505.59 per share. These shares may be deemed to be “issuer purchases” of shares.In December 2021, our Board of Directors authorized a stock repurchase program to repurchase up to $10 billion of our common stock from time to time on or prior to December 31, 2022. Repurchases under our stock repurchase program may be effected through a variety of methods, including open market or privately negotiated purchases. The timing and amount of shares repurchased will depend on the stock price, business and market conditions, corporate and regulatory requirements, alternative investment opportunities, acquisition opportunities and other factors. We are not obligated to repurchase any specific amount of shares of common stock, and the stock repurchase program may be suspended or terminated at any time.Stock Performance GraphThe following graph shows a comparison of cumulative total return for our common stock, the Standard & Poor’s 500 Stock Index (the “S&P 500 Index”) and the NASDAQ 100 Index for the five fiscal years ended October 31, 2021. The total return graph and table assume that $100 was invested on October 28, 2016 (the last trading day of our fiscal year 2016) in each of Broadcom Inc. common stock, the S&P 500 Index and the NASDAQ 100 Index and assume that all dividends are reinvested. Indexes are calculated on a month-end basis.The comparisons in the graph below are based on historical data and are not indicative of, or intended to forecast, the possible future performance of our common stock.33Table of ContentsComparison of Five Year Cumulative Total ReturnAmong Broadcom Inc., the S&P 500 Index and the NASDAQ 100 IndexOctober 30, 2016October 29, 2017November 4, 2018November 3, 2019November 1, 2020October 31, 2021Broadcom Inc.$100.00 $152.15 $136.54 $190.64 $235.49 $369.32 S&P 500 Index$100.00 $123.88 $133.27 $153.19 $166.44 $237.87 NASDAQ 100 Index$100.00 $130.81 $148.20 $175.60 $240.06 $346.72 The graph and the table above shall not be deemed “filed” with the SEC for the purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing made by us with the SEC, regardless of any general incorporation language in such filing.ITEM 6.[RESERVED]34Table of ContentsITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThis Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto, which appear elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the caption “Risk Factors” or in other parts of this Annual Report on Form 10-K. The following section generally discusses our financial condition and results of operations for our fiscal year ended October 31, 2021 (“fiscal year 2021”) compared to our fiscal year ended November 1, 2020 (“fiscal year 2020”). A discussion regarding our financial condition and results of operations for fiscal year 2020 compared to our fiscal year ended November 3, 2019 (“fiscal year 2019”) can be found in Part II, Item 7 of our Annual Report on Form 10-K for fiscal year 2020, filed with the Securities and Exchange Commission (the “SEC”) on December 18, 2020.Overview We are a global technology leader that designs, develops and supplies a broad range of semiconductor and infrastructure software solutions. We develop semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor based devices and analog III-V based products. We have a history of innovation in the semiconductor industry and offer thousands of products that are used in end products such as enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. Our infrastructure software solutions enable customers to plan, develop, automate, manage and secure applications across mainframe, distributed, mobile and cloud platforms. Our portfolio of industry-leading infrastructure and security software is designed to modernize, optimize, and secure the most complex hybrid environments, enabling scalability, agility, automation, insights, resiliency and security. We also offer mission critical fibre channel storage area networking (“FC SAN”) products and related software in the form of modules, switches and subsystems incorporating multiple semiconductor products. We have two reportable segments: semiconductor solutions and infrastructure software, as a result of a change in our organizational structure during fiscal year 2020. Our semiconductor solutions segment includes all of our product lines and intellectual property (“IP”) licensing. Our infrastructure software segment includes our mainframe, distributed and cyber security solutions, and our FC SAN business. During fiscal year 2020, we refined our allocation methodology for certain selling, general and administrative expenses to more closely align these costs with the segment benefiting from the shared expenses.Our strategy is to combine best-of-breed technology leadership in semiconductor and infrastructure software solutions, with unmatched scale, on a common sales and administrative platform to deliver a comprehensive suite of infrastructure technology products to the world’s leading business and government customers. We seek to achieve this through responsibly financed acquisitions of category-leading businesses and technologies, as well as investing extensively in research and development, to ensure our products retain their technology leadership. This strategy results in a robust business model designed to drive diversified and sustainable operating and financial results.The demand for our products has been affected in the past, and is likely to continue to be affected in the future, by various factors, including the following:•gain or loss of significant customers;•general economic and market conditions in the industries and markets in which we compete;•our distributors’ product inventory and end customer demand;•the rate at which our present and future customers and end-users adopt our products and technologies in our target markets, and the rate at which our customers' products that include our technology are accepted in their markets; •the shift to cloud-based information technology solutions and services, such as hyperscale computing, which may adversely affect the timing and volume of sales of our products for use in traditional enterprise data centers; and•the timing, rescheduling or cancellation of expected customer orders.COVID-19 UpdateIn response to the ongoing COVID-19 pandemic and the various resulting government directives, we have taken extensive measures to protect the health and safety of our employees and contractors at our facilities. We modified our workplace practices globally, which resulted in some of our employees working remotely for an extended period of time and some of whom are still working remotely. While we have implemented personal safety measures at all of our facilities where 35Table of Contentsour employees are working on site, we may need to modify our business practices and policies. We continue to monitor the implications of the COVID-19 pandemic on our business, as well as our customers’ and suppliers’ businesses.The demand environment for our semiconductor products was consistent with our expectations for the fourth quarter of fiscal year 2021, with continued demand for products and infrastructure as customers invest in technologies to support remote or hybrid tele-work and learning arising from COVID-19, as well as the transition to office re-openings. While we continue to see robust demand in this area and record profitability driven by the supply imbalance, the macroeconomic environment remains uncertain and it may not be sustainable over the longer term. We continue to experience various constraints in our supply chain due to the pandemic, including with respect to wafers and substrates. While supply lead times have stabilized, we continue to have difficulties in obtaining some necessary components and inputs in a timely manner to meet increased demand. To date, the impact of COVID-19 on the demand environment for our software products has been limited.We have also taken various actions to de-risk our business in light of the ongoing uncertainty and strengthen our balance sheet, including closely managing working capital and our debt instruments.Overall, in light of the changing nature and continuing uncertainty around the COVID-19 pandemic, our ability to predict the impact of COVID-19 on our business in future periods remains limited. The effects of the pandemic on our business are unlikely to be fully realized, or reflected in our financial results, until future periods. Fiscal Year HighlightsHighlights during fiscal year 2021 include the following: •We generated $13,764 million of cash from operations.•We paid $6,212 million in cash dividends.Acquisitions and DivestituresThe discussion and analysis in this section and the accompanying consolidated financial statements include the results of operations of acquired companies commencing on their respective acquisition dates.Acquisition of Symantec Corporation Enterprise Security BusinessOn November 4, 2019, we purchased and assumed certain assets and certain liabilities, respectively, of the Symantec Corporation Enterprise Security business (the “Symantec Business”) for $10.7 billion in cash. We financed this acquisition with the net proceeds from the borrowings under the November 2019 Term Loans, as defined in Note 10. “Borrowings” included in Part II, Item 8 of this Annual Report on Form 10-K. Acquisition of CA, Inc.On November 5, 2018, we acquired CA, Inc. (“CA”) for $18.8 billion in aggregate cash purchase consideration and assumed $2.25 billion of outstanding unsecured bonds. We financed the acquisition of CA with $18 billion of term loans, as well as cash on hand of the combined companies. We also assumed all eligible unvested CA equity awards in the transaction. On December 31, 2018, we sold Veracode, Inc., a subsidiary of CA and provider of application security testing solutions, to Thoma Bravo, LLC for cash consideration of $950 million, before working capital adjustments.Net RevenueA majority of our net revenue is derived from sales of a broad range of semiconductor devices that are incorporated into electronic products, as well as from modules, switches and subsystems. Net revenue is also generated from the sale of software solutions that enable our customers to plan, develop, automate, manage, and secure applications across mainframe, distributed, mobile, and cloud platforms. Our overall net revenue, as well as the percentage of total net revenue generated by sales in our semiconductor solutions and infrastructure software segments, have varied from quarter to quarter, due largely to fluctuations in end-market demand, including the effects of seasonality, which are discussed in detail in Part I, Item 1. Business under “Seasonality” of this Annual Report on Form 10-K.Original equipment manufacturers (“OEMs”), or their contract manufacturers, and distributors, typically account for the substantial majority of our semiconductor sales. To serve customers around the world, we have strategically developed relationships with large global electronic component distributors, complemented by a number of regional distributors with customer relationships based on their respective product ranges. We have established strong relationships with leading OEM customers across multiple target markets. Our direct sales force focuses on supporting our large OEM customers and has specialized product and service knowledge that enables us to sell specific offerings at key levels throughout a customer’s organization. Certain customers require us to contract with them directly and with specified intermediaries, such as contract 36Table of Contentsmanufacturers. Many of our major customer relationships have been in place for many years and are often the result of years of collaborative product development. This has enabled us to build our extensive IP portfolio and develop critical expertise regarding our customers’ requirements, including substantial system-level knowledge. This collaboration has provided us with key insights into our customers' businesses and has enabled us to be more efficient and productive and to better serve our target markets and customers. We recognize revenue upon the delivery of our products to the distributors, which can cause our quarterly net revenue to fluctuate significantly. Such revenue is reduced for estimated returns and distributor allowances. Our software customers generally consist of large enterprises that have computing environments from multiple vendors and are highly complex. We believe our enterprise-wide license model will continue to offer our customers reduced complexity, more flexibility and an easier renewal process that will help drive revenue growth.Costs and ExpensesCost of products sold. Cost of products sold consists primarily of the costs for semiconductor wafers and other materials, as well as the costs of assembling and testing those products and materials. Such costs include personnel and overhead related to our manufacturing operations, which include stock-based compensation expense; related occupancy; computer services; equipment costs; manufacturing quality; order fulfillment; warranty adjustments; inventory adjustments, including write-downs for inventory obsolescence; and acquisition costs, which include direct transaction costs and acquisition-related costs. Although we outsource a significant portion of our manufacturing activities, we do have some proprietary semiconductor fabrication facilities. If we are unable to utilize our owned fabrication facilities at a desired level, the fixed costs associated with these facilities will not be fully absorbed, resulting in higher average unit costs and lower gross margins.Cost of subscriptions and services. Cost of subscriptions and services consists of personnel, project costs associated with professional services or support of our subscriptions and services revenue, and allocated facilities costs and other corporate expenses. Personnel costs include stock-based compensation expense.Total cost of revenue also includes amortization of acquisition-related intangible assets and restructuring charges.Research and development. Research and development expense consists primarily of personnel costs for our engineers engaged in the design and development of our products and technologies, including stock-based compensation expense. These expenses also include project material costs, third-party fees paid to consultants, prototype development expense, allocated facilities costs and other corporate expenses and computer services costs related to supporting computer tools used in the engineering and design process.Selling, general and administrative. Selling expense consists primarily of compensation and associated costs for sales and marketing personnel, including stock-based compensation expense, sales commissions paid to our independent sales representatives, advertising costs, trade shows, corporate marketing, promotion, travel related to our sales and marketing operations, related occupancy and equipment costs, and other marketing costs. General and administrative expense consists primarily of compensation and associated costs for executive management, finance, human resources and other administrative personnel, including stock-based compensation expense, outside professional fees, allocated facilities costs, acquisition-related costs and other corporate expenses.Amortization of acquisition-related intangible assets. In connection with our acquisitions, we recognize intangible assets that are being amortized over their estimated useful lives. We also recognize goodwill, which is not amortized, and in-process research and development (“IPR&D”), which is initially capitalized as an indefinite-lived intangible asset, in connection with the acquisitions. Upon completion of each underlying project, IPR&D assets are reclassified as amortizable purchased intangible assets and amortized over their estimated useful lives.Restructuring, impairment and disposal charges. Restructuring, impairment and disposal charges consist primarily of compensation costs associated with employee exit programs, alignment of our global manufacturing operations, rationalizing product development program costs, facility and lease abandonments, fixed asset impairment, IPR&D impairment, and other exit costs, including curtailment of service or supply agreements.Interest expense. Interest expense includes coupon interest, commitment fees, accretion of original issue discount, amortization of debt premiums and debt issuance costs, and expenses related to debt modifications or extinguishments. Other income, net. Other income, net includes interest income, gains or losses on investments, foreign currency remeasurement, and other miscellaneous items.Provision for (benefit from) income taxes. We have structured our operations to maximize the benefit from tax incentives extended to us in various jurisdictions to encourage investment or employment. Our tax incentives from the Singapore Economic Development Board provide that any qualifying income earned in Singapore is subject to tax incentives or reduced rates of Singapore income tax. Subject to our compliance with the conditions specified in these incentives and 37Table of Contentslegislative developments, these Singapore tax incentives are presently expected to expire in November 2025. The corporate income tax rate in Singapore that would otherwise apply to us would be 17%. We also have a tax holiday on our qualifying income in Malaysia, which is scheduled to expire in fiscal year 2028.Each tax incentive and tax holiday is also subject to our compliance with various operating and other conditions. If we cannot, or elect not to, comply with any such operating conditions specified, we could, in some instances, be required to refund previously realized material tax benefits, or if such tax incentive or tax holiday is terminated prior to its expiration absent a new incentive applying, we will lose the related tax benefits earlier than scheduled. We may elect to modify our operational structure and tax strategy, which may not be as beneficial to us as the benefits provided under the present tax concession arrangements. Before taking into consideration the effects of the U.S. Tax Cuts and Jobs Act and other indirect tax impacts, the effect of these tax incentives and tax holiday was to decrease the provision for income taxes by approximately $1,156 million for fiscal year 2021 and increase the benefit from income taxes by approximately $833 million for fiscal year 2020.Our interpretations and conclusions regarding the tax incentives are not binding on any taxing authority, and if our assumptions about tax and other laws are incorrect or if these tax incentives are substantially modified or rescinded, we could suffer material adverse tax and other financial consequences, which would increase our expenses, reduce our profitability and adversely affect our cash flows. In addition, taxable income in any jurisdiction is dependent upon acceptance of our operational practices and intercompany transfer pricing by local tax authorities as being on an arm’s length basis. Due to inconsistencies in application of the arm’s length standard among taxing authorities, as well as lack of adequate treaty-based protection, transfer pricing challenges by tax authorities could, if successful, substantially increase our income tax expense.Critical Accounting EstimatesThe preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. Our actual financial results may differ materially and adversely from our estimates. Our critical accounting policies are those that affect our historical financial statements materially and involve difficult, subjective or complex judgments by management. Those policies include revenue recognition, business combinations, valuation of goodwill and long-lived assets, inventory valuation, income taxes, retirement and post-retirement benefit plan assumptions, stock-based compensation and employee bonus programs. See Note 2. “Summary of Significant Accounting Policies” included in Part II, Item 8. of this Annual Report on Form 10-K for further information on our critical accounting policies and estimates.Revenue recognition. We account for a contract with a customer when both parties have approved the contract and are committed to perform their respective obligations, each party’s rights can be identified, payment terms can be identified, the contract has commercial substance, and it is probable we will collect substantially all of the consideration we are entitled to. Revenue is recognized when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer. Our products and services can be broadly categorized as sales of products and subscriptions and services. We recognize products revenue from sales to direct customers and distributors when control transfers to the customer. An allowance for distributor credits covering price adjustments is made based on our estimate of historical experience rates as well as considering economic conditions and contractual terms. To date, actual distributor claims activity has been materially consistent with the provisions we have made based on our historical estimates. However, because of the inherent nature of estimates, there is always a risk that there could be significant differences between actual amounts and our estimates. Different judgments or estimates could result in variances that might be significant to reported operating results. We also record reductions of revenue for rebates in the same period that the related revenue is recorded. We accrue 100% of potential rebates at the time of sale. We reverse the accrual of unclaimed rebate amounts as specific rebate programs contractually end and when we believe unclaimed rebates are no longer subject to payment and will not be paid. Thus, the reversal of unclaimed rebates may have a positive impact on our net revenue and net income in subsequent periods.Our contracts may contain more than one of our products and services, each of which is separately accounted for as a distinct performance obligation. When available, we use directly observable transactions to determine the standalone selling prices for performance obligations. Our estimates of standalone selling price for each performance obligation require judgment that considers multiple factors, including, but not limited to, historical discounting trends for products and services and pricing practices through different sales channels, gross margin objectives, internal costs, competitor pricing strategies, technology lifecycles and market conditions.38Table of ContentsWe also estimate the standalone selling price of our material rights. Our estimate of the value of the customer’s option to purchase or receive additional products or services at a discounted price includes estimating the incremental discount the customer would obtain when exercising the option and the likelihood that the option would be exercised.Certain contracts contain a right of return that allows the customer to cancel all or a portion of the product or service and receive a credit. We estimate returns based on historical returns data which is constrained to an amount for which a material revenue reversal is not probable. We do not recognize revenue for products or services that are expected to be returned.Business combinations. Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based, in part, on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets we have acquired include, but are not limited to, future expected cash flows from product sales, customer contracts and acquired technologies, revenue growth rate, customer ramp-up period, technology obsolescence rates, expected costs to develop IPR&D into commercially viable products, estimated cash flows from the projects when completed, and discount rates. The discount rates used to discount expected future cash flows to present value are typically derived from a weighted-average cost of capital analysis and adjusted to reflect inherent risks. Unanticipated events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actual results.Valuation of goodwill and long-lived assets. We perform an annual impairment review of our goodwill during the fourth fiscal quarter of each year, and more frequently if we believe indicators of impairment exist. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. To review for impairment, we first assess qualitative factors to determine whether events or circumstances lead to a determination that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount. Our qualitative assessment of the recoverability of goodwill, whether performed annually or based on specific events or circumstances, considers various macroeconomic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of our financial performance; or (iv) a sustained decrease in our market capitalization below our net book value. After assessing the totality of events and circumstances, if we determine that it is not more likely than not that the fair value of any of our reporting units is less than its carrying amount, no further assessment is performed. If we determine that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount, we calculate the fair value of that reporting unit and compare the fair value to the reporting unit’s net book value. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. Our goodwill impairment test uses both the income approach and the market approach to estimate a reporting unit's fair value. The income approach is based on the discounted cash flow method that uses the reporting unit estimates for forecasted future financial performance including revenues, operating expenses, and taxes, as well as working capital and capital asset requirements. These estimates are developed as part of our long-term planning process based on assumed market segment growth rates and our assumed market segment share, estimated costs based on historical data and various internal estimates. Projected cash flows are then discounted to a present value employing a discount rate that properly accounts for the estimated market weighted-average cost of capital, as well as any risk unique to the subject cash flows. The market approach is based on weighting financial multiples of comparable companies and applies a control premium. A reporting unit's carrying value represents the assignment of various assets and liabilities, excluding certain corporate assets and liabilities, such as cash and debt. We assess the impairment of long-lived assets including purchased IPR&D, property, plant and equipment, and intangible assets, whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors we consider important which could trigger an impairment review include (i) significant under-performance relative to historical or projected future operating results, (ii) significant changes in the manner of our use of the acquired assets or the strategy for our overall business, or (iii) significant negative industry or economic trends. The process of evaluating the potential impairment of long-lived assets under the accounting guidance on property, plant and equipment and other intangible assets is also highly subjective and requires significant judgment. In order to estimate the fair value of long-lived assets, we typically make various assumptions about the future prospects of our business or the part of our business that the long-lived asset relates to. We also consider market factors specific to the business and estimate future cash flows to be generated by the business, which requires significant judgment as it is based on assumptions about market demand for our products over a number of future years. Based on these assumptions and estimates, we determine whether we need to take an impairment charge to reduce the value of the long-lived asset stated on our consolidated balance sheets 39Table of Contentsto reflect its estimated fair value. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors, such as the real estate market, industry and economic trends, and internal factors, such as changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, changes in assumptions and estimates could materially impact our reported financial results.Inventory valuation. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our forecast of product demand and production requirements. Demand for our products can fluctuate significantly from period to period. A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, our industry is characterized by rapid technological change, frequent new product development and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Additionally, our estimates of future product demand may prove to be inaccurate, which may cause us to understate or overstate both the provision required for excess and obsolete inventory and cost of products sold. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our results of operations. Income taxes. Significant management judgment is required in developing our provision for or benefit from income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. We have considered projected future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances. An adjustment to the valuation allowance will either increase or decrease our provision for or benefit from income taxes in the period such determination is made. In evaluating the exposure associated with various tax filing positions, we accrue an income tax liability when such positions do not meet the more likely than not threshold for recognition.The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax law and regulations in a multitude of jurisdictions. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes, interest, and penalties will be due. If our estimate of income tax liabilities proves to be less than the actual amount ultimately assessed, a further charge to tax expense would be required. If the payment of these amounts ultimately proves to be unnecessary, the reversal of the accrued liabilities would result in tax benefits being recognized in the period when we determine the liabilities no longer exist.Retirement and post-retirement benefit plan assumptions. Retirement and post-retirement benefit plan obligations represent liabilities that will ultimately be settled sometime in the future and therefore, are subject to estimation. Pension accounting is intended to reflect the recognition of future retirement and post-retirement benefit plan costs over the employees' average expected future service to us, based on the terms of the plans and investment and funding decisions. To estimate the impact of these future payments and our decisions concerning funding of these obligations, we are required to make assumptions using actuarial concepts within the framework of GAAP. One assumption is the discount rate used to calculate the estimated plan obligations. Other assumptions include the expected long-term return on plan assets, expected future salary increases, the health care cost trend rate, expected future increases to benefit payments, expected retirement dates, employee turnover, retiree mortality rates, and portfolio composition. We evaluate these assumptions at least annually.For our U.S. and non-U.S. plans, we use October 31, the month end closest to our fiscal year end, as the annual discount rate measurement date to determine the present value of future benefit payments. The U.S. discount rates are based on the results of matching expected plan benefit payments with cash flows from a hypothetical yield curve constructed with high-quality corporate bond yields. The discount rate for non-U.S. plans was based either on published rates for government bonds or use of a hypothetical yield curve constructed with high-quality corporate bond yields, depending on the availability of sufficient quantities of quality corporate bonds. Lower discount rates increase present values of the pension liabilities and subsequent year pension expense; higher discount rates decrease present values of the pension liabilities and subsequent year pension expense.The U.S. expected rate of return on plan assets is set equal to the discount rate due to the implementation of our fully-matched, liability-driven investment strategy.Actuarial assumptions are based on our best estimates and judgment. Material changes may occur in retirement benefit costs in the future if these assumptions differ from actual events or experiences. We performed a sensitivity analysis on the discount rate, which is the key assumption in calculating the U.S. pension and post-retirement benefit obligations. Each change of 25 basis points in the discount rate assumption would have had an estimated $36 million impact on the benefit obligations as of the fiscal year 2021 measurement date. Each change of 25 basis points in the discount rate assumption or expected rate of return assumption would not have a material impact on annual net retirement benefit costs for the fiscal year ending October 30, 2022 (“fiscal year 2022”).40Table of ContentsStock-based compensation expense. Stock-based compensation expense consists of expense for restricted stock units (“RSUs”) and stock options granted to employees and non-employees or assumed from acquisitions as well as expense associated with Broadcom employee stock purchase plan (“ESPP”). We recognize compensation expense for time-based stock options and ESPP rights based on the estimated grant-date fair value method required under the authoritative guidance using the Black-Scholes valuation model. Certain equity awards include both time-based and market-based conditions and are accounted for as market-based awards. The fair value of these market-based awards is estimated on the date of grant using a Monte Carlo simulation model. Employee Bonus Programs. Our employee bonus programs, which are overseen by our Compensation Committee, or our Board, in the case of our Chief Executive Officer, provide for variable compensation based on the attainment of overall corporate annual targets and functional performance metrics. At the end of each fiscal quarter, we monitor and accrue for an estimated, variable, proportional compensation expense based on our actual progress toward the achievement of the annual targets and metrics. The actual achievement of target and metrics at the end of the fiscal year, which is subject to approval by our Compensation Committee, may result in the actual variable compensation amounts being significantly higher or lower than the relevant estimated amounts accrued in earlier quarters, which would result in a corresponding adjustment in the fourth fiscal quarter. Fiscal Year PresentationWe operate on a 52- or 53-week fiscal year ending on the Sunday closest to October 31 in a 52-week year and the first Sunday in November in a 53-week year. Our fiscal years 2021, 2020 and 2019 consisted of 52 weeks. The financial statements included in Part II, Item 8. of this Annual Report on Form 10-K are presented in accordance with GAAP and expressed in U.S. dollars.41Table of ContentsResults of OperationsFiscal Year 2021 Compared to Fiscal Year 2020The following table sets forth our results of operations for the periods presented: Fiscal Year EndedOctober 31,2021November 1,2020October 31,2021November 1,2020 (In millions)(As a percentage of net revenue)Statements of Operations Data: Net revenue:Products$20,886 $17,435 76 %73 %Subscriptions and services6,564 6,453 24 27 Total net revenue27,450 23,888 100 100 Cost of revenue:Cost of products sold6,555 5,892 24 25 Cost of subscriptions and services607 626 2 2 Amortization of acquisition-related intangible assets3,427 3,819 13 16 Restructuring charges17 35 — — Total cost of revenue10,606 10,372 39 43 Gross margin16,844 13,516 61 57 Research and development4,854 4,968 18 21 Selling, general and administrative1,347 1,935 5 8 Amortization of acquisition-related intangible assets1,976 2,401 7 10 Restructuring, impairment and disposal charges148 198 — 1 Total operating expenses8,325 9,502 30 40 Operating income$8,519 $4,014 31 %17 %Net RevenueA relatively small number of customers account for a significant portion of our net revenue. Sales of products to distributors accounted for 53% and 42% of our net revenue for fiscal years 2021 and 2020, respectively. Direct sales to WT Microelectronics Co., Ltd., a distributor, accounted for 18% and 13% of our net revenue for fiscal years 2021 and 2020, respectively. We believe aggregate sales to our top five end customers, through all channels, accounted for more than 35% and 30% of our net revenue for fiscal years 2021 and 2020, respectively. We believe aggregate sales to Apple Inc., through all channels, accounted for approximately 20% and 15% of our net revenue for fiscal years 2021 and 2020, respectively. We expect to continue to experience significant customer concentration in future periods. The loss of, or significant decrease in demand from, any of our top five end customers could have a material adverse effect on our business, results of operations and financial condition. From time to time, some of our key semiconductor customers place large orders or delay orders, causing our quarterly net revenue to fluctuate significantly. This is particularly true of our wireless products as fluctuations may be magnified by the timing of launches, and seasonal variations in sales, of mobile handsets. The ongoing COVID-19 pandemic and related uncertainties and supply imbalance have caused and may continue to cause our net revenue to fluctuate significantly and impact our results of operations, as discussed above. Additionally, export restrictions on one of our larger customers have had, and may continue to have, an adverse impact on our revenue.Although we recognize revenue for the majority of our products when title and control transfer in Penang, Malaysia, we disclose net revenue by country based primarily on the geographic shipment or delivery location specified by our distributors, OEMs, contract manufacturers, channel partners, or software customers. In each of fiscal years 2021 and 2020, approximately 35% of our net revenue came from shipments or deliveries to China (including Hong Kong). However, the end customers for either our products or for the end products into which our products are incorporated, are frequently located in countries other than China (including Hong Kong). As a result, we believe that a substantially smaller percentage of our net revenue is ultimately dependent on sales of either our product or our customers’ product incorporating our product, to end customers located in China (including Hong Kong). 42Table of ContentsThe following tables set forth net revenue by segment for the periods presented:Fiscal Year EndedNet Revenue by SegmentOctober 31,2021November 1,2020$ Change% Change(In millions, except for percentages)Semiconductor solutions$20,383 $17,267 $3,116 18 %Infrastructure software7,067 6,621 446 7 %Total net revenue$27,450 $23,888 $3,562 15 %Fiscal Year EndedNet Revenue by SegmentOctober 31, 2021November 1, 2020(As a percentage of net revenue)Semiconductor solutions74 %72 %Infrastructure software26 28 Total net revenue100 %100 %Net revenue from our semiconductor solutions segment increased primarily due to higher demand for our wireless products, as well as the delayed production ramp of a new mobile handset by a major customer in the prior fiscal year, which resulted in lower shipments in fiscal year 2020. Net revenue from our semiconductor solutions segment also increased due to higher demand for our networking and wireless connectivity products. Net revenue from our infrastructure software segment increased primarily due to higher demand for our FC SAN products, mainframe and cyber security solutions.Gross MarginGross margin was $16,844 million, or 61% of net revenue, for fiscal year 2021, compared to $13,516 million, or 57% of net revenue, for fiscal year 2020. The increase was primarily due to lower amortization of acquisition-related intangible assets and favorable margin within our semiconductor solutions segment due to increased demand.Research and Development ExpenseResearch and development expense decreased $114 million, or 2%, in fiscal year 2021, compared to the prior fiscal year. The decrease was primarily due to lower stock-based compensation expense reflecting the full vesting of certain equity awards and the effects of forfeitures, partially offset by higher variable employee compensation expense. Selling, General and Administrative ExpenseSelling, general and administrative expense decreased $588 million, or 30%, in fiscal year 2021, compared to the prior fiscal year. The decrease was primarily due to higher acquisition-related costs incurred in the prior fiscal year as a result of our acquisition of the Symantec Business. The decrease was also due to lower compensation expense reflecting the full benefit of the completed Symantec Business integration as well as our strategic workforce alignment. In addition, fiscal year 2020 included non-recurring litigation settlements.Amortization of Acquisition-Related Intangible AssetsAmortization of acquisition-related intangible assets recognized in operating expenses decreased $425 million, or 18%, in fiscal year 2021, compared to the prior fiscal year. The decrease was primarily due to lower amortization of certain intangible assets from our acquisition of CA.Restructuring, Impairment and Disposal ChargesRestructuring, impairment and disposal charges recognized in operating expenses decreased $50 million, or 25%, in fiscal year 2021, compared to the prior fiscal year. The decrease was primarily due to higher employee termination costs in the prior fiscal year from cost reduction activities related to our acquisition of the Symantec Business.Stock-Based Compensation ExpenseTotal stock-based compensation expense was $1,704 million and $1,976 million for fiscal years 2021 and 2020, respectively. The decrease primarily reflects the full vesting of certain equity awards and the effect of forfeitures.The following table sets forth the total unrecognized compensation cost related to unvested stock-based awards outstanding and expected to vest as of October 31, 2021, which we expect to recognize over the remaining weighted-average service period of 2.9 years. 43Table of ContentsFiscal Year:Unrecognized Compensation Cost, Net of Expected Forfeitures(In millions)2022$1,289 2023907 2024535 2025210 202626 Total$2,967 During the first quarter of fiscal year 2019, our Compensation Committee approved a broad-based program of multi-year equity grants of time- and market-based RSUs (the “Multi-Year Equity Awards”) in lieu of our annual employee equity awards historically granted on March 15 of each year. Each Multi-Year Equity Award vests on the same basis as four annual grants made March 15 of each year, beginning in fiscal year 2019, with successive four-year vesting periods. We recognize stock-based compensation expense related to the Multi-Year Equity Awards from the grant date through their respective vesting date, ranging from 4 years to 7 years.Segment Operating Results Fiscal Year EndedOperating Income by SegmentOctober 31, 2021November 1, 2020$ Change% Change(In millions, except for percentages)Semiconductor solutions$10,976 $8,576 $2,400 28 %Infrastructure software4,936 4,363 573 13 %Unallocated expenses(7,393)(8,925)1,532 (17)%Total operating income$8,519 $4,014 $4,505 112 %Operating income from our semiconductor solutions segment increased primarily due to higher demand for our wireless products, as well as the delayed production ramp of a new mobile handset by a major customer in the prior fiscal year, which resulted in lower shipments in fiscal year 2020. Operating income from our semiconductor solutions segment also increased due to higher demand for our networking and wireless connectivity products, as well as higher gross margin. Operating income from our infrastructure software segment increased primarily due to higher demand for our FC SAN products and mainframe solutions.Unallocated expenses include amortization of acquisition-related intangible assets; stock-based compensation expense; restructuring, impairment and disposal charges; acquisition-related costs; and other costs that are not used in evaluating the results of, or in allocating resources to, our segments. Unallocated expenses decreased 17% in fiscal year 2021, compared to the prior fiscal year, primarily due to lower amortization of acquisition-related intangible assets, acquisition-related costs and stock-based compensation expense.Non-Operating Income and ExpensesInterest expense. Interest expense was $1,885 million and $1,777 million for fiscal years 2021 and 2020, respectively. The increase was primarily due to higher losses on extinguishment of debt as a result of our fiscal year 2021 debt transactions. Other income, net. Other income, net, which includes interest income, gains or losses on investments, foreign currency remeasurement and other miscellaneous items, was $131 million and $206 million for fiscal years 2021 and 2020, respectively. The decrease was primarily due to a $116 million non-recurring gain from the lapse of a tax indemnification arrangement included in the prior fiscal year, offset in part by an increase in gains on investments in fiscal year 2021.Provision for (benefit from) income taxes. The provision for income taxes of $29 million in fiscal year 2021 was primarily due to income from continuing operations, offset in part by excess tax benefits from stock-based awards, a benefit from foreign derived intangible income, and the recognition of gross unrecognized tax benefits as a result of lapses of statutes of limitations and audit settlements. 44Table of ContentsThe benefit from income taxes of $518 million in fiscal year 2020 was primarily due to the jurisdictional mix of income and expense, the recognition of gross uncertain tax benefits as a result of lapses of statutes of limitations, the remeasurement of certain foreign deferred tax assets and liabilities, and excess tax benefit from stock-based awards.Liquidity and Capital ResourcesThe following section discusses our principal liquidity and capital resources as well as our primary liquidity requirements and uses of cash. Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. We believe our cash equivalents are liquid and accessible. Our primary sources of liquidity as of October 31, 2021 consisted of: (i) $12,163 million in cash and cash equivalents, (ii) cash we expect to generate from operations and (iii) available capacity under our $7.5 billion unsecured revolving credit facility (the “Revolving Facility”). In addition, we may also generate cash from the sale of assets and debt or equity financing from time to time.Our short-term and long-term liquidity requirements primarily arise from: (i) business acquisitions and investments we may make from time to time, (ii) working capital requirements, (iii) research and development and capital expenditure needs, (iv) cash dividend payments (if and when declared by our Board of Directors), (v) interest and principal payments related to our outstanding indebtedness, (vi) share repurchases, and (vii) payment of income taxes. Our ability to fund these requirements will depend, in part, on our future cash flows, which are determined by our future operating performance and, therefore, subject to prevailing global macroeconomic conditions and financial, business and other factors, some of which are beyond our control.We believe that our cash and cash equivalents on hand, cash flows from operations, and the Revolving Facility will provide sufficient liquidity to operate our business and fund our current and assumed obligations for at least the next 12 months. We expect a slight increase in capital expenditures in fiscal year 2022 as compared to fiscal year 2021. For additional information regarding our cash requirement from contractual obligations, indebtedness and lease obligations, see Note 14. “Commitments and Contingencies”, Note 10. “Borrowings” and Note 6. “Leases” in Part II, Item 8 of this Annual Report on Form 10-K.From time to time, we engage in discussions with third parties regarding potential acquisitions of, or investments in, businesses, technologies and product lines. Any such transaction, or evaluation of potential transactions, could require significant use of our cash and cash equivalents, or require us to increase our borrowings to fund such transactions. If we do not have sufficient cash to fund our operations or finance growth opportunities, including acquisitions, or unanticipated capital expenditures, our business and financial condition could suffer. In such circumstances, we may seek to obtain new debt or equity financing. However, we cannot assure you that such additional financing will be available on terms acceptable to us or at all. Our ability to service our senior unsecured notes and any other indebtedness we may incur will depend on our ability to generate cash in the future. We may also elect to sell additional debt or equity securities for reasons other than those specified above.In addition, we may, at any time and from time to time, seek to retire or purchase our outstanding debt through cash tenders and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such tenders, exchanges or purchases, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Working CapitalWorking capital increased to $10,305 million at October 31, 2021 from $5,524 million at November 1, 2020. The increase was attributable to the following:•Cash and cash equivalents increased to $12,163 million at October 31, 2021 from $7,618 million at November 1, 2020, primarily due to $13,764 million in net cash provided by operating activities and $9,904 million in proceeds from long-term borrowings, partially offset by $11,495 million of payments on debt obligations, $6,212 million of dividend payments and $1,299 million in payments of employee withholding taxes related to net share settled equity awards. See the “Cash Flows” section below for further details. •Current portion of long-term debt decreased to $290 million at October 31, 2021 from $827 million at November 1, 2020, primarily as a result of our fiscal year 2021 debt transactions.•Inventory increased to $1,297 million at October 31, 2021 from $1,003 million at November 1, 2020, primarily due to the timing of customer product ramps.45Table of ContentsThese increases in working capital were offset in part by the following:•Accounts payable increased to $1,086 million at October 31, 2021 from $836 million at November 1, 2020, primarily due to the timing of vendor payments.•Accounts receivable decreased to $2,071 million at October 31, 2021 from $2,297 million at November 1, 2020, primarily due to revenue linearity and additional receivables sold through factoring arrangements.•Employee compensation and benefits increased to $1,066 million at October 31, 2021 from $877 million at November 1, 2020, primarily due to higher variable compensation based on current fiscal year performance.Capital Returns Fiscal Year EndedCash Dividends Declared and PaidOctober 31, 2021November 1, 2020(In millions, except per share data)Dividends per share to common stockholders$14.40 $13.00 Dividends to common stockholders$5,913 $5,235 Dividends per share to preferred stockholders$80.00 $80.00 Dividends to preferred stockholders$299 $299 During fiscal years 2021 and 2020, we paid approximately $1,299 million and $765 million, respectively, in employee withholding taxes due upon the vesting of net settled equity awards. We withheld approximately 3 million shares of common stock from employees in connection with such net share settlements during each of fiscal years 2021 and 2020.In December 2021, our Board of Directors authorized a stock repurchase program to repurchase up to $10 billion of our common stock from time to time on or prior to December 31, 2022. Repurchases under our stock repurchase program may be effected through a variety of methods, including open market or privately negotiated purchases. The timing and amount of shares repurchased will depend on the stock price, business and market conditions, corporate and regulatory requirements, alternative investment opportunities, acquisition opportunities, and other factors. We are not obligated to repurchase any specific amount of shares of common stock, and the stock repurchase program may be suspended or terminated at any time.Cash Flows Fiscal Year EndedOctober 31, 2021November 1, 2020(In millions)Net cash provided by operating activities$13,764 $12,061 Net cash used in investing activities(245)(11,109)Net cash provided by (used in) financing activities(8,974)1,611 Net change in cash and cash equivalents$4,545 $2,563 Operating ActivitiesCash provided by operating activities consisted of net income adjusted for certain non-cash and other items and changes in assets and liabilities. The $1,703 million increase in cash provided by operations during fiscal year 2021 compared to fiscal year 2020 was due to $3,776 million higher net income, offset by a $1,220 million decrease resulting from changes in operating assets and liabilities, as well as a $853 million decrease in amortization of intangible assets, stock-based compensation, and other adjustments. Investing Activities Cash flows from investing activities primarily consisted of cash used for acquisitions, capital expenditures and investments, and proceeds from sales of businesses and assets. The $10,864 million decrease in cash used in investing activities for fiscal year 2021 compared to fiscal year 2020 was primarily related to a $10,864 million decrease in cash paid for acquisitions, partially offset by $173 million less in proceeds received from sales of businesses. 46Table of ContentsFinancing ActivitiesCash flows from financing activities primarily consisted of net proceeds and payments related to our long-term borrowings, dividend and distribution payments, stock repurchases and the issuances of stock. The $10,585 million decrease in cash related to financing activities for fiscal year 2021 compared to fiscal year 2020 was primarily due to a $9,294 million decrease in net proceeds from borrowings as a result of debt repayments, and a $678 million increase in dividend payments.Summarized Obligor Group Financial InformationPursuant to indentures dated January 19, 2017 and October 17, 2017 (collectively, the “2017 Indentures”), Broadcom Cayman Finance Limited (subsequently merged into Broadcom Technologies Inc. (“BTI”) during fiscal year 2019 with BTI remaining as the surviving entity) and Broadcom Corporation (“BRCM”) (BRCM and BTI collectively, the “2017 Senior Notes Co-Issuers”) issued $13,550 million and $4,000 million aggregate principal amount of notes, respectively (collectively, the “2017 Senior Notes”). Substantially all of the 2017 Senior Notes have been registered with the SEC. We may redeem all or a portion of our 2017 Senior Notes at any time prior to their maturity, subject to a specified make-whole premium as set forth in the 2017 Indentures. In the event of a change of control triggering event, holders of our 2017 Senior Notes will have the right to require us to purchase for cash, all or a portion of their 2017 Senior Notes at a redemption price of 101% of the aggregate principal amount plus accrued and unpaid interest. The 2017 Indentures also contain covenants that restrict, among other things, the ability of Broadcom and its subsidiaries to incur certain secured debt and to consummate certain sale and leaseback transactions and restrict the ability of Broadcom, BRCM and BTI (collectively,the “Obligor Group”) to merge, consolidate or sell all or substantially all of their assets. Broadcom and BTI fully and unconditionally guarantee, jointly and severally, on an unsecured, unsubordinated basis, the 2017 Senior Notes. Because the guarantees are not secured, they are effectively subordinated to any existing and future secured indebtedness of the guarantors to the extent of the value of the collateral securing that indebtedness. The guarantee by Broadcom and BTI will be automatically and unconditionally released upon the sale, exchange, disposition or other transfer of all or substantially all of the assets of such guarantor if any of these events occurs, subject to the terms of the 2017 Indentures. The guarantee by Broadcom (1) will also be automatically and unconditionally released at such time as: (A) the 2017 Senior Notes Co-Issuers, in their sole discretion, determine that such guarantee is no longer required by Rule 3-10(a), as applicable, of Regulation S-X to except the 2017 Senior Notes Co-Issuers’ financial statements from being required to be filed pursuant to Rule 3-10(a) of Regulation S-X or otherwise facilitate a reduction in its financial reporting obligations or (B) either of the 2017 Senior Notes Co-Issuers becomes subject to Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) and (2) may, at the election of the 2017 Senior Notes Co-Issuers, be unconditionally released at such time as Broadcom is eligible to suspend its reporting obligation under the Exchange Act.In March 2021, we completed the settlement of our private offers to exchange $5.5 billion of certain of our outstanding notes maturing between 2024 and 2027 (the “Exchange Offer”) for $2,250 million of 3.419% new senior unsecured notes due April 2033 and $3,250 million of 3.469% new senior unsecured notes due April 2034. In connection with the Exchange Offer, BRCM and BTI were automatically and unconditionally released from their guarantees in accordance with the respective indentures governing the January 2021 Senior Notes, the June 2020 Senior Notes, the May 2020 Senior Notes, the April 2020 Senior Notes, and the April 2019 Senior Notes, as defined in Note 10. “Borrowings” included in Part II, Item 8 of this Annual Report on Form 10-K. The following tables set forth the summarized financial information of the Obligor Group on a combined basis. This summarized financial information excludes any subsidiaries that are not issuers or guarantors (the “Non-Obligor Group”). Intercompany balances and transactions between members of the Obligor Group have been eliminated.47Table of ContentsSummarized Balance Sheet InformationOctober 31,2021(In millions)ASSETSCurrent assets:Amount due from Non-Obligor Group$792 Other current assets7,418 Total current assets$8,210 Long-term assets:Amount due from Non-Obligor Group, long-term$4,620 Goodwill1,380 Other long-term assets1,376 Total long-term assets$7,376 LIABILITIES Current liabilities:Amount due to Non-Obligor Group$7,412 Current portion of long-term debt264 Other current liabilities666 Total current liabilities$8,342 Long-term liabilities:Amount due to Non-Obligor Group, long-term$7 Long-term debt38,998 Other long-term liabilities2,787 Total long-term liabilities$41,792 Fiscal Year EndedSummarized Statement of Operations InformationOctober 31,2021(In millions)Intercompany revenue with Non-Obligor Group$1,760 Intercompany gross margin$1,596 Net loss (a)$(1,262)_________________________________(a) In addition to intercompany gross margin, there were $962 million of intercompany transactions included in net loss.Accounting Changes and Recent Accounting StandardsFor a description of accounting changes and recent accounting standards, including the expected dates of adoption and estimated effects, if any, in our consolidated financial statements, see Note 2. “Summary of Significant Accounting Policies” included in Part II, Item 8. of this Annual Report on Form 10-K.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKForeign Currency Exchange RiskFrom time to time, we use foreign exchange forward contracts to hedge a portion of our exposures to changes in currency exchange rates, which result from our global operating and financing activities. We do not use derivative financial instruments for trading or speculative purposes. Gains and losses from foreign currency transactions, as well as derivative instruments, were not significant for any period presented in the consolidated financial statements included in this Form 10-K. As of October 31, 2021, we did not have any outstanding foreign exchange forward contracts.48Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA BROADCOM INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm50Consolidated Balance Sheets51Consolidated Statements of Operations52Consolidated Statements of Comprehensive Income53Consolidated Statements of Cash Flows54Consolidated Statements of Stockholders' Equity55Notes to Consolidated Financial Statements56Schedule II — Valuation and Qualifying Accounts9549Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders of Broadcom Inc.Opinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of Broadcom Inc. and its subsidiaries (the “Company”) as of October 31, 2021 and November 1, 2020, and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended October 31, 2021, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of October 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 31, 2021 and November 1, 2020, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.Change in Accounting Principle As discussed in Note 6 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in fiscal 2020.Basis for OpinionsThe Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Critical Audit MattersThe critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.Uncertain Tax Positions (UTPs)As described in Notes 2 and 12 to the consolidated financial statements, the gross unrecognized tax benefits balance was $5,030 million as of October 31, 2021. As management has disclosed, management evaluates the exposure associated with various tax filing positions and accrues an income tax liability when such positions do not meet the more-likely-than-not threshold for recognition. A tax benefit from an UTP may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits.The principal considerations for our determination that performing procedures relating to the UTPs is a critical audit matter are (i) the significant judgment by management when evaluating the technical merits of these tax positions, (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating the technical merits of the tax positions, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the identification and recognition of the income tax liability for UTPs, including controls addressing the completeness of the UTPs and the measurement of the income tax liability. These procedures also included, among others, (i) testing management’s process for identifying potential new UTPs, (ii) for a selection of UTPs, evaluating possible outcomes, and (iii) for a selection of UTPs, testing the calculation of the income tax liability by jurisdiction, including management’s assessment of the technical merits of tax positions and estimates of the amount of tax benefit expected to be sustained. Professionals with specialized skill and knowledge were used to assist in (i) the evaluation of the completeness of management’s identification of the UTPs and (ii) for a selection of UTPs, the evaluation of the reasonableness of management’s assessment of whether the tax positions are more-likely-than-not of being sustained, the amount of potential benefit to be realized, and the application of relevant tax laws./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaDecember 17, 2021We have served as the Company’s auditor since 2006.50Table of ContentsBROADCOM INC.CONSOLIDATED BALANCE SHEETSOctober 31,2021November 1,2020(In millions, except par value)ASSETS Current assets: Cash and cash equivalents$12,163 $7,618 Trade accounts receivable, net2,071 2,297 Inventory1,297 1,003 Other current assets1,055 977 Total current assets16,586 11,895 Long-term assets:Property, plant and equipment, net2,348 2,509 Goodwill43,450 43,447 Intangible assets, net11,374 16,782 Other long-term assets1,812 1,300 Total assets$75,570 $75,933 LIABILITIES AND EQUITY Current liabilities: Accounts payable$1,086 $836 Employee compensation and benefits1,066 877 Current portion of long-term debt290 827 Other current liabilities3,839 3,831 Total current liabilities6,281 6,371 Long-term liabilities: Long-term debt39,440 40,235 Other long-term liabilities4,860 5,426 Total liabilities50,581 52,032 Commitments and contingencies (Note 14)Preferred stock dividend obligation27 27 Stockholders’ equity: Preferred stock, $0.001 par value; 100 shares authorized; 8.00% Mandatory Convertible Preferred Stock, Series A, 4 shares issued and outstanding; aggregate liquidation value of $3,737 and $3,738 as of October 31, 2021 and November 1, 2020, respectively— — Common stock, $0.001 par value; 2,900 shares authorized; 413 and 407 shares issued and outstanding as of October 31, 2021 and November 1, 2020, respectively— — Additional paid-in capital24,330 23,982 Retained earnings748 — Accumulated other comprehensive loss(116)(108)Total stockholders’ equity24,962 23,874 Total liabilities and equity$75,570 $75,933 The accompanying notes are an integral part of these consolidated financial statements.51Table of Contents BROADCOM INC.CONSOLIDATED STATEMENTS OF OPERATIONSFiscal Year EndedOctober 31,2021November 1,2020November 3,2019(In millions, except per share data)Net revenue:Products$20,886 $17,435 $18,117 Subscriptions and services6,564 6,453 4,480 Total net revenue27,450 23,888 22,597 Cost of revenue: Cost of products sold6,555 5,892 6,208 Cost of subscriptions and services607 626 515 Amortization of acquisition-related intangible assets3,427 3,819 3,314 Restructuring charges17 35 77 Total cost of revenue10,606 10,372 10,114 Gross margin16,844 13,516 12,483 Research and development4,854 4,968 4,696 Selling, general and administrative1,347 1,935 1,709 Amortization of acquisition-related intangible assets1,976 2,401 1,898 Restructuring, impairment and disposal charges148 198 736 Total operating expenses8,325 9,502 9,039 Operating income8,519 4,014 3,444 Interest expense(1,885)(1,777)(1,444)Other income, net131 206 226 Income from continuing operations before income taxes6,765 2,443 2,226 Provision for (benefit from) income taxes29 (518)(510)Income from continuing operations6,736 2,961 2,736 Loss from discontinued operations, net of income taxes— (1)(12)Net income6,736 2,960 2,724 Dividends on preferred stock(299)(297)(29)Net income attributable to common stock$6,437 $2,663 $2,695 Basic income per share attributable to common stock:Income per share from continuing operations$15.70 $6.62 $6.80 Loss per share from discontinued operations— — (0.03)Net income per share$15.70 $6.62 $6.77 Diluted income per share attributable to common stock: Income per share from continuing operations$15.00 $6.33 $6.46 Loss per share from discontinued operations— — (0.03)Net income per share$15.00 $6.33 $6.43 Weighted-average shares used in per share calculations: Basic410 402 398 Diluted429 421 419 The accompanying notes are an integral part of these consolidated financial statements.52Table of ContentsBROADCOM INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEFiscal Year EndedOctober 31,2021November 1,2020November 3,2019(In millions)Net income$6,736 $2,960 $2,724 Other comprehensive income (loss), net of tax:Change in actuarial loss and prior service costs associated with defined benefit pension plans and post-retirement benefit plans(8)24 (24)Other comprehensive income (loss), net of tax(8)24 (24)Comprehensive income$6,728 $2,984 $2,700 The accompanying notes are an integral part of these consolidated financial statements.53Table of ContentsBROADCOM INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year EndedOctober 31,2021November 1,2020November 3,2019(In millions)Cash flows from operating activities: Net income$6,736 $2,960 $2,724 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangible and right-of-use assets5,502 6,335 5,239 Depreciation539 570 569 Stock-based compensation1,704 1,976 2,185 Deferred taxes and other non-cash taxes(809)(1,142)(934)Loss on debt extinguishment198 169 28 Non-cash restructuring, impairment and disposal charges38 44 133 Non-cash interest expense96 108 69 Other(113)(52)(132)Changes in assets and liabilities, net of acquisitions and disposals:Trade accounts receivable, net210 981 486 Inventory(294)(31)250 Accounts payable243 (3)(42)Employee compensation and benefits186 217 (294)Other current assets and current liabilities(177)331 (283)Other long-term assets and long-term liabilities(295)(402)(301)Net cash provided by operating activities13,764 12,061 9,697 Cash flows from investing activities:Acquisitions of businesses, net of cash acquired(8)(10,872)(16,033)Proceeds from sales of businesses45 218 957 Purchases of property, plant and equipment(443)(463)(432)Proceeds from disposals of property, plant and equipment4 12 88 Proceeds from sales of investments169 — — Other(12)(4)(2)Net cash used in investing activities(245)(11,109)(15,422)Cash flows from financing activities:Proceeds from long-term borrowings9,904 27,802 28,793 Payments on debt obligations(11,495)(18,814)(16,800)Other borrowings, net— (1,285)1,241 Payment of dividends(6,212)(5,534)(4,235)Repurchases of common stock - repurchase program— — (5,435)Shares repurchased for tax withholdings on vesting of equity awards(1,299)(765)(972)Issuance of preferred stock, net— — 3,679 Issuance of common stock170 276 253 Other(42)(69)(36)Net cash provided by (used in) financing activities(8,974)1,611 6,488 Net change in cash and cash equivalents4,545 2,563 763 Cash and cash equivalents at beginning of period7,618 5,055 4,292 Cash and cash equivalents at end of period$12,163 $7,618 $5,055 Supplemental disclosure of cash flow information:Cash paid for interest$1,565 $1,408 $1,287 Cash paid for income taxes$775 $501 $741 The accompanying notes are an integral part of these consolidated financial statements.54Table of ContentsBROADCOM INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 8.00% Mandatory Convertible Preferred StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal Stockholders’ Equity SharesPar ValueSharesPar Value(In millions)Balance as of November 4, 2018— $— 408 $— $23,285 $3,487 $(115)$26,657 Net income— — — — — 2,724 — 2,724 Other comprehensive loss— — — — — — (24)(24)Cumulative effect of accounting change— — — — — 8 (1)7 Fair value of partially vested equity awards assumed in connection with the acquisition of CA, Inc.— — — — 67 — — 67 Dividends to common stockholders— — — — (880)(3,355)— (4,235)Dividends to preferred stockholders— — — — (29)— — (29)Common stock issued— — 15 — 253 — — 253 Preferred stock issued, net4 — — — 3,679 — — 3,679 Stock-based compensation— — — — 2,260 — — 2,260 Repurchases of common stock— — (21)— (2,571)(2,864)— (5,435)Shares repurchased for tax withholdings on vesting of equity awards— — (4)— (983)— — (983)Balance as of November 3, 20194 — 398 — 25,081 — (140)24,941 Net income— — — — — 2,960 — 2,960 Other comprehensive income— — — — — — 24 24 Cumulative effect of accounting change— — — — — (10)8 (2)Fair value of partially vested equity awards assumed in connection with an acquisition— — — — 1 — — 1 Dividends to common stockholders— — — — (2,582)(2,653)— (5,235)Dividends to preferred stockholders— — — — — (297)— (297)Common stock issued— — 12 — 276 — — 276 Stock-based compensation— — — — 1,976 — — 1,976 Shares repurchased for tax withholdings on vesting of equity awards— — (3)— (770)— — (770)Balance as of November 1, 20204 — 407 — 23,982 — (108)23,874 Net income— — — — — 6,736 — 6,736 Other comprehensive loss— — — — — — (8)(8)Dividends to common stockholders— — — — (224)(5,689)— (5,913)Dividends to preferred stockholders— — — — — (299)— (299)Common stock issued— — 9 — 170 — — 170 Stock-based compensation— — — — 1,704 — — 1,704 Shares repurchased for tax withholdings on vesting of equity awards— — (3)— (1,302)— — (1,302)Balance as of October 31, 20214 $— 413 $— $24,330 $748 $(116)$24,962 The accompanying notes are an integral part of these consolidated financial statements.55Table of ContentsBROADCOM INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Overview and Basis of Presentation OverviewBroadcom Inc. (“Broadcom”), a Delaware corporation, is a global technology leader that designs, develops and supplies a broad range of semiconductor and infrastructure software solutions. We develop semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor based devices and analog III-V based products. We have a history of innovation in the semiconductor industry and offer thousands of products that are used in end products such as enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. Our infrastructure software solutions enable customers to plan, develop, automate, manage and secure applications across mainframe, distributed, mobile and cloud platforms. Our portfolio of industry-leading infrastructure and security software is designed to modernize, optimize, and secure the most complex hybrid environments, enabling scalability, agility, automation, insights, resiliency and security. We also offer mission critical fibre channel storage area networking (“FC SAN”) products and related software in the form of modules, switches and subsystems incorporating multiple semiconductor products. Unless stated otherwise or the context otherwise requires, references to “Broadcom,” “we,” “our,” and “us” mean Broadcom and its consolidated subsidiaries.Basis of PresentationWe operate on a 52- or 53-week fiscal year ending on the Sunday closest to October 31 in a 52-week year and the first Sunday in November in a 53-week year. Our fiscal year ended October 31, 2021 (“fiscal year 2021”) was a 52-week fiscal year. The first quarter of our fiscal year 2021 ended on January 31, 2021, the second quarter ended on May 2, 2021 and the third quarter ended on August 1, 2021. Our fiscal year ended November 1, 2020 (“fiscal year 2020”) and fiscal year ended November 3, 2019 (“fiscal year 2019”) were both 52-week fiscal years.On November 4, 2019, we completed the purchase of certain assets and assumption of certain liabilities of the Symantec Corporation Enterprise Security business (the “Symantec Business”). On November 5, 2018, we acquired CA, Inc. (“CA”). The accompanying consolidated financial statements include the results of operations of the Symantec Business and CA commencing as of their respective acquisition dates. See Note 4. “Acquisitions” for additional information.Certain reclassifications have been made to the consolidated statement of cash flows for fiscal year 2019. These reclassifications have no impact on previously reported operating, investing or financing cash flows. During the first quarter of fiscal year 2020, we changed our organizational structure, resulting in two reportable segments: semiconductor solutions and infrastructure software. Reclassifications have also been made to segment operating income. Fiscal year 2019 segment results have been recast to conform to the current presentation. See Note 13. “Segment Information” for additional information. These reclassifications have no impact on previously reported consolidated operating income.The accompanying consolidated financial statements include the accounts of Broadcom and its subsidiaries and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation.2. Summary of Significant Accounting Policies Foreign currency remeasurement. We operate in a U.S. dollar functional currency environment. Foreign currency assets and liabilities for monetary accounts are remeasured into U.S. dollars at current exchange rates. Non-monetary items such as inventory and property, plant and equipment, are measured and recorded at historical exchange rates. The effects of foreign currency remeasurement were not material for any period presented.Use of estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The inputs into certain of these estimates and assumptions include the consideration of the economic impact of the COVID-19 pandemic. Actual results could differ materially from these estimates, and such differences could affect the results of operations reported in future periods. As the impact of the COVID-19 pandemic continues to develop, many of these estimates could require increased judgment and carry a higher degree of variability and volatility, and may change materially in future periods.Cash and cash equivalents. We consider all highly liquid investment securities with original maturities of three months or less at the date of purchase to be cash equivalents. We determine the appropriate classification of our cash and cash equivalents at the time of purchase.56Table of ContentsTrade accounts receivable, net. Trade accounts receivable are recognized at the invoiced amount and do not bear interest. Accounts receivable are reduced by an allowance for doubtful accounts, which is our best estimate of the expected credit losses in our existing accounts receivable. We determine the allowance based on historical experience, current economic conditions and certain forward-looking information, among other factors. Allowances for doubtful accounts were not material as of October 31, 2021 or November 1, 2020. Accounts receivable are also recognized net of sales returns and distributor credit allowances. These amounts are recognized when it is both probable and estimable that discounts will be granted or products will be returned. Allowances for sales returns and distributor credit allowances as of October 31, 2021 and November 1, 2020 were $129 million and $174 million, respectively.Concentrations of credit risk and significant customers. Our cash, cash equivalents and accounts receivable are potentially subject to concentration of credit risk. Cash and cash equivalents may be redeemable upon demand and are maintained with financial institutions that management believes are of high credit quality and therefore bear minimal credit risk. We seek to mitigate our credit risks by spreading such risks across multiple counterparties and monitoring the risk profile of these counterparties. Our accounts receivable are derived from revenue earned from customers located both within and outside the U.S. We mitigate collection risks from our customers by performing regular credit evaluations of our customers’ financial conditions, and require collateral, such as letters of credit and bank guarantees, in certain circumstances.Concentration of other risks. We operate in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products with new capabilities, general economic conditions worldwide, the ability to safeguard patents and other intellectual property (“IP”) in a rapidly evolving market and reliance on assembly and test subcontractors, third-party wafer fabricators and independent distributors and other factors could affect our financial results.Inventory. We value our inventory at the lower of actual cost or net realizable value of the inventory, with cost being determined under the first-in, first-out method. We record a provision for excess and obsolete inventory based primarily on our forecast of product demand and production requirements. The excess and obsolete balance determined by this analysis becomes the basis for our excess and obsolete inventory charge and the written-down value of the inventory becomes its new cost basis. Retirement benefits. For defined benefit pension plans, we consider various factors in determining our respective benefit obligations and net periodic benefit (income) cost, including the number of employees that we expect to receive benefits, their salary levels and years of service, the expected return on plan assets, the discount rate, the timing of the payment of benefits, and other actuarial assumptions. If the actual results and events of the retirement benefit plans differ from our current assumptions, the benefit obligations may be over- or under-valued.Post-retirement benefit plan assets and obligations are estimates of benefits that we expect to pay to eligible retirees. We consider various factors in determining the value of our post-retirement benefit plan assets and obligations, including the number of employees that we expect to receive benefits and other actuarial assumptions. The key benefit plan assumptions are the discount rate and the expected rate of return on plan assets. The U.S. discount rates are based on the results of matching expected plan benefit payments with cash flows from a hypothetical yield curve constructed with high-quality corporate bond yields. The U.S. expected rate of return on plan assets is set equal to the discount rate due to the implementation of our fully-matched, liability-driven investment strategy. For the non-U.S. plans, we set assumptions specific to each country. We have elected to measure defined benefit pension plan and post-retirement benefit plan assets and liabilities as of October 31, which is the month end that is closest to our fiscal year end.Derivative instruments. We use derivative financial instruments, primarily foreign exchange forward contracts, to manage exposure to foreign exchange risk. Our forward contracts generally mature within three months. We do not use derivative financial instruments for speculative or trading purposes.Outstanding derivatives are recognized as either assets or liabilities at their fair values based on Level 2 inputs as defined in the fair value hierarchy. The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and its hedging designation. For derivative instruments designated as fair value hedges, the changes in fair value are recognized in other income, net in the periods of change, and are offset by the changes in fair value of the hedged items. For derivative instruments designated as cash flow hedges, the changes in fair value of the effective portion are initially recognized in other comprehensive income (loss), net of tax in the period of change, and are subsequently reclassified and recognized in the same line item as the hedged item when either the hedged transactions affect earnings or it becomes probable that the hedged transactions will not occur. The changes in the fair value of the ineffective portion of the derivative instruments are recognized in other income, net in the period of change, which have not been material to date. For derivative instruments not designated as hedges, the changes in fair value are recognized in other income, net in the period of change. We did not have any outstanding derivative instruments as of October 31, 2021 or November 1, 2020. 57Table of ContentsProperty, plant and equipment. Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Additions, improvements and major renewals are capitalized, and maintenance, repairs and minor renewals are expensed as incurred. Assets are held in construction in progress until placed in service, upon which date, we begin to depreciate these assets. When assets are retired or disposed of, the assets and related accumulated depreciation and amortization are removed from our property, plant and equipment balances and the resulting gain or loss is reflected in the consolidated statements of operations. Buildings and leasehold improvements are generally depreciated over 15 to 40 years, or over the lease period, whichever is shorter, and machinery and equipment are generally depreciated over 3 to 10 years. We use the straight-line method of depreciation for all property, plant and equipment.Leases. We determine if an arrangement is a lease, or contains a lease, at the inception of the arrangement and evaluate whether the lease is an operating lease or a finance lease at the commencement date. We recognize right-of-use (“ROU”) assets and lease liabilities for operating and finance leases with terms greater than 12 months, and account for the lease and non-lease components as a single component. ROU assets represent our right to use an asset for the lease term, while lease liabilities represent our obligation to make lease payments. Operating and finance lease ROU assets and liabilities are recognized based on the present value of lease payments over the lease term at the lease commencement date. We use the implicit interest rate or, if not readily determinable, our incremental borrowing rate as of the lease commencement date to determine the present value of lease payments. The incremental borrowing rate is based on our unsecured borrowing rate, adjusted for the effects of collateral. Operating and finance lease ROU assets are recognized net of any lease prepayments and incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term. Finance lease expense is recognized based on the effective-interest method over the lease term.Fair value measurement. Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy is applied to prioritize the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).The three levels of the fair value hierarchy under the guidance for fair value measurements are described below:Level 1 — Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Our Level 1 assets include cash equivalents, banker's acceptances, trading securities investments and investment funds. We measure trading securities investments and investment funds at quoted market prices as they are traded in active markets with sufficient volume and frequency of transactions. Level 2 — Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified contractual term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 — Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date. Level 3 assets and liabilities include investment in equity securities without readily determinable fair values, goodwill, intangible assets, and property, plant and equipment, which are measured at fair value using a discounted cash flow approach when they are impaired. Quantitative information for Level 3 assets and liabilities reviewed at each reporting period includes indicators of significant deterioration in the earnings performance, credit rating, asset quality, business prospects of the investee, and financial indicators of the investee's ability to continue as a going concern. 58Table of ContentsBusiness combinations. We account for business combinations under the acquisition method of accounting, which requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in our consolidated statements of operations. Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based, in part, on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain acquired intangible assets under the income approach include growth in future expected cash flows from product sales, customer contracts and acquired technologies, revenue growth rate, customer ramp-up period, technology obsolescence rates, expected costs to develop in-process research and development (“IPR&D”) into commercially viable products, estimated cash flows from the projects when completed and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Goodwill. Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill is not amortized but is reviewed annually (or more frequently if impairment indicators arise) for impairment. To review for impairment we first assess qualitative factors to determine whether events or circumstances lead to a determination that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount. Our qualitative assessment of the recoverability of goodwill, whether performed annually or based on specific events or circumstances, considers various macroeconomic, industry-specific and company-specific factors. Those factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of our financial performance; or (iv) a sustained decrease in our market capitalization below our net book value. After assessing the totality of events and circumstances, if we determine that it is not more likely than not that the fair value of any of our reporting units is less than its carrying amount, no further assessment is performed. If we determine that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount, we calculate the fair value of that reporting unit and compare the fair value to the reporting unit’s net book value. If the fair value of the reporting unit is greater than its net book value, there is no impairment. Otherwise, we calculate the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit. The implied fair value of goodwill is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions.Long-lived assets. Purchased finite-lived intangible assets are carried at cost less accumulated amortization. Amortization is recognized over the periods during which the intangible assets are expected to contribute to our cash flows. Purchased IPR&D projects are capitalized at fair value as an indefinite-lived intangible asset and assessed for impairment thereafter. Upon completion of each underlying project, IPR&D assets are reclassified as amortizable purchased intangible assets and amortized over their estimated useful lives. If an IPR&D project is abandoned, we recognize the carrying value of the related intangible asset in our consolidated statements of operations in the period it is abandoned. On a quarterly basis, we monitor factors and changes in circumstances that could indicate carrying amounts of long-lived assets, including purchased intangible assets and property, plant and equipment, may not be recoverable. Factors we consider important which could trigger an impairment review include (i) significant under-performance relative to historical or projected future operating results, (ii) significant changes in the manner of our use of the acquired assets or the strategy for our overall business, and (iii) significant negative industry or economic trends. An impairment loss must be measured if the sum of the expected future cash flows (undiscounted and before interest) from the use and eventual disposition of the asset (or asset group) is less than the net book value of the asset (or asset group). The amount of the impairment loss will generally be measured as the difference between the net book value of the asset (or asset group) and the estimated fair value.Warranty. We accrue for the estimated costs of product warranties at the time revenue is recognized. Product warranty costs are estimated based upon our historical experience and specific identification of the product requirements, which may fluctuate based on product mix. Additionally, we accrue for warranty costs associated with occasional or unanticipated product quality issues if a loss is probable and can be reasonably estimated.59Table of ContentsRevenue recognition. We account for a contract with a customer when both parties have approved the contract and are committed to perform their respective obligations, each party’s rights can be identified, payment terms can be identified, the contract has commercial substance, and it is probable we will collect substantially all of the consideration we are entitled to. Revenue is recognized when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer.Nature of Products and ServicesOur products and services can be broadly categorized as sales of products and subscriptions and services. The following is a description of the principal activities from which we generate revenue.Products. We recognize revenue from sales to direct customers and distributors when control transfers to the customer. Rebates and incentives offered to distributors, which are earned when sales to end customers are completed, are estimated at the point of revenue recognition. We have elected to exclude from the transaction price any taxes collected from a customer and to account for shipping and handling activities performed after a customer obtains control of the product as activities to fulfill the promise to transfer the product. From time to time, certain customers agree to pay us secure supply fees in exchange for prioritized fulfillment of product orders. Such fees are included in the transaction price of the product orders and are recognized as revenue in the period that control over the products is transferred to the customer. Subscriptions and services. Our subscriptions and services revenue consists of sales and royalties from software arrangements, support services, professional services, transfer of IP, and non-recurring engineering (“NRE”) arrangements.Revenue from software arrangements primarily consists of fees, which may be paid either at contract inception or in installments over the contract term, that provide customers with a right to use the software, access general support and maintenance, and utilize our professional services.Our software licenses have standalone functionality from which customers derive benefit, and the customer obtains control of the software when it is delivered or made available for download. We believe that for the majority of software arrangements, customers derive significant benefit from the ongoing support we provide. The majority of our subscriptions and services arrangements permit our customers to unilaterally terminate or cancel these arrangements at any time at the customer’s convenience, referred to as termination for convenience provisions, without substantive termination penalty and receive a pro-rata refund of any prepaid fees. Accordingly, we account for arrangements with these termination for convenience provisions as a series of daily contracts, resulting in ratable revenue recognition of software revenue over the contractual period.Support services consist primarily of telephone support and the provision of unspecified updates and upgrades on a when-and-if-available basis. Support services represent stand-ready obligations for which revenue is recognized ratably over the term of the arrangement.Professional services consist of implementation, consulting, customer education and customer training services. The obligation to provide professional services is generally satisfied over time, with the customer simultaneously receiving and consuming the benefits as we satisfy our performance obligations. Rights to our IP are either sold or licensed to a customer. IP revenue recognition is dependent on the nature and terms of each agreement. We recognize IP revenue upon delivery of the IP if there are no substantive future obligations to perform under the arrangement. Sales-based or usage-based royalties from the license of IP are recognized at the later of the period the sales or usages occur or the satisfaction of the performance obligation to which some or all of the sales-based or usage-based royalties have been allocated.There are two main categories of NRE contracts that we enter into with our customers: (a) NRE contracts in which we develop a custom chip and (b) NRE contracts in which we accelerate our development of a new chip upon the customer’s request. The majority of our NRE contract revenues meet the over time criteria. As such, revenue is recognized over the development period with the measure of progress using the input method based on costs incurred to total cost (“cost-to-cost”) as the services are provided. For NRE contracts that do not meet the over time criteria, revenue is recognized at a point in time when the NRE services are complete.Material rights. Contracts with customers may also include material rights that are also performance obligations. These include the right to renew or receive products or services at a discounted price in the future. Revenue allocated to material rights is recognized when the customer exercises the right or the right expires.Arrangements with Multiple Performance ObligationsOur contracts may contain more than one of the products and services listed above, each of which is separately accounted for as a distinct performance obligation. 60Table of ContentsAllocation of consideration. We allocate total contract consideration to each distinct performance obligation in a bundled arrangement on a relative standalone selling price basis. The standalone selling price reflects the price we would charge for a specific product or service if it were sold separately in similar circumstances and to similar customers.Standalone selling price. When available, we use directly observable transactions to determine the standalone selling prices for performance obligations. Our estimates of standalone selling price for each performance obligation require judgment that considers multiple factors, including, but not limited to, historical discounting trends for products and services and pricing practices through different sales channels, gross margin objectives, internal costs, competitor pricing strategies, technology lifecycles and market conditions.We separately determine the standalone selling prices by product or service type. Additionally, we segment the standalone selling prices for products where the pricing strategies differ, and where there are differences in customers and circumstances that warrant segmentation.We also estimate the standalone selling price of our material rights. Lastly, we estimate the value of the customer’s option to purchase or receive additional products or services at a discounted price by estimating the incremental discount the customer would obtain when exercising the option and the likelihood that the option would be exercised.Other Policies and JudgmentsContract modifications. We may modify contracts to offer customers additional products or services. Each of the additional products and services is generally considered distinct from those products or services transferred to the customer before the modification. We evaluate whether the contract price for the additional products and services reflects the standalone selling price as adjusted for facts and circumstances applicable to that contract. In these cases, we account for the additional products or services as a separate contract. In other cases where the pricing in the modification does not reflect the standalone selling price as adjusted for facts and circumstances applicable to that contract, we account for the additional products or services as part of the existing contract on a prospective basis, on a cumulative catch-up basis, or a combination of both based on the nature of the modification. In instances where the pricing in the modification offers the customer a credit for a prior arrangement, we adjust our variable consideration reserves for returns and other concessions. Right of return. Certain contracts contain a right of return that allows the customer to cancel all or a portion of the product or service and receive a credit. We estimate returns based on historical returns data which is constrained to an amount for which a material revenue reversal is not probable. We do not recognize revenue for products or services that are expected to be returned.Practical expedient elected. We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. For contracts that were modified before the beginning of the earliest reporting period presented, we have not retrospectively restated the contract for those modifications. We have disclosed the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations for purposes of determining the transaction price and allocating the transaction price at transition.Research and development. Research and development expense consists primarily of personnel costs for our engineers and third parties engaged in the design and development of our products, software and technologies, including salary, bonus and stock-based compensation expense, project material costs, services and depreciation. Such costs are charged to research and development expense as they are incurred.Stock-based compensation expense. We recognize compensation expense for time-based restricted stock units (“RSUs”) using the straight-line amortization method based on the fair value of RSUs on the date of grant. The fair value of RSUs is the closing market price of Broadcom common stock on the date of grant, reduced by the present value of dividends expected to be paid on Broadcom common stock prior to vesting. We recognize compensation expense for time-based stock options and employee stock purchase plan rights under the Broadcom Inc. Employee Stock Purchase Plan, as amended (“ESPP”) based on the estimated grant-date fair value determined using the Black-Scholes valuation model with a straight-line amortization method.Certain equity awards include both service and market conditions. The fair value of market-based awards is estimated on the date of grant using the Monte Carlo simulation technique. Compensation expense for market-based awards is amortized based upon a graded vesting method over the service period.We estimate forfeitures expected to occur and recognize stock-based compensation expense for such awards expected to vest. Changes in the estimated forfeiture rates can have a significant effect on stock-based compensation expense since the effect of adjusting the rate is recognized in the period the forfeiture estimate is changed.61Table of ContentsShipping and handling costs. Our shipping and handling costs charged to customers are included in net revenue and the associated expense is included in cost of revenue for all periods presented.Litigation and settlement cost. We are involved in legal actions and other matters arising in our recent business acquisitions and in the normal course of business. We recognize an estimated loss contingency when the outcome is probable prior to issuance of the consolidated financial statements and we are able to reasonably estimate the amount or range of any possible loss.Income taxes. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.We recognize net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. If we determine that we are able to realize our deferred income tax assets in the future in excess of their net carrying values, we adjust the valuation allowance and reduce the provision for income taxes or increase the benefit from income taxes. Likewise, if we determine that we are not able to realize all or part of our net deferred tax assets, we increase the provision for income taxes or decrease the benefit from income taxes in the period such determination is made.We account for uncertainty in income taxes in accordance with the applicable accounting guidance on income taxes. This guidance provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.Net income per share. Basic net income per share is computed by dividing net income attributable to common stock by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income attributable to common stock by the weighted-average number of shares of common stock and potentially dilutive shares of common stock outstanding during the period. Diluted shares outstanding include the dilutive effect of unvested RSUs, in-the-money stock options, and ESPP rights (together referred to as “equity awards”), as well as convertible preferred stock. Potentially dilutive shares whose effect would have been antidilutive are excluded from the computation of diluted net income per share.The dilutive effect of equity awards is calculated based on the average stock price for each fiscal period, using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options and purchasing shares under the ESPP and the amount of compensation cost for future service that we have not yet recognized are collectively assumed to be used to repurchase shares. The dilutive effect of convertible preferred stock is calculated using the if-converted method. The if-converted method assumes that these securities were converted at the beginning of the reporting period to the extent that the effect is dilutive.Recent Accounting Guidance Not Yet AdoptedIn October 2021, the Financial Accounting Standards Boards issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers, as if it had originated the contracts. This approach differs from the current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. The new guidance will be effective for the first quarter of our fiscal year ending October 29, 2023, with early adoption permitted. The adoption impact of the new standard will depend on the magnitude of future acquisitions. The standard will not impact acquired contract assets or liabilities from business combinations occurring prior to the adoption date. 3. Revenue from Contracts with Customers DisaggregationWe have considered (1) information that is regularly reviewed by our Chief Executive Officer, who has been identified as the chief operating decision maker (the “CODM”) as defined by the authoritative guidance on segment reporting, in evaluating financial performance and (2) disclosures presented outside of our financial statements in our earnings releases and used in investor presentations to disaggregate revenues. The principal category we use to disaggregate revenues is the 62Table of Contentsnature of our products and subscriptions and services, as presented in our consolidated statements of operations. In addition, revenues by reportable segment are presented in Note 13. “Segment Information”.The following tables present revenue disaggregated by type of revenue and by region for the periods presented:Fiscal Year 2021AmericasAsia PacificEurope, the Middle East and AfricaTotal(In millions)Products$1,809 $17,258 $1,819 $20,886 Subscriptions and services(a)4,290 720 1,554 6,564 Total$6,099 $17,978 $3,373 $27,450 Fiscal Year 2020AmericasAsia PacificEurope, the Middle East and AfricaTotal(In millions)Products$1,775 $14,442 $1,218 $17,435 Subscriptions and services(a)4,059 881 1,513 6,453 Total$5,834 $15,323 $2,731 $23,888 Fiscal Year 2019AmericasAsia PacificEurope, the Middle East and AfricaTotal(In millions)Products$2,023 $14,857 $1,237 $18,117 Subscriptions and services(a)3,126 374 980 4,480 Total$5,149 $15,231 $2,217 $22,597 _____________________________(a) Subscriptions and services predominantly includes software licenses with termination for convenience clauses.Although we recognize revenue for the majority of our products when title and control transfer in Penang, Malaysia, we disclose net revenue by region based primarily on the geographic shipment location or delivery location specified by our distributors, original equipment manufacturer (“OEM”) customers, contract manufacturers, channel partners, or software customers.63Table of ContentsContract BalancesContract assets and contract liabilities balances were as follows:Contract AssetsContract Liabilities(In millions)Balance as of November 1, 2020$158 $3,443 Balance as of October 31, 2021$126 $3,185 Changes in our contract assets and contract liabilities primarily result from the timing difference between our performance and the customer’s payment. We fulfill our obligations under a contract with a customer by transferring products and services in exchange for consideration from the customer. We recognize a contract asset when we transfer products or services to a customer and the right to consideration is conditional on something other than the passage of time. Accounts receivable are recorded when the customer has been billed or the right to consideration is unconditional. We recognize contract liabilities when we have received consideration or an amount of consideration is due from the customer and we have a future obligation to transfer products or services. Contract liabilities include amounts billed or collected and advanced payments on contracts or arrangements which may include termination for convenience provisions. The amount of revenue recognized during fiscal year 2021 that was included in the contract liabilities balance as of November 1, 2020 was $2,617 million. The amount of revenue recognized during fiscal year 2020 that was included in the contract liabilities balance as of November 3, 2019 was $1,450 million.Remaining Performance ObligationsRevenue allocated to remaining performance obligations represents the transaction price allocated to unsatisfied or partially unsatisfied performance obligations. Remaining performance obligations include unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, but do not include contracts for software, subscriptions or services where the customer is not committed. The customer is not considered committed when termination for convenience without payment of a substantive penalty exists, either contractually or through customary business practice. The majority of our customer software contracts include termination for convenience clauses without a substantive penalty and are not considered committed. Additionally, as a practical expedient, we have not included contracts that have an original duration of one year or less, nor have we included contracts with sales-based or usage-based royalties promised in exchange for a license of IP.Certain multi-year customer contracts in our semiconductor solutions segment contain firmly committed amounts and the remaining performance obligations under these contracts as of October 31, 2021 were approximately $13.6 billion. We expect approximately 31% of this amount to be recognized as revenue over the next 12 months. Although the majority of our software contracts are not deemed to be committed, our customers generally do not exercise their termination for convenience rights. In addition, the majority of our contracts for products, subscriptions and services have a duration of one year or less. Accordingly, our remaining performance obligations disclosed above are not indicative of revenue for future periods.64Table of Contents4. Acquisitions Acquisition of the Symantec Corporation Enterprise Security BusinessOn November 4, 2019 (the “Symantec Acquisition Date”), we completed the purchase of the Symantec Business, which was an established leader in cyber security, for $10.7 billion in cash. We acquired the Symantec Business to expand our footprint of mission critical infrastructure software with our existing customer base. The Symantec Business includes a deep and broad mix of products, services and solutions, unifying cloud and on-premises security to provide advanced threat protection and information protection across endpoints, network, email and cloud applications. We financed this acquisition with the net proceeds from borrowings under the November 2019 Term Loans, as defined in Note 10. “Borrowings”.The following table presents our allocation of the total purchase price:Fair Value(In millions)Current assets$273 Goodwill6,638 Intangible assets5,411 Other long-term assets92 Total assets acquired12,414 Current liabilities(1,127)Other long-term liabilities(587)Total liabilities assumed(1,714)Fair value of net assets acquired$10,700 Goodwill is primarily attributable to the assembled workforce and anticipated synergies and economies of scale expected from the integration of the Symantec Business. The synergies include certain cost savings, operating efficiencies, and other strategic benefits projected to be achieved resulting from the acquisition of the Symantec Business. Substantially all goodwill is deductible for tax purposes. Current assets and current liabilities included amounts held-for-sale related to the acquired Symantec Cyber Security Services (“CSS”) business. The CSS business was not aligned with our acquisition-date strategic objectives and was sold on April 30, 2020. We do not have any material continuing involvement with this business and have presented its results in discontinued operations.Our results of continuing operations for fiscal year 2020 included $1,610 million of net revenue attributable to the Symantec Business. It was impracticable to determine the effect on net income attributable to the Symantec Business as we had integrated the Symantec Business into our ongoing operations during the year. The results of operations of the Symantec Business were included in our infrastructure software segment. Transaction costs related to the acquisition of the Symantec Business of $110 million were included in selling, general and administrative expense for fiscal year 2020.Intangible AssetsFair ValueWeighted-Average Amortization Periods(In millions)(In years)Developed technology$2,900 5Customer contracts and related relationships2,410 5Trade name90 6Order backlog11 3Total identified finite-lived intangible assets$5,411 Developed technology relates to products used for cyber security solutions, including data loss prevention, endpoint protection, and web, email and cloud security solutions. We valued the developed technology using the multi-period excess earnings method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the developed technology less charges representing the contribution of other assets to those cash flows. The economic useful life was determined based on the technology cycle related to each developed technology, as well as the cash flows over the forecast period.65Table of ContentsCustomer contracts and related relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers of the Symantec Business. Customer contracts and related relationships were valued using the with-and-without-method under the income approach. In the with-and-without method, the fair value was measured by the difference between the present values of the cash flows with and without the existing customers in place over the period of time necessary to reacquire the customers. The economic useful life was determined by evaluating many factors, including the useful life of other intangible assets, the length of time remaining on the acquired contracts and the historical customer turnover rates.Trade name relates to the “Symantec” trade name. The fair value was determined by applying the relief-from-royalty method under the income approach. This method is based on the application of a royalty rate to forecasted revenue under the trade name. The economic useful life was determined based on the expected life of the trade name and the cash flows anticipated over the forecast period.Order backlog represents business under existing contractual obligations. The fair value of backlog was determined using the multi-period excess earnings method under the income approach based on expected operating cash flows from future contractual revenue. The economic useful life was determined based on the expected life of the backlog and the cash flows over the forecast period.We believe the amounts of purchased intangible assets recorded above represent the fair values of, and approximate the amounts a market participant would pay for, these intangible assets as of the Symantec Acquisition Date.Unaudited Pro Forma InformationThe following unaudited pro forma financial information presents combined results of operations for the periods presented, as if we had completed the acquisition of the Symantec Business as of the beginning of fiscal year 2019. The unaudited pro forma information includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment acquired, adjustments to interest expense for the additional indebtedness incurred to complete the acquisition, restructuring charges related to the acquisition and transaction costs. For the fiscal year 2019, non-recurring pro forma adjustments directly attributable to the acquisition of the Symantec Business included transaction costs of $136 million. The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2019 or of the results of our future operations of the combined business.Fiscal Year20202019(In millions)Pro forma net revenue$23,264 $24,227 Pro forma net income attributable to common stock$2,368 $1,265 Other Acquisitions During fiscal year 2020, we also completed three other acquisitions qualifying as business combinations for total consideration of $201 million, of which $109 million was allocated to goodwill and $46 million was allocated to intangible assets. Acquisition of CA, Inc.On November 5, 2018 (the “CA Acquisition Date”), we completed our acquisition of CA (the “CA Merger”), which was a leading provider of information technology (“IT”) management software and solutions. We acquired CA to enhance our infrastructure software capabilities. We financed the CA Merger with the net proceeds from $18 billion of term loans, as well as with cash on hand of the combined companies.66Table of ContentsPurchase Consideration(In millions)Cash paid for outstanding CA common stock $18,402 Cash paid by Broadcom to retire CA’s term loan274 Cash paid for vested CA equity awards101 Fair value of partially vested assumed equity awards67 Total purchase consideration18,844 Less: cash acquired(2,750)Total purchase consideration, net of cash acquired$16,094 All vested in-the-money CA stock options, after giving effect to any acceleration, and all outstanding deferred stock units were cashed out upon the completion of the CA Merger. We assumed all unvested CA equity awards held by continuing employees. The portion of the fair value of partially vested equity awards associated with prior service of CA employees represents a component of the total consideration as presented above and was valued based on our share price as of the CA Acquisition Date. The following table presents our allocation of the total purchase price, net of cash acquired:Fair Value(In millions)Current assets$1,665 Goodwill9,796 Intangible assets12,045 Other long-term assets240 Total assets acquired23,746 Current liabilities(1,966)Long-term debt(2,255)Other long-term liabilities(3,431)Total liabilities assumed(7,652)Fair value of net assets acquired$16,094 Goodwill is primarily attributable to the assembled workforce and anticipated synergies and economies of scale expected from the integration of the CA business. The synergies include certain cost savings, operating efficiencies, and other strategic benefits projected to be achieved as a result of the CA Merger. Goodwill is not deductible for tax purposes.Current assets included assets held-for-sale related to CA’s Veracode business, which was not aligned with our strategic objectives. On December 31, 2018, we sold this business to Thoma Bravo, LLC for cash consideration of $950 million, before working capital adjustments. We do not have any material continuing involvement with this business and have presented its results in discontinued operations. Current assets also included $80 million of real properties held-for-sale. During fiscal year 2019, we sold a portion of these real properties for $62 million and recognized a loss of $8 million.Our results of continuing operations for fiscal year 2019 included $3,377 million of net revenue attributable to CA. It was impracticable to determine the effect on net income attributable to CA as we had integrated a substantial portion of CA into our ongoing operations during the year. The results of operations of CA were included in our infrastructure software segment. Transaction costs related to the CA Merger of $73 million were included in selling, general and administrative expense for fiscal year 2019.67Table of ContentsIntangible AssetsFair ValueWeighted-Average Amortization Periods(In millions)(In years)Developed technology$4,957 6Customer contracts and related relationships4,190 6Order backlog2,569 3Trade name and other137 5Total identified finite-lived intangible assets11,853 IPR&D192 N/ATotal identified intangible assets$12,045 Developed technology relates to products used for mission critical business tools for processes and applications, as well as products used for cloud-based planning, development, management and security tools. We valued the developed technology using the multi-period excess earnings method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the developed technology less charges representing the contribution of other assets to those cash flows. The economic useful life was determined based on the technology cycle related to each developed technology, as well as the cash flows over the forecast period.Customer contracts and related relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers of CA. Customer contracts and related relationships were valued using the with-and-without-method under the income approach. In the with-and-without method, the fair value was measured by the difference between the present values of the cash flows with and without the existing customers in place over the period of time necessary to reacquire the customers. The economic useful life was determined by evaluating many factors, including the useful life of other intangible assets, the length of time remaining on the acquired contracts and the historical customer turnover rates.Order backlog represents business under existing contractual obligations. The fair value of backlog was determined using the multi-period excess earnings method under the income approach based on expected operating cash flows from future contractual revenue. The economic useful life was determined based on the expected life of the backlog and the cash flows over the forecast period.Trade name relates to the “CA” trade name. The fair value was determined by applying the relief-from-royalty method under the income approach. This method is based on the application of a royalty rate to forecasted revenue under the trade name. The economic useful life was determined based on the expected life of the trade name and the cash flows anticipated over the forecast period.The fair value of IPR&D was determined using the multi-period excess earnings method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the IPR&D, less charges representing the contribution of other assets to those cash flows.We believe the amounts of purchased intangible assets recorded above represent the fair values of, and approximate the amounts a market participant would pay for, these intangible assets as of the CA Acquisition Date.The following table summarizes the details of IPR&D by category as of the CA Acquisition Date:DescriptionIPR&DPercentage of Completion Estimated Cost to CompleteExpected Completion Date(By Fiscal Year)(Dollars in millions)Mainframe$178 67 %$138 2019Enterprise Solutions$14 63 %$12 2019Discount rates of 12% and 14% were applied to the projected cash flows to reflect the risk related to these mainframe and enterprise solutions IPR&D projects, respectively.During fiscal year 2020, these IPR&D projects were completed and placed in service.68Table of ContentsUnaudited Pro Forma InformationThe following unaudited pro forma financial information presents combined results of operations for fiscal year 2019, as if CA had been acquired as of the beginning of our fiscal year ended November 4, 2018 (“fiscal year 2018”). The unaudited pro forma information includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment acquired, adjustments to stock-based compensation expense, interest expense for the additional indebtedness incurred to complete the acquisition, restructuring charges related to the acquisition and transaction costs. The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2018 or of the results of our future operations of the combined business.Fiscal Year2019(In millions)Pro forma net revenue$21,697 Pro forma net income attributable to common stock$2,535 5. Supplemental Financial Information Cash EquivalentsCash equivalents included $4,668 million and $2,471 million of time deposits and $1,607 million and $790 million of money-market funds as of October 31, 2021 and November 1, 2020, respectively. For time deposits, carrying value approximates fair value due to the short-term nature of the instruments. The fair value of money-market funds, which was consistent with their carrying value, was determined using unadjusted prices in active, accessible markets for identical assets, and as such, they were classified as Level 1 assets in the fair value hierarchy.Accounts Receivable FactoringWe sell certain of our trade accounts receivable on a non-recourse basis to third-party financial institutions pursuant to factoring arrangements. We account for these transactions as sales of receivables and present cash proceeds as cash provided by operating activities in the consolidated statements of cash flows. Total trade accounts receivable sold under the factoring arrangements were $4,027 million, $3,723 million and $1,151 million during fiscal years 2021, 2020 and 2019, respectively. Factoring fees for the sales of receivables were recorded in other income, net and were not material for any of the periods presented.InventoryOctober 31,2021November 1,2020(In millions)Finished goods$423 $323 Work-in-process680 558 Raw materials194 122 Total inventory$1,297 $1,003 Property, Plant and Equipment, NetOctober 31,2021November 1,2020(In millions)Land$195 $194 Construction in progress38 113 Buildings and leasehold improvements1,150 1,133 Machinery and equipment 4,161 3,891 Total property, plant and equipment5,544 5,331 Accumulated depreciation and amortization(3,196)(2,822)Total property, plant and equipment, net$2,348 $2,509 69Table of ContentsDepreciation expense was $539 million, $570 million and $569 million for fiscal years 2021, 2020, and 2019, respectively.Other Current AssetsOctober 31,2021November 1,2020(In millions)Prepaid expenses$539 $387 Other (miscellaneous)516 590 Total other current assets$1,055 $977 Other Current LiabilitiesOctober 31,2021November 1,2020(In millions)Contract liabilities$2,619 $2,620 Tax liabilities541 440 Other (miscellaneous)679 771 Total other current liabilities$3,839 $3,831 Other Long-Term LiabilitiesOctober 31,2021November 1,2020(In millions)Unrecognized tax benefits, interest and penalties$3,407 $3,185 Contract liabilities566 823 Other (miscellaneous)887 1,418 Total other long-term liabilities$4,860 $5,426 Other Income, Net Fiscal Year202120202019(In millions)Gains on investments$99 $31 $145 Other income26 56 18 Interest income16 53 98 Other expense(10)(50)(35)Gain from lapse of indemnification— 116 — Other income, net$131 $206 $226 Other income includes dividends, gains on sales of businesses and other miscellaneous items.6. LeasesAt the beginning of fiscal year 2020, we adopted ASU 2016-02, Leases (“Topic 842”) using the optional adoption method, whereby no adjustment to the financial statements of comparative periods was required. We have operating and finance leases for our facilities, data centers and certain equipment. Operating lease expense was $102 million, $106 million and $244 million for fiscal years 2021, 2020 and 2019, respectively. Finance lease expense was $16 million and $14 million for fiscal years 2021 and 2020, respectively.70Table of ContentsOther information related to leases was as follows:Fiscal Year20212020(In millions)Cash paid for operating leases included in operating cash flows$140 $125 ROU assets obtained in exchange for operating lease liabilities$92 $682 ROU assets obtained in exchange for finance lease liabilities$15 $74 October 31,2021November 1,2020Weighted-average remaining lease term – operating leases (In years)1010Weighted-average remaining lease term – finance leases (In years)34Weighted-average discount rate – operating leases3.78 %3.80 %Weighted-average discount rate – finance leases3.11 %3.33 %Supplemental balance sheet information related to leases was as follows:Classification on the Consolidated Balance SheetsOctober 31,2021November 1,2020(In millions)ROU assets - operating leasesOther long-term assets$588 $589 ROU assets - finance leasesProperty, plant and equipment, net$55 $62 Short-term lease liabilities - operating leasesOther current liabilities$83 $100 Long-term lease liabilities - operating leasesOther long-term liabilities$460 $527 Short-term lease liabilities - finance leasesCurrent portion of long-term debt$26 $20 Long-term lease liabilities - finance leasesLong-term debt$39 $48 Future minimum lease payments under non-cancelable leases as of October 31, 2021 were as follows:October 31,2021Operating LeasesFinance Leases(In millions)2022$101 $28 202386 18 202467 18 202557 2 202646 2 Thereafter311 — Total undiscounted liabilities668 68 Less: interest(125)(3)Present value of lease liabilities$543 $65 71Table of Contents7. Goodwill and Intangible Assets GoodwillSemiconductor SolutionsInfrastructure SoftwareIP LicensingTotal(In millions)Balance as of November 3, 2019$25,929 $10,776 $9 $36,714 Reallocation due to change in segments9 — (9)— Acquisitions35 6,712 — 6,747 Sale of business(14)— — (14)Balance as of November 1, 202025,959 17,488 — 43,447 Acquisition— 10 — 10 Sale of business— (7)— (7)Balance as of October 31, 2021$25,959 $17,491 $— $43,450 In fiscal year 2020, we reassigned goodwill balances among our reportable segments to reflect changes in our segment structure.During the fourth quarter of fiscal years 2021, 2020 and 2019, we completed our annual impairment assessments and concluded that goodwill was not impaired in any of these years.Intangible AssetsGross CarryingAmountAccumulatedAmortizationNet Book Value(In millions)As of October 31, 2021: Purchased technology$23,932 $(17,148)$6,784 Customer contracts and related relationships8,356 (4,533)3,823 Order backlog2,579 (2,352)227 Trade names787 (386)401 Other239 (127)112 Intangible assets subject to amortization35,893 (24,546)11,347 IPR&D27 — 27 Total$35,920 $(24,546)$11,374 As of November 1, 2020: Purchased technology$24,119 $(13,925)$10,194 Customer contracts and related relationships8,389 (3,179)5,210 Order backlog2,579 (1,836)743 Trade names797 (322)475 Other252 (117)135 Intangible assets subject to amortization36,136 (19,379)16,757 IPR&D25 — 25 Total$36,161 $(19,379)$16,782 72Table of Contents Based on the amount of intangible assets subject to amortization at October 31, 2021, the expected amortization expense for each of the next five fiscal years and thereafter was as follows:Fiscal Year:Expected Amortization Expense(In millions)2022$4,365 20233,237 20242,367 2025659 2026323 Thereafter396 Total$11,347 The weighted-average amortization periods remaining by intangible asset category were as follows:Amortizable intangible assets:October 31,2021November 1,2020(In years)Purchased technology45Customer contracts and related relationships34Order backlog22Trade names89Other91073Table of Contents8. Net Income Per ShareFiscal Year202120202019(In millions, except per share data)Numerator:Income from continuing operations$6,736 $2,961 $2,736 Dividends on preferred stock(299)(297)(29)Income from continuing operations attributable to common stock6,437 2,664 2,707 Loss from discontinued operations, net of income taxes, attributable to common stock— (1)(12)Net income attributable to common stock$6,437 $2,663 $2,695 Denominator:Weighted-average shares outstanding - basic410 402 398 Dilutive effect of equity awards19 19 21 Weighted-average shares outstanding - diluted429 421 419 Basic income per share attributable to common stock:Income per share from continuing operations$15.70 $6.62 $6.80 Loss per share from discontinued operations— — (0.03)Net income per share$15.70 $6.62 $6.77 Diluted income per share attributable to common stock:Income per share from continuing operations$15.00 $6.33 $6.46 Loss per share from discontinued operations— — (0.03)Net income per share$15.00 $6.33 $6.43 For fiscal years 2021, 2020 and 2019, diluted net income per share excluded the potentially dilutive effect of 12 million, 12 million and 1 million shares of common stock, respectively, issuable upon the conversion of Mandatory Convertible Preferred Stock, as defined in Note 11. “Stockholders’ Equity,” as their effect was antidilutive.9. Retirement Plans and Post-Retirement Benefits Pension and Post-Retirement Benefit PlansDefined Benefit Pension Plans. The U.S. defined benefit pension plans primarily consist of a qualified pension plan. Benefits of the qualified pension plan are provided under an adjusted career-average-pay program, a cash-balance program or a dollar-per-month program. Benefit accruals under this plan were frozen in 2009. Participants in the adjusted career-average-pay program no longer earn service accruals. Participants in the cash-balance program no longer earn service accruals, but continue to earn 4% interest per year on their cash-balance accounts. There are no active participants under the dollar-per-month program. We also have a non-qualified supplemental pension plan in the United States that principally provides benefits based on compensation in excess of amounts that can be considered under the qualified pension plan. We also have defined benefit pension plans for certain employees in Austria, France, Germany, India, Israel, Italy, Japan and Taiwan. Eligibility is generally determined based on the terms of our plans and local statutory requirements.Post-Retirement Benefit Plans. Certain of our U.S. employees who meet the retirement eligibility requirements as of their termination dates, may receive post-retirement medical benefits under our retiree medical account program. The majority of the eligible employees receive a medical benefit spending account of $55,000 upon retirement to pay premiums for medical coverage through the maximum age of 75 as a retiree. Our group life insurance plan offers post-retirement life insurance coverage for certain U.S. employees.74Table of ContentsNet Periodic Benefit (Income) CostPension BenefitsPost-Retirement BenefitsFiscal YearFiscal Year202120202019202120202019(In millions)Service cost$11 $12 $10 $— $— $— Interest cost39 45 58 3 3 3 Expected return on plan assets(40)(46)(59)(3)(3)(3)Other1 (3)1 1 1 (1)Net periodic benefit (income) cost $11 $8 $10 $1 $1 $(1)Net actuarial (gain) loss$8 $(28)$13 $3 $— $11 The components of net periodic benefit (income) cost other than the service cost are included in other income, net. Service cost is recognized in operating expenses.Funded Status Pension BenefitsPost-Retirement BenefitsOctober 31,2021November 1,2020October 31,2021November 1,2020(In millions)Change in plan assets: Fair value of plan assets — beginning of period$1,593 $1,539 $88 $85 Actual return on plan assets20 129 (2)5 Employer contributions9 13 1 1 Payments from plan assets(102)(96)(3)(3)Foreign currency impact1 8 — — Fair value of plan assets — end of period1,521 1,593 84 88 Change in benefit obligations: Benefit obligations — beginning of period1,588 1,553 95 93 Service cost11 12 — — Interest cost39 45 3 3 Actuarial (gain) loss(11)61 (2)2 Benefit payments(102)(96)(3)(3)Curtailments(1)(6)— — Benefit obligations assumed in an acquisition— 10 — — Foreign currency impact2 9 — — Benefit obligations — end of period1,526 1,588 93 95 Overfunded (underfunded) status of benefit obligations (a)$(5)$5 $(9)$(7)Actuarial losses and prior service costs recognized in accumulated other comprehensive loss, net of taxes$(100)$(94)$(16)$(14)_______________________________(a)Substantially all amounts recognized in the consolidated balance sheets were recorded in other long-term assets and other long-term liabilities for all periods presented.75Table of ContentsPlans with benefit obligations in excess of plan assets:Pension BenefitsPost-Retirement BenefitsOctober 31,2021November 1,2020October 31,2021November 1,2020(In millions)Projected benefit obligations$83 $82 $— $— Accumulated benefit obligations$65 $68 $13 $15 Fair value of plan assets$13 $11 $— $— Plans with benefit obligations less than plan assets:Pension BenefitsPost-Retirement BenefitsOctober 31,2021November 1,2020October 31,2021November 1,2020(In millions)Projected benefit obligations$1,443 $1,506 $— $— Accumulated benefit obligations$1,442 $1,505 $80 $80 Fair value of plan assets$1,508 $1,582 $84 $88 The fair value of pension plan assets as of October 31, 2021 and November 1, 2020 included $174 million and $160 million, respectively, of assets for our non-U.S. pension plans.The projected benefit obligations as of October 31, 2021 and November 1, 2020 included $217 million and $206 million, respectively, of obligations related to our non-U.S. pension plans. The accumulated benefit obligations as of October 31, 2021 and November 1, 2020 included $199 million and $190 million, respectively, of obligations related to our non-U.S. pension plans.Expected Future Benefit PaymentsFiscal Years:Pension BenefitsPost-Retirement Benefits(In millions)2022$94 $8 2023$94 $4 2024$94 $4 2025$94 $4 2026$93 $4 2027-2031$447 $23 Defined Benefit Pension Plan Investment Policy Plan assets of the funded defined benefit pension plans are generally invested in funds held by third-party fund managers. Our benefit plan investment committee has set the investment strategy to fully match the liability. We direct the overall portfolio allocation and use a third-party investment consultant that has the discretion to structure portfolios and select the investment managers within those allocation parameters. Multiple investment managers are utilized, including both active and passive management approaches. The plan assets are invested using the liability-driven investment strategy intended to minimize market and interest rate risks, and those assets are periodically rebalanced toward asset allocation targets.Substantially all of the plan assets are for the U.S. qualified pension plan. The target asset allocation for this plan reflects a risk/return profile that we believe is appropriate relative to the liability structure and return goals for the plan. We periodically review the allocation of plan assets relative to alternative allocation models to evaluate the need for adjustments based on forecasted liabilities and plan liquidity needs. For both fiscal years 2021 and 2020, 100% of the U.S. qualified pension plan assets were allocated to fixed income, in line with the target allocation. The fixed income allocation is primarily directed toward long-term core bond investments, with smaller allocations to Treasury Inflation-Protected Securities and high-yield bonds.76Table of ContentsFair Value Measurement of Defined Benefit Pension Plan AssetsOctober 31, 2021Fair Value Measurements at Reporting Date UsingLevel 1Level 2Total(In millions)Cash equivalents$24 (a)$— $24 Equity securities:Non-U.S. equity securities28 (b)— 28 Fixed-income securities:U.S. treasuries— 186 (c)186 Corporate bonds— 1,222 (c)1,222 Municipal bonds— 24 (c)24 Government bonds— 34 (c)34 Asset-backed securities— 3 (c)3 Total plan assets$52 $1,469 $1,521 November 1, 2020Fair Value Measurements at Reporting Date UsingLevel 1Level 2Total(In millions)Cash equivalents$42 (a)$— $42 Equity securities:Non-U.S. equity securities26 (b)— 26 Fixed-income securities:U.S. treasuries— 158 (c)158 Corporate bonds— 1,307 (c)1,307 Municipal bonds— 22 (c)22 Government bonds— 36 (c)36 Asset-backed securities— 2 (c)2 Total plan assets$68 $1,525 $1,593 ______________________________(a)Cash equivalents primarily included short-term investment funds which consisted of short-term money market instruments that were valued based on quoted prices in active markets.(b)These equity securities were valued based on quoted prices in active markets.(c)These amounts consisted of investments that were traded less frequently than Level 1 securities and were valued using inputs that included quoted prices for similar assets in active markets and inputs other than quoted prices that were observable for the assets, such as interest rates, yield curves, prepayment speeds, collateral performance, broker/dealer quotes and indices that were observable at commonly quoted intervals.Post-Retirement Benefit Plan Investment PolicyOur overall investment strategy for the group life insurance plan is to allocate assets in a manner that seeks to both maximize the safety of promised benefits and minimize the cost of funding those benefits. The target asset allocation for plan assets reflects a risk/return profile that we believe is appropriate relative to the liability structure and return goals for the plan. We periodically review the allocation of plan assets relative to alternative allocation models to evaluate the need for adjustments based on forecasted liabilities and plan liquidity needs. We set the overall portfolio allocation and use an investment manager that directs the investment of funds consistent with that allocation. The investment manager invests the plan assets in index funds that it manages. For both fiscal years 2021 and 2020, 100% of plan assets were allocated to 77Table of Contentscommingled funds that invested in fixed income, in line with the target allocation. The fair value of the commingled funds are measured using net asset value per share as a practical expedient. Assumptions The assumptions used to determine the benefit obligations and net periodic benefit (income) cost from our defined benefit pension plans and post-retirement benefit plans are presented in the tables below. The expected long-term return on assets shown in the tables below represents an estimate of long-term returns on investment portfolios primarily consisting of combinations of debt, equity and other investments, depending on the plan. The long-term rates of return are then weighted based on the asset classes (both historical and forecasted) in which we expect the pension and post-retirement funds to be invested. Discount rates reflect the current rate at which defined benefit pension and post-retirement benefit obligations could be settled based on the measurement dates of the plans, which is October 31, the month end closest to our fiscal year end. The range of assumptions that are used for defined benefit pension plans reflects the different economic environments within various countries.Assumptions for Benefit Obligationsas ofAssumptions for Net Periodic Benefit (Income) CostFiscal YearOctober 31,2021November 1,2020202120202019Defined benefit pension plans: Discount rate0.75%-6.50%0.61%-6.54%0.61%-6.54%0.47%-7.00%0.50%-8.00%Average increase in compensation levels2.00%-10.00%2.00%-10.00%2.00%-10.00%2.00%-10.00%1.80%-10.00%Expected long-term return on assetsN/AN/A1.00%-8.00%1.50%-7.80%1.50%-7.75%Assumptions for Benefit Obligationsas ofAssumptions for Net Periodic Benefit (Income) CostFiscal YearOctober 31,2021November 1,2020202120202019Post-retirement benefit plans: Discount rate2.30%-2.90%2.10%-2.90%2.10%-2.90%2.80%-3.20%4.12%-4.60%Average increase in compensation levels3.00%3.00%3.00%3.00%3.00%Expected long-term return on assetsN/AN/A2.90%3.20%4.80%Assumed Health Care Cost Trend Rate Used to Measure the Expected Cost of Benefits as ofOctober 31,2021November 1,2020Health care cost trend rate assumed for next year6.75%7.25%Rate to which the health care cost trend rate is assumed to decline (ultimate health care cost trend rate)4.50%4.50%Year that the rate reaches the ultimate health care cost trend rate20292029Defined Contribution PlansOur eligible U.S. employees participate in a company-sponsored 401(k) plan. Under the plan, we match employees contributions dollar for dollar up to 6% of their eligible earnings. All matching contributions vest immediately. During fiscal years 2021, 2020 and 2019, we made contributions of $94 million, $99 million and $89 million, respectively, to the 401(k) plan.In addition, other eligible employees outside of the U.S. receive retirement benefits under various defined contribution retirement plans.78Table of Contents10. Borrowings Effective Interest RateOctober 31,2021November 1,2020(In millions, except percentages)September 2021 Senior Notes - fixed rate3.137% notes due November 20354.23 %$3,250 $— 3.187% notes due November 20364.79 %2,750 — 6,000 — March 2021 Senior Notes - fixed rate3.419% notes due April 20334.66 %2,250 — 3.469% notes due April 20344.63 %3,250 — 5,500 — January 2021 Senior Notes - fixed rate1.950% notes due February 20282.10 %750 — 2.450% notes due February 20312.56 %2,750 — 2.600% notes due February 20332.70 %1,750 — 3.500% notes due February 20413.60 %3,000 — 3.750% notes due February 20513.84 %1,750 — 10,000 — June 2020 Senior Notes - fixed rate3.459% notes due September 20264.19 %752 1,695 4.110% notes due September 20285.02 %1,965 2,222 2,717 3,917 May 2020 Senior Notes - fixed rate2.250% notes due November 20232.40 %105 1,000 3.150% notes due November 20253.29 %900 2,250 4.150% notes due November 20304.27 %2,679 2,750 4.300% notes due November 20324.39 %2,000 2,000 5,684 8,000 April 2020 Senior Notes - fixed rate4.700% notes due April 20254.88 %1,020 2,250 5.000% notes due April 20305.18 %1,086 2,250 2,106 4,500 November 2019 Term Loans - floating rateLIBOR plus 1.125% term loan due November 20221.54 %— 1,819 LIBOR plus 1.250% term loan due November 20241.56 %— 4,069 — 5,888 April 2019 Senior Notes - fixed rate3.125% notes due April 20213.61 %— 525 3.125% notes due October 20223.53 %— 693 3.625% notes due October 20243.98 %622 1,044 4.250% notes due April 20264.54 %944 2,500 4.750% notes due April 20294.95 %1,958 3,000 3,524 7,762 2017 Senior Notes - fixed rate2.200% notes due January 20212.41 %— 282 3.000% notes due January 20223.21 %255 842 79Table of ContentsEffective Interest RateOctober 31,2021November 1,2020(In millions, except percentages)2.650% notes due January 20232.78 %260 1,000 3.625% notes due January 20243.74 %829 1,352 3.125% notes due January 20253.23 %495 1,000 3.875% notes due January 20274.02 %2,922 4,800 3.500% notes due January 20283.60 %777 1,250 5,538 10,526 Assumed CA Senior Notes - fixed rate3.600% notes due August 20224.07 %— 283 4.500% notes due August 20234.10 %143 250 4.700% notes due March 20275.15 %265 350 408 883 Other borrowings2.500% - 4.500% senior notes due August 2022 - August 20342.59% - 4.55%22 22 Total principal amount outstanding41,499 41,498 Less: Unamortized discount and issuance costs(1,834)(504)Total debt$39,665 $40,994 As of October 31, 2021 and November 1, 2020, short-term finance lease liabilities of $26 million and $20 million, respectively, were included in the current portion of long-term debt and long-term finance lease liabilities of $39 million and $48 million, respectively, were included in long-term debt.September 2021 Senior NotesIn September 2021, we completed our private offers to exchange $6.0 billion of certain of our outstanding notes maturing between 2025 and 2030 (the “September 2021 Exchange Offer”) for $3,250 million of 3.137% new senior unsecured notes due November 2035 and $2,750 million of 3.187% new senior unsecured notes due November 2036 (collectively, the “September 2021 Senior Notes”). As a result of the September 2021 Exchange Offer, we paid premiums of $762 million, which were included in unamortized discount and issuance costs. We may redeem or purchase, in whole or in part, any of the September 2021 Senior Notes prior to their respective maturities, subject to a specified make-whole premium determined in accordance with the indenture governing the September 2021 Senior Notes, plus accrued and unpaid interest. In the event of a change in control, note holders will have the right to require us to repurchase their notes at a price equal to 101% of the principal amount of such notes, plus accrued and unpaid interest. As of October 31, 2021, the September 2021 Senior Notes were recorded as long-term debt, net of discount and issuance costs, which are amortized to interest expense over the respective terms of these borrowings.March 2021 Senior NotesIn March 2021, we completed our private offers to exchange $5.5 billion of certain of our outstanding notes maturing between 2024 and 2027 (the “March 2021 Exchange Offer”) for $2,250 million of 3.419% new senior unsecured notes due April 2033 and $3,250 million of 3.469% new senior unsecured notes due April 2034 (collectively, the “March 2021 Senior Notes”). As a result of the March 2021 Exchange Offer, we paid premiums of $581 million, which were included in unamortized discount and issuance costs. We may redeem or purchase, in whole or in part, any of the March 2021 Senior Notes prior to their respective maturities, subject to a specified make-whole premium determined in accordance with the indenture governing the March 2021 Senior Notes, plus accrued and unpaid interest. In the event of a change in control, note holders will have the right to require us to repurchase their notes at a price equal to 101% of the principal amount of such notes, plus accrued and unpaid interest. As of October 31, 2021, the March 2021 Senior Notes were recorded as long-term debt, net of discount and issuance costs, which are amortized to interest expense over the respective terms of these borrowings.80Table of ContentsIn connection with the March 2021 Exchange Offer, Broadcom Corporation (“BRCM”) and Broadcom Technologies Inc. (“BTI”) were automatically and unconditionally released from their guarantees in accordance with the respective indentures governing the January 2021 Senior Notes, June 2020 Senior Notes, May 2020 Senior Notes, April 2020 Senior Notes, and April 2019 Senior Notes, as defined below respectively. January 2021 Senior NotesIn January 2021, we issued $10 billion of senior unsecured notes (the “January 2021 Senior Notes”). We may redeem or purchase, in whole or in part, any of the January 2021 Senior Notes prior to their respective maturities, subject to a specified make-whole premium determined in accordance with the indenture governing the January 2021 Senior Notes, plus accrued and unpaid interest. In the event of a change in control, note holders will have the right to require us to repurchase their notes at a price equal to 101% of the principal amount of such notes, plus accrued and unpaid interest. As of October 31, 2021, the January 2021 Senior Notes were recorded as long-term debt, net of discount and issuance costs, which are amortized to interest expense over the respective terms of these borrowings.Using the net proceeds from the January 2021 Senior Notes, we repaid the outstanding balance of $5,888 million of our unsecured term A-3 facility and unsecured term A-5 facility under the credit agreement entered into on November 4, 2019 (the “November 2019 Credit Agreement”), repurchased $3,830 million of certain of our outstanding notes maturing between 2021 and 2023 through a cash tender offer and redemption, and repaid $282 million of our 2.200% notes upon maturity in January 2021. As a result of these repayments and repurchases, we incurred premiums of $151 million and wrote off $47 million of unamortized discount and issuance costs, both of which were included in interest expense.January 2021 Credit AgreementIn January 2021, we entered into a credit agreement (the “January 2021 Credit Agreement”), which provides for a five-year $7.5 billion unsecured revolving credit facility (the “Revolving Facility”), of which $500 million is available for the issuance of multi-currency letters of credit. The issuance of letters of credit and certain other instruments would reduce the aggregate amount otherwise available under the Revolving Facility for revolving loans. Subject to the terms of the January 2021 Credit Agreement, we are permitted to borrow, repay and reborrow revolving loans at any time prior to the earlier of (a) January 19, 2026 and (b) the date of termination in whole of the revolving lenders’ commitments under the January 2021 Credit Agreement. In connection with the January 2021 Credit Agreement, we terminated the credit agreement entered into on May 7, 2019 (the “May 2019 Credit Agreement”), which provided for a five-year $5 billion unsecured revolving credit facility, and the November 2019 Credit Agreement. As of October 31, 2021, we had no borrowings outstanding under the Revolving Facility.June 2020 Senior NotesIn June 2020, we completed our private offers to exchange $3,742 million of certain series of our outstanding notes maturing between 2021 and 2024, for $1,695 million of new senior notes due 2026 and $2,222 million of new senior notes due 2028 (collectively, the “June 2020 Senior Notes”). As a result of this exchange, we paid premiums of $177 million, which were included in unamortized discount and issuance costs. We may redeem or purchase, in whole or in part, any of the June 2020 Senior Notes prior to their respective maturities, subject to a specified make-whole premium determined in accordance with the indenture governing the June 2020 Senior Notes, plus accrued and unpaid interest. In the event of a change in control, note holders will have the right to require us to repurchase their notes at a price equal to 101% of the principal amount of such notes plus accrued and unpaid interest. The June 2020 Senior Notes are recorded as long-term debt, net of discount and issuance costs, which are amortized to interest expense over the respective terms of these borrowings. May 2020 Senior NotesIn May 2020, we issued $8 billion of senior unsecured notes (the “May 2020 Senior Notes”). We may redeem or purchase, in whole or in part, any of the May 2020 Senior Notes prior to their respective maturities, subject to a specified make-whole premium determined in accordance with the indenture governing the May 2020 Senior Notes, plus accrued and unpaid interest. In the event of a change in control, note holders will have the right to require us to repurchase their notes at a price equal to 101% of the principal amount of such notes plus accrued and unpaid interest. The May 2020 Senior Notes are recorded as long-term debt, net of discount and issuance costs, which are amortized to interest expense over the respective terms of these borrowings. The net proceeds from this issuance, together with the remaining net proceeds from the issuance of the April 2020 Senior Notes, as defined below, were used to repay an aggregate of $5,424 million of term loans outstanding under the November 2019 Credit Agreement, consisting of repayments of $2,712 million of each of our unsecured term A-3 and A-5 facilities and $3 billion of borrowings outstanding under the unsecured revolving credit facility provided by the May 2019 Credit Agreement. 81Table of ContentsApril 2020 Senior NotesIn April 2020, we issued $4.5 billion of senior unsecured notes (the “April 2020 Senior Notes”). We may redeem or purchase, in whole or in part, any of the April 2020 Senior Notes prior to their respective maturities, subject to a specified make-whole premium determined in accordance with the indenture governing the April 2020 Senior Notes, plus accrued and unpaid interest. In the event of a change in control, note holders will have the right to require us to repurchase their notes at a price equal to 101% of the principal amount of such notes plus accrued and unpaid interest. The April 2020 Senior Notes are recorded as long-term debt, net of discount and issuance costs, which are amortized to interest expense over the respective terms of these borrowings.Pursuant to a cash tender offer that we completed in April 2020, we repurchased $2,361 million of our 3.000% notes due January 2022, $1,274 million of our 3.125% notes due April 2021 and $351 million of our 2.200% notes due January 2021 with the net proceeds from the April 2020 Senior Notes. As a result of these repurchases, we incurred premiums of $78 million and wrote off $15 million of unamortized discount and issuance costs, both of which were included in interest expense.November 2019 Term LoansOn November 4, 2019, in connection with the acquisition of the Symantec Business, we entered into the November 2019 Credit Agreement, which provides for a $7,750 million unsecured term A-3 facility and a $7,750 million unsecured term A-5 facility (collectively, the “November 2019 Term Loans”). We used net proceeds from the November 2019 Term Loans to fund the $10.7 billion Symantec Business acquisition and to repay $750 million principal amount of 5.375% notes due December 2019 and $2,750 million principal amount of 2.375% notes due January 2020, on their respective maturity dates. During fiscal year 2020, we repaid an aggregate of $9,612 million of our November 2019 Term Loans, consisting of repayments of $5,931 million and $3,681 million of our unsecured term A-3 and A-5 facilities, respectively, and wrote off $60 million of unamortized discount and issuance costs. During fiscal year 2021, we repaid the remaining outstanding balance of the November 2019 Term Loans using the proceeds from the January 2021 Senior Notes.April 2019 Senior NotesIn April 2019, we issued $11 billion of senior unsecured notes (the “April 2019 Senior Notes”). We may redeem or purchase, in whole or in part, any of the April 2019 Senior Notes prior to their respective maturities, subject to a make-whole premium determined in accordance with the indenture governing the April 2019 Senior Notes, plus accrued and unpaid interest. The April 2019 Senior Notes are recorded as long-term debt, net of discount and issuance costs, which are amortized to interest expense over the respective terms of these borrowings.Registered Exchange OfferIn connection with the issuance of the June 2020 Senior Notes, the May 2020 Senior Notes, the April 2020 Senior Notes (collectively, the “2020 Senior Notes”) and the April 2019 Senior Notes, we entered into registration rights agreements, pursuant to which we were obligated to use commercially reasonable efforts to file with the Securities and Exchange Commission (the “SEC”), and cause to be declared effective, a registration statement with respect to an offer to exchange (the “Registered Exchange Offer”) each series of the 2020 Senior Notes and the April 2019 Senior Notes for notes that are registered with the SEC (the “Registered Notes”), with substantially identical terms. We completed the Registered Exchange Offer on August 10, 2020. Substantially all of our 2020 Senior Notes and April 2019 Senior Notes were tendered and exchanged for the corresponding Registered Notes in the Registered Exchange Offer. Commercial Paper In February 2019, we established a commercial paper program pursuant to which we may issue unsecured commercial paper notes (“Commercial Paper”) in principal amount of up to $2 billion outstanding at any time with maturities of up to 397 days from the date of issue. Commercial Paper is sold under customary terms in the commercial paper market and may be issued at a discount from par or, alternatively, may be sold at par and bear interest at rates dictated by market conditions at the time of their issuance. The discount associated with the Commercial Paper is amortized to interest expense over its term. Outstanding Commercial Paper reduces the amount that would otherwise be available to borrow for general corporate purposes under the Revolving Facility. As our commercial paper program is supported by the Revolving Facility, we have the ability and intent to continuously refinance Commercial Paper. As of October 31, 2021 and November 1, 2020, we had no Commercial Paper outstanding. 2017 Senior NotesDuring the fiscal year ended October 29, 2017, Broadcom Cayman Finance Limited, which subsequently merged into BTI during fiscal year 2019 with BTI remaining as the surviving entity, and BRCM issued $17,550 million of senior unsecured notes (the “2017 Senior Notes”). Our 2017 Senior Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured, unsubordinated basis by Broadcom and BTI. We may redeem or purchase, in whole or in part, any of the 2017 82Table of ContentsSenior Notes prior to their respective maturities, subject to a make-whole premium determined in accordance with the indenture governing the 2017 Senior Notes, plus accrued and unpaid interest. In the event of a change in control, note holders will have the right to require us to repurchase their notes at a price equal to 101% of the principal amount of such notes plus accrued and unpaid interest. During the fiscal year ended November 4, 2018, substantially all of the 2017 Senior Notes were tendered and exchanged for notes registered with the SEC, with substantially identical terms. Assumed CA Senior NotesIn connection with our acquisition of CA during fiscal year 2019, we assumed $2.25 billion CA’s outstanding senior unsecured notes (the “Assumed CA Senior Notes”). CA remains the sole obligor under the Assumed CA Senior Notes. We may redeem all or a portion of the Assumed CA Senior Notes at any time, subject to a specified make-whole premium as set forth with the indenture governing the Assumed CA Senior Notes. In the event of a change in control, note holders will have the right to require us to repurchase their notes at a price equal to 101% of the principal amount of such notes plus accrued and unpaid interest. Fair Value of DebtAs of October 31, 2021, the estimated aggregate fair value of our debt was $43,392 million. The fair value of our senior notes was determined using quoted prices from less active markets. All of our debt obligations are categorized as Level 2 instruments.Future Principal Payments of DebtThe future scheduled principal payments of debt as of October 31, 2021 were as follows:Fiscal Year:Future Scheduled Principal Payments(In millions)2022$264 2023403 20241,563 20251,515 20262,596 Thereafter35,158 Total$41,499 As of October 31, 2021 and November 1, 2020, we accrued interest payable of $282 million and $304 million, respectively, and were in compliance with all debt covenants.11. Stockholders’ Equity Mandatory Convertible Preferred Stock OfferingOn September 30, 2019, we completed an offering of approximately 4 million shares of 8.00% Mandatory Convertible Preferred Stock, Series A, $0.001 par value per share (“Mandatory Convertible Preferred Stock”), which generated net proceeds of approximately $3,679 million.The holders of Mandatory Convertible Preferred Stock are entitled to receive, when, as and if declared by our Board of Directors, or an authorized committee thereof, out of funds legally available for payment, cumulative dividends at the annual rate of 8.00% of the liquidation preference of $1,000 per share (equivalent to $80 annually per share), payable in cash or, subject to certain limitations, by delivery of shares of our common stock or any combination of cash and shares of our common stock, at our election; provided, however, that any undeclared and unpaid dividends will continue to accumulate. Subject to limited exceptions, no dividends may be declared or paid on shares of our common stock, unless all accumulated dividends have been paid or set aside for payment on all outstanding shares of our Mandatory Convertible Preferred Stock for all past completed dividend periods. In the event of our voluntary or involuntary liquidation, dissolution or winding-up, no distribution of our assets may be made to holders of our common stock until we have paid to holders of our Mandatory Convertible Preferred Stock a liquidation preference equal to $1,000 per share plus accumulated and unpaid dividends.83Table of ContentsOn September 30, 2022, unless earlier converted, each outstanding share of Mandatory Convertible Preferred Stock will automatically convert into shares of our common stock at a rate between the then minimum and maximum conversion rates. At any time prior to September 30, 2022, holders may elect to convert each share of Mandatory Convertible Preferred Stock into shares of our common stock at the then minimum conversion rate. The conversion rates are subject to anti-dilution adjustments. As of October 31, 2021, the minimum conversion rate was 3.0822 and the maximum conversion rate was 3.6025. We recognized $27 million of accrued preferred stock dividends at each of October 31, 2021 and November 1, 2020, which were presented as temporary equity in our consolidated balance sheets. Cash Dividends Declared and PaidFiscal Year202120202019(In millions, except per share data)Dividends per share to common stockholders$14.40 $13.00 $10.60 Dividends to common stockholders$5,913 $5,235 $4,235 Dividends per share to preferred stockholders$80.00 $80.00 $— Dividends to preferred stockholders$299 $299 $— Stock Repurchase ProgramPursuant to an $18 billion stock repurchase program previously authorized by our Board of Directors, we repurchased and retired approximately 21 million shares of our common stock for $5,435 million during fiscal year 2019. This authorization ended on November 3, 2019.In December 2021, our Board of Directors authorized a stock repurchase program to repurchase up to $10 billion of our common stock from time to time on or prior to December 31, 2022. Repurchases under our stock repurchase program may be effected through a variety of methods, including open market or privately negotiated purchases. The timing and amount of shares repurchased will depend on the stock price, business and market conditions, corporate and regulatory requirements, alternative investment opportunities, acquisition opportunities, and other factors. We are not obligated to repurchase any specific amount of shares of common stock, and the stock repurchase program may be suspended or terminated at any time.Equity Incentive Award Plan2012 PlanIn connection with the acquisition of BRCM, we assumed the BRCM 2012 Stock Incentive Plan (the “Original 2012 Plan”) and outstanding unvested RSUs originally granted by BRCM under the Original 2012 Plan that were held by continuing employees. During the second quarter of fiscal year 2021, our stockholders approved the amendment and restatement of the Original 2012 Plan, now called Broadcom Inc. 2012 Stock Incentive Plan (the “Amended 2012 Plan”). Under the Amended 2012 Plan, we may grant to employees stock options and stock appreciation rights with an exercise price that is no less than the fair market value on the date of grant, restricted stock awards and RSUs. No participant may be granted such awards for more than an aggregate of 4 million shares in any fiscal year. Equity awards granted under the Amended 2012 Plan generally vest over four years. The Amended 2012 Plan reduced the number of shares available for new equity award grants to 20 million shares and removed the annual share replenishment provision provided under the Original 2012 Plan. We will make no further equity award grants under our LSI Corporation 2003 Equity Incentive Plan, which we assumed in connection with the acquisition of LSI Corporation. As of October 31, 2021, 21 million shares remained available for issuance under the Amended 2012 Plan. We may grant market-based RSUs with both a service condition and a market condition as part of our equity compensation programs. The market-based RSUs generally vest over four years, subject to satisfaction of market conditions. During fiscal years 2021, 2020 and 2019, we granted market-based RSUs under which grantees may receive the number of shares ranging from 0% to 300% of the original grant at vesting based upon the total stockholder return (“TSR”) on our common stock on an absolute basis and as compared to the TSR of an index group of companies.84Table of ContentsAmendment to the RSU Vesting ScheduleDuring fiscal year 2019, the Compensation Committee of our Board of Directors approved an amendment to the vesting of time-based RSUs (other than those assumed in an acquisition), held by approximately 16,500 employees below the vice president level, from an annual vesting cycle to a quarterly vesting cycle.Employee Stock Purchase PlanThe ESPP provides eligible employees with the opportunity to acquire an ownership interest in us through periodic payroll deductions, based on a 6-month look-back period, at a price equal to the lesser of 85% of the fair market value of our common stock at either the beginning or the end of the relevant offering period. The ESPP is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986. However, the ESPP is not intended to be a qualified pension, profit sharing or stock bonus plan under Section 401(a) of the Internal Revenue Code of 1986 and is not subject to the provisions of the Employee Retirement Income Security Act of 1974.Stock-Based Compensation Expense Fiscal Year202120202019(In millions)Cost of products sold$78 $109 $120 Cost of subscriptions and services65 50 43 Research and development1,199 1,419 1,532 Selling, general and administrative362 398 490 Total stock-based compensation expense (a)$1,704 $1,976 $2,185 Estimated income tax benefits for stock-based compensation$283 $345 $400 Excess income tax benefits for stock-based awards exercised or released$310 $147 $232 _________________________________(a)Fiscal year 2019 stock-based compensation expense does not include $75 million restructuring charges for accelerated vesting of assumed equity awards held by employees terminated in connection with the CA Merger.We have assumed an annualized forfeiture rate for RSUs of 5%. We will recognize additional expense if actual forfeitures are lower than we estimated, and will recognize a benefit if actual forfeitures are higher than we estimated.During the first quarter of fiscal year 2019, the Compensation Committee of our Board of Directors approved a broad-based program of multi-year equity grants of time- and market-based RSUs (the “Multi-Year Equity Awards”) in lieu of our annual employee equity awards historically granted on March 15 of each year. Each Multi-Year Equity Award vests on the same basis as four annual grants made March 15 of each year, beginning in fiscal year 2019, with successive four-year vesting periods. Stock-based compensation expense related to the Multi-Year Equity Awards was $816 million, $902 million and $890 million for fiscal years 2021, 2020 and 2019, respectively.In connection with the amendment to the vesting of certain time-based RSUs from an annual cycle to a quarterly cycle, we recognized approximately $140 million in incremental compensation cost during fiscal year 2019. As of October 31, 2021, the total unrecognized compensation cost related to unvested stock-based awards was $2,967 million, which is expected to be recognized over the remaining weighted-average service period of 2.9 years. The following table summarizes the weighted-average assumptions utilized to calculate the fair value of market-based awards granted in the periods presented:Fiscal Year202120202019Risk-free interest rate0.3 %1.2 %2.7 %Dividend yield3.0 %4.7 %4.4 %Volatility39.0 %31.2 %33.0 %Expected term (in years)3.44.04.0The risk-free interest rate was derived from the average U.S. Treasury Strips rate, which approximated the rate in effect appropriate for the term at the time of grant.85Table of ContentsThe dividend yield was based on the historical and expected dividend payouts as of the respective award grant dates.The volatility was based on our own historical stock price volatility over the period commensurate with the expected life of the awards and the implied volatility of a 180-day call option on our own common stock measured at a specific date. The expected term was commensurate with the awards’ contractual terms.Restricted Stock Unit AwardsA summary of time- and market-based RSU activity is as follows:Number of RSUsOutstandingWeighted-AverageGrant DateFair ValuePer Share(In millions, except per share data)Balance as of November 4, 201818 $195.50 Assumed in CA Merger1 $206.14 Granted33 $183.64 Vested(10)$192.28 Forfeited(2)$182.80 Balance as of November 3, 201940 $188.52 Granted3 $252.36 Vested(8)$210.84 Forfeited(3)$198.17 Balance as of November 1, 202032 $188.35 Granted2 $408.69 Vested(8)$214.15 Forfeited(3)$189.84 Balance as of October 31, 202123 $200.38 The aggregate fair value of time- and market-based RSUs that vested in fiscal years 2021, 2020 and 2019 was $3,715 million, $2,254 million and $2,958 million, respectively, which represented the market value of our common stock on the date that the RSUs vested. The number of RSUs vested included shares of common stock that we withheld for settlement of employees’ tax obligations due upon the vesting of RSUs.Stock Option AwardsAs of October 31, 2021, our stock options outstanding were not material. The aggregate intrinsic value of stock options exercised in fiscal years 2021, 2020 and 2019 was $339 million, $917 million and $761 million, respectively.12. Income Taxes Components of Income from Continuing Operations Before Income TaxesThe following table presents the components of income from continuing operations before income taxes for financial reporting purposes: Fiscal Year202120202019(In millions)Domestic loss$(3,103)$(4,221)$(4,116)Foreign income9,868 6,664 6,342 Income from continuing operations before income taxes$6,765 $2,443 $2,226 Components of Provision for (Benefit from) Income TaxesThe provision for income taxes in fiscal year 2021 was primarily due to higher income from continuing operations, offset in part by excess tax benefits from stock-based awards, a benefit from foreign derived intangible income, and the recognition of gross unrecognized tax benefits as a result of lapses of statutes of limitations and audit settlements.86Table of ContentsThe benefit from income taxes in fiscal year 2020 was primarily due to jurisdictional mix of income and expense, the recognition of gross uncertain tax benefits as a result of lapses of statutes of limitations, the remeasurement of certain foreign deferred tax assets and liabilities, and excess tax benefits from stock-based awards.The benefit from income taxes in the fiscal year 2019 was primarily due to excess tax benefits from stock-based awards, the recognition of gross unrecognized tax benefits as a result of audit settlements and lapses of statutes of limitations net of increases in balances related to tax positions taken during the year, deferred tax remeasurement in state and foreign jurisdictions, internal reorganizations, and the partial release of our valuation allowance as a result of the CA Merger, partly offset by a change in estimate of our fiscal year 2018 provision resulting from regulations issued related to the U.S. Tax Cuts and Jobs Act (“2017 Tax Reform Act”).We have obtained several tax incentives from the Singapore Economic Development Board which provide that qualifying income earned in Singapore is subject to tax incentives or reduced rates of Singapore income tax. Each tax incentive is separate and distinct from the others and may be granted, withheld, extended, modified, truncated, complied with, or terminated independently without any effect on the other incentives. Subject to our compliance with the conditions specified in these incentives and legislative developments, the Singapore tax incentive is scheduled to expire in November 2025.We have also obtained a tax holiday on our qualifying income in Malaysia, which is scheduled to expire in fiscal year 2028. The tax holiday that we negotiated in Malaysia is also subject to our compliance with various operating and other conditions. If we cannot, or elect not to, comply with any such conditions specified, we will lose the related tax benefits and we could be required to refund previously realized material tax benefits.Before taking into consideration the effects of the 2017 Tax Reform Act and other indirect tax impacts, the effect of these tax incentives and tax holiday was to decrease the provision for income taxes by approximately $1,156 million for fiscal year 2021 and increase the benefit from income taxes by approximately $833 million and $923 million for fiscal years 2020 and 2019, respectively.Significant components of provision for (benefit from) income taxes are as follows: Fiscal Year202120202019(In millions)Current tax expense (benefit from): Federal$446 $7 $(49)State46 51 (16)Foreign534 506 342 1,026 564 277 Deferred tax expense (benefit from): Federal(876)(627)(497)State(114)(161)(113)Foreign(7)(294)(177) (997)(1,082)(787)Total provision for (benefit from) income taxes$29 $(518)$(510)87Table of ContentsRate Reconciliation Fiscal Year202120202019Statutory tax rate21.0 %21.0 %21.0 %State, net of federal benefit(0.8)(3.6)(4.6)Foreign income taxed at different rates(22.8)(48.6)(52.5)Deemed inclusion of foreign earnings12.7 23.3 25.9 Foreign-derived intangible income deduction(3.1)(1.5)— Deferred taxes on unremitted foreign earnings(0.7)(1.1)1.9 Excess tax benefits from stock-based compensation(4.6)(6.0)(10.4)Research and development credit(2.3)(4.3)(7.6)Other, net1.0 (0.4)(1.7)2017 Tax Reform Act— — 5.1 Effective tax rate on income before income taxes0.4 %(21.2)%(22.9)%Summary of Deferred Income TaxesOctober 31,2021November 1,2020(In millions)Deferred income tax assets: Net operating loss, credit and other carryforwards$1,774 $1,773 Deferred revenue1,332 529 Employee stock awards192 273 Other deferred income tax assets446 449 Gross deferred income tax assets3,744 3,024 Less: valuation allowance(1,782)(1,707)Deferred income tax assets1,962 1,317 Deferred income tax liabilities:Depreciation and amortization847 1,477 Unamortized discount and issuance costs374 57 Foreign earnings not indefinitely reinvested73 112 Deferred income tax liabilities1,294 1,646 Net deferred income tax assets (liabilities)$668 $(329)Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their basis for income tax purposes and the tax effects of net operating losses and tax credit carryforwards. The increase in net deferred income tax assets was primarily a result of an increase in deferred revenue and amortization of acquisition-related intangible assets, offset in part by unamortized discount and issuance costs included in the consolidated statement of operations.In connection with the acquisition of the Symantec Business in November 2019, we established $28 million of net deferred tax assets primarily as a result of the difference in book basis and tax basis related to acquired assets. In connection with the CA Merger in November 2018, we established $2,434 million of net deferred tax liabilities on the excess of the book basis over the tax basis of acquired identified intangible assets and investments in certain foreign subsidiaries that had not been indefinitely reinvested, partially offset by acquired tax attributes. We continue to indefinitely reinvest $2,291 million of certain accumulated foreign earnings. The unrecognized deferred income tax liability related to these earnings is estimated to be $241 million. All other current and future earnings of all our foreign subsidiaries are not considered permanently reinvested. 88Table of ContentsThe increase in the valuation allowance to $1,782 million in fiscal year 2021 from $1,707 million in fiscal year 2020 was primarily due to state and foreign deferred tax assets arising from credits and net operating loss carryforwards not expected to be realized.As of October 31, 2021, we had U.S. federal net operating loss carryforwards of $51 million, U.S. state net operating loss carryforwards of $2,610 million and foreign net operating loss carryforwards of $782 million, all of which expire in various years beginning fiscal year 2022. We also had $83 million, $1,896 million and $43 million of U.S. federal, state, and foreign research and development tax credits, respectively. U.S. federal, state and foreign research and development credits, if not utilized, begin to expire in fiscal years 2022, 2022 and 2023, respectively.Utilization of our net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the net operating loss and tax credit carryforwards before their utilization. The events that may cause ownership changes include, but are not limited to, a cumulative stock ownership change of greater than 50% over a three year period.Uncertain Tax PositionsGross unrecognized tax benefits increased by $282 million during fiscal year 2021, resulting in gross unrecognized tax benefits of $5,030 million as of October 31, 2021. Gross unrecognized tax benefits increased by $326 million during fiscal year 2020, resulting in gross unrecognized tax benefits of $4,748 million as of November 1, 2020. Gross unrecognized tax benefits increased by $392 million during fiscal year 2019, resulting in gross unrecognized tax benefits of $4,422 million as of November 3, 2019. We recognize interest and penalties related to unrecognized tax benefits within the provision for (benefit from) income taxes. Accrued interest and penalties were included within other long-term liabilities. During fiscal years 2021 and 2020, we recognized interest and penalties of $46 million and $37 million, respectively, within the provision for (benefit from) income taxes. There was no amount recognized during fiscal year 2019. As of October 31, 2021 and November 1, 2020, the combined amount of cumulative accrued interest and penalties was approximately $386 million and $340 million, respectively.The following table reconciles the beginning and ending balance of gross unrecognized tax benefits:Fiscal Year202120202019(In millions)Beginning balance$4,748 $4,422 $4,030 Lapses of statutes of limitations(58)(95)(36)Increases in balances related to tax positions taken during prior periods (including those related to acquisitions made during the year)41 98 467 Decreases in balances related to tax positions taken during prior periods— (14)(270)Increases in balances related to tax positions taken during current period337 379 460 Decreases in balances related to settlements with taxing authorities(38)(42)(229)Ending balance$5,030 $4,748 $4,422 A portion of our unrecognized tax benefits will affect our effective tax rate if they are recognized upon favorable resolution of the uncertain tax positions. As of October 31, 2021 and November 1, 2020, approximately $5,416 million and $5,088 million of the unrecognized tax benefits and accrued interest and penalties would affect our effective tax rate, respectively.We are subject to U.S. income tax examination for fiscal years 2015 and later. Certain of our acquired companies are subject to tax examinations in major jurisdictions outside of the U.S. for fiscal years 2008 and later. It is possible that our existing unrecognized tax benefits may change up to $289 million as a result of lapses of the statute of limitations for certain audit periods and/or audit examinations expected to be completed within the next 12 months.13. Segment Information Reportable SegmentsDuring the first quarter of fiscal year 2020, we updated our organizational structure resulting in two reportable segments: semiconductor solutions and infrastructure software. Each segment represents a component for which separate financial information is available that is utilized on a regular basis by the CODM in determining how to allocate resources and 89Table of Contentsevaluate performance. The reportable segments are determined based on several factors including, but not limited to, customer base, homogeneity of products, technology, delivery channels and similar economic characteristics.Semiconductor solutions. We provide semiconductor solutions for managing the movement of data in data center, telecom, enterprise and embedded networking applications. We provide a broad variety of radio frequency semiconductor devices, wireless connectivity solutions and custom touch controllers for mobile applications. We also provide semiconductor solutions for enabling the set-top box and broadband access markets and for enabling secure movement of digital data to and from host machines, such as servers, personal computers and storage systems, to the underlying storage devices, such as hard disk drives and solid state drives. We also provide a broad variety of products for the general industrial and automotive markets. Our semiconductor solutions segment also includes our IP licensing.Infrastructure software. We provide a portfolio of software solutions that enables customers to plan, develop, automate, manage and secure applications across mainframe, distributed, mobile and cloud platforms. Our portfolio of industry-leading infrastructure and security software is designed to modernize, optimize, and secure the most complex hybrid environments, enabling scalability, agility, automation, insights, resiliency and security. We also offer mission critical FC SAN products and related software.Our CODM assesses the performance of each segment and allocates resources to each segment based on net revenue and operating results and does not evaluate each segment using discrete asset information. Operating results by segment include items that are directly attributable to each segment and also include shared expenses such as global operations, including manufacturing support, logistics and quality control, expenses associated with selling, general and administrative activities, facilities and IT expenses. Shared expenses are primarily allocated based on revenue and headcount.During the fourth quarter of our fiscal year 2020, we refined our allocation methodology for certain selling, general and administrative expenses to more closely align these costs with the segment benefiting from the shared expenses. Prior period segment results have been recast to conform to the current presentation. Unallocated ExpensesUnallocated expenses include amortization of acquisition-related intangible assets, stock-based compensation expense, restructuring, impairment and disposal charges, acquisition-related costs, charges related to inventory step-up to fair value, and other costs, which are not used in evaluating the results of, or in allocating resources to, our segments. Acquisition-related costs include transaction costs and any costs directly related to the acquisition and integration of acquired businesses.Depreciation expense directly attributable to each reportable segment is included in operating results for each segment. However, the CODM does not evaluate depreciation expense by operating segment and, therefore, it is not separately presented. There was no inter-segment revenue for any of the periods presented. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.Fiscal Year202120202019(In millions)Net revenue:Semiconductor solutions$20,383 $17,267 $17,441 Infrastructure software7,067 6,621 5,156 Total net revenue$27,450 $23,888 $22,597 Operating income:Semiconductor solutions$10,976 $8,576 $8,538 Infrastructure software4,936 4,363 3,391 Unallocated expenses(7,393)(8,925)(8,485)Total operating income$8,519 $4,014 $3,444 Geographic InformationNet revenue by country is based primarily on the geographic shipment or delivery location as specified by the distributors, OEMs, contract manufacturers, channel partners, or software customers who purchased our products or services. For the majority of our products, title and control transfer to our customers in Penang, Malaysia. The products are then transported to the customer specific locations. Net revenue from the United States for fiscal years 2021, 2020 and 2019 was $5,285 million, $4,778 million and $4,235 million, respectively. Net revenue from China (including Hong Kong) for fiscal 90Table of Contentsyears 2021, 2020 and 2019 was $9,752 million, $7,808 million and $8,056 million, respectively. Net revenue from Singapore for fiscal years 2021 and 2019 was $2,754 million and $2,507 million, respectively (the amount was less than 10% for fiscal year 2020). Net revenue from other foreign countries for fiscal years 2021, 2020 and 2019 was $9,659 million, $11,302 million and $7,799 million, respectively. These geographic delivery locations are not necessarily indicative of the geographic location of our end customers or the country in which our end customers sell devices containing our products. For example, we believe a substantial portion of our products shipped or delivered to China (including Hong Kong) is included in devices sold by our end customers in the United States and Europe.Long-lived assets include property, plant and equipment and are based on the physical location of the assets. October 31,2021November 1,2020(In millions)Long-lived assets:United States$1,540 $1,659 Taiwan313 285 Other495 565 Total long-lived assets$2,348 $2,509 Significant Customer InformationWe sell our products through our direct sales force and a select network of distributors and channel partners globally. No customer accounted for more than 10% of our net accounts receivable balance as of October 31, 2021 or November 1, 2020. During fiscal years 2021, 2020 and 2019, one customer accounted for 18%, 13% and 17% of our net revenue, respectively. Revenue from this customer was included in our semiconductor solutions segment. 14. Commitments and ContingenciesCommitments The following table summarizes contractual obligations and commitments as of October 31, 2021:Fiscal Year:Purchase CommitmentsOther Contractual Commitments(In millions)2022$1,286 $738 202382 178 2024— 119 2025— 25 2026— 48 Thereafter— 1 Total$1,368 $1,109 Purchase Commitments. Represents unconditional purchase obligations that include agreements to purchase goods or services, primarily inventory, that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.Other Contractual Commitments. Represents amounts payable pursuant to agreements related to IT, human resources, and other service agreements.Due to the inherent uncertainty with respect to the timing of future cash outflows associated with our unrecognized tax benefits at October 31, 2021, we are unable to reliably estimate the timing of cash settlement with the respective taxing authorities. Therefore, $3,407 million of unrecognized tax benefits and accrued interest and penalties classified within other long-term liabilities on our consolidated balance sheet as of October 31, 2021 have been excluded from the table above.ContingenciesFrom time to time, we are involved in litigation that we believe is of the type common to companies engaged in our lines of business, including commercial disputes, employment issues, tax disputes and disputes involving claims by third parties that our activities infringe their patent, copyright, trademark or other IP rights, as well as regulatory investigations or 91Table of Contentsinquiries. Legal proceedings and regulatory investigations or inquiries are often complex, may require the expenditure of significant funds and other resources, and the outcome of such proceedings is inherently uncertain, with material adverse outcomes possible. IP property claims generally involve the demand by a third-party that we cease the manufacture, use or sale of the allegedly infringing products, processes or technologies and/or pay substantial damages or royalties for past, present and future use of the allegedly infringing IP. Claims that our products or processes infringe or misappropriate any third-party IP rights (including claims arising through our contractual indemnification of our customers) often involve highly complex, technical issues, the outcome of which is inherently uncertain. Moreover, from time to time, we pursue litigation to assert our IP rights. Regardless of the merit or resolution of any such litigation, complex IP litigation is generally costly and diverts the efforts and attention of our management and technical personnel.Lawsuits Relating to California Institute of TechnologyCalifornia Institute of Technology ("Caltech") filed a complaint against Broadcom and Apple Inc. on May 26, 2016 in the United States District Court for the Central District of California (the “U.S. Central District Court”), and an amended complaint adding Cypress Semiconductor Corporation as a defendant on August 15, 2016. The amended complaint alleged that chips that support certain error correction codes as specified in IEEE Standards 802.11n and 802.11ac willfully infringed four patents related to error correction coding: U.S. Patent Nos. 7,116,710; 7,421,032; 7,916,781; and 8,284,833 (“’833 patent”). Prior to trial, Caltech dismissed its claims against Cypress and withdrew its infringement allegations as to ‘833 patent. The complaint sought a preliminary and permanent injunction, damages, pre- and post-judgment interest, as well as attorneys’ fees, costs, and expenses. The trial was held in January 2020, and on January 29, 2020, the jury issued its verdict finding infringement and awarding Caltech past damages of $270.2 million from Broadcom and $837.8 million from Apple, for which Apple is seeking indemnification from Broadcom. On August 3, 2020, the U.S. Central District Court issued its judgment, awarding Caltech past damages in the amounts awarded by the jury, as well as pre- and post-judgment interest. Additionally, the U.S. Central District Court awarded Caltech an unspecified amount of ongoing royalties to be determined after the anticipated appeals process is resolved. Neither the jury nor the U.S. Central District Court found willful infringement, which if it had, could have resulted in enhanced damages up to three times the amount awarded. Broadcom and Apple have appealed to the United States Court of Appeals for the Federal Circuit (the “Federal Circuit Court”) and oral arguments were heard on September 1, 2021. We are unable to predict the date on which the Federal Circuit Court will issue its decision.We believe that the evidence and the law do not support the U.S. Central District Court’s findings of infringement or the award of damages, including ongoing royalties, and do not believe a material loss is probable at this time. We believe that there are strong grounds for appeal, and we intend to vigorously challenge the U.S. Central District Court’s judgment and rulings. As a result, we have not recorded a reserve with respect to this litigation, in accordance with the applicable accounting standards. We believe the low end of the possible range of loss is zero, but we cannot reasonably estimate the ultimate outcome, as a number of factors (including the appeal by Broadcom and Apple) could significantly change the assessment of damages.Other MattersIn addition to the matters discussed above, we are currently engaged in a number of legal actions in the ordinary course of our business.Contingency AssessmentWe do not believe, based on currently available facts and circumstances, that the final outcome of any pending legal proceedings or ongoing regulatory investigations, taken individually or as a whole, will have a material adverse effect on our consolidated financial statements. However, lawsuits may involve complex questions of fact and law and may require the expenditure of significant funds and other resources to defend. The results of litigation or regulatory investigations are inherently uncertain, and material adverse outcomes are possible. From time to time, we may enter into confidential discussions regarding the potential settlement of such lawsuits. Any settlement of pending litigation could require us to incur substantial costs and other ongoing expenses, such as future royalty payments in the case of an IP dispute. During the periods presented, no material amounts have been accrued or disclosed in the accompanying consolidated financial statements with respect to loss contingencies associated with any other legal proceedings or regulatory investigations, as potential losses for such matters are not considered probable and ranges of losses are not reasonably estimable. These matters are subject to many uncertainties and the ultimate outcomes are not predictable. There can be no assurances that the actual amounts required to satisfy any liabilities arising from the matters described above will not have a material adverse effect on our consolidated financial statements.92Table of ContentsOther IndemnificationsAs is customary in our industry and as provided for in local law in the U.S. and other jurisdictions, many of our standard contracts provide remedies to our customers and others with whom we enter into contracts, such as defense, settlement, or payment of judgment for IP claims related to the use of our products. From time to time, we indemnify customers, as well as our suppliers, contractors, lessors, lessees, companies that purchase our businesses or assets and others with whom we enter into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and the use of our products, the use of their goods and services, the use of facilities and state of our owned facilities, the state of the assets and businesses that we sell and other matters covered by such contracts, usually up to a specified maximum amount. In addition, from time to time we also provide protection to these parties against claims related to undiscovered liabilities, additional product liabilities or environmental obligations. In our experience, claims made under such indemnifications are rare and the associated estimated fair value of the liability is not material. 15. Restructuring, Impairment and Disposal Charges Restructuring ChargesThe following is a summary of significant restructuring expense recognized primarily in operating expenses:•During fiscal year 2021, we initiated cost reduction activities associated with plans to align our workforce with strategic business activities and to improve efficiencies in our operations. As a result, we recognized $149 million of restructuring expense primarily related to employee termination costs during fiscal year 2021. We have substantially completed these restructuring activities.•Restructuring expense during fiscal year 2020 was primarily related to employee termination and other cost reduction activities related to the acquisition of the Symantec Business of $174 million and the CA Merger of $28 million. We have substantially completed the restructuring activities related to the acquisition of the Symantec Business and the CA Merger.The following table summarizes the significant activities within, and components of, the restructuring liabilities:Employee Termination CostsOther Exit Costs(a)Total(In millions)Balance as of November 4, 2018$16 $6 $22 Liabilities assumed from CA29 38 67 Restructuring charges586 160 746 Utilization(562)(165)(727)Balance as of November 3, 201969 39 108 Restructuring charges(b)186 47 233 Utilization(221)(50)(271)Effect of adoption of Topic 842(c)— (36)(36)Balance as of November 1, 202034 — 34 Restructuring charges100 13 113 Utilization(130)(13)(143)Balance as of October 31, 2021(d)$4 $— $4 ______________________________(a)Included $30 million and $134 million of restructuring expense related to the write-down of certain lease-related ROU assets and other lease-related charges during fiscal years 2020 and 2019, respectively.(b)Included $19 million of restructuring expense related to discontinued operations recognized during fiscal year 2020, which was included in loss from discontinued operations.(c)Upon adoption of Topic 842, certain restructuring lease liabilities were required to be recognized as a reduction to the corresponding ROU assets.(d)The majority of the employee termination costs balance is expected to be paid within the next six months.93Table of ContentsRestructuring, impairment and disposal charges in our consolidated statement of operations for the fiscal year ended October 31, 2021 included $36 million for the write-down of certain lease-related ROU assets and other lease-related charges. As of October 31, 2021, short-term and long-term lease liabilities included $52 million of liabilities related to restructuring activities.Impairment and Disposal ChargesDuring fiscal years 2021 and 2020, impairment and disposal charges of $16 million and $19 million, respectively, primarily related to leasehold improvements. During fiscal year 2019, impairment and disposal charges of $67 million primarily related to property, plant and equipment. 16. Subsequent Events Preferred Stock Cash Dividends DeclaredOn December 7, 2021, our Board of Directors declared a quarterly cash dividend of $20.00 per share on our Mandatory Convertible Preferred Stock, payable on December 31, 2021 to stockholders of record on December 15, 2021.Common Stock Cash Dividends DeclaredOn December 7, 2021, our Board of Directors declared a quarterly cash dividend of $4.10 per share on our common stock, payable on December 31, 2021 to stockholders of record on December 22, 2021.94Table of ContentsSchedule II — Valuation and Qualifying AccountsBalance atBeginningof PeriodAdditions to AllowancesChargesUtilized/Write-offsBalance atEnd ofPeriod (In millions)Accounts receivable allowances:Distributor credit allowances (1)Fiscal year ended October 31, 2021$149 $756 $(777)$128 Fiscal year ended November 1, 2020$153 $696 $(700)$149 Fiscal year ended November 3, 2019$151 $705 $(703)$153 Other accounts receivable allowances (2) Fiscal year ended October 31, 2021$28 $14 $(40)$2 Fiscal year ended November 1, 2020$38 $84 $(94)$28 Fiscal year ended November 3, 2019$12 $99 $(73)$38 Income tax valuation allowances: Fiscal year ended October 31, 2021$1,707 $121 $(46)$1,782 Fiscal year ended November 1, 2020$1,563 $149 $(5)$1,707 Fiscal year ended November 3, 2019$1,347 $284 $(68)$1,563 ________________________________(1)Distributor credit allowances relate to price adjustments and other allowances.(2)Other accounts receivable allowances primarily include sales returns and allowance for doubtful accounts.ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENot applicable.ITEM 9A.CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of October 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of October 31, 2021, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.95Table of ContentsManagement’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by the Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:•pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets;•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of us are being made only in accordance with authorizations of management and directors; and•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Our management assessed the effectiveness of our internal control over financial reporting as of October 31, 2021. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on this assessment, our management concluded that, as of October 31, 2021, our internal control over financial reporting is effective based on those criteria.The effectiveness of our internal control over financial reporting, as of October 31, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in Part II, Item 8. of this Annual Report on Form 10-K.Changes in Internal Control over Financial ReportingNo change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fourth quarter ended October 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Although we have modified our workplace practices globally due to the COVID-19 pandemic, resulting in some of our employees working remotely, this has not meaningfully affected our internal controls over financial reporting. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.ITEM 9B.OTHER INFORMATIONNone.ITEM 9C.DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONSNot applicable.96Table of ContentsPART IIIITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by Item 10 is incorporated herein by reference from sections entitled “Proposal 1 — Election of Directors” and “Corporate Governance” in our definitive Proxy Statement for our 2022 Annual Meeting of Stockholders. Our executive officers are listed at the end of Item 1 of this Annual Report on Form 10-K.ITEM 11.EXECUTIVE COMPENSATIONThe information required by Item 11 is incorporated herein by reference from sections entitled “Director Compensation”, “Compensation Discussion and Analysis”, “Executive Compensation”, “Compensation Committee Report” and “Corporate Governance — Compensation Committee Interlocks and Insider Participation" in our definitive Proxy Statement for our 2022 Annual Meeting of Stockholders.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by Item 12 is incorporated herein by reference from sections entitled “Stockholder Information — Security Ownership of Certain Beneficial Owners, Directors and Executive Officers” and “Equity Compensation Plan Information” in our definitive Proxy Statement for our 2022 Annual Meeting of Stockholders.ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by Item 13 is incorporated herein by reference from sections entitled “Corporate Governance” and “Certain Relationships and Related Party Transactions” in our definitive Proxy Statement for our 2022 Annual Meeting of Stockholders.ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by Item 14 is incorporated herein by reference from the section entitled “Proposal 2 — Ratification of Appointment of Our Independent Registered Public Accounting Firm” in our definitive Proxy Statement for our 2022 Annual Meeting of Stockholders.97Table of ContentsPART IVITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) The following are filed as part of this Annual Report on Form 10-K:1. Financial StatementsThe following consolidated financial statements are included in Item 8 of this Annual Report on Form 10-K: PageReports of Independent Registered Public Accounting Firm50Consolidated Balance Sheets51Consolidated Statements of Operations52Consolidated Statements of Comprehensive Income53Consolidated Statements of Cash Flows54Consolidated Statements of Equity55Notes to Consolidated Financial Statements56 2. Financial Statement SchedulesThe financial statement schedule of the Registrant and its subsidiaries for fiscal years 2021, 2020 and 2019 required by Item 15(a) (Schedule II, Valuation and Qualifying Accounts) is included in Item 8 of this Annual Report on Form 10-K: PageSchedule II - Valuation and Qualifying Accounts95Schedules not filed have been omitted because they are not applicable, are not required or the information required to be set forth therein is included in the financial statements or notes thereto.3. ExhibitsThe documents set forth below are filed herewith or incorporated by reference to the location indicated.Exhibit No. Incorporated by Referenced HereinFiled HerewithDescriptionFormFiling Date2.1#Agreement and Plan of Merger, dated as of July 11, 2018, by and among Broadcom, Inc., Collie Acquisition Corp. and CA, Inc.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)July 12, 20182.2#Asset Purchase Agreement, dated as of August 8, 2019, by and between Broadcom Inc. and Symantec Corporation.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449) August 9, 20192.3#APA Letter Agreement, dated as of October 1, 2020, by and between Broadcom Inc. and NortonLifeLock Inc.Broadcom Inc. Annual Report on Form 10-K (Commission File No. 001-38449)December 18, 20203.1Amended and Restated Certificate of Incorporation.Broadcom Inc. Current Report on Form 8-K12B (Commission File No. 001-38449)April 4, 2018 3.2Certificate of Designation of the 8.00% Mandatory Convertible Preferred Stock, Series A.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)September 30, 20193.3Amended and Restated Bylaws.Broadcom Inc. Current Report on Form 8-K12B (Commission File No. 001-38449)April 4, 20184.1Form of Common Stock Certificate.Broadcom Inc. Quarterly Report on Form 10-Q (Commission File No. 001-38449)June 14, 2018 98Table of ContentsExhibit No. Incorporated by Referenced HereinFiled HerewithDescriptionFormFiling Date4.2Form of Certificate of the 8.00% Mandatory Convertible Preferred Stock, Series A (included in Exhibit 3.2).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)September 30, 20194.3Description of Common Stock.Broadcom Inc. Annual Report on Form 10-K (Commission File No. 001-38449)December 20, 20194.4Description of 8.00% Mandatory Convertible Preferred Stock, Series A.Broadcom Inc. Annual Report on Form 10-K (Commission File No. 001-38449)December 20, 20194.5Indenture, dated as of January 19, 2017, by and among the Broadcom Corporation and Broadcom Cayman Finance Limited (“Co-Issuers”), the guarantors and Wilmington Trust, National Association, as trustee.Broadcom Limited Current Report on Form 8-K (Commission File No. 001-37690)January 20, 20174.6Supplement Indenture to the January 2017 Indenture, dated as of April 9, 2018.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-34889)April 9, 20184.7Second Supplement Indenture to the January 2017 Indenture, dated as of January 25, 2019.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)January 25, 20194.8Form of 2.375% Senior Note due 2020 (included in Exhibit 4.5).Broadcom Limited Current Report on Form 8-K (Commission File No. 001-37690)January 20, 20174.9Form of 3.000% Senior Note due 2022 (included in Exhibit 4.5).Broadcom Limited Current Report on Form 8-K (Commission File No. 001-37690)January 20, 20174.10Form of 3.625% Senior Note due 2024 (included in Exhibit 4.5).Broadcom Limited Current Report on Form 8-K (Commission File No. 001-37690)January 20, 20174.11Form of 3.875% Senior Note due 2027 (included in Exhibit 4.5).Broadcom Limited Current Report on Form 8-K (Commission File No. 001-37690)January 20, 20174.12Indenture, dated as of October 17, 2017, by and among the Co-Issuers, the guarantors and Wilmington Trust, National Association, as trustee.Broadcom Limited Current Report on Form 8-K (Commission File No. 001-37690)October 17, 20174.13Supplement Indenture to October 2017 Indenture, dated as of April 9, 2018.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)April 9, 20184.14Second Supplement Indenture to October 2017 Indenture, dated as of January 25, 2019.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)January 25, 20194.15Form of 2.200% Senior Note due 2021 (included in Exhibit 4.12).Broadcom Limited Current Report on Form 8-K (Commission File No. 001-37690)October 17, 20174.16Form of 2.650% Senior Note due 2023 (included in Exhibit 4.12).Broadcom Limited Current Report on Form 8-K (Commission File No. 001-37690)October 17, 20174.17Form of 3.125% Senior Note due 2025 (included in Exhibit 4.12).Broadcom Limited Current Report on Form 8-K (Commission File No. 001-37690)October 17, 20174.18Form of 3.500% Senior Note due 2028 (included in Exhibit 4.12).Broadcom Limited Current Report on Form 8-K (Commission File No. 001-37690)October 17, 201799Table of ContentsExhibit No. Incorporated by Referenced HereinFiled HerewithDescriptionFormFiling Date4.19Indenture, dated as of April 5, 2019, by and among the Company, as Issuer, Broadcom Technologies Inc., Broadcom Corporation and Broadcom Cayman Finance Limited (the “2019 Guarantors”), and Wilmington Trust, National Association, as trustee.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)April 5, 20194.20Form of 3.125% Senior Note due 2021 (included in Exhibit 4.19).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)April 5, 20194.21Form of 3.125% Senior Note due 2022 (included in Exhibit 4.19).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)April 5, 20194.22Form of 3.625% Senior Note due 2024 (included in Exhibit 4.19).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)April 5, 20194.23Form of 4.250% Senior Note due 2026 (included in Exhibit 4.19).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)April 5, 20194.24Form of 4.750% Senior Note due 2029 (included in Exhibit 4.19).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)April 5, 20194.25Registration Rights Agreement, dated as of April 5, 2019, by and among the Company, the 2019 Guarantors and Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities LLC, as representatives of the several initial purchasers of the April 2019 Notes.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)April 5, 20194.26Indenture, dated as of April 9, 2020, by and among the Company, as Issuer, Broadcom Technologies Inc. and Broadcom Corporation (the “2020 Guarantors”), and Wilmington Trust, National Association, as trustee.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)April 9, 20204.27Form of 4.700% Senior Notes due 2025 (included in Exhibit 4.26).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)April 9, 20204.28Form of 5.000% Senior Notes due 2030 (included in Exhibit 4.26).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)April 9, 20204.29Registration Rights Agreement, dated as of April 9, 2020, by and among the Company, the 2020 Guarantors and J.P. Morgan Securities LLC, as representative of the several initial purchasers of the April 2020 Senior Notes.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)April 9, 20204.30Indenture, dated as of May 8, 2020, by and among the Company, as Issuer, the 2020 Guarantors, and Wilmington Trust, National Association, as trustee.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)May 8, 20204.31Form of 2.250% Senior Notes due 2023 (included in Exhibit 4.30).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)May 8, 20204.32Form of 3.150% Senior Notes due 2025 (included in Exhibit 4.30).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)May 8, 20204.33Form of 4.150% Senior Notes due 2030 (included in Exhibit 4.30).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)May 8, 2020100Table of ContentsExhibit No. Incorporated by Referenced HereinFiled HerewithDescriptionFormFiling Date4.34Form of 4.300% Senior Notes due 2032 (included in Exhibit 4.30).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)May 8, 20204.35Registration Rights Agreement, dated as of May 8, 2020, by and among the Company, the 2020 Guarantors and Citigroup Global Markets Inc., HSBC Securities (USA) Inc., J.P. Morgan Securities LLC and Wells Fargo Securities, LLC, as representatives of the several initial purchasers of the May 2020 Senior Notes.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)May 8, 20204.36Indenture, dated as of May 21, 2020, by and among the Company, the 2020 Guarantors and Wilmington Trust, National Association, as trustee.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)May 21, 20204.37Form of 3.459% Senior Notes due 2026 (included in Exhibit 4.36).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)May 21, 20204.38Form of 4.110% Senior Notes due 2028 (included in Exhibit 4.36).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)May 21, 20204.39Registration Rights Agreement, dated as of May 21, 2020, by and among the Company, the 2020 Guarantors and Barclays Capital Inc. and Credit Suisse Securities (USA) LLC, as dealer-managers in connection with the 2020 Exchange Offers.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)May 21, 20204.40Indenture, dated as of January 19, 2021, by and among the Company, the 2020 Guarantors and Wilmington Trust, National Association, as Trustee.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)January 19, 20214.41Form of 1.950% Senior Notes due 2028 (included in Exhibit 4.40).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)January 19, 20214.42Form of 2.450% Senior Notes due 2031 (included in Exhibit 4.40).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)January 19, 20214.43Form of 2.600% Senior Notes due 2033 (included in Exhibit 4.40).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)January 19, 20214.44Form of 3.500% Senior Notes due 2041 (included in Exhibit 4.40).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)January 19, 20214.45Form of 3.750% Senior Notes due 2051 (included in Exhibit 4.40).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)January 19, 20214.46Registration Rights Agreement, dated as of January 19, 2021, by and among the Company, the 2020 Guarantors and Morgan Stanley & Co. LLC, BNP Paribas Securities Corp., RBC Capital Markets, LLC, SMBC Nikko Securities America, Inc., and Truist Securities, Inc., as representatives of the several initial purchasers of the January 2021 Senior Notes.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)January 19, 20214.47Indenture, dated as of March 31, 2021, by and between the Company and Wilmington Trust, National Association, as Trustee.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)March 31, 20214.48Form of 3.419% Senior Notes due 2033 (included in Exhibit 4.47)Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)March 31, 2021101Table of ContentsExhibit No. Incorporated by Referenced HereinFiled HerewithDescriptionFormFiling Date4.49Form of 3.469% Senior Notes due 2034 (included in Exhibit 4.47)Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)March 31, 20214.50Registration Rights Agreement, dated as of March 31, 2021, by and among the Company and BofA Securities, Inc. and HSBC Securities (USA) Inc., as dealer-managers in connection with the March 2021 Senior Notes.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)March 31, 20214.51Indenture, dated as of September 30, 2021, by and between the Company and Wilmington Trust, National Association, as Trustee.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)September 30, 20214.52Form of 3.137% Senior Notes due 2035 (included in Exhibit 4.51).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)September 30, 20214.53Form of 3.187% Senior Notes due 2036 (included in Exhibit 4.51).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)September 30, 20214.54Registration Rights Agreement, dated as of September 30, 2021, by and among the Company and BNP Paribas Securities Corp., J.P. Morgan Securities LLC and TD Securities (USA) LLC, as dealer-managers in connection with the 2021 Exchange Offers.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)September 30, 202110.1Form of Indemnification and Advancement Agreement (effective April 4, 2018).Broadcom Inc. Current Report on Form 8-K12B (Commission File No. 001-38449)April 4, 201810.2Credit Agreement, dated as of May 7, 2019, among Broadcom Inc., the lenders and other parties party thereto, and Bank of America, N.A., as Administrative Agent.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)May 7, 201910.3Credit Agreement, dated as of November 4, 2019, among Broadcom Inc., the lenders and other parties party thereto, and Bank of America, N.A., as Administrative Agent.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)November 4, 201910.4Credit Agreement, dated as of January 19, 2021, among the Company, the lenders and other parties party thereto, and Bank of America, N.A., as Administrative Agent.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)January 19, 202110.5Lease Agreement dated August 10, 2017 between Five Point Office Venture I, LLC and Broadcom Corporation.Broadcom Limited Annual Report on Form 10-K (Commission File No. 001-37690)December 21, 201710.6First Amendment to Lease Agreement by and between Five Point Office Venture 1, LLC and Broadcom Corporation.Broadcom Inc. Annual Report on Form 10-K (Commission File No. 001-38449)December 18, 202010.7*Settlement and Patent License and Non-Assert Agreement by and between Qualcomm Incorporated and Broadcom Corporation.Broadcom Corporation Current Report on Form 8-K/A (Commission File No. 000-23993)July 23, 200910.8+Avago Technologies Limited 2009 Equity Incentive Award Plan.Amendment No. 5 to Avago Technologies Limited Registration Statement on Form S-1 (Commission File No. 333-153127)July 27, 2009 10.9+Broadcom Inc. Employee Stock Purchase Plan (as amended and restated on April 1, 2019).Broadcom Inc. Definitive Proxy Statement on Schedule 14A (Commission File No. 001-38449)February 19, 2019 102Table of ContentsExhibit No. Incorporated by Referenced HereinFiled HerewithDescriptionFormFiling Date10.10+LSI Corporation 2003 Equity Incentive Plan, as amended.Avago Technologies Limited Registration Statement on Form S-8 (Commission File No. 333-195741)May 6, 201410.11+Amendment to the LSI Corporation 2003 Equity Incentive Plan (effective February 1, 2016).Broadcom Limited Annual Report on Form 10-K (Commission File No. 001-37690) December 23, 201610.12+Amendment to the LSI Corporation 2003 Equity Incentive Plan (effective April 4, 2018).Broadcom Inc. Current Report on Form 8-K12B (Commission File No. 001-38449)April 4, 201810.13+Broadcom Inc. 2012 Stock Incentive Plan (as amended and restated on April 5, 2021).Broadcom Inc. Quarterly Report on Form 10-Q (Commission File No. 001-38449)June 11, 2021 10.14+Form of Annual Bonus Plan for Executive Employees.Broadcom Limited Annual Report on Form 10-K (Commission File No. 001-37690)December 23, 201610.15+Form of Option Agreement under Avago Technologies Limited 2009 Equity Incentive Plan.Amendment No. 5 to Avago Technologies Limited Registration Statement on Form S-1 (Commission File No. 333-153127)July 27, 200910.16+Form of Restricted Stock Unit Agreement (Sell to Cover) Under Avago Technologies Limited 2009 Equity Incentive Award Plan (effective February 1, 2016).Broadcom Limited Quarterly Report on Form 10-Q (Commission File No. 001-37690)March 10, 201610.17+Form of Restricted Stock Unit Agreement (Sell to Cover) Under Avago Technologies Limited 2009 Equity Incentive Award Plan (effective December 5, 2017).Broadcom Limited Annual Report on Form 10-K (Commission File No. 001-37690)December 21, 201710.18+Form of Agreement for Multi-Year Equity Award of Restricted Stock Unit Award under the Avago Technologies Limited 2009 Equity Incentive Award Plan).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)December 6, 201810.19+Form of Performance Stock Unit Agreement (Relative TSR) under Avago Technologies Limited 2009 Equity Incentive Award Plan.Broadcom Limited Quarterly Report on Form 10-Q (Commission File No. 001-37690)March 9, 201710.20+Form of Performance Share Unit Agreement (Relative TSR) under Avago Technologies Limited 2009 Equity Incentive Plan (effective March 13, 2018).Broadcom Limited Quarterly Report on Form 10-Q (Commission File No. 001-37690)March 15, 201810.21+Form of Agreement for Multi-Year Equity Award of Performance Stock Units under the Avago Technologies Limited 2009 Equity Incentive Award Plan).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)December 6, 201810.22+Form of Restricted Stock Unit Award Agreement under LSI Corporation 2003 Equity Incentive Plan, as amended (effective December 8, 2020).Broadcom Inc. Annual Report on Form 10-K (Commission File No. 001-38449)December 18, 202010.23+Form of Performance Stock Unit Agreement (Relative TSR) under LSI Corporation 2003 Equity Incentive Plan, as amended (effective December 8, 2020).Broadcom Inc. Annual Report on Form 10-K (Commission File No. 001-38449)December 18, 202010.24+Form of Restricted Stock Unit Award Agreement under Broadcom Corporation 2012 Stock Incentive Plan (effective February 1, 2016).Broadcom Limited Quarterly Report on Form 10-Q (Commission File No. 001-37690)March 10, 201610.25+Form of Restricted Stock Unit Award Agreement under Broadcom Corporation 2012 Stock Incentive Plan (effective December 5, 2017).Broadcom Limited Annual Report on Form 10-K (Commission File No. 001-37690)December 21, 2017103Table of ContentsExhibit No. Incorporated by Referenced HereinFiled HerewithDescriptionFormFiling Date10.26+Form of Restricted Stock Unit Award Agreement under Broadcom Inc. 2012 Stock Incentive Plan (effective April 5, 2021).Broadcom Inc. Quarterly Report on Form 10-Q (Commission File No. 001-38449)June 11, 202110.27+Form of Performance Stock Unit Agreement (Relative TSR) under Broadcom Corporation 2012 Stock Incentive Plan.Broadcom Limited Quarterly Report on Form 10-Q (Commission File No. 001-37690)March 9, 201710.28+Form of Performance Share Unit Agreement (Relative TSR) under Broadcom Corporation 2012 Stock Incentive Plan (effective March 15, 2018).Broadcom Limited Quarterly Report on Form 10-Q (Commission File No. 001-37690)March 15, 201810.29+Form of Performance Stock Unit Award Agreement under the Broadcom Inc. 2012 Stock Incentive Plan (effective April 5, 2021).Broadcom Inc. Quarterly Report on Form 10-Q (Commission File No. 001-38449)June 11, 202110.30+Performance Stock Unit Award Agreement, dated June 15, 2017, between Broadcom Limited and Hock E. Tan.Broadcom Limited Current Report on Form 8-K (Commission File No. 001-37690)June 19, 201710.31+Performance Stock Unit Award Agreement, dated April 5, 2021, between Broadcom Inc. and Hock E. Tan.Broadcom Inc. Quarterly Report on Form 10-Q (Commission File No. 001-38449)June 11, 202110.32+Policy on Acceleration of Executive Staff Equity Awards in the Event of Permanent Disability (as amended June 2, 2021).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)June 3, 202110.33+Policy on Acceleration of Equity Awards in the Event of Death (as amended June 2, 2021).Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)June 3, 202110.34+Amended and Restated Severance Benefits Agreement, dated December 10, 2020, between Broadcom Inc. and Hock E. Tan.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)December 10, 202010.35+Amended and Restated Severance Benefits Agreement, dated December 10, 2020, between Broadcom Inc. and Thomas H. Krause, Jr.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)December 10, 202010.36+Amended and Restated Severance Benefits Agreement, dated December 10, 2020, between Broadcom Inc. and Charlie B. Kawwas.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)December 10, 202010.37+Severance Benefits Agreement, dated September 26, 2017, between Broadcom Limited and Mark Brazeal.Broadcom Inc. Quarterly Report on Form 10-Q (Commission File No. 001-38449)June 16, 201810.38+Severance Benefits Agreement, dated December 10, 2020, between Broadcom Inc. and Kirsten M. Spears.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)December 10, 202010.39+Letter Agreement dated December 8, 2020, between Broadcom Inc. and Kirsten M. Spears.Broadcom Inc. Current Report on Form 8-K (Commission File No. 001-38449)December 10, 202021.1List of Subsidiaries. X23.1Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm. X24.1Power of Attorney (see signature page to this Form 10-K). X31.1Certification of Principal Executive Officer of Broadcom Inc. Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X104Table of ContentsExhibit No. Incorporated by Referenced HereinFiled HerewithDescriptionFormFiling Date31.2Certification of Principal Financial Officer of Broadcom Inc. Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X32.1Certification of Principal Executive Officer of Broadcom Inc. Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X32.2Certification of Principal Financial Officer of Broadcom Inc. Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.X101.SCHXBRL Schema DocumentX101.CALXBRL Calculation Linkbase DocumentX101.DEFXBRL Definition Linkbase DocumentX101.LABXBRL Labels Linkbase DocumentX101.PREXBRL Presentation Linkbase DocumentX104Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.XNotes:+Indicates a management contract or compensatory plan or arrangement.#Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Broadcom Inc. hereby undertakes to furnish supplementally copies of any omitted schedules upon request by the SEC.*Certain information omitted pursuant to a request for confidential treatment filed with the SEC.ITEM 16.FORM 10-K SUMMARYNone.105Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.BROADCOM INC. By: /s/ Hock E. TanName:Hock E. TanTitle:President and Chief Executive Officer Date: December 17, 2021POWER OF ATTORNEYEach person whose individual signature appears below hereby authorizes and appoints Hock E. Tan, Kirsten M. Spears and Mark D. Brazeal, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.106Table of ContentsPursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities indicated and on the dates indicated.Signature Title Date/s/ Hock E. TanPresident and Chief ExecutiveOfficer and Director(Principal Executive Officer)December 17, 2021Hock E. Tan /s/ Kirsten M. SpearsChief Financial Officer(Principal Financial Officer and Principal Accounting Officer)December 17, 2021Kirsten M. Spears/s/ Henry SamueliChairman of the Board of DirectorsDecember 17, 2021Henry Samueli/s/ Eddy W. HartensteinLead Independent DirectorDecember 17, 2021Eddy W. Hartenstein/s/ Diane M. BryantDirectorDecember 17, 2021Diane M. Bryant/s/ Gayla J. DellyDirectorDecember 17, 2021Gayla J. Delly/s/ Raul F. FernandezDirectorDecember 17, 2021Raul F. Fernandez/s/ Check Kian LowDirectorDecember 17, 2021Check Kian Low/s/ Justine F. PageDirectorDecember 17, 2021Justine F. Page/s/ Harry L. YouDirectorDecember 17, 2021Harry L. You107
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8-K
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d816414d8k.htm
FORM 8-K
Form 8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT Pursuant to Section 13
or 15(d) of The Securities Exchange Act of 1934 November 4, 2014
Date of Report (date of earliest event reported)
APPLE INC.
(Exact name of registrant as specified in its charter)
California
000-10030
94-2404110
(State or other jurisdiction
of incorporation)
(Commission
File Number)
(IRS. Employer
Identification No.)
1 Infinite Loop
Cupertino, California 95014 (Address of
principal executive offices) (Zip Code) (Registrants telephone number, including area code)
(408) 996-1010 Not applicable
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following
provisions:
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 8.01
Other Events. On November 4, 2014, Apple Inc. (Apple) entered into an underwriting agreement (the
Underwriting Agreement) with Goldman, Sachs & Co. as representative of the several underwriters named therein, for the issuance and sale by Apple of 1,400,000,000 aggregate
principal amount of Apples 1.000% Notes due 2022 (the 2022 Notes), and 1,400,000,000 aggregate principal amount of Apples 1.625% Notes due 2026 (the 2026
Notes and together with the 2022 Notes, the Notes). The Notes will be issued pursuant to an indenture, dated as of April 29, 2013 (the
Indenture), between Apple and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee), together with the officers certificate dated as of November 10, 2014 issued pursuant thereto establishing the
terms of each series of the Notes (the Officers Certificate). The Notes are being issued pursuant to Apples Registration Statement on Form
S-3 filed with the Securities and Exchange Commission on April 29, 2013 (Reg. No. 333-188191) (the Registration Statement). Interest on the
Notes will be payable annually on November 10 of each year, beginning on November 10, 2015, and on the applicable maturity date for each series of Notes. The 2022 Notes will mature on November 10, 2022 and the 2026 Notes will mature
on November 10, 2026. The Notes will be Apples senior unsecured obligations and will rank equally with Apples other unsecured and unsubordinated
debt from time to time outstanding. The foregoing descriptions of the Underwriting Agreement, the Indenture and the Officers Certificate (including the forms
of the Notes) are qualified in their entirety by the terms of such agreements and documents. The Underwriting Agreement and the Officers Certificate (including the forms of the Notes) are attached hereto as Exhibits 1.1 and 4.1 through 4.3,
respectively, and incorporated herein by reference. The Indenture is filed as Exhibit 4.1 to the Registration Statement.
Item 9.01
Financial Statements and Exhibits.
(d)
Exhibits
Exhibit
Number
Description
1.1
Underwriting Agreement, dated as of November 4, 2014, among Apple Inc. and Goldman, Sachs & Co., as representative of the several underwriters named therein
4.1
Officers Certificate of Apple Inc., dated as of November 10, 2014
4.2
Form of Global Note representing the 2022 Notes (included in Exhibit 4.1)
4.3
Form of Global Note representing the 2026 Notes (included in Exhibit 4.1)
5.1
Opinion of Shearman & Sterling LLP
23.1
Consent of Shearman & Sterling LLP (included in the opinion filed as Exhibit 5.1)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
APPLE INC.
Date: November 10, 2014
By:
/s/ Luca Maestri
Luca Maestri Senior Vice President,
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number
Description
1.1
Underwriting Agreement, dated as of November 4, 2014, among Apple Inc. and Goldman, Sachs & Co, as representative of the several underwriters named therein
4.1
Officers Certificate of Apple Inc., dated as of November 10, 2014
4.2
Form of Global Note representing the 2022 Notes (included in Exhibit 4.1)
4.3
Form of Global Note representing the 2026 Notes (included in Exhibit 4.1)
5.1
Opinion of Shearman & Sterling LLP
23.1
Consent of Shearman & Sterling LLP (included in the opinion filed as Exhibit 5.1)
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nvda-202106030001045810false01/3000010458102021-06-032021-06-0300010458102022-01-302022-01-30UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549______________FORM 8-K CURRENT REPORTPURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934Date of Report (Date of earliest event reported): June 3, 2021 NVIDIA CORPORATION(Exact name of registrant as specified in its charter)Delaware0-2398594-3177549(State or other jurisdiction(Commission(IRS Employerof incorporation)File Number)Identification No.) 2788 San Tomas Expressway, Santa Clara, CA 95051 (Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (408) 486-2000 Not Applicable(Former name or former address, if changed since last report)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock, $0.001 par value per shareNVDAThe Nasdaq Global Select MarketIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐Item 5.03. Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.(a) Amendment to Certificate of IncorporationOn June 3, 2021, at the 2021 Annual Meeting of Stockholders of NVIDIA Corporation, or the 2021 Annual Meeting, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation, or the Amendment, to increase the number of authorized shares of common stock from 2 billion to 4 billion. The Amendment, which was filed with the Secretary of State of the State of Delaware on June 4, 2021, is filed as Exhibit 3.1 to this Current Report on Form 8-K.Item 5.07. Submission of Matters to a Vote of Security Holders.On June 3, 2021, at the 2021 Annual Meeting, the following proposals were adopted by the margin indicated. Proxies for the 2021 Annual Meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended, and there was no solicitation in opposition of management’s solicitation.1. Stockholders approved the election of each of our thirteen (13) directors to serve for a one-year term until our 2022 Annual Meeting of Stockholders. The results of the voting were as follows:a. Robert K. Burgess Number of shares For420,596,553 Number of shares Withheld1,779,414 Number of shares Abstaining2,941,599 Number of Broker Non-Votes70,546,857 b. Tench Coxe Number of shares For410,255,042 Number of shares Withheld9,706,472 Number of shares Abstaining5,356,052 Number of Broker Non-Votes70,546,857 c. John O. Dabiri Number of shares For421,550,236 Number of shares Withheld1,091,854 Number of shares Abstaining2,675,476 Number of Broker Non-Votes70,546,857 d. Persis S. Drell Number of shares For420,006,508 Number of shares Withheld1,878,898 Number of shares Abstaining3,432,160 Number of Broker Non-Votes70,546,857 e. Jen-Hsun Huang Number of shares For419,866,452 Number of shares Withheld2,416,779 Number of shares Abstaining3,034,335 Number of Broker Non-Votes70,546,857 f. Dawn Hudson Number of shares For421,036,593 Number of shares Withheld1,668,906 Number of shares Abstaining2,612,067 Number of Broker Non-Votes70,546,857 g. Harvey C. Jones Number of shares For394,798,323 Number of shares Withheld24,482,410 Number of shares Abstaining6,036,833 Number of Broker Non-Votes70,546,857 h. Michael G. McCaffery Number of shares For421,031,980 Number of shares Withheld1,606,723 Number of shares Abstaining2,678,863 Number of Broker Non-Votes70,546,857 i. Stephen C. Neal Number of shares For417,133,291 Number of shares Withheld4,867,874 Number of shares Abstaining3,316,401 Number of Broker Non-Votes70,546,857 j. Mark L. Perry Number of shares For396,451,645 Number of shares Withheld22,995,645 Number of shares Abstaining5,870,276 Number of Broker Non-Votes70,546,857 k. A. Brooke Seawell Number of shares For403,897,070 Number of shares Withheld16,021,659 Number of shares Abstaining5,398,837 Number of Broker Non-Votes70,546,857 l. Aarti Shah Number of shares For421,918,802 Number of shares Withheld752,205 Number of shares Abstaining2,646,559 Number of Broker Non-Votes70,546,857 m. Mark A. Stevens Number of shares For403,821,782 Number of shares Withheld15,449,272 Number of shares Abstaining6,046,512 Number of Broker Non-Votes70,546,857 2. Stockholders approved, on an advisory basis, the compensation of our named executive officers as disclosed in our definitive proxy statement for the 2021 Annual Meeting filed with the Securities and Exchange Commission on April 23, 2021. The results of the voting were as follows: Number of shares For403,579,177 Number of shares Against18,867,902 Number of shares Abstaining2,870,487 Number of Broker Non-Votes70,546,857 3. Stockholders approved the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered accounting firm for our fiscal year ending January 30, 2022. The results of the voting were as follows: Number of shares For488,145,649 Number of shares Against5,075,065 Number of shares Abstaining2,643,709 Number of Broker Non-Votes— 4. Stockholders approved the Amendment. The results of the voting were as follows: Number of shares For473,734,960 Number of shares Against19,186,243 Number of shares Abstaining2,943,220 Number of Broker Non-Votes— Item 9.01 Financial Statements and Exhibits.(d) ExhibitsExhibit NumberDescription3.1Amendment to Amended and Restated Certificate of Incorporation of NVIDIA Corporation.104The cover page of this Current Report on Form 8-K, formatted in inline XBRL (included as Exhibit 101).SIGNATUREPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NVIDIA CorporationDate: June 4, 2021By: /s/ Rebecca Peters Rebecca PetersVice President, Deputy General Counsel and Assistant Secretary
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of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549Form 10-K (MARK ONE) ☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended October 29, 2023 OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Broadcom Inc.Delaware3421 Hillview Ave001-3844935-2617337(State or Other Jurisdiction ofIncorporation or Organization)Palo Alto,CA94304(Commission File Number)(I.R.S. EmployerIdentification No.)(650) 427-6000(Exact Name of Registrant as Specified in Its CharterAddress of Principal Executive Offices, Including Zip Code Registrant’s Telephone Number, Including Area Code)Securities registered pursuant to Section 12(b) of the Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which RegisteredCommon Stock, $0.001 par valueAVGOThe NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Large accelerated filer☑Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑The aggregate market value of voting and non-voting common equity held by non-affiliates as of April 28, 2023, based upon the closing sale price of such shares on The Nasdaq Global Select Market on such date was approximately $253.7 billion.As of November 24, 2023, there were 468,140,569 shares of our common stock outstanding.Documents Incorporated by ReferencePortions of the registrant’s definitive Proxy Statement for its 2024 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.Table of ContentsBROADCOM INC. 2023 ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTS PagePART I.ITEM 1.BUSINESS3ITEM 1A.RISK FACTORS14ITEM 1B.UNRESOLVED STAFF COMMENTS34ITEM 2.PROPERTIES34ITEM 3.LEGAL PROCEEDINGS34ITEM 4.MINE SAFETY DISCLOSURES34PART II.ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES35ITEM 6.[RESERVED]36ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS37ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK47ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA48ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE88ITEM 9A.CONTROLS AND PROCEDURES88ITEM 9B.OTHER INFORMATION89ITEM 9C.DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS89PART III.ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE90ITEM 11.EXECUTIVE COMPENSATION90ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS90ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE90ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES90PART IV.ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES91ITEM 16.FORM 10-K SUMMARY98SIGNATURES991Table of ContentsPART IThe following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws and particularly in Item 1: “Business,” Item 1A: “Risk Factors,” Item 3: “Legal Proceedings” and Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K. These statements are indicated by words or phrases such as “anticipate,” “expect,” “estimate,” “seek,” “plan,” “believe,” “could,” “intend,” “will,” and similar words or phrases. These forward-looking statements may include projections of financial information; statements about historical results that may suggest trends for our business; statements of the plans, strategies, and objectives of management for future operations; statements of expectation or belief regarding future events (including any acquisitions we may make), technology developments, our products, product sales, expenses, liquidity, cash flow and growth rates, or enforceability of our intellectual property rights; any backlog; and the effects of seasonality on our business. Such statements are based on current expectations, estimates, forecasts and projections of our industry performance and macroeconomic conditions, based on management’s judgment, beliefs, current trends and market conditions, and involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. We derive most of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Accordingly, we caution you not to place undue reliance on these statements. Material factors that could cause actual results to differ materially from our expectations are summarized and disclosed under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. Unless stated otherwise or the context otherwise requires, references to “Broadcom,” “we,” “our,” and “us” mean Broadcom Inc. and its consolidated subsidiaries. Our fiscal year ends on the Sunday closest to October 31 in a 52-week year and the first Sunday in November in a 53-week year. We refer to our fiscal years by the calendar year in which they end. For example, the fiscal year ended October 29, 2023 was a 52-week year. 2Table of ContentsITEM 1.BUSINESSOverviewWe are a global technology leader that designs, develops and supplies a broad range of semiconductor and infrastructure software solutions. Our over 50-year history of innovation dates back to our diverse origins from Hewlett-Packard Company, AT&T, LSI Corporation, Broadcom Corporation, Brocade Communications Systems LLC, CA, Inc., Symantec Enterprise Security, and VMware, Inc. (“VMware”). Over the years, we have assembled a large team of semiconductor and software design engineers around the world. We maintain design, product and software development engineering resources at locations in the U.S., Asia, Europe and Israel, providing us with engineering expertise worldwide. We strategically focus our research and development resources to address niche opportunities in our target markets and leverage our extensive portfolio of U.S. and other patents, and other intellectual property (“IP”) to integrate multiple technologies and create system-on-chip (“SoC”) component and software solutions that target growth opportunities. We design products and software that deliver high-performance and provide mission critical functionality.We develop semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor (“CMOS”) based devices and analog III-V based products. We have a history of innovation in the semiconductor industry and offer thousands of products that are used in end products such as enterprise and data center networking, home connectivity, set-top boxes (“STB”), broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. We differentiate ourselves through our high performance design and integration capabilities and focus on developing products for target markets where we believe we can earn attractive margins. Our infrastructure software solutions enable customers to plan, develop, automate, manage, and secure applications across mainframe, distributed, mobile, and cloud platforms. Many of the largest companies in the world, including most of the Fortune 500, and many government agencies rely on our software solutions to help manage and secure their on-premise and hybrid cloud environments. Our portfolio of industry-leading infrastructure and security software is designed to modernize, optimize, and secure the most complex hybrid environments, enabling scalability, agility, automation, insights, resiliency and security. We also offer mission critical fibre channel storage area networking (“FC SAN”) products and related software in the form of modules, switches and subsystems incorporating multiple semiconductor products.In addition, the hybrid-cloud portfolio we acquired with VMware helps enterprises simplify their information technology (“IT”) environments so they can increase business velocity and flexibility. The VMware portfolio spans hybrid cloud, app-delivery acceleration, zero-trust security, and software-defined edge, making it easy for customers to run their mission-critical workloads across private, public and edge environments with security and resiliency.Business StrategyOur strategy is to combine best-of-breed technology leadership in semiconductor and infrastructure software solutions, with unmatched scale, on a common sales and administrative platform to deliver a comprehensive suite of infrastructure technology products to the world’s leading business and government customers. We seek to achieve this through responsibly financed acquisitions of category-leading businesses and technologies, as well as investing extensively in research and development, to ensure our products retain their technology leadership. This strategy results in a robust business model designed to drive diversified and sustainable operating and financial results.Recent DevelopmentAcquisition of VMware, Inc.On November 22, 2023, we acquired VMware in a cash-and-stock transaction (the “VMware Merger”), in which VMware stockholders received, in aggregate, approximately $30.8 billion in cash and 54.4 million shares of Broadcom common stock in exchange for all shares of VMware common stock issued and outstanding immediately prior to the closing. The preliminary total purchase consideration for the VMware Merger was approximately $86.3 billion. We funded the cash portion of the VMware Merger consideration with net proceeds from the issuance of $30.4 billion in term loans under a credit agreement that we entered into on August 15, 2023, as well as cash on hand. We assumed all outstanding VMware restricted stock unit (“RSU”) awards and performance stock unit awards held by continuing employees. The assumed awards were converted into approximately 5 million Broadcom RSU awards. All outstanding in-the-money VMware stock options and RSU awards held by non-employee directors were accelerated and converted into the right to receive cash and shares of Broadcom common stock, in equal parts. All discussions and information in this Annual Report on Form 10-K regarding our business and financial results relate solely to our operations prior to the VMware Merger, unless otherwise indicated.3Table of ContentsProducts and MarketsSemiconductor SolutionsSemiconductors are made by imprinting a network of electronic components onto a semiconductor wafer. These devices are designed to perform various functions such as processing, amplifying and selectively filtering electronic signals, controlling electronic system functions and processing, and transmitting and storing data. Our digital and mixed signal products are based on silicon wafers with CMOS transistors offering fast switching speeds and low power consumption, which are both critical design factors for the markets we serve. We also offer analog products, which are based on III-V semiconductor materials that have higher electrical conductivity than silicon, and thus tend to have better performance characteristics in radio frequency (“RF”), and optoelectronic applications. III-V refers to elements from the 3rd and 5th groups in the periodic table of chemical elements. Examples of these materials used in our products are gallium arsenide (“GaAs”) and indium phosphide (“InP”). We provide semiconductor solutions for managing the movement of data in data center, service provider, and enterprise networking applications. We provide a broad variety of RF semiconductor devices, wireless connectivity solutions, custom touch controllers and inductive charging solutions for the wireless market. We also provide semiconductor solutions for enabling the STB and broadband access applications and for enabling secure movement of digital data to and from host machines, such as servers, personal computers and storage systems, to the underlying storage devices, such as hard disk drives (“HDD”) and solid-state drives (“SSD”).Our product portfolio ranges from discrete devices to complex sub-systems that include multiple device types and may also incorporate firmware for interfacing between analog and digital systems. In some cases, our products include mechanical hardware that interfaces with optoelectronic or capacitive sensors. We focus on markets that require high quality and the technology leadership and integrated performance characteristic of our products. The table below presents our material semiconductor product families and their major end markets and applications during fiscal year 2023.Major End MarketsMajor ApplicationsMaterial Product FamiliesBroadband• STB and Broadband Access• STB SoCs• DSL/PON gateways• DOCSIS cable modem and networking infrastructure• DSLAM/PON optical line termination• Wi-Fi access point SoCsNetworking• Data Center, Service Provider, and Enterprise Networking• Ethernet switching and routing silicon• Custom silicon solutions• Optical and copper PHYs• Fiber optic transmitter and receiver componentsWireless• Mobile Device Connectivity• RF front end modules and filters• Wi-Fi, Bluetooth, GPS/GNSS SoCs• Custom touch controllers• Inductive charging ASICsStorage• Servers and Storage Systems• SAS and RAID controllers and adapters• PCIe switches• Fibre channel host bus adapters• Ethernet NIC• HDD and SSD• Read channel based SoCs; Custom flash controllers• PreamplifiersIndustrial• Factory Automation, Renewable Energy and Automotive Electronics• Optocouplers• Industrial fiber optics• Industrial and medical sensors• Motion control encoders and subsystems• Light emitting diode• Ethernet PHYs, switch ICs and camera microcontrollersSet-Top Box Solutions: We offer complete SoC platform solutions for cable, satellite, Internet Protocol television, over-the-top and terrestrial STBs. Our products enable global service providers to introduce new and enhanced technologies and services in STBs, including transcoding, digital video recording functionality, higher definition video processing, increased networking capabilities, and more tuners to enable faster channel change and more simultaneous recordings. We are also enabling service providers in deploying High Efficiency Video Coding (“HEVC”), a video compression format that is a successor to the H.264/MPEG-4 format. HEVC enables ultra-high definition (“Ultra HD”), services by effectively doubling the capacity of 4Table of Contentsexisting networks to deploy new or existing content. Our families of STB solutions support the complete range of resolutions, from standard definition, to high definition, and Ultra HD.Broadband Access Solutions: We offer complete SoC platform solutions for digital subscriber line (“DSL”), cable, passive optical networking (“PON”) and wireless local area network for both consumer premise equipment (“CPE”) and central office (“CO”) deployments. Our CPE devices are used in broadband modems, residential gateways and Wi-Fi access points and routers. Our CO devices, including DSL Access Multiplexer (“DSLAM”), cable modem termination systems and PON optical line termination medium access controller, are empowering modern operator broadband infrastructure. Our products enable global service providers to continue to deploy next generation broadband access technologies across multiple standards, including G.fast, Data Over Cable Service Interface Specifications (“DOCSIS”), PON and Wi-Fi to provide more bandwidth and faster speeds to consumers. Ethernet Switching & Routing: Ethernet is a ubiquitous interconnection technology that enables high performance and cost effective networking infrastructure. We offer a broad set of Ethernet switching and routing products that are optimized for data center, service provider and enterprise networks. In the data center market, our high capacity, low latency, switching silicon supports advanced protocols around virtualization and multi-pathing. Our Ethernet switching fabric technologies provide the ability to build highly scalable flat networks supporting tens of thousands of servers. Our service provider switch portfolio enables carrier networks to support prioritized delivery of data traffic in the wireless backhaul, access, aggregation and core of their networks. For enterprise networks, we offer product families with secure, encrypted switching capabilities and support lower power modes that comply with industry standards around energy efficient Ethernet.Custom Silicon Solutions: We provide advanced technology and IP platforms for customers to design and develop application specific integrated circuits (“ASICs”), targeting data center compute offload, legacy and new 5G radio infrastructure, and wired communication networks. Our custom silicon provides the platform to integrate embedded logic, memory, serializer/deserializer (“SerDes”) technology, IP cores and processor cores. The ASICs are custom products built to individual customers specifications.Physical Layer Devices: These devices, also referred to as PHYs, are transceivers that enable the reception and transmission of Ethernet data packets over a physical medium such as copper wire or optical fibers. Our high performance Ethernet transceivers are built upon a proprietary digital signal processing communication architecture optimized for high-speed network connections and support the latest standards and advanced features, such as energy efficient Ethernet, data encryption and time synchronization. We also offer a range of automotive Ethernet products, including PHYs, switches and camera microcontrollers, to meet growing consumer demand for in-vehicle connectivity and smart vision.Fiber Optic Components: We supply a wide array of optical components to the Ethernet networking, storage, and access, metro- and long-haul telecommunication markets. Our optical components enable the high speed reception and transmission of data through optical fibers. RF Semiconductor Devices: Our RF semiconductor devices selectively filter, as well as amplify and route, RF signals. Filters enable modern wireless communication systems to support a large number of subscribers simultaneously by ensuring that the multiple transmissions and receptions of voice and data streams do not interfere with each other. We were among the first to deliver commercial film bulk acoustic resonator (“FBAR”) filters that offer technological advantages over competing filter technologies, to allow mobile handsets to function more efficiently in today's congested RF spectrum. FBAR technology has a significant market share within the cellular handset market. Our RF products include multi-chip module front-end modules that integrate transmit/receive switching and filtering functions for multiple frequency bands, filter modules and discrete filters, all using our proprietary FBAR technology.Our expertise in FBAR technology, amplifier design, and module integration enables us to offer industry-leading performance in cellular RF transceiver applications. Connectivity Solutions: Our connectivity solutions include discrete and integrated Wi-Fi and Bluetooth solutions, and global positioning system/global navigation satellite system (“GPS/GNSS”) receivers, designed for use in mobile devices including smartphones, tablets and wearable products.Wi-Fi allows devices on a local area network to communicate wirelessly, adding the convenience of mobility to the utility of high-speed data networks. We offer a family of high performance, low power Wi-Fi chipsets. Bluetooth is a low power technology that enables direct connectivity between devices. We offer a complete family of Bluetooth silicon and software solutions that enable manufacturers to easily and cost-effectively add Bluetooth functionality to virtually any device. These solutions include combination chips that offer integrated Wi-Fi and Bluetooth functionality, which provides significant performance advantages over discrete solutions.We also offer a family of GPS, assisted-GPS and GNSS semiconductor products, software and data services. These products are part of a broader location platform that leverages a broad range of communications technologies, including Wi-Fi, Bluetooth and GPS, to provide more accurate location and navigation capabilities.5Table of ContentsCustom Touch Controllers: Our touch controllers process signals from touch screens in mobile handsets and tablets.Inductive Charging ASICs: Our custom inductive charging ASIC devices offer high efficiency and are highly integrated solutions for mobile and wearable devices.SAS, RAID & PCIe Products: We provide serial attached small computer system interface (“SAS”) and redundant array of independent disks (“RAID”) controller and adapter solutions to server and storage system original equipment manufacturers (“OEMs”). These solutions enable secure and high speed data transmission between a host computer, such as a server, and storage peripheral devices, such as HDD, SSD and optical disk drives and disk and tape-based storage systems. Some of these solutions are delivered as stand-alone semiconductors, typically as a controller. Other solutions are delivered as circuit boards, known as adapter products, which incorporate our semiconductors onto a circuit board with other features. RAID technology is a critical part of our server storage connectivity solutions as it provides protection against the loss of critical data resulting from HDD failures.We also provide interconnect semiconductors that support the peripheral component interconnect express (“PCIe”) communication standards. PCIe is the primary interconnection mechanism inside computing systems today. Fibre Channel Products: We provide fibre channel host bus adapters, which connect host computers such as servers to FC SANs. Ethernet NIC Controllers: Our Ethernet network interface card (“NIC”) controllers are designed for high-performance virtualization, intelligent flow processing, secure data center connectivity, and machine learning.HDD & SSD Products: We provide read channel-based SoCs and preamplifiers to HDD OEMs. These are the critical chips required to read, write and protect data. An HDD SoC is an integrated circuit (“IC”) that combines the functionality of a read channel, serial interface, memory and a hard disk controller in a small, high-performance, low-power and cost-effective package. Read channels convert analog signals that are generated by reading the stored data on the physical media into digital signals. In addition, we sell preamplifiers, which are complex, high speed, mixed signal devices that enable writing and reading data to and from the HDD heads. The preamplifier interfaces with the SoC to provide the electronics data path in a HDD.We also provide custom flash controllers to SSD OEMs. An SSD stores data in flash memory instead of on a hard disk, providing high speed access to the data. Flash controllers manage the underlying flash memory in SSDs, performing critical functions such as reading and writing data to and from the flash memory and performing error correction, wear leveling and bad block management.Industrial End Markets: We also provide a broad variety of products for the general industrial and automotive markets, including optocouplers, industrial fiber optics, industrial and medical sensors, motion encoders, light emitting diode devices, and Ethernet ICs. Our industrial products are used in a diverse set of applications, spanning industrial automation, power generation and distribution systems, medical systems and equipment, defense and aerospace, and vehicle subsystems including those used in electric vehicle powertrain, infotainment and advanced driver assistance system.Infrastructure Software Our infrastructure software solutions offer customers greater choice and flexibility to build, run, manage, connect and protect applications and data at scale across hybrid IT environments.Our mainframe software provides market-leading DevOps, AIOps, Security, Workload Automation, Data Management, and Foundational Software solutions, that enable customers to embrace open tools and technologies, innovate with their mainframe as part of their hybrid cloud, and amplify the value of their mainframe investments. Our commitment to partnering with our customers extends beyond products and technology and includes unique Beyond Code programs that address challenges such as skills development, staffing, change management, and cost-saving initiatives that drive overall business success with the platform.Our distributed software solutions enable global enterprises to optimize the planning, development and delivery of software, powering their business critical digital services. Our solutions are designed to enable customers to innovate, improve customer experience, and drive profitability by aligning business, development, and operational teams. Our products, organized in the domains of ValueOps, DevOps, and AIOps, deliver end-to-end visibility across all stages of the digital lifecycle and help our customers realize better business outcomes and better experiences for their customers. Our Symantec cyber security software solutions help organizations and governments secure against threats and compliance risks by protecting their users and data on any app, device, or network. Our integrated cyber defense approach simplifies cyber security with comprehensive solutions designed to secure critical business assets across on-premises and cloud infrastructures. Our Symantec solutions utilize rich threat intelligence from a global network of security engineers, 6Table of Contentsthreat analyst and researchers, as well as advanced artificial intelligence (“AI”) and machine-learning engines, enabling customers to protect data, connect authorized users with trusted applications, and detect and respond to the most advanced targeted attacks. We also offer mission critical FC SAN products designed to help customers reduce the cost and complexity of managing business information within a shared data storage environment, enabling high levels of availability of mission critical applications in the form of modules, switches and subsystems incorporating multiple semiconductor products. We deliver reliable and simplified management of these FC SAN products through our software-based management tools designed to maximize uptime, dramatically simplify storage area networking deployment and management, and provide high levels of visibility and insight into the storage network.The table below presents our software portfolios and their material offerings during fiscal year 2023.Software PortfolioPortfolio DescriptionMajor Portfolio OfferingsMainframe Software• DevOps, AIOps, Security, Workload Automation, Data Management, and Foundational Software Solutions • Operational Analytics & Management• Workload Automation• Database & Data Management • Application Development & Testing• Identity & Access Management• Compliance & Data Protection• Security Insights• Beyond Code programs• Skills Development and Staffing• Software Rationalization and Migration• Software Efficiency and Cost Optimization Tools• Change Management Support• Technology Proof of ConceptsDistributed Software• Solutions that optimize the planning, development and delivery of business critical services• ValueOps• DevOps• AIOpsSymantec Cyber Security• Comprehensive threat protection and compliance solutions that secure against threats and compliance risks by protecting users and data on any app, device, or network• Endpoint Security• Network Security• Information Security• Identity SecurityFC SAN Management• Solutions that transforms current storage networks with autonomous SAN capabilities• Fibre Channel Switch Payment Security• Arcot payment authentication network powered by 3-D Secure • Payment Security SuiteOperational Analytics & Management: These solutions combine big data, machine learning and AI with mainframe expertise to deliver meaningful and actionable insights to augment and automate day-to-day operations and deliver exceptional customer experiences.Workload Automation: These solutions reduce manual effort by enabling customers to proactively optimize resources and orchestrate automation across enterprise applications and systems.Databases & Data Management: These high-performance databases and management tools store, organize, and manage mainframe data to ensure optimal performance, efficient administration, and reliability of critical systems. Customers can also manage their mainframe data storage using modern mainframe solutions that securely store data on any device that customers choose, including the cloud. These software-only solutions are designed to save on costs and maintain confidence in data security.Application Development & Testing: These solutions enable customers to accelerate software delivery while increasing code quality through the use of our agile processes and tools, and DevOps solutions. Our open-first strategy helps customers modernize their mainframe environment through the use of open source and open application programming technologies across people, process, tooling and applications, resulting in greater synergy and alignment with their corporate IT.Identity & Access Management: These solutions manage mainframe access and elevate it with modern practices such as multi-factor authentication and privileged user management, and support all external security managers.7Table of ContentsCompliance & Data Protection: These solutions protect crucial mainframe data to ensure compliance, identify risk, proactively respond to potential threats, and reduce those risks to lighten the load on security management with automated identification and authorization cleanup.Security Insights Platform: This solution helps ensure a trusted environment for customers and their employees by quickly interpreting and assessing mainframe security posture, identifying risks and developing remediation steps on an ongoing and ad hoc basis. This data is available for use with in-house tools for security information and event management.Beyond Code Programs: These value-added offerings go above and beyond the leading software we provide to help ensure our customers get the most out of their mainframe investments. These offerings unlock additional value for organizations in areas like educating and upskilling the workforce, providing expert guidance and support for change events, uncovering opportunities to improve efficiency and save costs.ValueOps: This solution delivers value stream management capabilities that enable customers to schedule, track, and manage work throughout its lifecycle from investment planning to execution. It aligns business and development teams across the enterprise, increasing transparency, reducing inefficiencies, and improving time to value.DevOps: This solution offers capabilities that empower users of our agile processes and tools to track development progress and deploy releases confidently with assurance of feature completeness, high-quality and reduced risk. Key stakeholders have a single view of key insights into release progress, health, quality, defect trends, and metrics that drive focus, gauge readiness, and help to ensure successful, quality releases.AIOps: This solution combines application, infrastructure and network monitoring and correlation with intelligent remediation capabilities to help customers create more resilient production environments and improve customer experience.Endpoint Security: Endpoints are the critical last line of defense against cyber attackers. Our Symantec endpoint security solutions prevent, detect and respond to emerging threats across all devices and operating systems including laptops, desktops, tablets, mobile phones, servers and cloud workloads through an intelligent AI driven security console and single agent.Network Security: Email and web access are the lifeblood and essential communication means for every modern organization. We have a full array of network security solutions, as well as a shared set of advanced threat protection technologies to stop inbound and outbound threats targeting end users, information and key infrastructure. Information Security: Information protection and compliance is critical to managing risk. We offer integrated information security solutions, based on an efficient, single-policy that can be applied across the entire environment, to help organizations identify and protect risky users, applications and their most sensitive data everywhere across endpoints, on-premises networks, cloud services and private applications.Identity Security: User identities are under attack by cyber criminals hoping to exploit their access and privileges and do harm. We mitigate these attacks by positively identifying legitimate users, enforcing granular access control policies, and streamlining access governance to prevent unauthorized access to sensitive resources and data.Fibre Channel Switch Products: Our Brocade Fibre Channel switch products provide interconnection, bandwidth and high-speed switching between servers and storage devices which are in a FC SAN. FC SANs are networks dedicated to mission critical storage traffic, and enable simultaneous high speed and secure connections among multiple host computers and multiple storage arrays.Payment Security Suite: This is a software as a service (“SaaS”)-based payment authentication service to help banks and merchants protect against fraud and ensure a hassle-free online shopping experience for their customers.Research and DevelopmentWe are committed to continuous investment in product development and enhancement, with a focus on rapidly introducing new, proprietary products and releases. Many of our products have grown out of our own research and development efforts, and have given us competitive advantages in certain target markets due to performance differentiation. However, we opportunistically seek to enhance our capabilities through the acquisition of engineers with complementary research and development skills and complementary technologies and businesses. We focus our research and development efforts on the development of mission critical, innovative, sustainable and higher value product platforms and those that improve the quality and stability in our broadly deployed products. We leverage our design capabilities in markets where we believe our innovation and reputation will allow us to earn attractive margins by developing high value-add products.8Table of ContentsWe plan to continue investing in product development, both organically and through acquisitions, to drive growth in our business. We also invest in process development and improvements to product features and functions, as well as fabrication capabilities to optimize processes for devices that are manufactured internally. Our field application engineers, design engineers, and product and software development engineers are located in many places around the world, and in many cases near our top customers. This enhances our customer reach and our visibility into new product opportunities and, in the case of our semiconductor customers, enables us to support our customers in each stage of their product development cycle, from the early stages of production design to volume manufacturing and future growth. By collaborating with our customers, we have opportunities to develop high value-added, customized products for them that leverage our existing technologies. We anticipate that we will continue to make significant research and development expenditures in order to maintain our competitive position, and to ensure a continuous flow of innovative and sustainable product platforms. Customers, Sales and DistributionWe sell our products through our direct sales force and a select network of distributors and channel partners globally. Distributors and OEMs, or their contract manufacturers, typically account for the substantial majority of our semiconductor sales. A relatively small number of customers account for a significant portion of our net revenue. Sales to distributors accounted for 57% and 56% of our net revenue for fiscal years 2023 and 2022, respectively. We believe aggregate sales to our top five end customers, through all channels, accounted for approximately 35% of our net revenue for each of our fiscal years 2023 and 2022. We believe aggregate sales to Apple Inc., through all channels, accounted for approximately 20% of our net revenue for each of fiscal years 2023 and 2022. We expect to continue to experience significant customer concentration in future periods. The loss of, or significant decrease in demand from, any of our top five end customers could have a material adverse effect on our business, results of operations and financial condition.Many of our semiconductor customers design products in North America or Europe that are then manufactured in Asia. To serve customers around the world, we have strategically developed relationships with large global electronic component distributors, complemented by a number of regional distributors with customer relationships based on their respective product ranges. We also sell our products to a wide variety of OEMs or their contract manufacturers. We have established strong relationships with leading OEM customers across multiple target markets. Our direct sales force focuses on supporting our large OEM customers, and has specialized product and service knowledge that enables us to sell specific offerings at key levels throughout a customer’s organization. Certain customers require us to contract with them directly and with specified intermediaries, such as contract manufacturers. Many of our major customer relationships have been in place for many years and are often the result of years of collaborative product development. This has enabled us to build our extensive IP portfolio and develop critical expertise regarding our customers’ requirements, including substantial system-level knowledge. This collaboration has provided us with key insights into our customers' businesses and has enabled us to be more efficient and productive and to better serve our target markets and customers. Many of our customers and their contract manufacturers often require time critical delivery of our products to multiple locations around the world. With sales offices located in various countries, our primary warehouse in Malaysia, and dedicated regional customer support call centers, where we address customer issues and handle logistics and other order fulfillment requirements, we believe we are well-positioned to support our customers throughout the design, technology transfer and manufacturing stages across all geographies.Our software customers are in most major industries worldwide, including banks, insurance companies, other financial services providers, government agencies, global IT service providers, telecommunication providers, transportation companies, manufacturers, technology companies, retailers, educational organizations and health care institutions. Our customers generally consist of large enterprises that have computing environments from multiple vendors and are highly complex. We remain focused on strengthening relationships and increasing penetration within our existing core, mainframe-centric, and Symantec endpoint customers and expanding the adoption of our enterprise software offerings with these customers. We believe our enterprise-wide license model will continue to offer our customers reduced complexity, more flexibility and an easier renewal process that will help drive revenue growth.Manufacturing OperationsWe focus on maintaining an efficient global supply chain and a variable, low-cost operating model. Accordingly, we outsource a majority of our manufacturing operations, utilizing third-party foundry and assembly and test capabilities, as well as some of our corporate infrastructure functions. The majority of our front-end wafer manufacturing operations is outsourced to external foundries, including Taiwan Semiconductor Manufacturing Company Limited (“TSMC”). We use third-party contract manufacturers for a significant majority of our assembly and test operations, including TSMC, Advanced Semiconductor Engineering, Inc., Foxconn Technology Group, Amkor Technology, Inc. and Siliconware Precision Industries Co., Ltd. We use our internal fabrication facilities for products utilizing our innovative and proprietary processes, such as our FBAR filters for wireless communications and our vertical-cavity surface emitting laser and side emitting lasers-based on GaAs and InP lasers for fiber optic communications, while outsourcing commodity processes such as standard CMOS. By doing so, we can protect our IP and accelerate time to market for our products. The majority of our internal III-V semiconductor wafer fabrication is done in the U.S. and Singapore. 9Table of ContentsWe also have a long history of operating in Asia where we manufacture and source the majority of our products and materials. We store the majority of our product inventory in our warehouse in Malaysia and our presence in Asia places us in close proximity to many of our customers’ manufacturing facilities.Manufacturing Materials and SuppliersOur manufacturing operations employ a wide variety of semiconductors, electromechanical components and assemblies and raw materials. We purchase materials from hundreds of suppliers on a global basis. These purchases are generally on a purchase order basis and some parts are not readily available from alternate suppliers due to their unique design or the length of time and cost necessary for re-design or qualification. To address the potential disruption in our supply chain, we may use a number of techniques, including redesigning products for alternative components, making incremental or “lifetime” purchases, or qualifying more than one source of supply. Our long-term relationships with our suppliers allow us to proactively manage our technology development and product discontinuance plans, and to monitor our suppliers' financial health. Some suppliers may, nonetheless, extend their lead times, limit supplies, increase prices or cease to produce necessary parts for our products. If these are unique or highly specialized components, we may not be able to find a substitute quickly, or at all.CompetitionThe markets in which we participate are highly competitive. Our competitors range from large, international companies offering a wide range of products to smaller companies specializing in narrow markets. The competitive landscape is changing as a result of a trend toward consolidation within many industries, as some of our competitors have merged with or been acquired by other competitors, while others have begun collaborating with each other. We expect this consolidation trend to continue. We expect competition in the markets in which we participate to continue to increase as existing competitors improve or expand their product offerings and as new companies enter the market. Additionally, our ability to compete effectively depends on a number of factors, including: quality, technical performance, price, product features, product system compatibility, system-level design capability, engineering expertise, responsiveness to customers, new product innovation, product availability, delivery timing and reliability, and customer sales and technical support.In the semiconductor market, we compete with integrated device manufacturers, fabless semiconductor companies, as well as the internal resources of large, integrated OEMs. Our primary competitors are Advanced Micro Devices, Inc., Amlogic Inc., Analog Devices, Inc., Cisco Systems, Inc., GlobalFoundries Inc., Hamamatsu Photonics K.K., Heidenhain Corporation, iC-Haus GmbH, Intel Corporation, Lumentum Holdings Inc., MACOM Technology Solutions Holdings, Inc., Marvell Technology, Inc., MaxLinear, Inc., MediaTek Inc., Microchip Technology Incorporated, Mitsubishi Electric Corporation, Murata Manufacturing Co., Ltd., NVIDIA Corporation, NXP Semiconductors N.V., ON Semiconductor Corporation, OSRAM Licht AG, Qorvo, Inc., Qualcomm Inc., Realtek Semiconductor Corp., Renesas Electronics Corporation, Skyworks Solutions, Inc., STMicroelectronics N.V., Sumitomo Corporation, Synaptics Incorporated, Texas Instruments, Inc., TDK-EPC Corporation, Toshiba Corporation, Wolfspeed, Inc. (f/k/a Cree, Inc.), and II-VI Incorporated. We compete based on the strength and expertise of our high speed proprietary design expertise, FBAR technology, amplifier design, module integration, proprietary materials processes, multiple storage protocols and mixed-signal design, our broad product portfolio, support of key industry standards, reputation for quality products, and our customer relationships.In the infrastructure software market, we compete with large enterprise software vendors who continue to expand their product and service offerings and consolidate offerings into broad product lines, and smaller, niche players focused on specific markets. Our primary competitors are Atlassian Corporation, Plc, BeyondTrust Corporation, BMC Software Inc., Cisco Systems, Inc., CrowdStrike Holdings, Inc., CyberArk Software, Ltd., Dino-Software Corporation, International Business Machines Corporation, Microsoft Corporation, New Relic, Inc., OpenText Corporation, Oracle Corporation, Proofpoint, Inc., Rocket Software, Inc., SailPoint Technologies Holdings, Inc., Salesforce.com, Inc., ServiceNow, Inc., SolarWinds Corporation, Splunk, Inc. and Zscaler, Inc. We compete based on the breadth of our enterprise management tools portfolio, breadth and synergy of offerings, our platform and hardware independence, our global reach, and our deep customer relationships and industry experience.Intellectual PropertyOur success depends in part upon our ability to protect our IP. To accomplish this, we rely on a combination of IP rights, including patents, copyrights, trademarks, service marks, trade secrets and similar IP, as well as customary contractual protections with our customers, suppliers, employees and consultants, and through security measures to protect our trade secrets. We believe our current product expertise, key engineering talent and IP portfolio provide us with a strong platform from which to develop application specific products in key target markets.As of October 29, 2023, we had 15,400 U.S. and other patents and 910 U.S. and other pending patent applications. The expiration dates of our patents range from 2023 to 2042, with a small number of patents expiring in the near future, none of 10Table of Contentswhich are expected to be material to our IP portfolio. We are not substantially dependent on any single patent or group of related patents.We focus our patent application program to a greater extent on those inventions and improvements that we believe are likely to be incorporated into our products, as contrasted with more basic research. However, we do not know how many of our pending patent applications will result in the issuance of patents or the extent to which the examination process could require us to narrow our claims.We and our predecessors have also entered into a variety of IP licensing and cross-licensing arrangements that have both benefited our business and enabled some of our competitors. A portion of our revenue comes from IP licensing royalty payments and from litigation settlements relating to such IP. We also license third-party technologies that are incorporated into some elements of our design activities, products and manufacturing processes. Historically, licenses of the third-party technologies used by us have generally been available to us on acceptable terms.The industries in which we compete are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by the vigorous pursuit, protection and enforcement of IP rights, including by patent holding companies that do not make or sell products. Some of our customer agreements require us to indemnify our customers for third-party IP infringement claims arising from our products. Claims of this sort could harm our relationships with our customers and might deter future customers from doing business with us. With respect to any IP rights claims against us or our customers or distributors, we may be required to defend ourselves or our customers or distributors in litigation, cease manufacturing the infringing products, pay damages, expend resources to develop non-infringing technology, seek a license which may not be available on commercially reasonable terms or at all, or relinquish patents or other IP rights.With respect to our infrastructure software, the proprietary portions of our source code for our products are protected both as a trade secret and as copyrighted works. Except with respect to software components that are subject to open source licenses, our customers do not generally have access to the source code for our products. Rather, on-premise customers typically access only the executable code for our products, and SaaS customers access only the functionality of our SaaS offerings. Under certain contingent circumstances, some of our customers are beneficiaries of a source code escrow arrangement that would enable them to obtain a limited right to access and use our source code if specific conditions are met.EmployeesOur continued success depends on our ability to attract, motivate and retain our workforce in a highly competitive labor market. Specifically, as the source of our technological and product innovations, our engineering and technical personnel are a critical asset. We measure our employees’ engagement by our voluntary attrition rate and employee feedback. Our global voluntary attrition rate in fiscal year 2023 was approximately 3.3%, well below the technology industry benchmark (AON, 2023 Salary Increase and Turnover Study — Second Edition, September 2023). We also track the portion of our workforce in research and development roles. As of October 29, 2023, we had approximately 20,000 employees worldwide, with approximately 63% in research and development roles. By geography, approximately 54% of our employees are located in North America, 34% in Asia, and 12% in Europe, the Middle East and Africa. Governmental RegulationOur semiconductor manufacturing operations and research and development involve the use of hazardous substances and are regulated under international, federal, state and local laws governing health, safety and the environment. These regulations include limitations on discharge of pollutants to air, water, and soil; remediation requirements; product chemical content limitations; manufacturing chemical use and handling restrictions; pollution control requirements; waste minimization considerations; and treatment, transport, storage and disposal of solid and hazardous wastes. We are also subject to regulation by the U.S. Occupational Safety and Health Administration and similar health and safety laws in other jurisdictions.We believe that our properties and operations at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws. However, the risk of environmental liabilities cannot be completely eliminated and there can be no assurance that the application of environmental, health and safety laws to our business will not require us to incur significant expenditures.We are also regulated under a number of international, federal, state and local laws regarding recycling, product packaging and product content requirements, including legislation enacted in the U.S., European Union and China, among a growing number of jurisdictions, which have placed greater restrictions on the use of lead, among other restricted substances, in electronic products, which affects materials composition and semiconductor packaging. In addition, our business is subject 11Table of Contentsto various import/export regulations, such as the U.S. Export Administration Regulations, and applicable executive orders, and rules of industrial standards bodies, like the International Organization for Standardization, as well as regulation by other agencies, such as the U.S. Federal Trade Commission (“FTC”). These laws, regulations and orders are complex, may change frequently and with limited notice, have generally and may continue to become more stringent over time. We may incur significant expenditures in future periods as a result. SeasonalityHistorically, our net revenue has typically been higher in the second half of the fiscal year than in the first half, primarily due to seasonality in our wireless communications products. These products have historically experienced seasonality due to launches of new mobile devices manufactured by our OEM customers. However, from time to time, typical seasonality and industry cyclicality are overshadowed by other factors such as wider macroeconomic effects, the timing of significant product transitions and launches by large OEMs, particularly with our wireless communications products. We have a diversified business portfolio and we believe that our overall revenue is less susceptible to seasonal variations as a result of this diversification.Other InformationOur website is www.broadcom.com. You may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports (and amendments thereto) filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) with the Securities and Exchange Commission (the “SEC”), as well as proxy statements filed by Broadcom, free of charge at the “Investor Center - SEC Filings” section of our website at www.broadcom.com, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Such periodic reports, proxy statements and other information are also available at the SEC’s website at www.sec.gov. The reference to our website address does not constitute incorporation by reference of the information contained on or accessible through our website.Information About Our Executive OfficersThe following table provides information regarding our executive officers as of December 14, 2023: Name and TitleAgePosition and OfficesHock E. Tan72President, Chief Executive Officer and DirectorKirsten M. Spears59Chief Financial Officer and Chief Accounting OfficerMark D. Brazeal55Chief Legal and Corporate Affairs OfficerCharlie B. Kawwas, Ph.D.53President, Semiconductor Solutions GroupHock E. Tan has served as our President and Chief Executive Officer since March 2006. He was President and Chief Executive Officer at Integrated Circuit Systems, Inc. (“ICS”), a publicly traded timing solutions IC company, from 1999 until its acquisition by Integrated Device Technology, Inc. in 2005. He also held several executive leadership positions at ICS, including Chief Operating Officer from 1996 to 1999 and Senior Vice President and Chief Financial Officer from 1995 to 1999. He was Vice President of Finance at Commodore International, Ltd. from 1992 to 1994, and held senior management positions at PepsiCo, Inc. and General Motors Corporation. He was also managing director of Pacven Investment, Ltd., a venture capital fund in Singapore, from 1988 to 1992, and was managing director of Hume Industries Ltd. in Malaysia from 1983 to 1988.Kirsten M. Spears has served as our Chief Financial Officer and Chief Accounting Officer since December 2020. She served as our Principal Accounting Officer from March 2016 to December 2020 and Vice President and Corporate Controller from May 2014 to December 2020. She was Vice President and Corporate Controller at LSI Corporation from 2007 until its acquisition by us in 2014. She held several management positions in accounting and reporting at LSI from 1997 to 2007. She also worked for PriceWaterhouseCoopers prior to joining LSI.Mark D. Brazeal has served as our Chief Legal and Corporate Affairs Officer since December 2021. He served as our Chief Legal Officer from March 2017 to December 2021. He was Chief Legal Officer and Senior Vice President, IP Licensing for SanDisk Corporation from 2014 until its acquisition by Western Digital Corporation in 2016. He held several senior legal positions at Broadcom Corporation from 2000 to 2014, including Senior Vice President and Senior Deputy General Counsel in charge of all commercial, operational, IP licensing and litigation matters. He was also an attorney in the transactional and IP groups at the law firms of Wilson Sonsini Goodrich & Rosati, Yuasa & Hara and Howrey & Simon prior to joining Broadcom Corporation.Charlie B. Kawwas has served as our President, Semiconductor Solutions Group since July 2022. He served as our Chief Operating Officer from December 2020 to July 2022, Senior Vice President and Chief Sales Officer from June 2015 to December 2020 and Senior Vice President, Worldwide Sales from May 2014 to June 2015. He was head of worldwide sales at 12Table of ContentsLSI Corporation from 2010 until its acquisition by us in 2014. He held several executive leadership positions at LSI from 2007 to 2010, including Vice President of Sales and Marketing for the networking division and Vice President of Marketing for the networking and storage products group. He was also the leader of Product Line Management for the Optical Ethernet and Multi-service Edge portfolio at Nortel Networks Corporation prior to joining LSI.13Table of ContentsITEM 1A. RISK FACTORSOur business, operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. The following material factors, among others, could cause our actual results to differ materially from historical results and those expressed in forward-looking statements made by us or on our behalf in filings with the SEC, press releases, communications with investors and oral statements.Risk Factors SummaryThe following is a summary of the principal risks that could adversely affect our business, operations and financial results.Risks Related to Our Business•Adverse global economic conditions could have a negative effect on us.•Our business is subject to various governmental regulations and trade restrictions. Compliance with these regulations may cause us to incur significant expense and, if we fail to maintain compliance, we may be forced to cease manufacture and distribution of certain products or subjected to administrative proceedings and civil or criminal penalties.•Global political and economic conditions and other factors related to our international operations could adversely affect us.•The failure to realize the expected benefits from the VMware Merger may adversely affect our business and the value of our common stock.•We may pursue acquisitions, investments, joint ventures and dispositions, which could adversely affect our results of operations.•We are subject to risks associated with our distributors and other channel partners, including product inventory levels and product sell-through.•We are dependent on senior management and if we are unable to attract and retain qualified personnel, we may not be able to execute our business strategy effectively.•An impairment of the confidentiality, integrity, or availability of our IT systems, or those of one or more of our corporate infrastructure vendors, could have a material adverse effect on our business.•We operate in the highly cyclical semiconductor industry.•The majority of our sales come from a small number of customers and a reduction in demand or loss of one or more of our significant customers may adversely affect our business.•Dependence on contract manufacturing and suppliers of critical components within our supply chain may adversely affect our ability to bring products to market.•We purchase a significant amount of the materials used in our products from a limited number of suppliers.•Failure to adjust our manufacturing and supply chain to accurately meet customer demand could adversely affect our results of operations.•Winning business in the semiconductor solutions industry is subject to a lengthy process that often requires us to incur significant expense, from which we may ultimately generate no revenue.•A prolonged disruption of our manufacturing facilities, research and development facilities, warehouses or other significant operations, or those of our suppliers, could have a material adverse effect on us.•We may be unable to maintain appropriate manufacturing capacity or product yields at our own manufacturing facilities.•We may be involved in legal proceedings, including IP, securities litigation, and employee-related claims that could adversely affect our business.•If demand for our data center virtualization products is less than anticipated, our business could be adversely affected.•The growth of our software business depends on customer acceptance of our newer products and services. •Incompatibility of our software products with operating environments, platforms, or third-party products, demand for our products and services could decrease.•Failure to enter into software license agreements on a satisfactory basis could adversely affect us.•Licensed third party software used in our products may not be available to us in the future, which may delay product development and production or cause us to incur additional expense.14Table of Contents•Our use of open source software in certain products and services could materially adversely affect our business, financial condition and results of operations.•Failure of our software products to manage and secure IT infrastructures and environments could have a material adverse effect on our business.•Our sales to government customers subject us to uncertainties and governmental regulations, which could have a material adverse effect on our business.•Failure to effectively manage our products and services lifecycles could harm our business.•Our operating results are subject to substantial quarterly and annual fluctuations.•Competition in our industries could prevent us from growing our revenue.•Our ability to maintain or improve gross margin.•Our ability to protect the significant amount of IP in our business. •We are subject to warranty claims, product recalls and product liability.•The complexity of our products could result in unforeseen delays or expense or undetected defects or bugs.•We make substantial investments in research and development and unsuccessful investments could materially adversely affect our business, financial condition and results of operations.•We collect, use, store, or otherwise process personal information, which subjects us to privacy and data security laws and contractual commitments, and our actual or perceived failure to comply with such laws and commitments could harm our business.•We are subject to environmental, health and safety laws, which could increase our costs, restrict our operations and require expenditures.•Environmental, social and governance matters may adversely affect our relationships with customers and investors.•The average selling prices of semiconductor products in our markets have often decreased rapidly and may do so in the future.•Fluctuations in foreign exchange rates could result in losses.Risks Relating to Taxes•Changes in tax legislation or policies could materially impact our financial position and results of operations.•Our corporate income taxes could significantly increase if we are unable to maintain our tax concessions or if our assumptions and interpretations regarding tax laws and concessions prove to be incorrect.•Our income taxes and overall cash tax costs are affected by a number of factors that could materially, adversely affect financial results.•We have potential tax liabilities as a result of VMware’s former controlling ownership by Dell, which could have an adverse effect on our financial condition and operating results.Risks Relating to Our Indebtedness•Our substantial indebtedness could adversely affect our financial health and our ability to execute our business strategy.•The instruments governing our indebtedness impose certain restrictions on our business.•Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flows from our business to pay our substantial debt.Risks Relating to Owning Our Common Stock•Volatility of our stock price could result in substantial losses for our investors as well as class action litigation against us and our management.•The amount and frequency of our stock repurchases may fluctuate.•A substantial amount of our stock is held by a small number of large investors.•There can be no assurance that we will continue to declare cash dividends.For a more complete discussion of the material risks facing our business, see below.15Table of ContentsRisks Related to Our BusinessAdverse global economic conditions could have a negative effect on our business, results of operations and financial condition and liquidity.A general slowdown in the global economy, including a recession, or in a particular region or industry, an increase in trade tensions with U.S. trading partners, inflation or a tightening of the credit markets could negatively impact our business, financial condition and liquidity. Adverse global economic conditions have from time to time caused or exacerbated significant slowdowns in the industries and markets in which we operate, which have adversely affected our business and results of operations. Macroeconomic weakness and uncertainty also make it more difficult for us to accurately forecast revenue, gross margin and expenses, and may make it more difficult to raise or refinance debt. An escalation of trade tensions between the U.S. and China has resulted in trade restrictions, increased protectionism and increased tariffs that harm our ability to participate in Chinese markets or compete effectively with Chinese companies. Sustained uncertainty about, or worsening of, current global economic conditions and further escalation of trade tensions between the U.S. and its trading partners, especially China, and possible decoupling of the U.S. and China economies, could result in a global economic slowdown and long-term changes to global trade. Such events may also (i) cause our customers and consumers to reduce, delay or forgo technology spending, (ii) result in customers sourcing products from other suppliers not subject to such restrictions or tariffs, (iii) lead to the insolvency or consolidation of key suppliers and customers, and (iv) intensify pricing pressures. Any or all of these factors could negatively affect demand for our products and our business, financial condition and results of operations.Our business is subject to various governmental regulations, and compliance with these regulations may cause us to incur significant expense. If we fail to maintain compliance with applicable regulations, we may be forced to cease the manufacture and distribution of certain products, and we could be subject to administrative proceedings and civil or criminal penalties.Our business is subject to various domestic and international laws and other legal requirements, including anti-competition and import/export regulations, such as the U.S. Export Administration Regulations, and applicable executive orders. These laws, regulations and orders are complex, may change frequently and with limited notice, and have generally and may continue to become more stringent over time. We may be required to incur significant expense to comply with, or to remedy violations of, these regulations. In addition, if our customers fail to comply with these regulations, we may be required to suspend sales to these customers, which could damage our reputation and negatively impact our results of operations. The U.S. government may also add companies to its restricted entity list and/or technologies to its list of prohibited exports to specific countries, which have had and may continue to have an adverse effect on our ability to sell our products and our revenue. For example, Huawei Technologies Co., Ltd., one of our customers, is subject to certain U.S. export restrictions, which has required us to suspend sales to Huawei until we obtain licenses from the U.S. Department of Commerce. We may be unable to obtain or maintain the necessary licenses to allow us to export products to them. These restrictive governmental actions and any similar measures that may be imposed on U.S. companies by other governments, especially in light of ongoing trade tensions with China, will likely limit or prevent us from doing business with certain of our customers or suppliers and harm our ability to compete effectively or otherwise negatively affect our ability to sell our products, and adversely affect our business and results of operations. Furthermore, government authorities may take retaliatory actions, impose conditions for the supply of products or require the license or other transfer of intellectual property, which could have a material adverse effect on our business.Our products and operations are also subject to regulation by U.S. and non-U.S. regulatory agencies, such as the FTC. From time to time, we may also be involved or required to participate in regulatory investigations or inquiries, such as the ongoing investigation by the Korean Fair Trade Commission into certain of our contracting and business practices, which may evolve into legal or other administrative proceedings. Growing public concern over concentration of economic power in corporations is likely to result in increased anti-competition legislation, regulation, administrative rule making, and enforcement activity. Involvement in regulatory investigations or inquiries, can be costly, lengthy, complex and time consuming, diverting the attention and energies of our management and technical personnel.If any pending or future governmental investigations result in an unfavorable resolution, we could be required to cease the manufacture and sale of the subject products or technology, pay fines or disgorge profits or other payments, and/or cease certain conduct and/or modify our contracting or business practices, which could have a material adverse effect on our business, financial condition and results of operations. We may be obligated to indemnify our current or former directors or employees, or former directors or employees of companies that we have acquired, in connection with regulatory investigations. These liabilities could be substantial and may include, among other things, the cost of government, law enforcement or regulatory investigations and civil or criminal fines and penalties.In addition, the manufacture and distribution of our semiconductors must comply with various laws and adapt to changes in regulatory requirements as they occur. For example, if a country in which our products are manufactured or sold sets technical standards that are not widely shared, it may require us to stop distributing our products commercially until they comply with such new standards, lead certain of our customers to suspend imports of their products into that country, require manufacturers in that country to manufacture products with different technical standards and disrupt cross-border 16Table of Contentsmanufacturing relationships, any of which could have a material adverse effect on our business, financial condition and results of operations. If we fail to comply with these requirements, we could also be required to pay civil penalties or face criminal prosecution. Global political and economic conditions and other factors related to our international operations could adversely affect our business, financial condition and results of operations.A majority of our products are produced, sourced and sold internationally and our international revenue represents a significant percentage of our overall revenue. In addition, as of October 29, 2023, nearly 49% of our employees were located outside the U.S. Multiple factors relating to our international operations and to particular countries in which we operate could have a material adverse effect on our business, financial condition and results of operations. These factors include:•changes in political, regulatory, legal or economic conditions or geopolitical turmoil (including China-Taiwan relations), including terrorism, war or political or military coups, state-sponsored or politically motivated cyber-attacks, or civil disturbances or political instability (foreign and domestic);•restrictive governmental actions, such as restrictions on the transfer or repatriation of funds and foreign investments, data privacy regulations, imposition of climate change regulations, and trade protection measures, including increasing protectionism, import/export restrictions (including with regards to advanced technologies), import/export duties and quotas, trade sanctions and customs duties and tariffs, all of which have increased in recent years;•difficulty in obtaining product distribution and support, and transportation delays;•potential inability to localize software products;•difficulty in enforcing contracts, collecting accounts receivables and maintaining appropriate financial control;•difficulty in conducting due diligence with respect to business partners;•public health or safety concerns, medical epidemics or pandemics, such as COVID-19, and other natural- or man-made disasters;•nationalization of businesses and expropriation of assets; and•changes in U.S. and foreign tax laws.A significant legal risk associated with conducting business internationally is compliance with the various and differing laws and regulations of the many countries in which we do business. In addition, the laws in various countries are constantly evolving and may, in some cases, conflict with each other or with agreements we have made in one or more jurisdictions. Although our policies prohibit us, our employees and our agents from engaging in unethical business practices, there can be no assurance that all of our employees, distributors or other agents will refrain from acting in violation of our related anti-corruption or other policies and procedures. Any such violation could have a material adverse effect on our business.Failure to realize the benefits expected from the VMware Merger could adversely affect our business and the value of our common stock.As part of our integration of the VMware business, we plan to focus on VMware’s core business of creating private and hybrid cloud environments among large enterprises globally and divesting non-core assets. If VMware customers do not accept this plan, the investments we have made or may make to implement this plan may be of no or limited value, we may lose customers, our financial results may be adversely affected and our stock price may suffer.Although we expect significant benefits to result from the VMware Merger, there can be no assurance that we will actually realize these benefits. Achieving these benefits will depend, in part, on our ability to integrate VMware's business successfully and efficiently. The challenges involved in this integration, which are complex and time consuming, include the following:•preserving customer and other important relationships of VMware and attracting new business and operational relationships;•integrating financial forecasting and controls, procedures and reporting cycles;•consolidating and integrating corporate, information technology, finance and administrative infrastructures;•coordinating sales and marketing efforts to effectively position our capabilities;•coordinating and integrating operations in countries in which we have not previously operated; 17Table of Contents•reorienting the VMware sales and marketing force to align with the change in strategy and effectively position the business; and •integrating the VMware workforce, including managing employee transitions and attrition, maintaining employee morale and retaining key employees.If we do not successfully manage these issues and the other challenges inherent in integrating an acquired business, then we may not achieve the anticipated benefits of the VMware Merger within our anticipated timeframe or at all and our revenue, expenses, operating results, financial condition and stock price could be materially adversely affected. The successful integration of the VMware business will require significant management attention both before and after the completion of the VMware Merger, and may divert the attention of management from our business and operational issues.We may pursue acquisitions, investments, joint ventures and dispositions, which could adversely affect our results of operations.Our growth strategy includes acquiring or investing in businesses that offer complementary products, services and technologies, or enhance our market coverage or technological capabilities. Any acquisitions we may undertake, including the VMware Merger, and their integration involve risks and uncertainties, such as:•unexpected delays, challenges and related expenses, and disruption of our business;•diversion of management’s attention from daily operations and the pursuit of other opportunities;•incurring significant restructuring charges and amortization expense, assuming liabilities (some of which may be unexpected) and ongoing or new lawsuits, potential impairment of acquired goodwill and other intangible assets, and increasing our expenses and working capital requirements; •the potential for deficiencies in internal controls at the acquired business, as well as implementing our own management information systems, operating systems and internal controls for the acquired operations;•our due diligence process may fail to identify significant issues with the acquired business’ products, financial disclosures, accounting practices, legal, tax and other contingencies, compliance with local laws and regulations (and interpretations thereof) in the U.S. and multiple international jurisdictions;•additional acquisition-related debt, which could increase our leverage and potentially negatively affect our credit ratings resulting in more restrictive borrowing terms or increased borrowing costs thereby limiting our ability to borrow; •dilution of stock ownership of existing stockholders;•difficulties integrating the acquired business or company and in managing and retaining acquired employees, vendors and customers; and •inaccuracies in our original estimates and assumptions used to assess a transaction, which may result in us not realizing the expected financial or strategic benefits of any such transaction. In addition, current and future changes to the U.S. and foreign regulatory approval process and requirements related to acquisitions may cause approvals to take longer than anticipated, not be forthcoming or contain burdensome conditions, which may prevent the transaction or jeopardize, delay or reduce the anticipated benefits of the transaction, and impede the execution of our business strategy. From time to time, we may also seek to divest or wind down portions of our business, either acquired or otherwise, or we may exit minority investments, any of which could materially affect our cash flows and results of operations. Such dispositions involve risks and uncertainties, including our ability to sell such businesses on terms acceptable to us, or at all, disruption to other parts of our business, potential loss of employees or customers, or exposure to unanticipated liabilities or ongoing obligations to us following any such dispositions. In addition, dispositions may include the transfer of technology and/or the licensing of certain IP rights to third-party purchasers, which could limit our ability to utilize such IP rights or assert these rights against such third-party purchasers or other third parties.We are subject to risks associated with our distributors and other channel partners, including product inventory levels and product sell-through.We sell our products through a direct sales force and a select network of distributors and other channel partners globally. Sales to distributors accounted for 57% of our net revenue in the fiscal year ended October 29, 2023 and are subject to a number of risks, including:18Table of Contents•fluctuations in demand based on our distributors’ product inventory levels and end customer demand;•our distributors and other channel partners are generally not subject to minimum sales requirements or any obligation to market our products to their customers;•our distributors and other channel partners agreements are generally nonexclusive and may be terminated at any time without cause;•our lack of control over the timing of delivery of our products to end customers; and•our distributors and other channel partners may market and distribute competing products and may place greater emphasis on the sale of these products.We expect our dependence on channel partners will increase following the VMware Merger. Failure to maintain good relationships with our distributors and channel partners could adversely impact our business. In addition, we sell our semiconductor products through an increasingly limited number of distributors, which exposes us to additional customer concentration and related credit risks. We do not always have a direct relationship with the end customers of our products. As a result, our semiconductor products may be used in applications for which they were not necessarily designed or tested, including, for example, medical devices, and they may not perform as anticipated in such applications. In such event, failure of even a small number of parts could result in significant liabilities to us, damage our reputation and harm our business and results of operations.Our business would be adversely affected by the departure of existing members of our senior management team.Our success depends, in large part, on the continued contributions of our senior management team, and in particular, the services of Hock E. Tan, our President and Chief Executive Officer. Effective succession planning is also important for our long-term success. Failure to ensure effective transfers of knowledge and smooth transitions involving senior management could hinder our strategic planning and execution. None of our senior management is bound by written employment contracts. In addition, we do not currently maintain key person life insurance covering our senior management. The loss of any of our senior management could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate.If we are unable to attract and retain qualified personnel, especially our engineering and technical personnel, we may not be able to execute our business strategy effectively.Our future success depends on our ability to attract, retain and motivate qualified personnel. As the source of our technological and product innovations, our engineering and technical personnel (including cyber security experts) are a significant asset. Competition for these employees is significant in many areas of the world in which we operate, particularly in Silicon Valley and Southeast Asia where qualified engineers are in high demand. In addition, current or future immigration laws may make it more difficult to hire or retain qualified engineers, further limiting the pool of available talent. We believe equity awards provide a powerful long-term retention incentive and have historically granted these awards to the substantial majority of our employees. If we are unable to continue our current equity granting philosophy, this could impair our efforts to attract and retain necessary personnel. Any inability to retain, attract or motivate such personnel and provide competitive employment benefits could have a material adverse effect on our business, financial condition and results of operations.An impairment of the confidentiality, integrity, or availability of our IT systems, or those of one or more of our corporate infrastructure vendors could have a material adverse effect on our business.Our business depends on a wide variety of complex IT systems and services, including cloud-based and other critical corporate services relating to, among other things, product research and development, financial reporting, product orders and fulfillment, HR, benefit plan administration, IT network management, and electronic communication and collaboration services. These systems and services are both internally managed and outsourced, and in many cases we rely upon third-party data centers. Any failure of these internal or third-party systems and services to operate effectively could disrupt our operations and could have a material adverse effect on our business, financial condition and results of operations. Our operations are dependent upon our ability to protect our IT infrastructure against damage from business continuity events that could have a significant disruptive effect. Although these systems are designed to protect and secure our customers’, suppliers’ and employees’ confidential information, as well as our own proprietary information, we are, out of necessity, dependent on our vendors to adequately address cyber security threats to their own systems. In addition, software products we use and technologies produced by us have occasionally had in the past and may have in the future, vulnerabilities that, if left unmitigated, could reduce the overall level of security of the systems on which the software is installed. Cyber-attacks are increasing in number and sophistication, are well-financed, in some cases supported by state actors, and are designed to not only attack, but also to evade detection. Since the techniques used to obtain unauthorized access to systems, or to otherwise sabotage them, change frequently and are often not recognized until launched against a target, we 19Table of Contentsmay be unable to anticipate these techniques or to implement adequate preventative measures. As a critical vendor in the digital supply chain for both governmental entities and critical infrastructure operators, we and our products may be targeted by those seeking to threaten the confidentiality, integrity and availability of systems supporting essential public services. Geopolitical instability may increase the likelihood that we will experience direct or collateral consequences from cyber conflicts between nation-states or other politically motivated actors targeting critical technology infrastructure. Accidental or willful security breaches or other unauthorized access to our information systems or the systems of our service providers and business partners, or the existence of computer viruses or malware (such as ransomware) in our or their data or software have in the past, and could in the future, expose us to a risk of information loss, business disruption, and misappropriation of proprietary and confidential information, including information relating to our products or customers and the personal information of our employees or third parties. Such an event could disrupt our business and result in, among other things, unfavorable publicity, damage to our reputation, loss of our trade secrets and other competitive information, litigation by affected parties and possible financial obligations for liabilities and damages related to the theft or misuse of such information, significant remediation costs, disruption of key business operations and significant diversion of our resources, as well as fines and other sanctions resulting from any related breaches of data privacy regulations (such as the General Data Protection Regulation), any of which could have a material adverse effect on our business, profitability and financial condition. While we may be entitled to damages if our vendors fail to perform under their agreements with us, any award may be insufficient to cover the actual costs incurred by us and, as a result of a vendor’s failure to perform, we may be unable to collect any damages.Despite our internal controls and investment in security measures, we have, from time to time, been subject to disruptive cyber-attacks and unauthorized network intrusions and malware on our own IT networks or those of our service providers or business partners. Although no such cyber security incidents have been material to Broadcom, we continue to devote resources to protect our systems and data from unauthorized access or misuse, and we may be required to expend greater resources in the future. Businesses we acquire may increase the scope and complexity of our IT networks, and this may increase our risk exposure to cyber-attacks when there are difficulties integrating diverse legacy systems that support operations for the acquired businesses.In addition, certain aspects of effective cybersecurity are dependent upon our employees, contractors and other trusted partners reliably safeguarding secrets (e.g., application credentials) and adhering to our security policies and access control mechanisms. We have in the past experienced, and expect in the future to experience, security incidents arising from a failure to properly handle such secrets or adhere to such policies and, although no such events have had a material adverse effect on our business, there can be no assurance that an insider threat will not result in an incident that is material to Broadcom. Our logging, alerting and cyber incident detection mechanisms may not cover every system potentially targeted by threat actors, may not have the capability to detect certain types of unauthorized activities, and may not capture and surface information sufficient to enable us to timely detect and take responsive action to insider or external threats.U.S. and foreign regulators, as well as customers and service providers, have also increased their focus on cyber security vulnerabilities and risks. Compliance with laws, regulations, and contractual provisions concerning privacy, cyber security, secure technology development, data governance, data protection, confidentiality and IP could result in significant expense, and any failure to comply could result in proceedings against us by regulatory authorities or other third parties and may also increase our overall compliance burden.We operate in the highly cyclical semiconductor industry.The semiconductor industry is highly cyclical and is characterized by price erosion, wide fluctuations in product supply and demand, constant and rapid technological change, evolving technical standards, frequent new product introductions, and short product life cycles (for semiconductors and for many of the end products in which they are used). From time to time, these factors, together with changes in general economic conditions, cause significant upturns and downturns in the industry in general, and in our business in particular. The industry previously experienced a significant upturn due to a supply imbalance that resulted in record profitability and increases in average selling prices. The industry, however is currently experiencing a downturn, and historically, such down-cycles have been characterized by diminished demand for end-user products, high inventory levels and periods of inventory adjustment, under-utilization of manufacturing capacity, changes in revenue mix, accelerated erosion of average selling prices and elimination of expedite fees leading to reduced profitability and a decline in our stock price. The Creating Helpful Incentives to Produce Semiconductors for America Act could also result in an increase in supply leading to excess inventory and a decrease in average selling prices. We expect our business to continue to be subject to cyclical downturns even when overall economic conditions are relatively stable. If we cannot offset industry or market downturns, our net revenue may decline and our financial condition and results of operations may suffer.20Table of ContentsThe majority of our sales have historically come from a small number of customers and a reduction in demand or loss of one or more of our significant customers may adversely affect our business.We have historically depended on a small number of end customers, OEMs, their respective contract manufacturers (“CMs”) and certain distributors for a majority of our business and revenue. For fiscal year 2023, sales to distributors accounted for 57% of our net revenue. We believe aggregate sales, through all channels, to Apple and our top five end customers, accounted for approximately 20% and 35% of our net revenue for fiscal year 2023, respectively. This customer concentration increases the risk of quarterly fluctuations in our operating results and our sensitivity to any material adverse developments experienced by our significant customers.Our semiconductor customers are not generally required to purchase specific quantities of products. Even when customers agree to source an agreed portion of their product needs from us, such arrangements often include pricing schedules or methodologies that apply regardless of the volume of products purchased, and those customers may not purchase the amount of product we expect. As a result, we may not generate the amount of revenue or achieve the level of profitability we expect under such arrangements. Moreover, our top customers’ purchasing power has, in some cases, given them the ability to make greater demands on us with regard to pricing and contractual terms in general. We expect this trend to continue, which may adversely affect our gross margin on certain products and, should we fail to perform under these arrangements, we could also be liable for significant monetary damages.The loss of, or any substantial reduction in sales to, any of our top customers could have a material adverse effect on our business, financial condition, results of operations and cash flows.Dependence on contract manufacturing and suppliers of critical components within our supply chain may adversely affect our ability to bring products to market, damage our reputation and adversely affect our results of operations.We operate a primarily outsourced manufacturing business model that principally utilizes CMs, such as third-party wafer foundries and module assembly and test capabilities. Our semiconductor products require wafer manufacturers with state-of-the-art fabrication equipment and techniques, and most of our products are designed to be manufactured in a specific process, typically at one particular fab or foundry, either our own or with a particular CM.We depend on our CMs to allocate sufficient manufacturing capacity to meet our needs, to produce products of acceptable quality at acceptable yields, and to deliver those products to us on a timely basis. We do not generally have long-term capacity commitments with our CMs and substantially all of our manufacturing services are on a purchase order basis with no minimum quantities. Further, our CMs may fail to timely develop new, advanced manufacturing processes, including transitions to smaller geometry process technologies or, from time to time, will cease to, or will become unable to, manufacture a component for us. As lead times to identify, qualify and establish reliable production at acceptable yields with a new CM is typically lengthy, there is often no readily available alternative source and there may be other constraints on our ability to change CMs. In addition, qualifying new CMs is often expensive, and they may not produce products as cost-effectively as our current suppliers. TSMC, one of our CMs, manufactured approximately 90% of the wafers manufactured by our CMs during fiscal year 2023. We believe our wafer requirements represent a meaningful portion of TSMC’s total production capacity. However, TSMC also fabricates wafers for other companies, including some of our competitors, and could choose or be required to prioritize capacity for other customers or reduce or eliminate deliveries to us on short notice. In addition, TSMC has, and may in the future, raise their prices to us. If any of the foregoing circumstances occur, we may be unable to meet our customer demand, or to the same extent as our competitors, fail to meet our contractual obligations or forgo revenue opportunities. This could damage our relationships with our customers or result in litigation for alleged failure to meet our obligations, payment of significant damages, and our net revenue could decline, adversely affecting our business, financial condition, results of operations and gross margin. Further, any substantial disruption in the contract manufacturing services that we utilize, including TSMC’s supply of wafers to us, as a result of a natural disaster, climate change, water shortages, political unrest, military conflicts, geopolitical turmoil, trade tensions, government orders, labor shortages, medical epidemics, such as the COVID-19 pandemic, economic instability, equipment failure or other cause, could materially harm our business, customer relationships and results of operations.We purchase a significant amount of the materials used in our products from a limited number of suppliers.Our manufacturing processes and those of our CMs rely on many materials, including silicon, GaAs and InP wafers, copper lead frames, precious and rare earth metals, mold compound, ceramic packages and various chemicals and gases. During fiscal year 2023, we purchased approximately two-thirds of our manufacturing materials from five materials providers, some of which are single source suppliers. As certain materials are highly specialized, the lead time needed to identify and qualify a new supplier is typically lengthy and there is often no readily available alternative source. We do not generally have long-term 21Table of Contentscontracts with our materials providers and substantially all of our purchases are on a purchase order basis. Suppliers may extend lead times, limit supplies, place products on allocation or increase prices due to commodity price increases, capacity constraints, inflation, or other factors, any of which could lead to interruption of supply or increased demand in the industry. For example, macroeconomic and geopolitical conditions, as well as the COVID-19 pandemic, caused some supply constraints and increases in prices, including with respect to wafers and substrates. Additionally, the supply of these materials may be negatively impacted by increased trade tensions between the U.S. and its trading partners, particularly China. Any such supply constraints could result in loss of revenue opportunities and adversely impact our business, financial condition and results of operations.Failure to adjust our manufacturing and supply chain to accurately meet customer demand could adversely affect our results of operations.We make significant decisions, including determining the levels of business that we will seek and accept, production schedules, levels of reliance on contract manufacturing and outsourcing, internal fabrication utilization and other resource requirements, based on customer requirements or estimates thereof, which may not be accurate. We largely build to order and have extended customer lead times substantially, which has limited and may continue to limit our ability to fulfill orders and satisfy all of the demand for our products. Customers may require rapid increases in production on short notice. If we are unable to meet such increases in demand, this could damage our customer relationships, reduce revenue growth and margins, subject us to additional liabilities, harm our reputation, and prevent us from taking advantage of opportunities.Conversely, if actual sales of our products is lower than expected, we may also experience higher inventory carrying and operating costs and product obsolescence. Because certain of our sales, research and development, and internal manufacturing overhead expenses are relatively fixed, a reduction in customer demand may also decrease our gross margin and operating income.Winning business in the semiconductor solutions industry is subject to a lengthy process that often requires us to incur significant expense, from which we may ultimately generate no revenue.Our semiconductor business is dependent on us winning competitive bid selection processes, known as “design wins”. These selection processes are typically lengthy and can require us to dedicate significant development expenditures and scarce engineering resources in pursuit of a single customer opportunity. Failure to obtain a particular design win may prevent us from obtaining design wins in subsequent generations of a particular product. This can result in lost revenue and can weaken our position in future selection processes.Winning a product design does not guarantee sales to a customer. A delay or cancellation of a customer’s plans could materially and adversely affect our financial results, as we incur significant expense in the design process and may generate little or no revenue from it. In addition, the timing of design wins is unpredictable and implementing production for a major design win, or multiple design wins at the same time, may strain our resources and those of our CMs. In such event, we may be forced to dedicate significant additional resources and incur additional costs and expenses. Further, often customers will only purchase limited numbers of evaluation units until they qualify the products and/or the manufacturing line for those products. The qualification process can take significant time and resources. Delays in qualification or failure to qualify our products may cause a customer to discontinue use of our products and result in a significant loss of revenue. Finally, customers could choose at any time to stop using our products or could fail to successfully market and sell their products, which could reduce demand for our products and cause us to hold excess inventory, materially adversely affecting our business, financial condition and results of operations. These risks are exacerbated by the fact that many of our products, and the end products into which our products are incorporated, often have very short life cycles.A prolonged disruption of our manufacturing facilities, research and development facilities, warehouses or other significant operations, or those of our suppliers, could have a material adverse effect on our business, financial condition and results of operations.Although we operate a primarily outsourced manufacturing business model, we also rely on our own manufacturing facilities, in particular in Fort Collins, Colorado, Singapore, and Breinigsville, Pennsylvania. We use these internal fabrication facilities for products utilizing our innovative and proprietary processes. Our Fort Collins and Breinigsville facilities are the sole sources for the FBAR components used in many of our wireless devices and for the InP-based wafers used in our fibre optics products, respectively. Many of our facilities, and those of our CMs and suppliers, are located in California and the Pacific Rim region, which have above average seismic activity and severe weather activity. In addition, a significant majority of our research and development personnel are located in the Czech Republic, India, Israel, and the U.S., with the expertise of the personnel at each such location tending to be focused on one or two specific areas, and our primary warehouse is in Malaysia.A prolonged disruption at or shut-down of one or more of our manufacturing facilities or warehouses, especially our Colorado, Singapore, Malaysia and Pennsylvania facilities, or those of our CMs or suppliers, due to natural- or man-made 22Table of Contentsdisasters or other events outside of our control, such as equipment malfunction or widespread outbreaks of acute illness, including COVID-19, or for any other reason, would limit our capacity to meet customer demands and delay new product development until a replacement facility and equipment, if necessary, were found. To date, we have not experienced a material event, however such an event could disrupt our operations, delay production, shipments and revenue, result in us being unable to timely satisfy customer demand, expose us to claims by our customers, result in significant expense to repair or replace our affected facilities, and, in some instances, could significantly curtail our research and development efforts in a particular product area or target market. As a result, we could forgo revenue opportunities, potentially lose market share, damage our customer relationships and be subject to litigation and additional liabilities, all of which could materially and adversely affect our business. Although we purchase insurance to mitigate certain losses, such insurance often carries a high deductible amount and any uninsured losses could negatively affect our operating results. In addition, even if we were able to promptly resume production of our affected products, if our customers cannot timely resume their own manufacturing following such an event, they may cancel or scale back their orders from us and this may in turn adversely affect our results of operations. Such events could also result in increased fixed costs relative to the revenue we generate and adversely affect our results of operations.We may be unable to maintain appropriate manufacturing capacity or product yields at our own manufacturing facilities, which could adversely affect our relationships with our customers, and our business, financial condition and results of operations.We must maintain appropriate capacity and product yields at our own manufacturing facilities to meet anticipated customer demand. From time to time, this requires us to invest in expansion or improvements of those facilities, which often involves substantial cost and other risks. Such expanded manufacturing capacity may still be insufficient, or may not come online soon enough, to meet customer demand and we may have to put customers on product allocation, forgo sales or lose customers as a result. Conversely, if we overestimate customer demand, we would experience excess capacity and fixed costs at these facilities will not be fully absorbed, all of which could adversely affect our results of operations. Similarly, reduced product yields, due to design or manufacturing issues or otherwise, may involve significant time and cost to remedy and cause delays in our ability to supply product to our customers, all of which could cause us to forgo sales, incur liabilities or lose customers, and harm our results of operations.We may be involved in legal proceedings, including IP, securities litigation, and employee-related claims, which could, among other things, divert efforts of management and result in significant expense and loss of our IP rights.We are often involved in legal proceedings, including cases involving our IP rights and those of others, commercial matters, acquisition-related suits, securities class action suits, employee-related claims and other actions. Litigation or settlement of such actions, regardless of their merit, can be costly, lengthy, complex and time consuming, diverting the attention and energies of our management and technical personnel.The industries in which we operate are characterized by companies holding large numbers of patents, copyrights, trademarks and trade secrets and by the vigorous pursuit, protection and enforcement of IP rights, including actions by patent-holding companies that do not make or sell products. From time to time, third parties assert against us and our customers and distributors their IP rights to technologies that are important to our business. For example, in September 2023 we settled a patent infringement claim filed by California Institute of Technology against Broadcom and Apple. Many of our customer agreements, and in some cases our asset sale agreements, and/or the laws of certain jurisdictions may require us to indemnify our customers or purchasers for third-party IP infringement claims, including costs to defend those claims, and payment of damages in the case of adverse rulings. However, our CMs and suppliers may or may not be required to indemnify us should we or our customers be subject to such third-party claims. Claims of this sort could also harm our relationships with our customers and might deter future customers from doing business with us. If any pending or future proceedings result in an adverse outcome, we could be required to:•cease the manufacture, use or sale of the infringing products, processes or technology and/or make changes to our processes or products;•pay substantial damages for past, present and future use of the infringing technology, including up to treble damages if willful infringement is found;•expend significant resources to develop non-infringing technology;•license technology from the third-party claiming infringement, which license may not be available on commercially reasonable terms, or at all;•enter into cross-licenses with our competitors, which could weaken our overall IP portfolio and our ability to compete in particular product categories;23Table of Contents•pay substantial damages to our direct or end customers to discontinue use or replace infringing technology with non-infringing technology; or•relinquish IP rights associated with one or more of our patent claims.Any of the foregoing results could have a material adverse effect on our business, financial condition and results of operations.In addition, we may be obligated to indemnify our current or former directors or employees, or former directors or employees of companies that we have acquired, in connection with such litigation. These liabilities could be substantial and may include, among other things, the cost of defending lawsuits against these individuals, as well as stockholder derivative suits; civil or criminal fines and penalties; legal and other expenses; and expenses associated with the remedial measure, if any, which may be imposed.If demand for our data center virtualization products is less than anticipated, our business could be adversely affected.We expect to generate a significant portion of our software revenue from our data center virtualization products. However, if businesses build new or shift existing compute workloads off-premises to public cloud providers, this could limit the market for on-premises deployments of our data center virtualization products. Although we have developed, and will continue to develop, products to extend our product offerings to the public cloud, if demand for our server virtualization products is significantly less than anticipated, our business, financial condition, results of operations and cash flows may be adversely affected. The growth of our software business depends on customer acceptance of our newer products and services.Many of our software products and services are based on data center virtualization, application modernization and related hybrid-cloud technologies used to manage distributed computing architectures, which form the foundation for hybrid-cloud computing. We expect to increase product development and marketing and sales efforts toward products and services that enable businesses to modernize applications and efficiently implement their hybrid-cloud services. These cloud and SaaS initiatives present new and difficult technological, operational and compliance challenges. We expect significant investments will be required to develop or acquire solutions to address those challenges. Current and future customers may not perceive benefits and cost savings associated with adopting our hybrid-cloud and application platform solutions or we may fail to realize returns on our investments in new initiatives, which could harm our results of operations.If our software products do not remain compatible with ever-changing operating environments, platforms, or third-party products, demand for our products and services could decrease, which could materially adversely affect our business.We may be required to make substantial modification of our products to maintain compatibility with operating systems, systems software and computer hardware used by our customers or to provide our customers with desired features or capabilities. We must also continually address the challenges of dynamic and accelerating market trends and competitive developments, such as the emergence of advanced persistent threats in the security space to compete effectively. There can be no assurance that we will be able to adapt our products in response to these developments.Further, our software solutions interact with a variety of software and hardware developed by third parties, as well as cloud providers. If we lose access to third-party code and specifications for the development of code or cloud providers fail to support our products or otherwise limit the functionality, compatibility or certification of our products, this could negatively impact our ability to develop compatible software. In addition, if software providers and hardware manufacturers, including some of our largest vendors, adopt new policies restricting the use or availability of their code or technical documentation for their operating systems, applications, or hardware, or otherwise impose unfavorable terms and conditions for such access, this could result in higher research and development costs for the enhancement and modification of our existing products or development of new products. Any additional restrictions could materially adversely affect our business, financial condition and operating results and cash flow.Failure to enter into software license agreements on a satisfactory basis could materially adversely affect our business.Many of our existing customers have multi-year enterprise software license agreements, some of which involve substantial aggregate fee amounts. These customers often do not have a contractual obligation to purchase additional solutions. Customer renewal rates may decline or fluctuate as a result of a number of factors, including the level of customer satisfaction with our solutions or customer support, customer budgets and the pricing of our solutions as compared with the solutions offered by our competitors, any of which may cause our revenue to grow more slowly than expected, if at all. The failure to renew customer agreements of similar scope, on terms that are commercially attractive to us, could materially adversely affect our business, financial condition and operating results and cash flow.24Table of ContentsCertain software that we use in our products is licensed from third parties and may not be available to us in the future, which may delay product development and production or cause us to incur additional expense.Some of our solutions contain software licensed from third parties, some of which may not be available to us in the future on terms that are acceptable to us or allow our products to remain competitive. The loss of these licenses or the inability to maintain any of them on commercially acceptable terms could delay development of future products or the enhancement of existing products. Our use of open source software in certain products and services could materially adversely affect our business, financial condition, operating results and cash flow.Many of our products and services incorporate open source software, the use of which may subject us to certain conditions, including the obligation to offer such products for no cost or to make the proprietary source code of those products publicly available. Open source licenses are generally “as-is” and do not provide warranties, support or assurance of title or controls on origin of the software, which exposes us to potential liability if the software fails to work or infringes the intellectual property of a third-party. Although we monitor our use of open source software to avoid subjecting our products to unintended conditions and exposing us to unacceptable financial risk, such use, under certain circumstances, could materially adversely affect our business, financial condition and operating results and cash flow, including if we are required to take remedial action that may divert resources away from our development efforts. In addition, we may receive inquiries or claims from authors, distributors or recipients of open source software included in our products regarding our compliance with the conditions of such open source licenses and we may be required to take steps to avoid or remedy an alleged infringement or noncompliance, including modifying our product code, stopping the distribution of some of our products, paying damages or releasing the source code of our propriety software. Further, although we believe that we have complied with our obligations under the licenses for such open source software, there is little legal precedent governing the interpretation of some terms in some of these licenses, which increases the risk that a court could interpret the licenses differently than we do.Failure of our software products to manage and secure IT infrastructures and environments could have a material adverse effect on our business.Certain aspects of our software products are intended to manage and secure IT infrastructures and environments, and as a result, we expect these products to be ongoing targets of cyber-attacks. Open source code or other third-party software used in these products could also be targeted and may make our products vulnerable to additional security risks not posed by purely proprietary products. Our products are complex and, when deployed, may contain errors, defects or security vulnerabilities, some of which may not be discovered before the product has been released, installed and used by customers. The complexity and breadth of our technical and production environments, which involve globally dispersed development and engineering teams, increases the risk that errors, defects or vulnerabilities will be introduced and may delay our ability to detect, mitigate or remediate such incidents. In the past, elements of our proprietary source code have been exposed in an unauthorized manner. It is possible that such exposure of source code could reveal unknown security vulnerabilities in our products that could be exploited by malicious actors. Our products are also subject to known and unknown security vulnerabilities resulting from integration with third-party products or services.Although we continually seek to improve our countermeasures to prevent such incidents, we may be unable to anticipate every scenario and it is possible that certain cyber threats or vulnerabilities will be undetected or unmitigated in time to prevent an attack or an accidental incident on us and our customers. Additionally, efforts by malicious cyber actors or others could cause interruptions, delays or cessation of our product licensing, or modification of our software, which could cause us to lose existing or potential customers. A successful cyber-attack involving our products could cause customers and potential customers to believe our services are ineffective or unreliable and result in, among other things, the loss of customers, unfavorable publicity, damage to our reputation, difficulty in marketing our products, allegations by our customers that we have not performed our contractual obligations and give rise to significant costs, including costs related to developing solutions or indemnification obligations under our agreements. Any such event could adversely impact our revenue and results of operations. See also “An impairment of the confidentiality, integrity, or availability of our IT systems, or those of one or more of our corporate infrastructure vendors, could have a material adverse effect on our business”.Our sales to government customers subject us to uncertainties and governmental regulations, which could have a material adverse effect on our business.Our contracts signed with the U.S. federal, state and local government and non-U.S. government agencies are generally subject to annual fiscal funding approval and may be renegotiated or terminated at the discretion of the government. 25Table of ContentsTermination, renegotiation or the lack of funding approval for a contract could adversely affect our sales, revenue and reputation. Additionally, our government contracts and our arrangements with channel partners who may sell directly to government customers are generally subject to certain requirements, some of which are generally not present in commercial contracts and/or may be complex, as well as to audits and investigations. Failure to meet contractual requirements could result in various civil and criminal actions and penalties, and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the government, which could materially adversely affect our business, financial condition, operating results and cash flow.Failure to effectively manage our products and services lifecycles could harm our business.As part of the natural lifecycle of our products and services, customers are informed when products or services will be reaching their end of life or end of availability and will no longer be supported or receive updates and security patches. If these products or services remain subject to a service contract, the customer may transition to alternative products or services. Failure to effectively manage our products and services lifecycles could lead to customer dissatisfaction and contractual liabilities, which could adversely affect our business and operating results.Our operating results are subject to substantial quarterly and annual fluctuations.Our operating results have fluctuated in the past and are likely to fluctuate in the future. These fluctuations may occur on a quarterly and annual basis and are due to a number of factors, many of which are beyond our control. In addition to many of the risks described elsewhere in this “Risk Factors” section, these factors include, among others:•the timing of launches by our customers of new product in which our products are included and changes in end-user demand for our customers’ products;•fluctuations in the levels of component or product inventories held by our customers, which may lead to increased requests to delay shipment of our products;•the shift to cloud-based IT solutions and services, such as hyperscale computing, which may adversely affect the timing and volume of sales of our products for use in traditional enterprise data centers;•the timing of new software contracts and renewals, as well as the timing of any terminations of software contracts that require us to refund to customers any pre-paid amounts under the contract;•our ability to timely develop, introduce and market new products and technologies;•the timing and extent of our software license and subscription revenue, and other non-product revenue;•new product announcements and introductions by us or our competitors;•seasonality or other fluctuations in demand in our markets;•timing and amount of research and development and related new product expenditures, and the timing of receipt of any research and development grant monies; and•timing of any regulatory changes, particularly with respect to trade sanctions and customs duties and tariffs, and tax reform.The foregoing factors are often difficult to predict, and these, as well as other factors, could materially adversely affect our quarterly or annual operating results. In addition, a significant amount of our operating expenses are relatively fixed in nature. Any failure to adjust spending quickly enough to compensate for a revenue shortfall could magnify the adverse impact of such revenue shortfall on our results of operations. As a result, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be meaningful or reliable indicators of our future performance. If our operating results in one or more future quarters fail to meet the expectations of securities analysts or investors, a significant decline in the trading price of our common stock may occur, which may happen immediately or over time.Competition in our industries could prevent us from growing our revenue.The industries in which we operate are highly competitive and characterized by rapid technological changes, evolving industry standards, changes in customer requirements, often aggressive pricing practices and, in some cases, new delivery methods. We expect competition in these industries to continue to increase as existing competitors improve or expand their product offerings or as new competitors enter our markets. Some of our competitors have longer operating histories, greater name recognition, a larger installed customer base, larger technical staffs, more established relationships with vendors or suppliers, or greater manufacturing, distribution, financial, research and development, technical and marketing resources than us. We also face competition from public cloud 26Table of Contentsproviders, numerous smaller companies that specialize in specific aspects of the highly fragmented software industry, open source authors who provide software and IP for free, competitors who offer their products through try-and-buy or freemium models, and customers who develop competing products.In addition, the trend toward consolidation is changing the competitive landscape. We expect this trend to continue, which may result in combined competitors having greater resources than us. Some of our competitors may also receive financial and other support from their home country government or may have a greater presence in key markets, a larger customer base, a more comprehensive IP portfolio or better patent protection than us. The actions of our competitors, in the areas of pricing and product bundling in particular, could have a substantial adverse impact on us. Further, competitors may leverage their superior market position, as well as IP or other proprietary information, including interface, interoperability or technical information, in new and emerging technologies and platforms that may inhibit our ability to compete effectively. If we are unable to compete successfully, we may lose market share for our products or incur significant reduction in our gross margins, either of which could have a material adverse effect on our business and results of operations.Our gross margin is dependent on a number of factors, including our product mix, price erosion, acquisitions we may make, level of capacity utilization and commodity prices.Our gross margin is highly dependent on product mix, which is susceptible to seasonal and other fluctuations in our markets. A shift in sales mix away from our higher margin products, as well as the timing and amount of our software licensing and non-product revenue, could adversely affect our future gross margin percentages. In addition, increased competition and the existence of product alternatives, more complex engineering requirements, lower demand, industry oversupply or reductions in our technological lead compared to our competitors, and other factors have in the past and may in the future lead to further price erosion, lower revenue and lower margin. Conversely, periods of robust demand that create a supply imbalance can lead to higher gross margins that may not be sustainable over the longer term.In addition, semiconductor manufacturing requires significant capital investment, leading to high fixed costs, including depreciation expense. If we are unable to utilize our owned manufacturing facilities at a high level, the fixed costs associated with these facilities will not be fully absorbed, resulting in higher average unit costs and a lower gross margin. Furthermore, we do not hedge our exposure to commodity prices, some of which are very volatile, and sudden or prolonged increases in commodity prices may adversely affect our gross margin.Our gross margin may also be adversely affected if businesses or companies that we acquire have different gross margin profiles and by expenses related to such acquisitions.We utilize a significant amount of IP in our business. If we are unable or fail to protect our IP, our business could be adversely affected.Our success depends in part upon protecting our IP. To accomplish this, we rely on a combination of IP rights, including patents, copyrights, trademarks and trade secrets, as well as customary contractual protections with our customers, suppliers, employees and consultants. We spend significant resources to monitor and protect our IP rights, including the unauthorized use of our products, usage rates of the software seat licenses and subscriptions that we sell, and even with significant expenditures, we may not be able to protect the IP rights that are valuable to our business. We are unable to predict or assure that:•our IP rights will not lapse or be invalidated, circumvented, challenged, or, in the case of third-party IP rights licensed to us, be licensed to others;•our IP rights will provide competitive advantages to us;•rights previously granted by third parties to IP licensed or assigned to us, including portfolio cross-licenses, will not hamper our ability to assert our IP rights or hinder the settlement of currently pending or future disputes;•any of our pending or future patent, trademark or copyright applications will be issued or have the coverage originally sought;•our IP rights will be enforced in certain jurisdictions where competition is intense or where legal protection may be weak; or•we have sufficient IP rights to protect our products or our business.Effective IP protection may be unavailable or more limited in other jurisdictions, relative to those protections available in the U.S., and may not be applied for or may be abandoned in one or more relevant jurisdictions. In addition, when patents expire, we lose the protection and competitive advantages they provided to us.27Table of ContentsWe also generate revenue from licensing royalty payments and from technology claim settlements relating to certain of our IP. Licensing of our IP rights, particularly exclusive licenses, may limit our ability to assert those IP rights against third parties, including the licensee of those rights. In addition, we may acquire companies with IP that is subject to licensing obligations to other third parties. These licensing obligations may extend to our own IP following any such acquisition and may limit our ability to assert our IP rights. From time to time, we pursue litigation to assert our IP rights, including, in some cases, against our customers and suppliers. Claims of this sort could also harm our relationships with our customers and might deter future customers from doing business with us. Conversely, third parties have and may in the future pursue IP litigation against us, including as a result of our IP licensing business. An adverse decision in such types of legal action could limit our ability to assert our IP rights and limit the value of our technology, including the loss of opportunities to sell or license our technology to others or to collect royalty payments, which could otherwise negatively impact our business, financial condition and results of operations.From time to time, we may need to obtain additional IP licenses or renew existing license agreements. We are unable to predict whether these license agreements can be obtained or renewed on acceptable terms or at all.We are subject to warranty claims, product recalls and product liability.From time to time, we may be subject to warranty or product liability claims that may lead to significant expense. Our customer contracts typically contain warranty and indemnification provisions, and in certain cases may also contain liquidated damages provisions, relating to product quality issues. The potential liabilities associated with such provisions are significant, and in some cases, including in agreements with some of our largest customers, are potentially unlimited. Any such liabilities may greatly exceed any revenue we receive from the relevant products. Costs, payments or damages incurred or paid by us in connection with warranty and product liability claims and product recalls could materially adversely affect our financial condition and results of operations. We may also be exposed to such claims as a result of any acquisition we may undertake in the future.Product liability insurance is subject to significant deductibles and there is no guarantee that such insurance will be available or adequate to protect against all such claims, or we may elect to self-insure with respect to certain matters. For example, it is possible for one of our customers to recall a product containing one of our semiconductor devices. In such an event, we may incur significant costs and expenses, including among others, replacement costs, contract damage claims from our customers and reputational harm. Although we maintain reserves for reasonably estimable liabilities and purchase product liability insurance, our reserves may be inadequate to cover the uninsured portion of such claims. Conversely, in some cases, amounts we reserve may ultimately exceed our actual liability for particular claims and may need to be reversed.The complexity of our products could result in unforeseen delays or expense or undetected defects or bugs, which could adversely affect the market acceptance of new products, damage our reputation with current or prospective customers, and materially and adversely affect our operating costs.Highly complex products, such as those we offer, may contain defects and bugs when they are first introduced or as new versions, software documentation or enhancements are released, or their release may be delayed due to unforeseen difficulties during product development. If any of our products or third-party components used in our products, contain defects or bugs, or have reliability, quality or compatibility problems, we may not be able to successfully design workarounds. Furthermore, if any of these problems are not discovered until after we have commenced commercial production or deployment of a new product, we may be required to incur additional development costs and product recall, repair or replacement costs. Significant technical challenges also arise with our software products because our customers license and deploy our products across a variety of computer platforms and integrate them with a number of third-party software applications and databases. As a result, if there is system-wide failure or an actual or perceived breach of information integrity, security or availability occurs in one of our end-user customer’s system, it can be difficult to determine which product is at fault and we could ultimately be harmed by the failure of another supplier’s product. Consequently, our reputation may be damaged and customers may be reluctant to buy our products, which could materially and adversely affect our ability to retain existing customers and attract new customers. To resolve these problems, we may have to invest significant capital and other resources and we would likely lose, or experience a delay in, market acceptance of the affected product or products. These problems may also result in claims against us by our customers or others. For example, if a delay in the manufacture and delivery of our products causes the delay of a customer’s end-product delivery, we may be required, under the terms of our agreement with that customer, to compensate the customer for the adverse effects of such delays. As a result, our financial results could be materially adversely affected.We make substantial investments in research and development and unsuccessful investments could materially adversely affect our business, financial condition and results of operations.The industries in which we compete are characterized by rapid technological change, changes in customer requirements, frequent new product introductions and enhancements, short product cycles and evolving industry standards, and new 28Table of Contentsdelivery methods. In addition, semiconductor products transition over time to increasingly smaller line width geometries and failure to successfully transition to smaller geometry process technologies could impair our competitive position. In order to remain competitive, we have made, and expect to continue to make, significant investments in research and development. If we fail to timely develop new and enhanced products and technologies, if we focus on technologies that do not become widely adopted, or if new competitive technologies that we do not support become widely accepted, demand for our products may be reduced. Increased investments in research and development or unsuccessful research and development efforts could cause our cost structure to fall out of alignment with demand for our products, which would have a negative impact on our financial results.We collect, use, store, or otherwise process personal information, which subjects us to privacy and data security laws and contractual commitments, and our actual or perceived failure to comply with such laws and commitments could harm our business.We collect, use and store (collectively, “process”) a high volume, variety and velocity of certain personal information in connection with the operation of our business. This creates various levels of privacy risks across different parts of our business, depending on the type of personal information, the jurisdiction in question and the purpose of their processing. The personal information we process is subject to an increasing number of federal, state, local, and foreign laws and regulations regarding privacy and data security, as well as contractual commitments. Privacy legislation and other data protection regulations, enforcement and policy activity in this area are expanding rapidly in many jurisdictions and creating a complex regulatory compliance environment. Sectoral legislation, certification requirements and technical standards applying to certain categories of our customers, such as those is the financial services or public sector, have exacerbated this trend. The cost of complying with and implementing these privacy-related and data governance measures could be significant as they may create additional burdensome security, business process, business record or data localization requirements. Concerns about government interference, sovereignty, expanding privacy, cyber security and data governance legislation could adversely affect our customers and our products and services, particularly in cloud computing, artificial intelligence and our own data management practices. The theft, loss or misuse of personal data collected, used, stored or transferred by us to run our business could result in significantly increased business and security costs or costs related to defending legal claims. Any inadvertent failure or perceived failure by us to comply with privacy, data governance or cyber security obligations may result in governmental enforcement actions, litigation, substantial fines and damages, and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.We are subject to environmental, health and safety laws, which could increase our costs, restrict our operations and require expenditures that could have a material adverse effect on our results of operations and financial condition.We are subject to a variety of domestic and international laws and regulations relating to the use, disposal, clean-up of and human exposure to hazardous materials. Compliance with environmental, health and safety requirements could, among other things, require us to modify our manufacturing processes, restrict our ability to expand our facilities, or require us to acquire pollution control equipment, all of which can be very costly. Any failure by us to comply with such requirements could result in the limitation or suspension of the manufacture of our products and could result in litigation against us and the payment of significant fines and damages by us in the event of a significant adverse judgment. In addition, complying with any cleanup or remediation obligations for which we are or become responsible could be costly and have a material adverse effect on our business, financial condition and results of operations.Changing requirements relating to the materials composition of our semiconductor products, including the restrictions on lead and certain other substances in electronic products sold in various countries, including the U.S., China and Japan, and in the European Union, increase the complexity and costs of our product design and procurement operations and may require us to re-engineer our products. Such re-engineering may result in excess inventory or other additional costs and could have a material adverse effect on our results of operations. We may also experience claims from employees from time to time with regard to exposure to hazardous materials or other workplace related environmental claims.Environmental, social and governance (“ESG”) matters may adversely affect our relationships with customers and investors.There is an increasing focus from lawmakers, regulators, investors, customers, employees and other stakeholders concerning ESG matters, including environment, climate, diversity and inclusion, human rights and governance transparency. A number of our customers have adopted, or may adopt, procurement policies that include ESG provisions or requirements that their suppliers should comply with, or they may seek to include such provisions or requirements in their procurement terms and conditions. An increasing number of investors are also requiring companies to disclose ESG-related policies, practices and metrics. In addition, various jurisdictions are developing climate-related laws or regulations that could cause us to incur additional direct costs for compliance, as well as indirect costs resulting from our customers, suppliers, or additional compliance costs that are passed on to us. These legal and regulatory requirements, as well as investor expectations on ESG practices and disclosures, are subject to change, can be unpredictable, and may be difficult and expensive for us to comply 29Table of Contentswith, given the complexity of our supply chain and our outsourced manufacturing. Further, there is an increasing number of state-level anti-ESG initiatives in the United States that may conflict with other regulatory requirements or our various stakeholders’ expectations. If we fail to comply with or meet the evolving legal and regulatory requirements or expectations of our various stakeholders, we may be subject to enforcement actions, required to pay fines, customers may stop purchasing products from us or investors may sell their shares, which could harm our reputation, revenue and results of operations. Our actual or perceived failure to achieve our ESG-related initiatives could negatively impact our reputation or harm our business.In addition, as part of their ESG programs, an increasing number of OEMs are seeking to source products that do not contain minerals sourced from areas where proceeds from the sale of such minerals are likely to be used to fund armed conflicts, such as in the Democratic Republic of Congo. This could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of semiconductor devices, including our products. As a result, we may face difficulties in satisfying these customers’ demands, which may harm our sales and operating results.The average selling prices of semiconductor products in our markets have often decreased rapidly and may do so in the future, which could harm our revenue and gross profit.The semiconductor products we develop and sell are used for high volume applications. As a result, the prices of those products have often decreased rapidly. Gross profit on our products may be negatively affected by, among other things, pricing pressures from our customers. In the past, we have reduced the average selling prices of our products in anticipation of future competitive pricing pressures, new product introductions by us or our competitors and other factors. In addition, some of our customer agreements provide for volume-based pricing and product pricing roadmaps, which can also reduce the average selling prices of our products over time. Our margins and financial results will suffer if we are unable to offset any reductions in our average selling prices by increasing our sales volumes, reducing manufacturing costs, or developing new and higher value-added products on a timely basis.Fluctuations in foreign exchange rates could result in losses.We operate global businesses and our consolidated financial results are reported in U.S. dollars. However, some of the revenue and expenses of our foreign subsidiaries are denominated in local currencies. Fluctuations in foreign exchange rates against the U.S. dollar could result in substantial changes in reported revenues and operating results due to the foreign exchange impact of remeasuring these transactions into U.S. dollars.In the normal course of business, we employ various hedging strategies to partially mitigate these risks, including the use of derivative instruments. These strategies may not be effective in protecting us against the effects of fluctuations in foreign exchange rates. As a result, fluctuations in foreign exchange rates could result in financial losses.Risks Related to Our TaxesChanges in tax legislation or policies could materially impact our financial position and results of operations.Corporate tax reform, anti-base-erosion rules and tax transparency continue to be high priorities in many jurisdictions. As a result, policies regarding corporate income and other taxes in numerous jurisdictions are under heightened scrutiny and tax reform legislation has been, and will likely continue to be, proposed or enacted in a number of jurisdictions in which we operate. After the enactment of the U.S. Tax Cuts and Jobs Act (the “2017 Tax Reform Act”), most of our income is taxable in the U.S. with a significant portion taxable under the Global Intangible Low-Taxed Income (“GILTI”) regime. Beginning in fiscal year 2027, the deduction allowable under the GILTI regime will decrease from 50% to 37.5%, which will increase the effective tax rate imposed on our income. The 2017 Tax Reform Act also limits our ability to deduct research and development expenses beginning in fiscal year 2023. These expenses are now capitalized and amortized over 5 years (15 years for foreign expenses), which have and may continue to materially increase our cash tax costs. The U.S. also enacted the Inflation Reduction Act of 2022 (“IRA”) in August 2022, which created a new book minimum tax of at least 15% of consolidated GAAP pre-tax income for corporations with average book income in excess of $1 billion. This book minimum tax will first apply to our fiscal year 2024 and any increase in our effective tax rate or cash tax will depend on a number of factors, including any offsets for foreign tax credits or general business credits, or changes in book income following business combinations. The IRA also created an excise tax of 1% of the value of our stock repurchased after December 31, 2022. While the impact of this excise tax has not been material, it could increase materially depending on various factors, including the amount and frequency of our stock repurchases, applicability to business combination transactions, and any permitted reductions or exceptions to the amount subject to the tax. If (i) the U.S. tax rate increases, (ii) the deduction allowable under the GILTI regime is further reduced or eliminated, or (iii) additional limitations are put on our ability to deduct interest expense, our provision for income taxes, net income, and cash flows would be adversely impacted. In addition, many countries are implementing legislation and other guidance to align their international tax rules with the Organisation for Economic Co-operation and Development’s (“OECD”) Base Erosion and Profit Shifting recommendations and 30Table of Contentsaction plan that aim to standardize and modernize global corporate tax policy, including changes to cross-border tax, transfer pricing documentation rules, and nexus-based tax incentive practices. The OECD is also continuing discussions surrounding fundamental changes in allocation of profits among tax jurisdictions in which companies do business, as well as the implementation of a global minimum tax (namely the “Pillar One” and “Pillar Two” proposals). Many countries have enacted or begun the process of enacting laws based on Pillar Two proposals, which may adversely impact our provision for income taxes, net income and cash flows. As a result of this heightened scrutiny, prior decisions by tax authorities regarding treatments and positions of corporate income taxes could be subject to enforcement activities, and legislative investigation and inquiry, which could also result in changes in tax policies or prior tax rulings. Any substantial changes in domestic or international corporate tax policies, regulations or guidance, enforcement activities or legislative initiatives may materially adversely affect our business, the amount of taxes we are required to pay and our financial condition and results of operations generally.If the tax incentives or tax holiday arrangements we have negotiated change or cease to be in effect or applicable for any reason, or if our assumptions and interpretations regarding tax laws and incentives or holiday arrangements prove to be incorrect, our corporate income taxes could significantly increase.Our operations are currently structured to benefit from the various tax incentives extended to us in various jurisdictions to encourage investment or employment. For example, absent our principal tax incentives from the Singapore Economic Development Board, which is scheduled to expire in 2025, the corporate income tax rate that would apply to our Singapore taxable income would be 17%. We also have a tax holiday on our qualifying income in Malaysia, which is scheduled to expire in fiscal year 2028. Each tax incentive and tax holiday is subject to our compliance with various operating and other conditions and may, in some instances, be amended or terminated prior to their scheduled termination date by the relevant governmental authority. If we cannot, or elect not to, comply with the operating conditions included in any particular tax incentive or tax holiday, we could, in some instances, be required to refund previously realized material tax benefits, or if such tax incentive or tax holiday is terminated prior to its expiration absent a new incentive applying, we will lose the related tax benefits earlier than scheduled. In addition, we may be required, or elect, to modify our operational structure and tax strategy in order to keep an incentive, which could result in a decrease in the benefits of the incentive. Our tax incentives could also be adversely impacted if the global minimum tax provisions (Pillar Two) are adopted in a country in which we have an existing tax incentive. Our tax incentives and tax holiday, before taking into consideration U.S. foreign tax credits, decreased the provision for income taxes by approximately $2,104 million in the aggregate and increased diluted net income per share by $4.93 for fiscal year 2023.Our interpretations and conclusions regarding the tax incentives are not binding on any taxing authority, and if our assumptions about tax and other laws are incorrect or if these tax incentives are substantially modified or rescinded, we could suffer material adverse tax and other financial consequences, which would increase our expenses, reduce our profitability and adversely affect our cash flows.Our income taxes and overall cash tax costs are affected by a number of factors that could materially, adversely affect financial results.Significant judgment is required in determining our worldwide income taxes. In the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain. Additionally, our calculations of income taxes payable currently and on a deferred basis are based on our interpretations of applicable tax laws in the jurisdictions in which we are required to file tax returns. Although we believe our tax estimates are reasonable, there is no assurance that the final determination of our income tax liability will not be materially different than what is reflected in our income tax provisions and accruals. Our income taxes are subject to volatility and could be adversely affected by numerous factors including:•reorganization or restructuring of our businesses, tangible and intangible assets, outstanding indebtedness and corporate structure, including business combinations;•jurisdictional mix of our income and assets;•changes in the allocation of income and expenses, including adjustments related to changes in our corporate structure, acquisitions or tax law;•changes in U.S and foreign tax laws and regulations, changes to the taxation of earnings of foreign subsidiaries, taxation of U.S. income generated from foreign sources, the deductibility of expenses attributable to income and foreign tax credit rules;•tax effects of increases in non-deductible employee compensation; and•changes in tax accounting rules or principles and in the valuation of deferred tax assets and liabilities.31Table of ContentsWe have adopted transfer pricing policies that call for the provision of services, the sale of products, the arrangement of financing and the grant of licenses from one affiliate to another at prices that we believe are negotiated on an arm’s length basis. Our taxable income is dependent upon acceptance by local authorities that our operational practices and intercompany transfer pricing are on an arm’s length basis. Due to inconsistencies in application of the arm’s length standard among taxing authorities, as well as lack of comprehensive treaty-based protection, transfer pricing challenges by tax authorities could, if successful, result in adjustments for prior or future years. The effects of any such changes could subject us to higher taxes and our earnings, results of operations and cash flow would be adversely affected.Further, we are subject to, and are under, tax audit in various jurisdictions, and such jurisdictions may assess additional income tax against us. Although we believe our tax positions are reasonable, the final determination of tax audits could be materially different from our income tax provisions and accruals. The ultimate result of an audit could have a material adverse effect on our results of operations and cash flows in the period or periods for which that determination is made.As a result of the VMware Merger, we are subject to tax audits in various jurisdictions for the Dell consolidated group, of which VMware was a member beginning in Dell’s fiscal year 2017 until November 2021. While VMware is no longer a member of the Dell consolidated group, it is still subject to audit for the periods in which it was member of the Dell consolidated group. While we believe VMware’s positions are reasonable, the final determination of tax audits could be materially different from our income tax provisions and accruals. Further, pursuant to a tax agreement VMware and Dell, in the event VMware becomes subject to audits as a member of Dell’s consolidated group, Dell has authority to control the audit and represent Dell and our interests, could limit our ability to affect the outcome of such audits.We have potential tax liabilities as a result of VMware’s former controlling ownership by Dell, which could have an adverse effect on our financial condition and operating results.If the VMware spin-off from Dell in November 2021 is determined to not be tax-free for any reason, we could be liable for all or a portion of the tax liability, which could have a material adverse effect on our financial condition and operating results. Further, if the VMware Merger results in the spin-off failing to qualify as a tax-free transaction under Section 355 of the Internal Revenue Code, Dell, its affiliates and, potentially, its stockholders would incur significant tax liabilities and we may be required to indemnify Dell and its affiliates for any such tax liabilities, which could be material.Risks Related to Our IndebtednessOur substantial indebtedness could adversely affect our financial health and our ability to execute our business strategy.As of October 29, 2023, the aggregate indebtedness under our senior notes was $40,815 million. Subsequent to the end of fiscal year 2023, we borrowed $30,390 million in term loans to finance the VMware Merger (the “2023 Term Loans”), and we assumed $8,250 million of VMware’s outstanding senior unsecured notes.Our substantial indebtedness could have important consequences including:•increasing our vulnerability to adverse general economic and industry conditions;•exposing us to interest rate risk as our 2023 Term Loans bear floating interest rates, which we do not typically hedge against;•limiting our flexibility in planning for, or reacting to, changes in the economy and the semiconductor industry;•placing us at a competitive disadvantage compared to our competitors with less indebtedness; •making it more difficult to borrow additional funds in the future to fund growth, acquisitions, working capital, capital expenditures and other purposes; and•potentially requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund our other business needs.We receive debt ratings from the major credit rating agencies in the U.S. Factors that may impact our credit ratings include debt levels, planned asset purchases or sales and near-term and long-term production growth opportunities. Liquidity, asset quality, cost structure, reserve mix and commodity pricing levels could also be considered by the rating agencies. While we are focused on maintaining investment grade ratings from these agencies, we may be unable to do so. Any downgrade in our credit rating or the ratings of our indebtedness, or adverse conditions in the debt capital markets, could:•adversely affect the trading price of, or market for, our debt securities;•increase interest expense under our term facilities;•increase the cost of, and adversely affect our ability to refinance, our existing debt; and•adversely affect our ability to raise additional debt.32Table of ContentsThe instruments governing our indebtedness impose certain restrictions on our business.The instruments governing our indebtedness contain certain covenants imposing restrictions on our business. These restrictions may affect our ability to operate our business, to plan for, or react to, changes in the market conditions or our capital needs and may limit our ability to take advantage of potential business opportunities as they arise. The restrictions placed on us include maintenance of an interest coverage ratio and limitations on our ability to incur certain secured debt, enter into certain sale and lease-back transactions and consolidate, merge, sell or otherwise dispose of all or substantially all of our assets. In addition, the instruments contain customary events of default upon the occurrence of which, after any applicable grace period, the indebtedness could be declared immediately due and payable. In such event, we may not have sufficient available cash to repay such debt at the time it becomes due, or be able to refinance such debt on acceptable terms or at all. Any of the foregoing could materially adversely affect our business, financial condition and results of operations.Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.Our ability to make scheduled payments of the principal of, to pay interest on, and to refinance our debt, depends on our future performance, which is subject to economic, financial, competitive and other factors. Our business may not continue to generate cash flow from operations in the future sufficient to satisfy our obligations under our current indebtedness and any future indebtedness we may incur and to make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our outstanding indebtedness or future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms when needed, which could result in a default on our indebtedness.Risks Related to Owning Our Common StockAt times, our stock price has been volatile and it may fluctuate substantially in the future, which could result in substantial losses for our investors as well as class action litigation against us and our management which could cause us to incur substantial costs and divert our management’s attention and resources.The trading price of our common stock has, at times, fluctuated significantly and could be subject to wide fluctuations in response to any of the risk factors listed in this “Risk Factors” section, and others, including:•issuance of new or updated research or other reports by securities analysts;•fluctuations in the valuation and results of operations of our significant customers as well as companies perceived by investors to be comparable to us;•announcements of proposed acquisitions by us or our competitors;•announcements of, or expectations of, additional debt or equity financing transactions;•stock price and volume fluctuations attributable to inconsistent trading volume levels of our common stock;•hedging or arbitrage trading activity involving our common stock; and•unsubstantiated news reports or other inaccurate publicity regarding us or our business.These fluctuations are often unrelated or disproportionate to our operating performance. Broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or currency fluctuations, may negatively impact the market price of our common stock. You may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. In addition, we have been, and in the future we may be, subject to lawsuits stemming from our acquisitions, including the VMware Merger. Securities litigation against us, including the lawsuits related to such acquisitions, could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.The amount and frequency of our stock repurchases may fluctuate.The amount, timing and execution of our stock repurchase program may fluctuate based on our priorities for the use of cash for other purposes. These purposes include operational spending, capital spending, acquisitions, repayment of debt and returning cash to our stockholders as dividend payments. Changes in cash flows, tax laws and our stock price could also impact our stock repurchase program. We are not obligated to repurchase any specific amount of shares of common stock, and the stock repurchase program may be suspended or terminated at any time.33Table of ContentsA substantial amount of our stock is held by a small number of large investors and significant sales of our common stock by one or more of these holders could cause our stock price to fall.As of September 29, 2023, we believe 10 of our 20 largest holders of common stock were active institutional investors who held 23% of our outstanding shares of common stock in the aggregate. These investors may sell their shares at any time for a variety of reasons and such sales could depress the market price of our common stock. In addition, any such sales of our common stock by these entities could also impair our ability to raise capital through the sale of additional equity securities.There can be no assurance that we will continue to declare cash dividends.Our Board of Directors has adopted a dividend policy pursuant to which we currently pay a cash dividend on our common stock on a quarterly basis. The declaration and payment of any dividend is subject to the approval of our Board of Directors and our dividend may be discontinued or reduced at any time. Because we are a holding company, our ability to pay cash dividends is also limited by restrictions or limitations on our ability to obtain sufficient funds through dividends from subsidiaries. There can be no assurance that we will declare cash dividends in the future in any particular amounts, or at all.ITEM 1B.UNRESOLVED STAFF COMMENTSNone. ITEM 1C.CYBERSECURITYNot applicable.ITEM 2.PROPERTIESWe are headquartered in Palo Alto, California and our primary warehouse is located in Malaysia. We conduct our administration, manufacturing, research and development, sales and marketing in both owned and leased facilities. We believe that our owned and leased facilities are adequate for our present operations. We do not identify or allocate assets by operating segment.As of October 29, 2023, our owned and leased facilities in excess of 100,000 square feet consisted of:(In square feet)United StatesOther CountriesTotalOwned facilities (a)2,586,368 928,888 3,515,256 Leased facilities (b)796,508 1,309,667 2,106,175 Total facilities3,382,876 2,238,555 5,621,431 _______________(a) Includes 318,000 square feet and 153,000 square feet of property owned in Malaysia subject to a 60-year land lease with the state authority expiring in May 2051 and March 2077, respectively, subject to renewal at our option.(b) Building leases expire on varying dates through February 2046 and generally include renewals at our option. ITEM 3. LEGAL PROCEEDINGSThe information set forth under Note 13. “Commitments and Contingencies” included in Part II, Item 8. of this Annual Report on Form 10-K, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see “Risk Factors” above.ITEM 4. MINE SAFETY DISCLOSURESNone.34Table of ContentsPART IIITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESMarket InformationBroadcom common stock is listed on The Nasdaq Global Select Market under the symbol “AVGO”. HoldersAs of November 24, 2023, there were 1,389 holders of record of our common stock. A substantially greater number of stockholders are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.Issuer Purchases of Equity SecuritiesIn December 2021, our Board of Directors authorized a stock repurchase program to repurchase up to $10 billion of our common stock from time to time through December 31, 2022, which was subsequently extended to December 31, 2023. In May 2022, our Board of Directors authorized another stock repurchase program to repurchase up to an additional $10 billion of our common stock from time to time through December 31, 2023 (“May 2022 Authorization”). We repurchased and retired approximately 9 million and 12 million shares of our common stock for $5,824 million and $7,000 million under these stock repurchase programs during fiscal years 2023 and 2022, respectively.Repurchases under our stock repurchase programs may be effected through a variety of methods, including open market or privately negotiated purchases. The timing and amount of shares repurchased will depend on the stock price, business and market conditions, corporate and regulatory requirements, alternative investment opportunities, acquisition opportunities, and other factors. We are not obligated to repurchase any specific amount of shares of common stock, and the stock repurchase programs may be suspended or terminated at any time.The following table presents details of our various repurchases during the fiscal quarter ended October 29, 2023, pursuant to the May 2022 Authorization.PeriodTotal Number of Shares Purchased (a)Average Price per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plan (a)Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan(In millions, except per share data)July 31, 2023 - August 27, 20230.1 $894.78 0.1 $7,209 August 28, 2023 - September 24, 2023— $— — $7,209 September 25, 2023 - October 29, 2023— (b)$861.23 — (b)$7,176 Total0.1 $885.52 0.1 _________________________________(a) We also paid approximately $454 million in employee withholding taxes due upon the vesting of net settled equity awards. We withheld approximately 1 million shares of common stock from employees in connection with such net share settlement at an average price of $852.93 per share. These shares may be deemed to be “issuer purchases” of shares and are not included in this table.(b) Represents fewer than 0.1 million shares.35Table of ContentsStock Performance GraphThe following graph shows a comparison of cumulative total return for our common stock, the Standard & Poor’s 500 Stock Index (the “S&P 500 Index”) and the NASDAQ 100 Index for the five fiscal years ended October 29, 2023. The total return graph and table assume that $100 was invested on November 2, 2018 (the last trading day of our fiscal year 2018) in each of Broadcom Inc. common stock, the S&P 500 Index and the NASDAQ 100 Index and assume that all dividends are reinvested. Indexes are calculated on a month-end basis.The comparisons in the graph below are based on historical data and are not indicative of, or intended to forecast, the possible future performance of our common stock.Comparison of Five Year Cumulative Total ReturnAmong Broadcom Inc., the S&P 500 Index and the NASDAQ 100 IndexNovember 4, 2018November 3, 2019November 1, 2020October 31,2021October 30,2022October 29, 2023Broadcom Inc.$100.00 $139.62 $172.47 $270.48 $247.83 $451.15 S&P 500 Index$100.00 $114.95 $124.89 $178.49 $153.55 $164.78 NASDAQ 100 Index$100.00 $118.49 $161.99 $233.96 $171.79 $212.82 The graph and the table above shall not be deemed “filed” with the SEC for the purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing made by us with the SEC, regardless of any general incorporation language in such filing.ITEM 6.[RESERVED]36Table of ContentsITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThis Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto, which appear elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the caption “Risk Factors” or in other parts of this Annual Report on Form 10-K. The following section generally discusses our financial condition and results of operations for our fiscal year ended October 29, 2023 (“fiscal year 2023”) compared to our fiscal year ended October 30, 2022 (“fiscal year 2022”). A discussion regarding our financial condition and results of operations for fiscal year 2022 compared to our fiscal year ended October 31, 2021 (“fiscal year 2021”) can be found in Part II, Item 7 of our Annual Report on Form 10-K for fiscal year 2022, filed with the Securities and Exchange Commission (the “SEC”) on December 16, 2022.Overview We are a global technology leader that designs, develops and supplies a broad range of semiconductor and infrastructure software solutions. We develop semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor based devices and analog III-V based products. We have a history of innovation in the semiconductor industry and offer thousands of products that are used in end products such as enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. Our infrastructure software solutions enable customers to plan, develop, automate, manage and secure applications across mainframe, distributed, mobile and cloud platforms. Our portfolio of infrastructure and security software is designed to modernize, optimize, and secure the most complex hybrid environments, enabling scalability, agility, automation, insights, resiliency and security. We also offer mission critical fibre channel storage area networking (“FC SAN”) products and related software in the form of modules, switches and subsystems incorporating multiple semiconductor products. We have two reportable segments: semiconductor solutions and infrastructure software. Our semiconductor solutions segment includes all of our product lines and intellectual property (“IP”) licensing. Our infrastructure software segment includes our mainframe, distributed and cyber security solutions, and our FC SAN business.Our strategy is to combine best-of-breed technology leadership in semiconductor and infrastructure software solutions, with unmatched scale, on a common sales and administrative platform to deliver a comprehensive suite of infrastructure technology products to the world’s leading business and government customers. We seek to achieve this through responsibly financed acquisitions of category-leading businesses and technologies, as well as investing extensively in research and development, to ensure our products retain their technology leadership. This strategy results in a robust business model designed to drive diversified and sustainable operating and financial results.The demand for our products has been affected in the past, and is likely to continue to be affected in the future, by various factors, including the following:•gain or loss of significant customers;•general economic and market conditions in the industries and markets in which we compete;•our distributors’ product inventory and end customer demand;•the rate at which our present and future customers and end-users adopt our products and technologies in our target markets, and the rate at which our customers' products that include our technology are accepted in their markets; •the shift to cloud-based information technology solutions and services, such as hyperscale computing, which may adversely affect the timing and volume of sales of our products for use in traditional enterprise data centers; and•the timing, rescheduling or cancellation of expected customer orders.Fiscal Year HighlightsHighlights during fiscal year 2023 include the following: •We generated $18,085 million of cash from operations.•We paid $7,645 million in cash dividends.•We repurchased $5,824 million of common stock.37Table of ContentsAcquisition of VMware, Inc.On November 22, 2023, we completed the acquisition of VMware in a cash-and-stock transaction (the “VMware Merger”). Pursuant to the Agreement and Plan of Merger, each share of VMware common stock issued and outstanding immediately prior to the effective time of the VMware Merger was indirectly converted into the right to receive, at the election of the holder of such share of VMware common stock, either $142.50 in cash, without interest, or 0.2520 shares of Broadcom common stock. The stockholder election was prorated, such that the total number of shares of VMware common stock entitled to receive cash and the total number of shares of VMware common stock entitled to receive Broadcom common stock, in each case, was equal to 50% of the aggregate number of shares of VMware common stock issued and outstanding. Based on the VMware stockholders’ elections, the VMware stockholders received approximately $30.8 billion in cash and 54.4 million shares of Broadcom common stock in aggregate. We assumed all outstanding VMware restricted stock unit (“RSU”) awards and performance stock unit awards held by continuing employees. The assumed awards were converted into approximately 5 million Broadcom RSU awards. All outstanding in-the-money VMware stock options and RSU awards held by non-employee directors were accelerated and converted into the right to receive cash and shares of Broadcom common stock, in equal parts. VMware was a leading provider of multi-cloud services for all applications, enabling digital innovation with enterprise control. We acquired VMware to enhance our infrastructure software capabilities.The preliminary purchase consideration for the VMware Merger was approximately $86.3 billion. We funded the cash portion of the VMware Merger with net proceeds from the issuance of $30.4 billion in term loans under a credit agreement that we entered into on August 15, 2023 (the “2023 Credit Agreement”), as well as cash on hand. See Note 15. “Subsequent Events” included in Part II, Item 8 of this Annual Report on Form 10-K for additional information.The discussions below related to our business and financial results for fiscal year 2023 and prior periods do not include any impact from or information relating to the VMware Merger.Net RevenueA majority of our net revenue is derived from sales of a broad range of semiconductor devices that are incorporated into electronic products, as well as from modules, switches and subsystems. Net revenue is also generated from the sale of software solutions that enable our customers to plan, develop, automate, manage, and secure applications across mainframe, distributed, mobile, and cloud platforms. Our overall net revenue, as well as the percentage of total net revenue generated by sales in our semiconductor solutions and infrastructure software segments, have varied from quarter to quarter, due largely to fluctuations in end-market demand, including the effects of seasonality, which are discussed in detail in Part I, Item 1. Business under “Seasonality” of this Annual Report on Form 10-K.Distributors and original equipment manufacturers (“OEMs”), or their contract manufacturers, typically account for the substantial majority of our semiconductor sales. To serve customers around the world, we have strategically developed relationships with large global electronic component distributors, complemented by a number of regional distributors with customer relationships based on their respective product ranges. We have established strong relationships with leading OEM customers across multiple target markets. Our direct sales force focuses on supporting our large OEM customers and has specialized product and service knowledge that enables us to sell specific offerings at key levels throughout a customer’s organization. Certain customers require us to contract with them directly and with specified intermediaries, such as contract manufacturers. Many of our major customer relationships have been in place for many years and are often the result of years of collaborative product development. This has enabled us to build our extensive IP portfolio and develop critical expertise regarding our customers’ requirements, including substantial system-level knowledge. This collaboration has provided us with key insights into our customers' businesses and has enabled us to be more efficient and productive and to better serve our target markets and customers. We recognize revenue upon the delivery of our products to the distributors, which can cause our quarterly net revenue to fluctuate significantly. Such revenue is reduced for estimated returns and distributor allowances. Our software customers generally consist of large enterprises that have computing environments from multiple vendors and are highly complex. We believe our enterprise-wide license model will continue to offer our customers reduced complexity, more flexibility and an easier renewal process that will help drive revenue growth.Costs and ExpensesCost of products sold. Cost of products sold consists primarily of the costs for semiconductor wafers and other materials, as well as the costs of assembling and testing those products and materials. Such costs include personnel and overhead related to our manufacturing operations, which include stock-based compensation expense, related occupancy, computer services, equipment costs, manufacturing quality, order fulfillment, warranty adjustments, inventory adjustments 38Table of Contentsincluding write-downs for inventory obsolescence, and acquisition costs, which include direct transaction costs and acquisition-related costs. Although we outsource a significant portion of our manufacturing activities, we do have some proprietary semiconductor fabrication facilities. If we are unable to utilize our owned fabrication facilities at a desired level, the fixed costs associated with these facilities will not be fully absorbed, resulting in higher average unit costs and lower gross margins.Cost of subscriptions and services. Cost of subscriptions and services consists of personnel, project costs associated with professional services or support of our subscriptions and services revenue, and allocated facilities costs and other corporate expenses. Personnel costs include stock-based compensation expense.Total cost of revenue also includes amortization of acquisition-related intangible assets and restructuring charges.Research and development. Research and development expense consists primarily of personnel costs for our engineers engaged in the design and development of our products and technologies, including stock-based compensation expense. These expenses also include project material costs, third-party fees paid to consultants, prototype development expense, allocated facilities costs and other corporate expenses and computer services costs related to supporting computer tools used in the engineering and design process.Selling, general and administrative. Selling expense consists primarily of compensation and associated costs for sales and marketing personnel, including stock-based compensation expense, sales commissions paid to our independent sales representatives, advertising costs, trade shows, corporate marketing, promotion, travel related to our sales and marketing operations, related occupancy and equipment costs, and other marketing costs. General and administrative expense consists primarily of compensation and associated costs for executive management, finance, human resources and other administrative personnel, including stock-based compensation expense, outside professional fees, allocated facilities costs, acquisition-related costs and other corporate expenses.Amortization of acquisition-related intangible assets. In connection with our acquisitions, we recognize intangible assets that are being amortized over their estimated useful lives. We also recognize goodwill, which is not amortized, and in-process research and development (“IPR&D”), which is initially capitalized as an indefinite-lived intangible asset, in connection with the acquisitions. Upon completion of each underlying project, IPR&D assets are reclassified as amortizable purchased intangible assets and amortized over their estimated useful lives.Restructuring and other charges. Restructuring and other charges consist primarily of non-recurring charges related to IP litigation, compensation costs associated with employee exit programs, alignment of our global manufacturing operations, rationalizing product development program costs, facility and lease abandonments, fixed asset impairment, IPR&D impairment, and other exit costs, including curtailment of service or supply agreements.Interest expense. Interest expense includes coupon interest, commitment fees, accretion of original issue discount, amortization of debt premiums and debt issuance costs, and expenses related to debt modifications or extinguishments. Other income (expense), net. Other income (expense), net includes interest income, gains or losses on investments, foreign currency remeasurement, and other miscellaneous items.Provision for income taxes. We have structured our operations to maximize the benefit from tax incentives extended to us in various jurisdictions to encourage investment or employment. Our tax incentives from the Singapore Economic Development Board provide that any qualifying income earned in Singapore is subject to tax incentives or reduced rates of Singapore income tax, subject to our compliance with the conditions specified in these incentives and legislative developments. These Singapore tax incentives are presently expected to expire in November 2025. The corporate income tax rate in Singapore that would otherwise apply to us would be 17%. We also have a tax holiday from our qualifying income earned in Malaysia, which is scheduled to expire in 2028.Each tax incentive and tax holiday is also subject to our compliance with various operating and other conditions. If we cannot, or elect not to, comply with any such operating conditions specified, we could, in some instances, be required to refund previously realized material tax benefits, or if such tax incentive or tax holiday is terminated prior to its expiration absent a new incentive applying, we will lose the related tax benefits earlier than scheduled. We may elect to modify our operational structure and tax strategy, which may not be as beneficial to us as the benefits provided under the present tax concession arrangements. Before taking into consideration the effects of the U.S. Tax Cuts and Jobs Act and other indirect tax impacts, the effect of these tax incentives and tax holiday decreased the provision for income taxes by approximately $2,104 million and $1,821 million for fiscal years 2023 and 2022, respectively.Our interpretations and conclusions regarding the tax incentives are not binding on any taxing authority, and if our assumptions about tax and other laws are incorrect or if these tax incentives are substantially modified or rescinded, we could suffer material adverse tax and other financial consequences, which would increase our expenses, reduce our profitability and 39Table of Contentsadversely affect our cash flows. In addition, taxable income in any jurisdiction is dependent upon acceptance of our operational practices and intercompany transfer pricing by local tax authorities as being on an arm’s length basis. Due to inconsistencies in application of the arm’s length standard among taxing authorities, as well as lack of adequate treaty-based protection, transfer pricing challenges by tax authorities could, if successful, substantially increase our income tax expense.Critical Accounting EstimatesThe preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. Our actual financial results may differ materially and adversely from our estimates. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies include revenue recognition, valuation of goodwill and long-lived assets, and income taxes. See Note 2. “Summary of Significant Accounting Policies” included in Part II, Item 8. of this Annual Report on Form 10-K for further information on our critical accounting policies and estimates.Revenue recognition. We account for a contract with a customer when both parties have approved the contract and are committed to perform their respective obligations, each party’s rights can be identified, payment terms can be identified, the contract has commercial substance, and it is probable we will collect substantially all of the consideration we are entitled to. Revenue is recognized when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer. Our products and services can be broadly categorized as sales of products and subscriptions and services. We recognize products revenue from sales to direct customers and distributors when control transfers to the customer. An allowance for distributor credits covering price adjustments is made based on our estimate of historical experience rates as well as considering economic conditions and contractual terms. To date, actual distributor claims activity has been materially consistent with the provisions we have made based on our historical estimates. However, because of the inherent nature of estimates, there is always a risk that there could be significant differences between actual amounts and our estimates. Different judgments or estimates could result in variances that might be significant to reported operating results. We also record reductions of revenue for rebates in the same period that the related revenue is recorded. We accrue 100% of potential rebates at the time of sale. We reverse the accrual of unclaimed rebate amounts as specific rebate programs contractually end and when we believe unclaimed rebates are no longer subject to payment and will not be paid. Thus, the reversal of unclaimed rebates may have a positive impact on our net revenue and net income in subsequent periods.Valuation of goodwill and long-lived assets. We perform an annual impairment review of our goodwill during the fourth fiscal quarter of each year, and more frequently if we believe indicators of impairment exist. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. To review for impairment, we first assess qualitative factors to determine whether events or circumstances lead to a determination that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount. Our qualitative assessment of the recoverability of goodwill, whether performed annually or based on specific events or circumstances, considers various macroeconomic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of our financial performance; or (iv) a sustained decrease in our market capitalization below our net book value. After assessing the totality of events and circumstances, if we determine that it is not more likely than not that the fair value of any of our reporting units is less than its carrying amount, no further assessment is performed. If we determine that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount, we calculate the fair value of that reporting unit and compare the fair value to the reporting unit’s net book value. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. Our goodwill impairment test uses both the income approach and the market approach to estimate a reporting unit's fair value. The income approach is based on the discounted cash flow method that uses the reporting unit estimates for forecasted future financial performance, including revenues, operating expenses, and taxes, as well as working capital and capital asset requirements. These estimates are developed as part of our long-term planning process based on assumed market segment growth rates and our assumed market segment share, estimated costs based on historical data and various internal estimates. Projected cash flows are then discounted to a present value employing a discount rate that properly accounts for the estimated market weighted-average cost of capital, as well as any risk unique to the subject cash flows. The market approach is based on weighting the financial multiples of comparable companies and applying a control premium. A reporting unit's 40Table of Contentscarrying value represents the assignment of various assets and liabilities, excluding certain corporate assets and liabilities, such as cash and debt. We assess the impairment of long-lived assets, including purchased IPR&D, property, plant and equipment, right-of-use assets, and intangible assets, whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors we consider important which could trigger an impairment review include: (i) significant under-performance relative to historical or projected future operating results, (ii) significant changes in the manner of our use of the acquired assets or the strategy for our overall business, or (iii) significant negative industry or economic trends. The process of evaluating the potential impairment of long-lived assets under the accounting guidance on property, plant and equipment, and intangible assets is also highly subjective and requires significant judgment. In order to estimate the fair value of long-lived assets, we typically make various assumptions about the future prospects of our business or the part of our business to which the long-lived assets relate. We also consider market factors specific to the business and estimate future cash flows to be generated by the business, which requires significant judgment as it is based on assumptions about market demand for our products over a number of future years. Based on these assumptions and estimates, we determine whether we need to take an impairment charge to reduce the value of the long-lived assets stated on our consolidated balance sheets to reflect their estimated fair value. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors, such as the real estate market, industry and economic trends, and internal factors, such as changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, changes in assumptions and estimates could materially impact our reported financial results.Income taxes. Significant management judgment is required in developing our provision for or benefit from income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. We have considered projected future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances. An adjustment to the valuation allowance will either increase or decrease our provision for or benefit from income taxes in the period such determination is made. In evaluating the exposure associated with various tax filing positions, we accrue an income tax liability when such positions do not meet the more-likely-than-not threshold for recognition.The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes, interest, and penalties will be due. If our estimate of income tax liabilities proves to be less than the actual amount ultimately assessed, a further charge to tax expense would be required. If the payment of these amounts ultimately proves to be unnecessary, the reversal of the accrued liabilities would result in tax benefits being recognized in the period when we determine the liabilities no longer exist.Fiscal Year PresentationWe operate on a 52- or 53-week fiscal year ending on the Sunday closest to October 31 in a 52-week year and the first Sunday in November in a 53-week year. Our fiscal years 2023, 2022 and 2021 each consisted of 52 weeks. The financial statements included in Part II, Item 8. of this Annual Report on Form 10-K are presented in accordance with GAAP and expressed in U.S. dollars.41Table of ContentsResults of OperationsFiscal Year 2023 Compared to Fiscal Year 2022The following table sets forth our results of operations for the periods presented: Fiscal Year EndedOctober 29,2023October 30,2022October 29,2023October 30,2022 (In millions)(As a percentage of net revenue)Statements of Operations Data: Net revenue:Products$27,891 $26,277 78 %79 %Subscriptions and services7,928 6,926 22 21 Total net revenue35,819 33,203 100 100 Cost of revenue:Cost of products sold8,636 7,629 24 23 Cost of subscriptions and services636 627 2 2 Amortization of acquisition-related intangible assets1,853 2,847 5 8 Restructuring charges4 5 — — Total cost of revenue11,129 11,108 31 33 Gross margin24,690 22,095 69 67 Research and development5,253 4,919 15 15 Selling, general and administrative1,592 1,382 4 4 Amortization of acquisition-related intangible assets1,394 1,512 4 5 Restructuring and other charges244 57 1 — Total operating expenses8,483 7,870 24 24 Operating income$16,207 $14,225 45 %43 %Net RevenueA relatively small number of customers account for a significant portion of our net revenue. Sales of products to distributors accounted for 57% and 56% of our net revenue for fiscal years 2023 and 2022, respectively. Direct sales to WT Microelectronics Co., Ltd., a distributor, accounted for 21% and 20% of our net revenue for fiscal years 2023 and 2022, respectively. We believe aggregate sales to our top five end customers, through all channels, accounted for approximately 35% of our net revenue for each of fiscal years 2023 and 2022. We believe aggregate sales to Apple Inc., through all channels, accounted for approximately 20% of our net revenue for each of fiscal years 2023 and 2022. We expect to continue to experience significant customer concentration in future periods. The loss of, or significant decrease in demand from, any of our top five end customers could have a material adverse effect on our business, results of operations and financial condition. From time to time, some of our key semiconductor customers place large orders or delay orders, causing our quarterly net revenue to fluctuate significantly. This is particularly true of our wireless products as fluctuations may be magnified by the timing of launches, and seasonal variations in sales, of mobile devices. In addition, the macroeconomic environment remains uncertain and may cause our net revenue to fluctuate significantly and impact our results of operations.Although we recognize revenue for the majority of our products when title and control transfer in Penang, Malaysia, we disclose net revenue by country based primarily on the geographic shipment or delivery location specified by our distributors, OEMs, contract manufacturers, channel partners, or software customers. In fiscal years 2023 and 2022, 32% and 35%, respectively, of our net revenue came from shipments or deliveries to China (including Hong Kong). However, the end customers for either our products or for the end products into which our products are incorporated, are frequently located in countries other than China (including Hong Kong). As a result, we believe that a substantially smaller percentage of our net revenue is ultimately dependent on sales of either our product or our customers’ product incorporating our product, to end customers located in China (including Hong Kong). 42Table of ContentsThe following tables set forth net revenue by segment for the periods presented:Fiscal Year EndedNet Revenue by SegmentOctober 29,2023October 30,2022$ Change% Change(In millions, except percentages)Semiconductor solutions$28,182 $25,818 $2,364 9 %Infrastructure software7,637 7,385 252 3 %Total net revenue$35,819 $33,203 $2,616 8 %Fiscal Year EndedNet Revenue by SegmentOctober 29, 2023October 30, 2022(As a percentage of net revenue)Semiconductor solutions79 %78 %Infrastructure software21 22 Total net revenue100 %100 %Net revenue from our semiconductor solutions segment increased due to strong product demand, primarily for networking, server storage and broadband products. Net revenue from our infrastructure software segment increased primarily due to increases in sales from our mainframe solutions, partially offset by lower demand for our FC SAN products.Gross MarginGross margin was $24,690 million, or 69% of net revenue, for fiscal year 2023, compared to $22,095 million, or 67% of net revenue, for fiscal year 2022. The increase was primarily due to lower amortization of acquisition-related intangible assets, mainly from our 2016 acquisition of Broadcom Corporation, partially offset by less favorable margin within our semiconductor solutions segment driven by product mix. We expect to incur additional amortization of acquisition-related intangible assets in future periods as a result of the VMware Merger and any further acquisitions we may make.Research and Development ExpenseResearch and development expense increased $334 million, or 7%, in fiscal year 2023, compared to the prior fiscal year. The increase was primarily due to higher stock-based compensation expense as a result of annual employee equity awards granted at higher grant-date fair values in fiscal year 2023, partially offset by lower variable employee compensation expense. We expect to incur additional research and development expense in future periods as a result of the VMware Merger and any further acquisitions we may make.Selling, General and Administrative ExpenseSelling, general and administrative expense increased $210 million, or 15%, in fiscal year 2023, compared to the prior fiscal year. The increase was primarily due to higher costs incurred in connection with the VMware Merger and higher stock-based compensation expense as a result of annual employee equity awards granted at higher grant-date fair values in fiscal year 2023, partially offset by lower variable employee compensation expense.Amortization of Acquisition-Related Intangible AssetsAmortization of acquisition-related intangible assets recognized in operating expenses decreased $118 million, or 8%, in fiscal year 2023, compared to the prior fiscal year. The decrease was primarily due to lower amortization of customer-related intangible assets from our acquisition of LSI Corporation. We expect to incur additional amortization of acquisition-related intangible assets in future periods as a result of the VMware Merger and any further acquisitions we may make.Restructuring and Other ChargesRestructuring and other charges in fiscal year 2023 primarily included non-recurring charges related to IP litigation. We expect to incur additional restructuring and other charges in future periods as a result of the VMware Merger and any further acquisitions we may make.Stock-Based Compensation ExpenseTotal stock-based compensation expense was $2,171 million and $1,533 million for fiscal years 2023 and 2022, respectively. The increase was primarily due to annual employee equity awards granted at higher grant-date fair values in fiscal year 2023. We expect to incur additional stock-based compensation expense in future periods as a result of the VMware Merger and any further acquisitions we may make.43Table of ContentsThe following table sets forth the total unrecognized compensation cost related to unvested stock-based awards outstanding and expected to vest as of October 29, 2023. The remaining weighted-average service period was 3.4 years. Fiscal Year:Unrecognized Compensation Cost, Net of Expected Forfeitures(In millions)2024$2,279 20251,845 20261,407 2027715 2028129 Total$6,375 During the first quarter of fiscal year ended November 3, 2019 (“fiscal year 2019”), our Compensation Committee approved a broad-based program of multi-year equity grants of time- and market-based RSUs (the “Multi-Year Equity Awards”) in lieu of our annual employee equity awards historically granted on March 15 of each year. Each Multi-Year Equity Award vests on the same basis as four annual grants made on March 15 of each year, beginning in fiscal year 2019, with successive four-year vesting periods. We recognize stock-based compensation expense related to the Multi-Year Equity Awards from the grant date through their respective vesting date, ranging from 4 years to 7 years.Segment Operating Results Fiscal Year EndedOperating Income by SegmentOctober 29, 2023October 30, 2022$ Change% Change(In millions, except percentages)Semiconductor solutions$16,486 $15,075 $1,411 9 %Infrastructure software5,639 5,219 420 8 %Unallocated expenses(5,918)(6,069)151 (2)%Total operating income$16,207 $14,225 $1,982 14 %Operating income from our semiconductor solutions segment increased primarily due to higher net revenue from networking, server storage, and broadband products. Operating income from our infrastructure software segment increased primarily due to higher net revenue from our mainframe solutions, partially offset by lower net revenue from our FC SAN products.Unallocated expenses include amortization of acquisition-related intangible assets; stock-based compensation expense; restructuring and other charges; acquisition-related costs; and other costs that are not used in evaluating the results of, or in allocating resources to, our segments. Unallocated expenses decreased 2% in fiscal year 2023, compared to the prior fiscal year, primarily due to lower amortization of acquisition-related intangible assets, substantially offset by higher stock-based compensation expense, non-recurring charges related to IP litigation, and acquisition-related costs.Non-Operating Income and ExpensesInterest expense. Interest expense was $1,622 million and $1,737 million for fiscal years 2023 and 2022, respectively. The decrease was due to losses on extinguishment of debt related to debt transactions incurred in fiscal year 2022. We expect to incur additional interest expense in future periods as a result of indebtedness associated with the VMware Merger.Other income (expense), net. Other income (expense), net includes interest income, gains or losses on investments, foreign currency remeasurement and other miscellaneous items. Other income, net, was $512 million for fiscal year 2023, compared to other expense, net, of $54 million for fiscal year 2022. The change was primarily due to higher interest income as a result of higher interest rates and changes in investment gains or losses.Provision for income taxes. The provision for income taxes was $1,015 million and $939 million for fiscal years 2023 and 2022, respectively. The increase was primarily due to higher income before income taxes, partially offset by an increase in the recognition of uncertain tax benefits as a result of lapses of statutes of limitations.44Table of ContentsLiquidity and Capital ResourcesThe following section discusses our principal liquidity and capital resources as well as our primary liquidity requirements and uses of cash. Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. We believe our cash equivalents are liquid and accessible. Our primary sources of liquidity as of October 29, 2023 consisted of: (i) $14,189 million in cash and cash equivalents, (ii) cash we expect to generate from operations and (iii) available capacity under our $7.5 billion unsecured revolving credit facility. In addition, we may also generate cash from the sale of assets and debt or equity financings from time to time.Our short-term and long-term liquidity requirements primarily arise from: (i) business acquisitions and investments we may make from time to time, (ii) working capital requirements, (iii) research and development and capital expenditure needs, (iv) cash dividend payments (if and when declared by our Board of Directors), (v) interest and principal payments related to our $40,815 million of outstanding indebtedness, (vi) share repurchases, and (vii) payment of income taxes. Our ability to fund these requirements will depend, in part, on our future cash flows, which are determined by our future operating performance and, therefore, subject to prevailing global macroeconomic conditions and financial, business and other factors, some of which are beyond our control. We expect capital expenditures to be higher in fiscal year 2024 as compared to fiscal year 2023. Our debt and liquidity needs increased as a result of completing the VMware Merger. We funded the cash portion of the consideration with net proceeds from the issuance of $30,390 million in term loans under the 2023 Credit Agreement, as well as cash on hand. We also assumed $8,250 million of VMware’s outstanding senior unsecured notes.We believe that our cash and cash equivalents on hand, cash flows from operations, and the revolving credit facility will provide sufficient liquidity to operate our business and fund our current and assumed obligations for at least the next 12 months. For additional information regarding our cash requirement from contractual obligations, indebtedness and lease obligations, see Note 13. “Commitments and Contingencies”, Note 9. “Borrowings” and Note 5. “Leases” in Part II, Item 8 of this Annual Report on Form 10-K.From time to time, we engage in discussions with third parties regarding potential acquisitions of, or investments in, businesses, technologies and product lines. Any such transaction, or evaluation of potential transactions, could require significant use of our cash and cash equivalents, or require us to increase our borrowings to fund such transactions. If we do not have sufficient cash to fund our operations or finance growth opportunities, including acquisitions, or unanticipated capital expenditures, our business and financial condition could suffer. In such circumstances, we may seek to obtain new debt or equity financing. However, we cannot assure you that such additional financing will be available on terms acceptable to us or at all. Our ability to service our senior unsecured notes, the term loans we issued to fund the VMware Merger, and any other indebtedness we may incur will depend on our ability to generate cash in the future. We may also elect to sell additional debt or equity securities for reasons other than those specified above.In addition, we may, at any time and from time to time, seek to retire or purchase our outstanding debt through cash tenders and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such tenders, exchanges or purchases, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Working CapitalWorking capital increased to $13,442 million at October 29, 2023 from $11,452 million at October 30, 2022. The increase was attributable to the following:•Cash and cash equivalents increased to $14,189 million at October 29, 2023 from $12,416 million at October 30, 2022, primarily due to $18,085 million in net cash provided by operating activities, partially offset by $7,645 million of dividend payments, $5,824 million of common stock repurchases, and $1,861 million of employee withholding tax payments related to net settled equity awards. •Other current liabilities decreased to $3,652 million at October 29, 2023 from $4,412 million at October 30, 2022, primarily due to decreases in contract liabilities and income taxes payable.•Other current assets increased to $1,606 million at October 29, 2023 from $1,205 million at October 30, 2022, primarily due to an increase in contract assets, offset in part by a decrease in prepaid income taxes.•Employee compensation and benefits decreased to $935 million at October 29, 2023 from $1,202 million at October 30, 2022, primarily due to lower variable compensation.•Accounts receivable increased to $3,154 million at October 29, 2023 from $2,958 million at October 30, 2022, primarily due to revenue linearity, offset in part by additional receivables sold through factoring arrangements.45Table of ContentsThese increases in working capital were offset in part by the following:•Current portion of long-term debt increased to $1,608 million at October 29, 2023 from $440 million at October 30, 2022, primarily due to certain debt instruments becoming due within the next twelve months, offset in part by repayments.•Accounts payable increased to $1,210 million at October 29, 2023 from $998 million at October 30, 2022, primarily due to the timing of vendor payments.Capital ReturnsFiscal Year EndedCash Dividends Declared and PaidOctober 29, 2023October 30, 2022(In millions, except per share data)Dividends per share to common stockholders$18.40 $16.40 Dividends to common stockholders$7,645 $6,733 Dividends per share to preferred stockholders$— $80.00 Dividends to preferred stockholders$— $299 On September 30, 2019, we issued approximately 4 million shares of 8.00% Mandatory Convertible Preferred Stock, Series A, $0.001 par value per share. These shares were converted into shares of our common stock during fiscal year 2022.In December 2021, our Board of Directors authorized a stock repurchase program to repurchase up to $10 billion of our common stock from time to time on or prior to December 31, 2022, which was subsequently extended through December 31, 2023. In May 2022, our Board of Directors authorized another stock repurchase program to repurchase up to an additional $10 billion of our common stock from time to time through December 31, 2023. As of October 29, 2023, $7,176 million of the authorized amount remained available for repurchases.During fiscal years 2023 and 2022, we repurchased and retired approximately 9 million and 12 million shares of our common stock for $5,824 million and $7,000 million, respectively, under these stock repurchase programs. Repurchases under our stock repurchase programs may be effected through a variety of methods, including open market or privately negotiated purchases. The timing and amount of shares repurchased will depend on the stock price, business and market conditions, corporate and regulatory requirements, alternative investment opportunities, acquisition opportunities, and other factors. We are not obligated to repurchase any specific amount of shares of common stock, and the stock repurchase programs may be suspended or terminated at any time.During fiscal years 2023 and 2022, we paid approximately $1,861 million and $1,455 million, respectively, in employee withholding taxes due upon the vesting of net settled equity awards. We withheld approximately 3 million shares of common stock from employees in connection with such net share settlements during each of fiscal years 2023 and 2022.Cash Flows Fiscal Year EndedOctober 29, 2023October 30, 2022(In millions)Net cash provided by operating activities$18,085 $16,736 Net cash used in investing activities(689)(667)Net cash used in financing activities(15,623)(15,816)Net change in cash and cash equivalents$1,773 $253 Operating ActivitiesCash flows from operating activities consisted of net income adjusted for certain non-cash and other items and changes in assets and liabilities. The $1,349 million increase in cash provided by operations during fiscal year 2023 compared to fiscal year 2022 was due to $2,587 million higher net income, offset in part by $1,249 million lower non-cash adjustments primarily from lower amortization of intangible assets. 46Table of ContentsInvesting Activities Cash flows from investing activities primarily consisted of capital expenditures, sales and purchases of investments, and cash used for acquisitions. The $22 million increase in cash used in investing activities for fiscal year 2023 compared to fiscal year 2022 was primarily due to a $118 million increase in purchases of investments, net of proceeds from sales of investments, offset by a $193 million decrease in cash paid for acquisitions. Financing ActivitiesCash flows from financing activities primarily consisted of dividend payments, stock repurchases, proceeds and payments related to our long-term borrowings, and employee withholding tax payments related to net settled equity awards. The $193 million decrease in cash used in financing activities for fiscal year 2023 compared to fiscal year 2022 was primarily due to a $1,958 million decrease in payments on debt obligations and a $1,176 million decrease in stock repurchases, offset by a $1,935 million decrease in proceeds from long-term borrowings, a $613 million increase in dividend payments and a $406 million increase in employee withholding tax payments related to net settled equity awards.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKForeign Currency Exchange RiskFrom time to time, we use foreign exchange forward contracts to hedge a portion of our exposures to changes in currency exchange rates, which result from our global operating and financing activities. We do not use derivative financial instruments for trading or speculative purposes. Neither gains and losses from foreign currency transactions nor foreign exchange forward contracts were significant for any period presented in the consolidated financial statements included in this Form 10-K. We did not have any outstanding foreign exchange forward contracts as of October 29, 2023 or October 30, 2022.Interest Rate RiskChanges in interest rates affect the fair value of our outstanding debt. As of October 29, 2023 and October 30, 2022, we had $40.8 billion and $41.2 billion in principal amount of debt outstanding, and the estimated aggregate fair value of debt was $33.2 billion and $33.0 billion, respectively. As of October 29, 2023 and October 30, 2022, a hypothetical 50 basis points increase or decrease in market interest rates would change the fair value of debt by a decrease or increase of approximately $1.4 billion and $1.6 billion, respectively. However, this hypothetical change in interest rates would not impact the interest expense on our debt as we only had fixed rate senior notes outstanding. To hedge variability of cash flows due to changes in the benchmark interest rate of anticipated future debt issuances, we have entered, and in the future may enter, into treasury rate lock contracts. 47Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA BROADCOM INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm (PCAOB ID 238)49Consolidated Balance Sheets50Consolidated Statements of Operations51Consolidated Statements of Comprehensive Income52Consolidated Statements of Cash Flows53Consolidated Statements of Stockholders' Equity54Notes to Consolidated Financial Statements55Schedule II — Valuation and Qualifying Accounts8848Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders of Broadcom Inc.Opinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of Broadcom Inc. and its subsidiaries (the “Company”) as of October 29, 2023 and October 30, 2022, and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended October 29, 2023, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of October 29, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 29, 2023 and October 30, 2022, and the results of its operations and its cash flows for each of the three years in the period ended October 29, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 29, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.Basis for OpinionsThe Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Critical Audit MattersThe critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.Uncertain Tax Positions (UTPs)As described in Notes 2 and 11 to the consolidated financial statements, the gross unrecognized tax benefits balance was $4,655 million as of October 29, 2023. As management has disclosed, management evaluates the exposure associated with various tax filing positions and accrues an income tax liability when such positions do not meet the more-likely-than-not threshold for recognition. A tax benefit from an UTP may be recognized when it is more-likely-than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits.The principal considerations for our determination that performing procedures relating to the UTPs is a critical audit matter are (i) the significant judgment by management when evaluating the technical merits of these tax positions, (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating the technical merits of the tax positions, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the identification and recognition of the income tax liability for UTPs, including controls addressing the completeness of the UTPs and the measurement of the income tax liability. These procedures also included, among others, (i) testing management’s process for identifying potential new UTPs, (ii) for a selection of UTPs, evaluating possible outcomes, and (iii) for a selection of UTPs, testing the calculation of the income tax liability, including management’s assessment of the technical merits of tax positions and estimates of the amount of tax benefit expected to be sustained. Professionals with specialized skill and knowledge were used to assist in (i) the evaluation of the completeness of management’s identification of the UTPs and (ii) for a selection of UTPs, the evaluation of the reasonableness of management’s assessment of whether the tax positions are more-likely-than-not of being sustained, the amount of potential benefit to be realized, and the application of relevant tax laws./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaDecember 14, 2023We have served as the Company’s auditor since 2006.49Table of ContentsBROADCOM INC.CONSOLIDATED BALANCE SHEETSOctober 29,2023October 30,2022(In millions, except par value)ASSETS Current assets: Cash and cash equivalents$14,189 $12,416 Trade accounts receivable, net3,154 2,958 Inventory1,898 1,925 Other current assets1,606 1,205 Total current assets20,847 18,504 Long-term assets:Property, plant and equipment, net2,154 2,223 Goodwill43,653 43,614 Intangible assets, net3,867 7,111 Other long-term assets2,340 1,797 Total assets$72,861 $73,249 LIABILITIES AND EQUITY Current liabilities: Accounts payable$1,210 $998 Employee compensation and benefits935 1,202 Current portion of long-term debt1,608 440 Other current liabilities3,652 4,412 Total current liabilities7,405 7,052 Long-term liabilities: Long-term debt37,621 39,075 Other long-term liabilities3,847 4,413 Total liabilities48,873 50,540 Commitments and contingencies (Note 13)Stockholders’ equity: Preferred stock, $0.001 par value; 100 shares authorized; none issued and outstanding — — Common stock, $0.001 par value; 2,900 shares authorized; 414 and 418 shares issued and outstanding as of October 29, 2023 and October 30, 2022, respectively— — Additional paid-in capital21,099 21,159 Retained earnings2,682 1,604 Accumulated other comprehensive income (loss)207 (54)Total stockholders’ equity23,988 22,709 Total liabilities and equity$72,861 $73,249 The accompanying notes are an integral part of these consolidated financial statements.50Table of ContentsBROADCOM INC.CONSOLIDATED STATEMENTS OF OPERATIONSFiscal Year EndedOctober 29,2023October 30,2022October 31,2021(In millions, except per share data)Net revenue:Products$27,891 $26,277 $20,886 Subscriptions and services7,928 6,926 6,564 Total net revenue35,819 33,203 27,450 Cost of revenue: Cost of products sold8,636 7,629 6,555 Cost of subscriptions and services636 627 607 Amortization of acquisition-related intangible assets1,853 2,847 3,427 Restructuring charges4 5 17 Total cost of revenue11,129 11,108 10,606 Gross margin24,690 22,095 16,844 Research and development5,253 4,919 4,854 Selling, general and administrative1,592 1,382 1,347 Amortization of acquisition-related intangible assets1,394 1,512 1,976 Restructuring and other charges244 57 148 Total operating expenses8,483 7,870 8,325 Operating income16,207 14,225 8,519 Interest expense(1,622)(1,737)(1,885)Other income (expense), net512 (54)131 Income before income taxes15,097 12,434 6,765 Provision for income taxes1,015 939 29 Net income14,082 11,495 6,736 Dividends on preferred stock— (272)(299)Net income attributable to common stock$14,082 $11,223 $6,437 Net income per share attributable to common stock:Basic$33.93 $27.44 $15.70 Diluted$32.98 $26.53 $15.00 Weighted-average shares used in per share calculations: Basic415409410Diluted427423429The accompanying notes are an integral part of these consolidated financial statements.51Table of ContentsBROADCOM INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEFiscal Year EndedOctober 29,2023October 30,2022October 31,2021(In millions)Net income$14,082 $11,495 $6,736 Other comprehensive income (loss), net of tax:Change in unrealized gain on derivative instruments290 37 — Change in actuarial loss and prior service costs associated with defined benefit plans (29)25 (8)Other comprehensive income (loss), net of tax261 62 (8)Comprehensive income$14,343 $11,557 $6,728 The accompanying notes are an integral part of these consolidated financial statements.52Table of ContentsBROADCOM INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year EndedOctober 29,2023October 30,2022October 31,2021(In millions)Cash flows from operating activities: Net income$14,082 $11,495 $6,736 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangible and right-of-use assets3,333 4,455 5,502 Depreciation502 529 539 Stock-based compensation2,171 1,533 1,704 Deferred taxes and other non-cash taxes(501)(34)(809)Loss on debt extinguishment— 100 198 Non-cash interest expense132 129 96 Other9 183 (75)Changes in assets and liabilities, net of acquisitions and disposals:Trade accounts receivable, net(187)(870)210 Inventory27 (627)(294)Accounts payable209 (79)243 Employee compensation and benefits(279)136 186 Other current assets and current liabilities(628)222 (177)Other long-term assets and long-term liabilities(785)(436)(295)Net cash provided by operating activities18,085 16,736 13,764 Cash flows from investing activities:Acquisitions of businesses, net of cash acquired(53)(246)(8)Proceeds from sales of businesses— — 45 Purchases of property, plant and equipment(452)(424)(443)Purchases of investments(346)(200)— Sales of investments228 200 169 Other(66)3 (8)Net cash used in investing activities(689)(667)(245)Cash flows from financing activities:Proceeds from long-term borrowings— 1,935 9,904 Payments on debt obligations(403)(2,361)(11,495)Payments of dividends(7,645)(7,032)(6,212)Repurchases of common stock - repurchase program(5,824)(7,000)— Shares repurchased for tax withholdings on vesting of equity awards(1,861)(1,455)(1,299)Issuance of common stock122 114 170 Other(12)(17)(42)Net cash used in financing activities(15,623)(15,816)(8,974)Net change in cash and cash equivalents1,773 253 4,545 Cash and cash equivalents at beginning of period12,416 12,163 7,618 Cash and cash equivalents at end of period$14,189 $12,416 $12,163 Supplemental disclosure of cash flow information:Cash paid for interest$1,503 $1,386 $1,565 Cash paid for income taxes$1,782 $908 $775 The accompanying notes are an integral part of these consolidated financial statements.53Table of ContentsBROADCOM INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY8.00% Mandatory Convertible Preferred StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Total Stockholders’ EquitySharesPar ValueSharesPar Value(In millions)Balance as of November 1, 20204 $— 407 $— $23,982 $— $(108)$23,874 Net income— — — — — 6,736 — 6,736 Other comprehensive loss— — — — — — (8)(8)Dividends to common stockholders— — — — (224)(5,689)— (5,913)Dividends to preferred stockholders— — — — — (299)— (299)Common stock issued— — 9 — 170 — — 170 Stock-based compensation— — — — 1,704 — — 1,704 Shares repurchased for tax withholdings on vesting of equity awards— — (3)— (1,302)— — (1,302)Balance as of October 31, 20214 — 413 — 24,330 748 (116)24,962 Net income— — — — — 11,495 — 11,495 Other comprehensive income— — — — — — 62 62 Fair value of partially vested equity awards assumed in connection with an acquisition— — — — 4 — — 4 Dividends to common stockholders— — — — (50)(6,683)— (6,733)Dividends to preferred stockholders— — — — — (272)— (272)Common stock issued— — 8 — 114 — — 114 Stock-based compensation— — — — 1,533 — — 1,533 Repurchases of common stock— — (12)— (3,316)(3,684)— (7,000)Common stock issued in connection with Mandatory Convertible Preferred Stock conversion(4)— 12 — — — — — Shares repurchased for tax withholdings on vesting of equity awards— — (3)— (1,456)— — (1,456)Balance as of October 30, 2022— — 418 — 21,159 1,604 (54)22,709 Net income— — — — — 14,082 — 14,082 Other comprehensive income— — — — — — 261 261 Dividends to common stockholders— — — — — (7,645)— (7,645)Common stock issued— — 8 — 122 — — 122 Stock-based compensation— — — — 2,171 — — 2,171 Repurchases of common stock— — (9)— (481)(5,359)— (5,840)Shares repurchased for tax withholdings on vesting of equity awards— — (3)— (1,872)— — (1,872)Balance as of October 29, 2023— $— 414 $— $21,099 $2,682 $207 $23,988 The accompanying notes are an integral part of these consolidated financial statements.54Table of ContentsBROADCOM INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Overview and Basis of Presentation OverviewBroadcom Inc. (“Broadcom”), a Delaware corporation, is a global technology leader that designs, develops and supplies a broad range of semiconductor and infrastructure software solutions. We develop semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor based devices and analog III-V based products. We have a history of innovation in the semiconductor industry and offer thousands of products that are used in end products such as enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. Our infrastructure software solutions enable customers to plan, develop, automate, manage and secure applications across mainframe, distributed, mobile and cloud platforms. Our portfolio of infrastructure and security software is designed to modernize, optimize, and secure the most complex hybrid environments, enabling scalability, agility, automation, insights, resiliency and security. We also offer mission critical fibre channel storage area networking (“FC SAN”) products and related software in the form of modules, switches and subsystems incorporating multiple semiconductor products. Unless stated otherwise or the context otherwise requires, references to “Broadcom,” “we,” “our,” and “us” mean Broadcom and its consolidated subsidiaries. We have two reportable segments: semiconductor solutions and infrastructure software. See Note 12. “Segment Information” for additional information.Basis of PresentationWe operate on a 52- or 53-week fiscal year ending on the Sunday closest to October 31 in a 52-week year and the first Sunday in November in a 53-week year. Our fiscal year ended October 29, 2023 (“fiscal year 2023”) was a 52-week fiscal year. The first quarter of our fiscal year 2023 ended on January 29, 2023, the second quarter ended on April 30, 2023 and the third quarter ended on July 30, 2023. Our fiscal year ended October 30, 2022 (“fiscal year 2022”) and fiscal year ended October 31, 2021 (“fiscal year 2021”) were both 52-week fiscal years.The accompanying consolidated financial statements include the accounts of Broadcom and its subsidiaries and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation.2. Summary of Significant Accounting Policies Foreign currency remeasurement. We operate in a U.S. dollar functional currency environment. Foreign currency assets and liabilities for monetary accounts are remeasured into U.S. dollars at current exchange rates. Non-monetary items such as inventory and property, plant and equipment, are measured and recorded at historical exchange rates. The effects of foreign currency remeasurement were not material for any period presented.Use of estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates, and such differences could affect the results of operations reported in future periods. Cash and cash equivalents. We consider all highly liquid investment securities with original maturities of three months or less at the date of purchase to be cash equivalents. We determine the appropriate classification of our cash and cash equivalents at the time of purchase.Trade accounts receivable, net. Trade accounts receivable are recognized at the invoiced amount and do not bear interest. Accounts receivable are reduced by an allowance for doubtful accounts, which is our best estimate of the expected credit losses in our existing accounts receivable. We determine the allowance based on historical experience and current economic conditions, among other factors. Allowances for doubtful accounts were not material as of October 29, 2023 or October 30, 2022. Accounts receivable are also recognized net of sales returns and distributor credit allowances. These amounts are recognized when it is both probable and estimable that discounts will be granted or products will be returned. Allowances for sales returns and distributor credit allowances as of October 29, 2023 and October 30, 2022 were $137 million and $126 million, respectively.Concentrations of credit risk and significant customers. Our cash, cash equivalents and accounts receivable are potentially subject to concentration of credit risk. Cash and cash equivalents may be redeemable upon demand and are maintained with financial institutions that management believes are of high credit quality and therefore bear minimal credit risk. We seek to mitigate our credit risks by spreading such risks across multiple counterparties and monitoring the risk profile 55Table of Contentsof these counterparties. Our accounts receivable are derived from revenue earned from customers located both within and outside the U.S. We mitigate collection risks from our customers by performing regular credit evaluations of our customers’ financial conditions, and require collateral, such as letters of credit and bank guarantees, in certain circumstances.Concentration of other risks. We operate in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products with new capabilities, general economic conditions worldwide, the ability to safeguard patents and other intellectual property (“IP”) in a rapidly evolving market and reliance on assembly and test subcontractors, third-party wafer fabricators and independent distributors and other factors could affect our financial results.Inventory. We value our inventory at the lower of actual cost or net realizable value of the inventory, with cost being determined under the first-in, first-out method. We record a provision for excess and obsolete inventory based primarily on our forecast of product demand and production requirements. The excess and obsolete balance determined by this analysis becomes the basis for our excess and obsolete inventory charge and the written-down value of the inventory becomes its new cost basis. Retirement benefit plans. For defined benefit pension plans, we consider various factors in determining our respective benefit obligations and net periodic benefit cost, including the number of employees that we expect to receive benefits, their salary levels and years of service, the expected return on plan assets, the discount rate, the timing of the payment of benefits, and other actuarial assumptions. If the actual results and events of the benefit plans differ from our current assumptions, the benefit obligations may be over- or under-valued.The key assumptions are the discount rate and the expected rate of return on plan assets. The U.S. discount rates are based on a hypothetical yield curve constructed using high-quality corporate bonds selected to yield cash flows that match the expected timing and amount of the benefit payments. The U.S. expected rate of return on plan assets is set equal to the discount rate due to the implementation of our fully-matched, liability-driven investment strategy. We evaluate these assumptions at least annually. For the non-U.S. plans, we set assumptions specific to each country. We have elected to measure defined benefit pension plan assets and liabilities as of October 31, which is the month end that is closest to our fiscal year end.Derivative instruments. We use derivative financial instruments to manage exposure to foreign exchange risk and interest rate risk. We do not use derivative financial instruments for speculative or trading purposes.Outstanding derivatives are recognized as assets or liabilities at their fair values based on Level 2 inputs, as defined in the fair value hierarchy. For derivative instruments designated as cash flow hedges, the changes in fair value are initially recognized in other comprehensive income (loss), net of tax in the period of change, and are subsequently reclassified and recognized in the same line item as the hedged item when either the hedged transactions affect earnings or it becomes probable that the hedged transactions will not occur.We use foreign exchange forward contracts to manage exposure to foreign exchange risk. These forward contracts are not designated as hedging instruments, and the changes in fair value are recognized in other income (expense), net in the period of change. We did not have any outstanding foreign exchange forward contracts as of October 29, 2023 or October 30, 2022. The gains and losses recorded in other income (expense), net for derivative instruments not designated as hedges were not material.During fiscal years 2023 and 2022, we entered into treasury rate lock contracts that mature in approximately one year to hedge variability of cash flows due to changes in the benchmark interest rate of anticipated future debt issuances. These treasury rate locks were designated and accounted for as cash flow hedging instruments. As of October 30, 2022, the total notional amount of these contracts was $1.3 billion, and the fair value of these contracts was $47 million, which was recorded as a derivative asset with the gains recorded net of tax as a component of accumulated other comprehensive loss on our consolidated balance sheet. In August 2023, we early settled all treasury rate lock contracts, which had a $5.5 billion notional amount, for a cumulative gain of $371 million, which was recorded net of tax as a component of accumulated other comprehensive income as of October 29, 2023. The cumulative gain will be amortized to interest expense associated with future debt to be issued referencing the respective hedged treasury rates. The cash receipts were included in cash flows from operating activities in the consolidated statements of cash flows. No derivative instruments that hedge interest rate risk were outstanding as of October 29, 2023. Property, plant and equipment. Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Additions, improvements and major renewals are capitalized, and maintenance, repairs and minor renewals are expensed as incurred. Assets are held in construction in progress until placed in service, upon which date, we begin to depreciate these assets. When assets are retired or disposed of, the assets and related accumulated depreciation and amortization are removed from our property, plant and equipment balances and the resulting gain or loss is reflected in the consolidated statements of operations. Buildings and leasehold improvements are generally depreciated over 15 to 40 years, 56Table of Contentsor over the lease period, whichever is shorter, and machinery and equipment are generally depreciated over 3 to 10 years. We use the straight-line method of depreciation for all property, plant and equipment.Leases. We determine if an arrangement is a lease, or contains a lease, at the inception of the arrangement and evaluate whether the lease is an operating lease or a finance lease at the commencement date. We recognize right-of-use (“ROU”) assets and lease liabilities for operating and finance leases with terms greater than 12 months, and account for the lease and non-lease components as a single component. ROU assets represent our right to use an asset for the lease term, while lease liabilities represent our obligation to make lease payments. Operating and finance lease ROU assets and liabilities are recognized based on the present value of lease payments over the lease term at the lease commencement date. We use the implicit interest rate or, if not readily determinable, our incremental borrowing rate as of the lease commencement date to determine the present value of lease payments. The incremental borrowing rate is based on our unsecured borrowing rate, adjusted for the effects of collateral. Operating and finance lease ROU assets are recognized net of any lease prepayments and incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term. Finance lease expense is recognized based on the effective-interest method over the lease term.Fair value measurement. Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy is applied to prioritize the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).The three levels of the fair value hierarchy under the guidance on fair value measurements are described below:Level 1 — Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Our Level 1 assets include cash equivalents, banker's acceptances, trading securities investments and investment funds. We measure trading securities investments and investment funds at quoted market prices as they are traded in active markets with sufficient volume and frequency of transactions. Level 2 — Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified contractual term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 — Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date. Level 3 assets and liabilities include investment in equity securities without readily determinable fair values, goodwill, intangible assets, and property, plant and equipment, which are measured at fair value using a discounted cash flow approach when they are impaired. Quantitative information for Level 3 assets and liabilities reviewed at each reporting period includes indicators of significant deterioration in the earnings performance, credit rating, asset quality, business prospects of the investee, and financial indicators of the investee's ability to continue as a going concern. Business combinations. We account for business combinations under the acquisition method of accounting, which requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values, except for revenue contracts acquired, which are recognized in accordance with our revenue recognition policy. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in our consolidated statements of operations. Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based, in part, on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain acquired intangible assets under the income approach include growth in future expected cash flows from product sales, customer contracts and acquired technologies, revenue growth rate, customer ramp-up period, technology obsolescence rates, expected costs to develop in-process research and development (“IPR&D”) into commercially viable products, estimated cash flows from the projects when completed and discount rates. Unanticipated events and circumstances may occur which could affect the accuracy or validity of such assumptions, estimates or actual results. 57Table of ContentsGoodwill. Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill is not amortized but is reviewed annually (or more frequently if impairment indicators arise) for impairment. To review for impairment we first assess qualitative factors to determine whether events or circumstances lead to a determination that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount. Our qualitative assessment of the recoverability of goodwill, whether performed annually or based on specific events or circumstances, considers various macroeconomic, industry-specific and company-specific factors. Those factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of our financial performance; or (iv) a sustained decrease in our market capitalization below our net book value. After assessing the totality of events and circumstances, if we determine that it is not more likely than not that the fair value of any of our reporting units is less than its carrying amount, no further assessment is performed. If we determine that it is more likely than not that the fair value of any of our reporting units is less than its carrying amount, we calculate the fair value of that reporting unit and compare the fair value to the reporting unit’s net book value. If the fair value of the reporting unit is greater than its net book value, there is no impairment. Otherwise, we calculate the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit. The implied fair value of goodwill is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions.Long-lived assets. Purchased finite-lived intangible assets are carried at cost less accumulated amortization. Amortization is recognized over the periods during which the intangible assets are expected to contribute to our cash flows. Purchased IPR&D projects are capitalized at fair value as an indefinite-lived intangible asset and assessed for impairment thereafter. Upon completion of each underlying project, IPR&D assets are reclassified as amortizable purchased intangible assets and amortized over their estimated useful lives. If an IPR&D project is abandoned, we recognize the carrying value of the related intangible asset in our consolidated statements of operations in the period it is abandoned. On a quarterly basis, we monitor factors and changes in circumstances that could indicate carrying amounts of long-lived assets, including purchased intangible assets, ROU assets, and property, plant and equipment, may not be recoverable. Factors we consider important which could trigger an impairment review include: (i) significant under-performance relative to historical or projected future operating results, (ii) significant changes in the manner of our use of the acquired assets or the strategy for our overall business, and (iii) significant negative industry or economic trends. An impairment loss must be measured if the sum of the expected future cash flows (undiscounted and before interest) from the use and eventual disposition of the asset (or asset group) is less than the net book value of the asset (or asset group). The amount of the impairment loss will generally be measured as the difference between the net book value of the asset (or asset group) and the estimated fair value.Warranty. We accrue for the estimated costs of product warranties at the time revenue is recognized. Product warranty costs are estimated based upon our historical experience and specific identification of the product requirements, which may fluctuate based on product mix. Additionally, we accrue for warranty costs associated with occasional or unanticipated product quality issues if a loss is probable and can be reasonably estimated.Revenue recognition. We account for a contract with a customer when both parties have approved the contract and are committed to perform their respective obligations, each party’s rights can be identified, payment terms can be identified, the contract has commercial substance, and it is probable we will collect substantially all of the consideration we are entitled to. Revenue is recognized when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer.Nature of Products and ServicesOur products and services can be broadly categorized as sales of products and subscriptions and services. The following is a description of the principal activities from which we generate revenue.Products. We recognize revenue from sales to direct customers and distributors when control transfers to the customer. Rebates and incentives offered to distributors, which are earned when sales to end customers are completed, are estimated at the point of revenue recognition. We have elected to exclude from the transaction price any taxes collected from a customer and to account for shipping and handling activities performed after a customer obtains control of the product as activities to fulfill the promise to transfer the product. From time to time, certain customers agree to pay us secure supply fees in exchange for prioritized fulfillment of product orders. Such fees are included in the transaction price of the product orders and are recognized as revenue in the period that control over the products is transferred to the customer. Subscriptions and services. Our subscriptions and services revenue consists of sales and royalties from software arrangements, support services, professional services, transfer of IP, and non-recurring engineering (“NRE”) arrangements.Revenue from software arrangements primarily consists of fees, which may be paid either at contract inception or in 58Table of Contentsinstallments over the contract term, that provide customers with a right to use the software, access general support and maintenance, and utilize our professional services.Our software licenses have standalone functionality from which customers derive benefit, and the customer obtains control of the software when it is delivered or made available for download. We believe that for the majority of software arrangements, customers derive significant benefit from the ongoing support we provide. The majority of our subscriptions and services arrangements permit our customers to unilaterally terminate or cancel these arrangements at any time at the customer’s convenience, referred to as termination for convenience provisions, without substantive termination penalty and receive a pro-rata refund of any prepaid fees. Accordingly, we account for arrangements with these termination for convenience provisions as a series of daily contracts, resulting in ratable revenue recognition of software revenue over the contractual period.Support services consist primarily of telephone support and the provision of unspecified updates and upgrades on a when-and-if-available basis. Support services represent stand-ready obligations for which revenue is recognized ratably over the term of the arrangement.Professional services consist of implementation, consulting, customer education and customer training services. The obligation to provide professional services is generally satisfied over time, with the customer simultaneously receiving and consuming the benefits as we satisfy our performance obligations. Rights to our IP are either sold or licensed to a customer. IP revenue recognition is dependent on the nature and terms of each agreement. We recognize IP revenue upon delivery of the IP if there are no substantive future obligations to perform under the arrangement. Sales-based or usage-based royalties from the license of IP are recognized at the later of the period the sales or usages occur or the satisfaction of the performance obligation to which some or all of the sales-based or usage-based royalties have been allocated.There are two main categories of NRE contracts that we enter into with our customers: (a) NRE contracts in which we develop a custom chip and (b) NRE contracts in which we accelerate our development of a new chip upon the customer’s request. The majority of our NRE contract revenues meet the over time criteria. As such, revenue is recognized over the development period with the measure of progress using the input method based on costs incurred to total cost as the services are provided. For NRE contracts that do not meet the over time criteria, revenue is recognized at a point in time when the NRE services are complete.Material rights. Contracts with customers may also include material rights that are also performance obligations. These include the right to renew or receive products or services at a discounted price in the future. Revenue allocated to material rights is recognized when the customer exercises the right or the right expires.Arrangements with Multiple Performance ObligationsOur contracts may contain more than one of the products and services listed above, each of which is separately accounted for as a distinct performance obligation. Allocation of consideration. We allocate total contract consideration to each distinct performance obligation in a bundled arrangement on a relative standalone selling price basis. The standalone selling price reflects the price we would charge for a specific product or service if it were sold separately in similar circumstances and to similar customers.Standalone selling price. When available, we use directly observable transactions to determine the standalone selling prices for performance obligations. When directly observable transactions are not available, our estimates of standalone selling price for each performance obligation require judgment that considers multiple factors, including, but not limited to, historical discounting trends for products and services and pricing practices through different sales channels, gross margin objectives, internal costs, competitor pricing strategies, technology lifecycles and market conditions.We separately determine the standalone selling prices by product or service type. Additionally, we segment the standalone selling prices for products where the pricing strategies differ, and where there are differences in customers and circumstances that warrant segmentation.We also estimate the standalone selling price of our material rights. We estimate the value of the customer’s option to purchase or receive additional products or services at a discounted price by estimating the incremental discount the customer would obtain when exercising the option and the likelihood that the option would be exercised.Other Policies and JudgmentsContract modifications. We may modify contracts to offer customers additional products or services. Each of the additional products and services is generally considered distinct from those products or services transferred to the customer before the modification. We evaluate whether the contract price for the additional products and services reflects the 59Table of Contentsstandalone selling price as adjusted for facts and circumstances applicable to that contract. In these cases, we account for the additional products or services as a separate contract. In other cases where the pricing in the modification does not reflect the standalone selling price as adjusted for facts and circumstances applicable to that contract, we account for the additional products or services as part of the existing contract on a prospective basis, on a cumulative catch-up basis, or a combination of both based on the nature of the modification. In instances where the pricing in the modification offers the customer a credit for a prior arrangement, we adjust our variable consideration reserves for returns and other concessions. Right of return. Certain contracts contain a right of return that allows the customer to cancel all or a portion of the product or service and receive a credit. We estimate returns based on historical returns data which is constrained to an amount for which a material revenue reversal is not probable. We do not recognize revenue for products or services that are expected to be returned.Practical expedient elected. We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. For contracts that were modified before the beginning of the earliest reporting period presented, we have not retrospectively restated the contract for those modifications. We have disclosed the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations for purposes of determining the transaction price and allocating the transaction price at transition.Research and development. Research and development expense consists primarily of personnel costs for our engineers and third parties engaged in the design and development of our products, software and technologies, including salary, bonus and stock-based compensation expense, project material costs, services and depreciation. Such costs are charged to research and development expense as they are incurred.Stock-based compensation expense. We recognize compensation expense for time-based restricted stock units (“RSUs”) using the straight-line amortization method based on the fair value of RSUs on the date of grant. The fair value of RSUs is the closing market price of Broadcom common stock on the date of grant, reduced by the present value of dividends expected to be paid on Broadcom common stock prior to vesting. We recognize compensation expense for time-based stock options and employee stock purchase plan rights under the Broadcom Inc. Employee Stock Purchase Plan, as amended (“ESPP”) based on the estimated grant-date fair value determined using the Black-Scholes valuation model with a straight-line amortization method.Certain equity awards include both service and market conditions. The fair value of market-based awards is estimated on the date of grant using the Monte Carlo simulation technique. Compensation expense for market-based awards is amortized based upon a graded vesting method over the service period.We estimate forfeitures expected to occur and recognize stock-based compensation expense for such awards expected to vest. Changes in the estimated forfeiture rates can have a significant effect on stock-based compensation expense since the effect of adjusting the rate is recognized in the period the forfeiture estimate is changed.Shipping and handling costs. Our shipping and handling costs charged to customers are included in net revenue and the associated expense is included in cost of revenue for all periods presented.Litigation and settlement costs. We are involved in legal actions and other matters arising in our recent business acquisitions and in the normal course of business. We recognize an estimated loss contingency when the outcome is probable prior to issuance of the consolidated financial statements and we are able to reasonably estimate the amount or range of any possible loss.Income taxes. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.We recognize net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. If we determine that we are able to realize our deferred income tax assets in the future in excess of their net carrying values, we adjust the valuation allowance and reduce the provision for income taxes or increase the benefit from income taxes. Likewise, if we determine that we are not able to realize all or part of our net deferred tax assets, we increase the provision for income taxes or decrease the benefit from income taxes in the period such determination is made.60Table of ContentsThe U.S. Tax Cuts and Jobs Act enacted on December 22, 2017 (the “2017 Tax Act”) introduced significant changes to U.S. income tax law. The Global Intangible Low-Taxed Income (“GILTI”) provisions of the 2017 Tax Act require Broadcom to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. We have elected to record the impacts of GILTI during the period incurred.We account for uncertainty in income taxes in accordance with the applicable accounting guidance on income taxes. This guidance provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.Net income per share. Basic net income per share is computed by dividing net income attributable to common stock by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income attributable to common stock by the weighted-average number of shares of common stock and potentially dilutive shares of common stock outstanding during the period. Diluted shares outstanding include the dilutive effect of unvested RSUs, in-the-money stock options, and ESPP rights (together referred to as “equity awards”), as well as convertible preferred stock. Potentially dilutive shares whose effect would have been antidilutive are excluded from the computation of diluted net income per share.The dilutive effect of equity awards is calculated based on the average stock price for each fiscal period, using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options and purchasing shares under the ESPP and the amount of compensation cost for future service that we have not yet recognized are collectively assumed to be used to repurchase shares. The dilutive effect of convertible preferred stock is calculated using the if-converted method. The if-converted method assumes that these securities were converted at the beginning of the reporting period to the extent that the effect is dilutive.3. Revenue from Contracts with Customers DisaggregationWe have considered (1) information that is regularly reviewed by our Chief Executive Officer, who has been identified as the chief operating decision maker (the “CODM”) as defined by the authoritative guidance on segment reporting, in evaluating financial performance and (2) disclosures presented outside of our financial statements in our earnings releases and used in investor presentations to disaggregate revenues. The principal category we use to disaggregate revenues is the nature of our products and subscriptions and services, as presented in our consolidated statements of operations. In addition, revenues by reportable segment are presented in Note 12. “Segment Information.”The following tables present revenue disaggregated by type of revenue and by region for the periods presented:Fiscal Year 2023AmericasAsia PacificEurope, the Middle East and AfricaTotal(In millions)Products$2,601 $23,263 $2,027 $27,891 Subscriptions and services(a)5,678 657 1,593 7,928 Total$8,279 $23,920 $3,620 $35,819 Fiscal Year 2022AmericasAsia PacificEurope, the Middle East and AfricaTotal(In millions)Products$2,371 $21,761 $2,145 $26,277 Subscriptions and services(a)4,573 744 1,609 6,926 Total$6,944 $22,505 $3,754 $33,203 61Table of ContentsFiscal Year 2021AmericasAsia PacificEurope, the Middle East and AfricaTotal(In millions)Products$1,809 $17,258 $1,819 $20,886 Subscriptions and services(a)4,290 720 1,554 6,564 Total$6,099 $17,978 $3,373 $27,450 _____________________________(a) Subscriptions and services predominantly includes software licenses with termination for convenience clauses.Although we recognize revenue for the majority of our products when title and control transfer in Penang, Malaysia, we disclose net revenue by region based primarily on the geographic shipment location or delivery location specified by our distributors, original equipment manufacturer (“OEM”) customers, contract manufacturers, channel partners, or software customers.Contract BalancesContract assets and contract liabilities balances were as follows:October 29,2023October 30,2022(In millions)Contract Assets$955 $128 Contract Liabilities$2,786 $3,341 Changes in our contract assets and contract liabilities primarily result from the timing difference between our performance and the customer’s payment. We fulfill our obligations under a contract with a customer by transferring products and services in exchange for consideration from the customer. We recognize a contract asset when we transfer products or services to a customer and the right to consideration is conditional on something other than the passage of time. Accounts receivable are recorded when the customer has been billed or the right to consideration is unconditional. We recognize contract liabilities when we have received consideration or an amount of consideration is due from the customer and we have a future obligation to transfer products or services. The majority of our contract liabilities represents amounts billed or collected and advanced payments on contracts or arrangements which include termination for convenience provisions. The amount of revenue recognized during fiscal year 2023 that was included in the contract liabilities balance as of October 30, 2022 was $2,915 million. The amount of revenue recognized during fiscal year 2022 that was included in the contract liabilities balance as of October 31, 2021 was $2,615 million.Remaining Performance ObligationsRevenue allocated to remaining performance obligations represents the transaction price allocated to unsatisfied or partially unsatisfied performance obligations. Remaining performance obligations include unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, but do not include contracts for software, subscriptions or services where the customer is not committed. The customer is not considered committed when termination for convenience without payment of a substantive penalty exists, either contractually or through customary business practice. The majority of our customer software contracts include termination for convenience clauses without a substantive penalty and are not considered committed. Additionally, as a practical expedient, we have not included contracts that have an original duration of one year or less, nor have we included contracts with sales-based or usage-based royalties promised in exchange for a license of IP.Certain multi-year customer contracts, primarily in our semiconductor solutions segment, contain firmly committed amounts and the remaining performance obligations under these contracts as of October 29, 2023 were approximately $20.3 billion. We expect approximately 30% of this amount to be recognized as revenue over the next 12 months. Although the majority of our software contracts are not deemed to be committed, our customers generally do not exercise their termination for convenience rights. In addition, the majority of our contracts for products, subscriptions and services have a duration of one year or less. Accordingly, our remaining performance obligations disclosed above are not indicative of revenue for future periods.62Table of Contents4. Supplemental Financial Information Cash EquivalentsCash equivalents included $1,470 million and $3,915 million of time deposits and $1,650 million and $2,365 million of money-market funds as of October 29, 2023 and October 30, 2022, respectively. For time deposits, carrying value approximates fair value due to the short-term nature of the instruments. The fair value of money-market funds, which was consistent with their carrying value, was determined using unadjusted prices in active, accessible markets for identical assets, and as such, they were classified as Level 1 assets in the fair value hierarchy.Accounts Receivable FactoringWe sell certain of our trade accounts receivable on a non-recourse basis to third-party financial institutions pursuant to factoring arrangements. We account for these transactions as sales of receivables and present cash proceeds as cash provided by operating activities in the consolidated statements of cash flows. Total trade accounts receivable sold under the factoring arrangements were $3,975 million, $3,700 million and $4,027 million during fiscal years 2023, 2022 and 2021, respectively. Factoring fees for the sales of receivables were recorded in other income (expense), net and were not material for any of the periods presented.InventoryOctober 29,2023October 30,2022(In millions)Finished goods$676 $780 Work-in-process901 966 Raw materials321 179 Total inventory$1,898 $1,925 Property, Plant and Equipment, NetOctober 29,2023October 30,2022(In millions)Land$195 $195 Construction in progress63 63 Buildings and leasehold improvements1,181 1,156 Machinery and equipment 4,739 4,413 Total property, plant and equipment6,178 5,827 Accumulated depreciation and amortization(4,024)(3,604)Total property, plant and equipment, net$2,154 $2,223 Depreciation expense was $502 million, $529 million and $539 million for fiscal years 2023, 2022 and 2021, respectively.Other Current AssetsOctober 29,2023October 30,2022(In millions)Prepaid expenses$743 $864 Other863 341 Total other current assets$1,606 $1,205 63Table of ContentsOther Current LiabilitiesOctober 29,2023October 30,2022(In millions)Contract liabilities$2,487 $2,931 Tax liabilities473 680 Interest payable380 393 Other312 408 Total other current liabilities$3,652 $4,412 Other Long-Term LiabilitiesOctober 29,2023October 30,2022(In millions)Unrecognized tax benefits, interest and penalties$2,792 $3,229 Contract liabilities299 410 Other756 774 Total other long-term liabilities$3,847 $4,413 Other Income (Expense), Net Fiscal Year202320222021(In millions)Interest income$535 $100 $16 Other income15 30 26 Gain (loss) on investments11 (169)99 Other expense(49)(15)(10)Other income (expense), net$512 $(54)$131 Other income and other expense include foreign exchange gains and losses, factoring fees for the sales of receivables, dividend income, and other miscellaneous items.5. LeasesWe have operating and finance leases for our facilities, data centers and certain equipment. Operating lease expense was $91 million, $98 million and $102 million for fiscal years 2023, 2022 and 2021, respectively. Finance lease expense was $16 million, $18 million and $16 million for fiscal years 2023, 2022 and 2021 respectively.64Table of ContentsOther information related to leases was as follows:Fiscal Year202320222021(In millions)Cash paid for operating leases included in operating cash flows$90 $103 $140 ROU assets obtained in exchange for operating lease liabilities$28 $16 $92 ROU assets obtained in exchange for finance lease liabilities$— $1 $15 October 29,2023October 30,2022Weighted-average remaining lease term – operating leases (In years)1010Weighted-average remaining lease term – finance leases (In years)22Weighted-average discount rate – operating leases3.90 %3.60 %Weighted-average discount rate – finance leases3.09 %3.05 %Supplemental balance sheet information related to leases was as follows:Classification on the Consolidated Balance SheetsOctober 29,2023October 30,2022(In millions)ROU assets - operating leasesOther long-term assets$463 $517 ROU assets - finance leasesProperty, plant and equipment, net$22 $40 Short-term lease liabilities - operating leasesOther current liabilities$60 $74 Long-term lease liabilities - operating leasesOther long-term liabilities$359 $389 Short-term lease liabilities - finance leasesCurrent portion of long-term debt$45 $37 Long-term lease liabilities - finance leasesLong-term debt$4 $22 Future minimum lease payments under non-cancelable leases as of October 29, 2023 were as follows:October 29,2023Operating LeasesFinance Leases(In millions)2024$75 $45 202565 2 202652 2 202746 — 202840 — Thereafter236 — Total undiscounted liabilities514 49 Less: interest(95)— Present value of lease liabilities$419 $49 As of October 29, 2023, the Company had $642 million of future payments under additional leases that will commence in fiscal year ending November 3, 2024 with a lease term of 15 years.65Table of Contents6. Goodwill and Intangible Assets GoodwillSemiconductor SolutionsInfrastructure SoftwareTotal(In millions)Balance as of October 31, 2021$25,959 $17,491 $43,450 Acquisitions8 156 164 Balance as of October 30, 202225,967 17,647 43,614 Acquisitions34 5 39 Balance as of October 29, 2023$26,001 $17,652 $43,653 We completed three acquisitions in fiscal year 2023 and four acquisitions in fiscal year 2022, all of which qualified as business combinations. The consideration for these acquisitions was primarily allocated to goodwill and intangible assets.During the fourth quarter of fiscal years 2023, 2022 and 2021, we completed our annual impairment assessments and concluded that goodwill was not impaired in any of these years.Intangible AssetsGross CarryingAmountAccumulatedAmortizationNet Book Value(In millions)As of October 29, 2023: Purchased technology$12,938 $(10,723)$2,215 Customer contracts and related relationships7,059 (5,753)1,306 Order backlog9 (8)1 Trade names649 (388)261 Other168 (94)74 Intangible assets subject to amortization20,823 (16,966)3,857 IPR&D10 — 10 Total$20,833 $(16,966)$3,867 As of October 30, 2022: Purchased technology$19,450 $(15,422)$4,028 Customer contracts and related relationships7,066 (4,535)2,531 Order backlog484 (382)102 Trade names700 (372)328 Other174 (81)93 Intangible assets subject to amortization27,874 (20,792)7,082 IPR&D29 — 29 Total$27,903 $(20,792)$7,111 66Table of ContentsBased on the amount of intangible assets subject to amortization at October 29, 2023, the expected amortization expense for each of the next five fiscal years and thereafter was as follows:Fiscal Year:Expected Amortization Expense(In millions)2024$2,392 2025685 2026348 2027222 202869 Thereafter141 Total$3,857 The weighted-average remaining amortization periods by intangible asset category were as follows:Amortizable intangible assets:October 29,2023October 30,2022(In years)Purchased technology33Customer contracts and related relationships12Order backlog— (a)1Trade names88Other88(a) Represents less than one year.7. Net Income Per ShareFiscal Year202320222021(In millions, except per share data)Numerator:Net income$14,082 $11,495 $6,736 Dividends on preferred stock— (272)(299)Net income attributable to common stock$14,082 $11,223 $6,437 Denominator:Weighted-average shares outstanding - basic415 409 410 Dilutive effect of equity awards12 14 19 Weighted-average shares outstanding - diluted427 423 429 Net income per share attributable to common stock:Basic$33.93 $27.44 $15.70 Diluted$32.98 $26.53 $15.00 For fiscal years 2022 and 2021, diluted net income per share excluded the potentially dilutive effect of 10 million and 12 million shares of common stock, respectively, issuable upon the conversion of 8.00% Mandatory Convertible Preferred Stock, Series A, $0.001 par value per share (“Mandatory Convertible Preferred Stock”) as their effect was antidilutive. All shares of our Mandatory Convertible Preferred Stock were converted into shares of our common stock before the end of fiscal year 2022.67Table of Contents8. Retirement Plans Defined Benefit Pension PlansThe U.S. defined benefit pension plans primarily consist of a qualified pension plan. Benefits of the qualified pension plan are provided under an adjusted career-average-pay program, a cash-balance program or a dollar-per-month program. Benefit accruals under this plan were frozen in 2009. Participants in the adjusted career-average-pay program no longer earn service accruals. Participants in the cash-balance program no longer earn service accruals, but continue to earn 4% interest per year on their cash-balance accounts. There are no active participants under the dollar-per-month program. We also have a frozen non-qualified supplemental pension plan in the United States that principally provides benefits based on compensation in excess of amounts that can be considered under the qualified pension plan. We also have defined benefit pension plans for certain employees in Austria, France, Germany, India, Israel, Italy, Japan and Taiwan. Eligibility is generally determined based on the terms of our plans and local statutory requirements.Net Periodic Benefit CostFiscal Year202320222021(In millions)Service cost$8 $8 $11 Interest cost60 39 39 Expected return on plan assets(59)(39)(40)Other— 1 1 Net periodic benefit cost $9 $9 $11 Net actuarial (gain) loss$20 $(17)$8 The components of net periodic benefit cost other than the service cost are included in other income (expense), net. Service cost is recognized in operating expenses.68Table of ContentsBenefit Obligations and Plan Assets October 29,2023October 30,2022(In millions)Change in plan assets: Fair value of plan assets — beginning of period$1,160 $1,521 Actual return on plan assets19 (279)Employer contributions15 10 Plan participants’ contributions1 1 Benefit payments(94)(95)Foreign currency impact4 2 Fair value of plan assets — end of period1,105 1,160 Change in benefit obligations: Benefit obligations — beginning of period1,143 1,526 Service cost8 8 Interest cost60 39 Actuarial gain (a)(22)(336)Plan participants’ contributions1 1 Benefit payments(94)(95)Foreign currency impact5 — Benefit obligations — end of period1,101 1,143 Overfunded (underfunded) status of benefit obligations (b)$4 $17 Actuarial losses and prior service costs recognized in accumulated other comprehensive loss, net of taxes$(108)$(82)_______________________________(a)The actuarial gain in fiscal year 2022 was primarily due to an increase in discount rates experienced by the majority of our plans.(b)Substantially all amounts recognized on the consolidated balance sheets were recorded in other long-term assets and other long-term liabilities for all periods presented.Plans with benefit obligations in excess of plan assets:October 29,2023October 30,2022(In millions)Projected benefit obligations$79 $71 Accumulated benefit obligations$64 $55 Fair value of plan assets$26 $12 Plans with benefit obligations less than plan assets:October 29,2023October 30,2022(In millions)Projected benefit obligations$1,022 $1,072 Accumulated benefit obligations$1,022 $1,070 Fair value of plan assets$1,079 $1,148 The fair value of pension plan assets as of October 29, 2023 and October 30, 2022 included $204 million and $184 million, respectively, of assets for our non-U.S. pension plans.69Table of ContentsThe projected benefit obligations as of October 29, 2023 and October 30, 2022 included $202 million and $185 million, respectively, of obligations related to our non-U.S. pension plans. The accumulated benefit obligations as of October 29, 2023 and October 30, 2022 included $188 million and $168 million, respectively, of obligations related to our non-U.S. pension plans.Expected Future Benefit PaymentsFiscal Years:Expected Benefit Payments(In millions)2024$96 2025$95 2026$95 2027$93 2028$91 2029-2033$429 Investment Policy Plan assets of the U.S. qualified pension plan, which represent substantially all of the plan assets, are generally invested in funds held by third-party fund managers. Our benefit plan investment committee has set the investment strategy to fully match the liability. We direct the overall portfolio allocation and use a third-party investment consultant that has the discretion to structure portfolios and select the investment managers within those allocation parameters. Multiple investment managers are utilized, including both active and passive management approaches. The plan assets are invested using the liability-driven investment strategy intended to minimize market and interest rate risks, and those assets are periodically rebalanced toward asset allocation targets.The target asset allocation for the U.S. qualified pension plan reflects a risk/return profile that we believe is appropriate relative to the liability structure and return goals for the plan. We periodically review the allocation of plan assets relative to alternative allocation models to evaluate the need for adjustments based on forecasted liabilities and plan liquidity needs. For both fiscal years 2023 and 2022, 100% of the U.S. qualified pension plan assets were allocated to fixed income, in line with the target allocation. The fixed income allocation is primarily directed toward long-term core bond investments, with smaller allocations to Treasury Inflation-Protected Securities and high-yield bonds.70Table of ContentsFair Value Measurement of Plan AssetsOctober 29, 2023Fair Value Measurements at Reporting Date UsingLevel 1Level 2Total(In millions)Cash equivalents$16 (a)$— $16 Equity securities:Non-U.S. equity securities62 (b)— 62 Fixed-income securities:U.S. treasuries— 144 (c)144 Corporate bonds— 837 (c)837 Municipal bonds— 23 (c)23 Government bonds— 21 (c)21 Asset-backed securities— 2 (c)2 Total plan assets$78 $1,027 $1,105 October 30, 2022Fair Value Measurements at Reporting Date UsingLevel 1Level 2Total(In millions)Cash equivalents$19 (a)$— $19 Equity securities:Non-U.S. equity securities46 (b)— 46 Fixed-income securities:U.S. treasuries— 147 (c)147 Corporate bonds— 901 (c)901 Municipal bonds— 20 (c)20 Government bonds— 25 (c)25 Asset-backed securities— 2 (c)2 Total plan assets$65 $1,095 $1,160 ______________________________(a)Cash equivalents primarily included short-term investment funds which consisted of short-term money market instruments that were valued based on quoted prices in active markets.(b)These equity securities were valued based on quoted prices in active markets.(c)These amounts consisted of investments that were traded less frequently than Level 1 securities and were valued using inputs that included quoted prices for similar assets in active markets and inputs other than quoted prices that were observable for the assets, such as interest rates, yield curves, prepayment speeds, collateral performance, broker/dealer quotes and indices that were observable at commonly quoted intervals.Assumptions The assumptions used to determine the benefit obligations and net periodic benefit cost for our defined benefit pension plans are presented in the table below. The expected long-term return on assets shown in the table below represents an estimate of long-term returns on investment portfolios primarily consisting of combinations of debt, equity and other investments, depending on the plan. The long-term rates of return are then weighted based on the asset classes in which the pension funds are invested. Discount rates reflect the current rate at which defined benefit pension obligations could be settled based on the measurement dates of the plans, which is October 31, the month end closest to our fiscal year end. The range of assumptions reflects the different economic environments within various countries.71Table of ContentsAssumptions for Benefit Obligationsas ofAssumptions for Net Periodic Benefit CostFiscal YearOctober 29,2023October 30,2022202320222021Discount rate1.75%-7.00%1.25%-7.25%1.25%-7.25%0.75%-6.50%0.61%-6.54%Average increase in compensation levels2.00%-10.00%2.00%-10.00%2.00%-10.00%2.00%-10.00%2.00%-10.00%Expected long-term return on assetsN/AN/A2.50%-7.00%1.50%-7.25%1.00%-8.00%Defined Contribution PlansOur eligible U.S. employees participate in a company-sponsored 401(k) plan. Under the plan, we match employee contributions dollar for dollar up to 6% of their eligible earnings. All matching contributions vest immediately. During fiscal years 2023, 2022 and 2021, we made contributions of $100 million, $96 million and $94 million, respectively, to the 401(k) plan.In addition, other eligible employees outside of the U.S. receive retirement benefits under various defined contribution retirement plans.72Table of Contents9. Borrowings Effective Interest RateOctober 29,2023October 30,2022(In millions, except percentages)April 2022 Senior Notes - fixed rate4.000% notes due April 20294.17 %$750 $750 4.150% notes due April 20324.30 %1,200 1,200 4.926% notes due May 20375.33 %2,500 2,500 4,450 4,450 September 2021 Senior Notes - fixed rate3.137% notes due November 20354.23 %3,250 3,250 3.187% notes due November 20364.79 %2,750 2,750 6,000 6,000 March 2021 Senior Notes - fixed rate3.419% notes due April 20334.66 %2,250 2,250 3.469% notes due April 20344.63 %3,250 3,250 5,500 5,500 January 2021 Senior Notes - fixed rate1.950% notes due February 20282.10 %750 750 2.450% notes due February 20312.56 %2,750 2,750 2.600% notes due February 20332.70 %1,750 1,750 3.500% notes due February 20413.60 %3,000 3,000 3.750% notes due February 20513.84 %1,750 1,750 10,000 10,000 June 2020 Senior Notes - fixed rate3.459% notes due September 20264.19 %752 752 4.110% notes due September 20285.02 %1,118 1,118 1,870 1,870 May 2020 Senior Notes - fixed rate2.250% notes due November 20232.40 %105 105 3.150% notes due November 20253.29 %900 900 4.150% notes due November 20304.27 %1,856 1,856 4.300% notes due November 20324.39 %2,000 2,000 4,861 4,861 April 2020 Senior Notes - fixed rate5.000% notes due April 20305.18 %606 606 April 2019 Senior Notes - fixed rate3.625% notes due October 20243.98 %622 622 4.750% notes due April 20294.95 %1,655 1,655 2,277 2,277 2017 Senior Notes - fixed rate2.650% notes due January 20232.78 %— 260 3.625% notes due January 20243.74 %829 829 3.125% notes due January 20253.23 %495 495 3.875% notes due January 20274.02 %2,922 2,922 73Table of ContentsEffective Interest RateOctober 29,2023October 30,2022(In millions, except percentages)3.500% notes due January 20283.60 %777 777 5,023 5,283 Assumed CA Senior Notes - fixed rate4.500% notes due August 20234.10 %— 143 4.700% notes due March 20275.15 %215 215 215 358 Other senior notes - fixed rate 3.500% notes due August 20243.55 %7 7 4.500% notes due August 20344.55 %6 6 13 13 Total principal amount outstanding$40,815 $41,218 Current portion of principal amount outstanding$1,563 $403 Short-term finance lease liabilities45 37 Total current portion of long-term debt$1,608 $440 Non-current portion of principal amount outstanding$39,252 $40,815 Long-term finance lease liabilities4 22 Unamortized discount and issuance costs(1,635)(1,762)Total long-term debt$37,621 $39,075 The senior notes are recorded net of discount and issuance costs, which are amortized to interest expense over the respective terms of such senior notes.We may redeem or purchase, in whole or in part, any of our senior notes prior to their respective maturities, subject to a specified make-whole premium determined in accordance with the indentures governing the respective notes, plus accrued and unpaid interest. In the event of a change in control, note holders will have the right to require us to repurchase their notes at a price equal to 101% of the principal amount of such notes, plus accrued and unpaid interest. Subsequent to the end of fiscal year 2023, we borrowed term loans to finance the acquisition of VMware, Inc. (“VMware”) and assumed VMware’s outstanding senior unsecured notes. See Note 15. “Subsequent Events” for additional information.April 2022 Senior NotesIn April 2022, we issued $750 million of 4.000% senior unsecured notes due April 2029 and $1,200 million of 4.150% senior unsecured notes due April 2032. Using the net proceeds, we redeemed the outstanding balance of $1,020 million of our 4.700% notes due 2025 and $944 million of our 4.250% notes due 2026. As a result of these redemptions, we incurred premiums of $85 million and wrote off $15 million of unamortized discount and issuance costs, both of which were included in interest expense.In April 2022, we issued $2,500 million of 4.926% senior unsecured notes due May 2037 in exchange for $2,502 million of certain of our outstanding notes maturing between 2027 and 2030. As a result of this exchange, we paid premiums of $47 million, which were included in unamortized discount and issuance costs. The 4.926% notes due 2037, the 4.000% notes due 2029 and the 4.150% notes due 2032 are collectively referred as the “April 2022 Senior Notes.”September 2021 Senior NotesIn September 2021, we completed our private offers to exchange $6.0 billion of certain of our outstanding notes maturing between 2025 and 2030 for $3,250 million of 3.137% senior unsecured notes due November 2035 and $2,750 million of 3.187% senior unsecured notes due November 2036 (collectively, the “September 2021 Senior Notes”). As a result of this exchange, we paid premiums of $762 million, which were included in unamortized discount and issuance costs.74Table of ContentsMarch 2021 Senior NotesIn March 2021, we completed our private offers to exchange $5.5 billion of certain of our outstanding notes maturing between 2024 and 2027 (the “March 2021 Exchange Offer”) for $2,250 million of 3.419% senior unsecured notes due April 2033 and $3,250 million of 3.469% senior unsecured notes due April 2034 (collectively, the “March 2021 Senior Notes”). As a result of this exchange, we paid premiums of $581 million, which were included in unamortized discount and issuance costs.In connection with the March 2021 Exchange Offer, Broadcom Corporation (“BRCM”) and Broadcom Technologies Inc. (“BTI”) were automatically and unconditionally released from their guarantees in accordance with the respective indentures governing the January 2021 Senior Notes, June 2020 Senior Notes, May 2020 Senior Notes, April 2020 Senior Notes, and April 2019 Senior Notes, as defined below respectively. January 2021 Senior NotesIn January 2021, we issued $10 billion of senior unsecured notes (the “January 2021 Senior Notes”). Using the net proceeds from the January 2021 Senior Notes, we repaid the outstanding balance of $5,888 million of our unsecured term A-3 facility and unsecured term A-5 facility under the credit agreement entered into on November 4, 2019 (the “November 2019 Credit Agreement”), repurchased $3,830 million of certain of our outstanding notes maturing between 2021 and 2023 through a cash tender offer and redemption, and repaid $282 million of our 2.200% notes upon maturity in January 2021. As a result of these repayments and repurchases, we incurred premiums of $151 million and wrote off $47 million of unamortized discount and issuance costs, both of which were included in interest expense.2021 Credit AgreementIn January 2021, we entered into a credit agreement (the “2021 Credit Agreement”), which provides for a five-year $7.5 billion unsecured revolving credit facility, of which $500 million is available for the issuance of multi-currency letters of credit. The issuance of letters of credit and certain other instruments would reduce the aggregate amount otherwise available under the revolving credit facility for revolving loans. Subject to the terms of the 2021 Credit Agreement, we are permitted to borrow, repay and reborrow revolving loans at any time prior to the earlier of (a) January 19, 2026 and (b) the date of termination in whole of the revolving lenders’ commitments under the 2021 Credit Agreement. In connection with the 2021 Credit Agreement, we terminated the credit agreement entered into on May 7, 2019, which provided for a five-year $5 billion unsecured revolving credit facility, and the November 2019 Credit Agreement. We had no borrowings outstanding under the revolving credit facility at either October 29, 2023 or October 30, 2022.June 2020 Senior NotesIn June 2020, we completed our private offers to exchange $3,742 million of certain series of our outstanding senior notes maturing between 2021 and 2024 for $1,695 million of senior notes due 2026 and $2,222 million of senior notes due 2028 (collectively, the “June 2020 Senior Notes”).May 2020 Senior NotesIn May 2020, we issued $8 billion of senior unsecured notes (the “May 2020 Senior Notes”). Using the net proceeds, we repaid certain term loans under the November 2019 Credit Agreement and all outstanding borrowings under a revolving credit facility.April 2020 Senior NotesIn April 2020, we issued $4.5 billion of senior unsecured notes (the “April 2020 Senior Notes”). Using the net proceeds, we repurchased certain series of our outstanding senior notes maturing between 2021 and 2022, pursuant to a cash tender offer that we completed in April 2020.April 2019 Senior NotesIn April 2019, we issued $11 billion of senior unsecured notes (the “April 2019 Senior Notes”). Using the net proceeds, we repaid certain term loans.75Table of ContentsRegistered Exchange OfferIn connection with the issuance of the June 2020 Senior Notes, the May 2020 Senior Notes, the April 2020 Senior Notes (collectively, the “2020 Senior Notes”) and the April 2019 Senior Notes, we entered into registration rights agreements, pursuant to which we were obligated to use commercially reasonable efforts to file with the Securities and Exchange Commission (the “SEC”), and cause to be declared effective, a registration statement with respect to an offer to exchange (the “Registered Exchange Offer”) each series of the 2020 Senior Notes and the April 2019 Senior Notes for notes that are registered with the SEC (the “Registered Notes”), with substantially identical terms. We completed the Registered Exchange Offer on August 10, 2020. Substantially all of our 2020 Senior Notes and April 2019 Senior Notes were tendered and exchanged for the corresponding Registered Notes in the Registered Exchange Offer. Commercial Paper In February 2019, we established a commercial paper program pursuant to which we may issue unsecured commercial paper notes (“Commercial Paper”) in principal amount of up to $2 billion outstanding at any time with maturities of up to 397 days from the date of issue. Commercial Paper is sold under customary terms in the commercial paper market and may be issued at a discount from par or, alternatively, may be sold at par and bear interest at rates dictated by market conditions at the time of their issuance. The discount associated with the Commercial Paper is amortized to interest expense over its term. Outstanding Commercial Paper reduces the amount that would otherwise be available to borrow for general corporate purposes under our revolving credit facility. We had no Commercial Paper outstanding at either October 29, 2023 or October 30, 2022. 2017 Senior NotesDuring the fiscal year ended October 29, 2017, Broadcom Cayman Finance Limited, which subsequently merged into BTI during the fiscal year ended November 3, 2019 (“fiscal year 2019”) with BTI remaining as the surviving entity, and BRCM issued $17,550 million of senior unsecured notes (the “2017 Senior Notes”). Our 2017 Senior Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured, unsubordinated basis by Broadcom and BTI. Using the net proceeds, plus cash on hand, we repaid certain term loans and financed the acquisition of Brocade Communications Systems, Inc.During the fiscal year ended November 4, 2018, substantially all of the 2017 Senior Notes were tendered and exchanged for notes registered with the SEC, with substantially identical terms. Assumed CA Senior NotesIn connection with our acquisition of CA, Inc. (“CA”) during fiscal year 2019, we assumed $2.25 billion of CA’s outstanding senior unsecured notes (the “Assumed CA Senior Notes”). CA remains the sole obligor under the Assumed CA Senior Notes. Fair Value of DebtAs of October 29, 2023, the estimated aggregate fair value of our debt was $33,181 million. The fair value of our senior notes was determined using quoted prices from less active markets. All of our debt obligations are categorized as Level 2 instruments.Future Principal Payments of DebtThe future scheduled principal payments of debt as of October 29, 2023 were as follows:Fiscal Year:Future Scheduled Principal Payments(In millions)2024$1,563 2025495 20261,652 20273,137 20282,645 Thereafter31,323 Total$40,815 As of October 29, 2023 and October 30, 2022, we were in compliance with all debt covenants.76Table of Contents10. Stockholders’ Equity Cash Dividends Declared and PaidFiscal Year202320222021(In millions, except per share data)Dividends per share to common stockholders$18.40 $16.40 $14.40 Dividends to common stockholders$7,645 $6,733 $5,913 Dividends per share to preferred stockholders$— $80.00 $80.00 Dividends to preferred stockholders$— $299 $299 On September 30, 2019, we completed an offering of approximately 4 million shares of Mandatory Convertible Preferred Stock, which generated net proceeds of approximately $3,679 million and would automatically convert into shares of our common stock on September 30, 2022. The holders of Mandatory Convertible Preferred Stock were entitled to receive, when, as and if declared by our Board of Directors, or an authorized committee thereof, out of funds legally available for payment, cumulative dividends at the annual rate of 8.00% of the liquidation preference of $1,000 per share (equivalent to $80 annually per share), payable in cash or, subject to certain limitations, by delivery of shares of our common stock or any combination of cash and shares of our common stock, at our election. During fiscal year 2022, outstanding shares of our Mandatory Convertible Preferred Stock converted into an aggregate of approximately 12 million shares of our common stock at conversion rates ranging between 3.0894 and 3.1149 common shares per share of Mandatory Convertible Preferred Stock. We paid cash in lieu of fractional shares of common stock upon conversion.Stock Repurchase ProgramsIn December 2021, our Board of Directors authorized a stock repurchase program to repurchase up to $10 billion of our common stock from time to time through December 31, 2022, which was subsequently extended to December 31, 2023. In May 2022, our Board of Directors authorized another stock repurchase program to repurchase up to an additional $10 billion of our common stock from time to time through December 31, 2023. We repurchased and retired approximately 9 million and 12 million shares of our common stock for $5,824 million and $7,000 million under these stock repurchase programs during fiscal years 2023 and 2022, respectively.Repurchases under our stock repurchase programs may be effected through a variety of methods, including open market or privately negotiated purchases. The timing and amount of shares repurchased will depend on the stock price, business and market conditions, corporate and regulatory requirements, alternative investment opportunities, acquisition opportunities, and other factors. We are not obligated to repurchase any specific amount of shares of common stock, and the stock repurchase programs may be suspended or terminated at any time.Equity Incentive Award Plan2012 PlanIn connection with the acquisition of BRCM, we assumed the BRCM 2012 Stock Incentive Plan (the “Original 2012 Plan”) and outstanding unvested RSUs originally granted by BRCM under the Original 2012 Plan that were held by continuing employees. During the second quarter of fiscal year 2021, our stockholders approved the amendment and restatement of the Original 2012 Plan, now called the Broadcom Inc. 2012 Stock Incentive Plan (the “Amended 2012 Plan”). Under the Amended 2012 Plan, we may grant stock options and stock appreciation rights with an exercise price that is no less than the fair market value on the date of grant, restricted stock awards, and RSUs to employees. No participant may be granted such awards for more than an aggregate of 4 million shares in any fiscal year. Equity awards granted under the Amended 2012 Plan generally vest over four years. The Amended 2012 Plan reduced the number of shares available for new equity award grants to 20 million shares and removed the annual share replenishment provision provided under the Original 2012 Plan. During the second quarter of fiscal year 2023, our stockholders approved the amendment and restatement of the Amended 2012 Plan to increase the number of shares of common stock authorized for issuance by 25 million shares. Awards cancelled or forfeited and shares withheld to satisfy tax withholding obligations become available for future issuance. As of October 29, 2023, 36 million shares remained available for issuance under the Amended 2012 Plan.We may grant market-based RSUs with both a service condition and a market condition as part of our equity compensation programs. The market-based RSUs generally vest over four years, subject to satisfaction of market conditions. During fiscal years 2023, 2022 and 2021, we granted market-based RSUs under which grantees may receive the number of 77Table of Contentsshares ranging from 0% to 300% of the original grant at vesting based upon the total stockholder return (“TSR”) on our common stock on an absolute basis and as compared to the TSR of an index group of companies. During fiscal year 2023, we also granted market-based RSUs vesting over five years, subject to satisfaction of stock price performance milestones.Employee Stock Purchase PlanThe ESPP provides eligible employees with the opportunity to acquire an ownership interest in us through periodic payroll deductions, based on a 6-month look-back period, at a price equal to the lesser of 85% of the fair market value of our common stock at either the beginning or the end of the relevant offering period. The ESPP is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986. However, the ESPP is not intended to be a qualified pension, profit sharing or stock bonus plan under Section 401(a) of the Internal Revenue Code of 1986 and is not subject to the provisions of the Employee Retirement Income Security Act of 1974.Stock-Based Compensation Expense Fiscal Year202320222021(In millions)Cost of products sold$88 $65 $78 Cost of subscriptions and services122 82 65 Research and development1,513 1,048 1,199 Selling, general and administrative448 338 362 Total stock-based compensation expense$2,171 $1,533 $1,704 Estimated income tax benefits for stock-based compensation$367 $255 $283 Excess income tax benefits for stock-based awards exercised or released$507 $375 $310 We have assumed an annualized forfeiture rate for RSUs of 5%. We will recognize additional expense if actual forfeitures are lower than we estimated, and will recognize a benefit if actual forfeitures are higher than we estimated.During the first quarter of fiscal year 2019, the Compensation Committee of our Board of Directors approved a broad-based program of multi-year equity grants of time- and market-based RSUs (the “Multi-Year Equity Awards”) in lieu of our annual employee equity awards historically granted on March 15 of each year. Each Multi-Year Equity Award vests on the same basis as four annual grants made March 15 of each year, beginning in fiscal year 2019, with successive four-year vesting periods. Stock-based compensation expense related to the Multi-Year Equity Awards was $596 million, $794 million and $816 million for fiscal years 2023, 2022 and 2021, respectively.As of October 29, 2023, the total unrecognized compensation cost related to unvested stock-based awards was $6,375 million, which is expected to be recognized over the remaining weighted-average service period of 3.4 years.The following table summarizes the weighted-average assumptions utilized to calculate the fair value of market-based awards granted in the periods presented:Fiscal Year202320222021Risk-free interest rate4.0 %1.4 %0.3 %Dividend yield3.3 %2.7 %3.0 %Volatility32.8 %37.1 %39.0 %Expected term (in years)4.83.43.4The risk-free interest rate was derived from the average U.S. Treasury Strips rate, which approximated the rate in effect appropriate for the term at the time of grant.The dividend yield was based on the historical and expected dividend payouts as of the respective award grant dates.The volatility was based on our own historical stock price volatility over the period commensurate with the expected life of the awards and the implied volatility of a 180-day call option on our own common stock measured at a specific date. The expected term was commensurate with the awards’ contractual terms.78Table of ContentsRestricted Stock Unit AwardsA summary of time- and market-based RSU activity was as follows:Number of RSUsOutstandingWeighted-AverageGrant DateFair ValuePer Share(In millions, except per share data)Balance as of November 1, 202032 $188.35 Granted2 $408.69 Vested(8)$214.15 Forfeited(3)$189.84 Balance as of October 31, 202123 $200.38 Granted3 $527.69 Vested(7)$225.52 Forfeited(1)$242.82 Balance as of October 30, 202218 $238.49 Granted12 $519.78 Vested(7)$262.48 Forfeited(1)$307.91 Balance as of October 29, 202322 $389.21 The aggregate fair value of time- and market-based RSUs that vested in fiscal years 2023, 2022 and 2021 was $5,423 million, $4,207 million and $3,715 million, respectively, which represented the market value of our common stock on the date that the RSUs vested. The number of RSUs vested included shares of common stock that we withheld for settlement of employees’ tax obligations due upon the vesting of RSUs.11. Income Taxes The components of income before income taxes by U.S. and foreign jurisdictions were as follows: Fiscal Year202320222021(In millions)Domestic loss$(63)$(2,020)$(3,103)Foreign income15,160 14,454 9,868 Income before income taxes$15,097 $12,434 $6,765 The components of the provision for income taxes were as follows: Fiscal Year202320222021(In millions)Current tax provision: Federal$952 $174 $446 State23 48 46 Foreign541 762 534 Total1,516 984 1,026 Deferred tax provision (benefit): Federal(499)68 (876)State(31)(15)(114)Foreign29 (98)(7)Total(501)(45)(997)Total provision for income taxes$1,015 $939 $29 79Table of ContentsThe following is a reconciliation of our effective tax rate to the statutory federal tax rate: Fiscal Year202320222021Statutory tax rate21.0 %21.0 %21.0 %State, net of federal benefit— 0.2 (0.8)Foreign income taxed at different rates(17.3)(19.1)(22.8)Deemed inclusion of foreign earnings9.9 8.0 9.5 Foreign-derived intangible income deduction— — (3.1)Uncertain tax benefits(1.9)1.6 3.7 Excess tax benefits from stock-based compensation(3.4)(3.0)(4.6)Research and development credit(1.8)(1.4)(2.3)Other, net0.2 0.2 (0.2)Effective tax rate on income before income taxes6.7 %7.5 %0.4 %The increase in provision for income taxes in fiscal year 2023 compared to fiscal year 2022 was primarily due to higher income before income taxes, partially offset by an increase in the recognition of uncertain tax benefits as a result of lapses of statutes of limitations. The increase in provision for income taxes in fiscal year 2022 compared to fiscal year 2021 was primarily due to higher income before income taxes.We derive the effective tax rate benefit attributed to foreign income taxed at different rates primarily from our operations in Singapore and Malaysia. Our tax incentives from the Singapore Economic Development Board provide that any qualifying income earned in Singapore is subject to tax incentives or reduced rates of Singapore income tax, subject to our compliance with the conditions specified in these incentives and legislative developments. These Singapore tax incentives are expected to expire in November 2025. We have also obtained a tax holiday from our qualifying income earned in Malaysia, which is scheduled to expire in fiscal year 2028. The tax holiday that we negotiated in Malaysia is also subject to our compliance with various operating and other conditions. Before taking into consideration the effects of the U.S. Tax Cuts and Jobs Act and other indirect tax impacts, the effect of these tax incentives and tax holiday decreased the provision for income taxes by approximately $2,104 million, $1,821 million and $1,156 million for fiscal years 2023, 2022 and 2021, respectively.80Table of ContentsSignificant components of our deferred tax assets and liabilities consisted of the following:October 29,2023October 30,2022(In millions)Deferred income tax assets: Net operating loss, credit and other carryforwards$1,809 $1,808 Capitalized research and development275 — Deferred revenue208 645 Employee stock awards190 183 Depreciation and amortization223 156 Other deferred income tax assets329 343 Gross deferred income tax assets3,034 3,135 Less: valuation allowance(1,789)(1,777)Deferred income tax assets1,245 1,358 Deferred income tax liabilities:Depreciation and amortization97 341 Unamortized debt discount and issuance costs302 322 Foreign earnings not indefinitely reinvested86 86 Other deferred income tax liabilities62 36 Deferred income tax liabilities547 785 Net deferred income tax assets$698 $573 The 2017 Tax Act amended Internal Revenue Code Section 174 to require businesses to capitalize and amortize research and development expenses and became effective in our fiscal year 2023. In fiscal year 2023, we recorded a deferred tax asset of $275 million for capitalized research and development.We continue to indefinitely reinvest $1,963 million of certain accumulated foreign earnings. The unrecognized deferred income tax liability related to these earnings is estimated to be $206 million. All other current and future earnings of all our foreign subsidiaries are not considered permanently reinvested. As of October 29, 2023, we had tax effected U.S. state net operating loss (“NOL”) carryforwards of $136 million and foreign NOL carryforwards of $128 million. The state and foreign NOL carryforwards expire in various years beginning in fiscal years 2024 and 2025, respectively. We had $1,462 million of state research and development tax credits which begin to expire in fiscal year 2024. We have provided a valuation allowance on substantially all state tax credits and state and foreign net operating loss carryforwards as we do not expect them to be realized.81Table of ContentsUncertain Tax PositionsThe following table reconciles the beginning and ending balance of gross unrecognized tax benefits:Fiscal Year202320222021(In millions)Beginning balance$5,117 $5,030 $4,748 Lapses of statutes of limitations(634)(50)(58)Increases in balances related to tax positions taken during prior periods26 — 41 Decreases in balances related to tax positions taken during prior periods(13)(113)— Increases in balances related to tax positions taken during current period170 288 337 Decreases in balances related to settlements with taxing authorities(11)(38)(38)Ending balance$4,655 $5,117 $5,030 We recognize interest and penalties related to unrecognized tax benefits within the provision for income taxes. Accrued interest and penalties were included within other long-term liabilities. During fiscal years 2023, 2022 and 2021, we recognized interest and penalties of $22 million, $25 million and $46 million respectively, within the provision for income taxes. As of October 29, 2023 and October 30, 2022, the combined amount of cumulative accrued interest and penalties was approximately $389 million and $411 million, respectively.As of October 29, 2023 and October 30, 2022, approximately $5,044 million and $5,528 million, respectively, of the unrecognized tax benefits and accrued interest and penalties would, if recognized, benefit our effective income tax rate. We are subject to U.S. income tax examination for fiscal years 2018 and later. Certain of our acquired companies are subject to tax examinations in major jurisdictions outside of the U.S. for fiscal years 2008 and later. It is possible that our existing unrecognized tax benefits may change up to $499 million as a result of lapses of the statute of limitations for certain audit periods and/or audit examinations expected to be completed within the next 12 months.12. Segment Information Reportable SegmentsWe have two reportable segments: semiconductor solutions and infrastructure software. Each segment has separate financial information that is utilized on a regular basis by the CODM in determining how to allocate resources and evaluate performance. The reportable segments are determined based on several factors including, but not limited to, customer base, homogeneity of products, technology, delivery channels and similar economic characteristics.Semiconductor solutions. We provide semiconductor solutions for managing the movement of data in data center, service provider, and enterprise networking applications. We provide a broad variety of radio frequency semiconductor devices, wireless connectivity solutions, custom touch controllers, and inductive charging solutions for mobile applications. We also provide semiconductor solutions for enabling the set-top box and broadband access markets and for enabling secure movement of digital data to and from host machines, such as servers, personal computers and storage systems, to the underlying storage devices, such as hard disk drives and solid state drives. We also provide a broad variety of products for the general industrial and automotive markets. Our semiconductor solutions segment also includes our IP licensing.Infrastructure software. We provide a portfolio of software solutions that enables customers to plan, develop, automate, manage and secure applications across mainframe, distributed, mobile and cloud platforms. Our portfolio of infrastructure and security software is designed to modernize, optimize, and secure the most complex hybrid environments, enabling scalability, agility, automation, insights, resiliency and security. We also offer mission critical FC SAN products and related software.Our CODM assesses the performance of each segment and allocates resources to each segment based on net revenue and operating results and does not evaluate each segment using discrete asset information. Operating results by segment include items that are directly attributable to each segment and also include shared expenses such as marketing, general and administrative activities, facilities and information technology (“IT”) expenses. Shared expenses are primarily allocated based on revenue and headcount. 82Table of ContentsUnallocated ExpensesUnallocated expenses include amortization of acquisition-related intangible assets, stock-based compensation expense, restructuring and other charges, acquisition-related costs, and other costs, which are not used in evaluating the results of, or in allocating resources to, our segments. Acquisition-related costs include transaction costs and any costs directly related to the acquisition and integration of acquired businesses.Depreciation expense directly attributable to each reportable segment is included in the operating results of each segment. However, the CODM does not evaluate depreciation expense by operating segment and, therefore, it is not separately presented. There was no inter-segment revenue for any of the periods presented. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.Fiscal Year202320222021(In millions)Net revenue:Semiconductor solutions$28,182 $25,818 $20,383 Infrastructure software7,637 7,385 7,067 Total net revenue$35,819 $33,203 $27,450 Operating income:Semiconductor solutions$16,486 $15,075 $10,976 Infrastructure software5,639 5,219 4,936 Unallocated expenses(5,918)(6,069)(7,393)Total operating income$16,207 $14,225 $8,519 Geographic InformationNet revenue by country is based primarily on the geographic shipment or delivery location as specified by the distributors, OEMs, contract manufacturers, channel partners, or software customers who purchased our products or services. For the majority of our products, title and control transfer to our customers in Penang, Malaysia. The products are then transported to the customer specific locations. Net revenue from the United States for fiscal years 2023, 2022 and 2021 was $6,975 million, $5,915 million and $5,285 million, respectively. Net revenue from China (including Hong Kong) for fiscal years 2023, 2022 and 2021 was $11,533 million, $11,637 million and $9,752 million, respectively. Net revenue from Singapore for fiscal years 2023, 2022 and 2021 was $4,479 million, $4,003 million and $2,754 million, respectively. Net revenue from other foreign countries for fiscal years 2023, 2022 and 2021 was $12,832 million, $11,648 million and $9,659 million, respectively. These geographic delivery locations are not necessarily indicative of the geographic location of our end customers or the country in which our end customers sell devices containing our products. For example, we believe a substantial portion of our products shipped or delivered to China (including Hong Kong) is included in devices sold by our end customers in the United States and Europe.83Table of ContentsLong-lived assets include property, plant and equipment and are based on the physical location of the assets. October 29,2023October 30,2022(In millions)Long-lived assets:United States$1,371 $1,441 Taiwan341 318 Other442 464 Total long-lived assets$2,154 $2,223 Significant Customer InformationWe sell our products through our direct sales force and a select network of distributors and channel partners globally. One customer accounted for 21% of our net accounts receivable balance as of October 29, 2023. Two customers accounted for 15% and 11% of our net accounts receivable balance as of October 30, 2022. During fiscal years 2023, 2022 and 2021, one customer accounted for 21%, 20% and 18% of our net revenue, respectively. Revenue from this customer was included in our semiconductor solutions segment. 13. Commitments and ContingenciesCommitments The following table summarizes contractual obligations and commitments as of October 29, 2023:Fiscal Year:Purchase CommitmentsOther Contractual Commitments(In millions)2024$254 $328 2025168 269 202611 278 20277 219 20287 176 Thereafter— 341 Total$447 $1,611 Purchase Commitments. Represent unconditional purchase obligations to purchase goods or services, primarily inventory, that are enforceable and legally binding on us and specify all significant terms, including fixed or minimum quantities to be purchased, price provisions, and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty and unconditional purchase obligations with a remaining term of one year or less.Other Contractual Commitments. Represent amounts payable pursuant to agreements related to IT and other service agreements.Due to the inherent uncertainty with respect to the timing of future cash outflows associated with our unrecognized tax benefits at October 29, 2023, we are unable to reliably estimate the timing of cash settlement with the respective taxing authorities. Therefore, $2,792 million of unrecognized tax benefits and accrued interest and penalties as of October 29, 2023 have been excluded from the table above.ContingenciesFrom time to time, we are involved in litigation that we believe is of the type common to companies engaged in our lines of business, including commercial disputes, employment issues, tax disputes and disputes involving claims by third parties that our activities infringe their patent, copyright, trademark or other IP rights, as well as regulatory investigations or inquiries. Legal proceedings and regulatory investigations or inquiries are often complex, may require the expenditure of significant funds and other resources, and the outcomes of such proceedings are inherently uncertain, with material adverse outcomes possible. IP property claims generally involve the demand by a third-party that we cease the manufacture, use or sale of the allegedly infringing products, processes or technologies and/or pay substantial damages or royalties for past, present and future use of the allegedly infringing IP. Claims that our products or processes infringe or misappropriate any 84Table of Contentsthird-party IP rights (including claims arising through our contractual indemnification of our customers) often involve highly complex, technical issues, the outcome of which is inherently uncertain. Moreover, from time to time, we pursue litigation to assert our IP rights. Regardless of the merit or resolution of any such litigation, complex IP litigation is generally costly and diverts the efforts and attention of our management and technical personnel.Lawsuits Relating to California Institute of TechnologyCalifornia Institute of Technology ("Caltech") filed a complaint against Broadcom and Apple Inc. on May 26, 2016 in the United States District Court for the Central District of California (the “U.S. Central District Court”), and an amended complaint adding Cypress Semiconductor Corporation as a defendant on August 15, 2016. The amended complaint alleged that chips that support certain error correction codes as specified in IEEE Standards 802.11n and 802.11ac willfully infringed four patents related to error correction coding: U.S. Patent Nos. 7,116,710; 7,421,032; 7,916,781; and 8,284,833 (“’833 patent”). Prior to trial, Caltech dismissed its claims against Cypress and withdrew its infringement allegations as to ‘833 patent. The complaint sought a preliminary and permanent injunction, damages, pre- and post-judgment interest, as well as attorneys’ fees, costs, and expenses. The trial was held in January 2020, and on January 29, 2020, the jury issued its verdict finding infringement and awarding Caltech past damages of $270.2 million from Broadcom and $837.8 million from Apple, for which Apple is seeking indemnification from Broadcom. On August 3, 2020, the U.S. Central District Court issued its judgment, awarding Caltech past damages in the amounts awarded by the jury, as well as pre- and post-judgment interest. Additionally, the U.S. Central District Court awarded Caltech an unspecified amount of ongoing royalties to be determined after the anticipated appeals process is resolved. Neither the jury nor the U.S. Central District Court found willful infringement, which if it had, could have resulted in enhanced damages up to three times the amount awarded. Broadcom and Apple appealed to the United States Court of Appeals for the Federal Circuit (the “Federal Circuit Court”). In February 2022, the Federal Circuit Court affirmed infringement of two patents, both of which expired in August 2020, but it did not address all issues and ordered a new trial on damages and on the infringement of the 7,916,781 patent, which also expired in August 2020. In May 2022, the Federal Circuit Court denied the petition for rehearing filed by Broadcom and Apple, and remanded the case to the U.S. Central District Court. Subsequently, Caltech withdrew its infringement allegations as to the 7,916,781 patent. In September 2023, we entered into a settlement and patent license agreement with Caltech pursuant to which we agreed to pay an aggregate of $160 million over five years and the case was dismissed with prejudice.Other MattersIn addition to the matters discussed above, we are currently engaged in a number of legal actions in the ordinary course of our business.Contingency AssessmentWe do not believe, based on currently available facts and circumstances, that the final outcome of any pending legal proceedings or ongoing regulatory investigations, taken individually or as a whole, will have a material adverse effect on our consolidated financial statements. However, lawsuits may involve complex questions of fact and law and may require the expenditure of significant funds and other resources to defend. The results of litigation or regulatory investigations are inherently uncertain, and material adverse outcomes are possible. From time to time, we may enter into confidential discussions regarding the potential settlement of such lawsuits. Any settlement of pending litigation could require us to incur substantial costs and other ongoing expenses, such as future royalty payments in the case of an IP dispute. During the periods presented, no material amounts have been accrued or disclosed in the accompanying consolidated financial statements with respect to loss contingencies associated with any other legal proceedings or regulatory investigations, as potential losses for such matters are not considered probable and ranges of losses are not reasonably estimable. These matters are subject to many uncertainties and the ultimate outcomes are not predictable. There can be no assurances that the actual amounts required to satisfy any liabilities arising from the matters described above will not have a material adverse effect on our consolidated financial statements.Other IndemnificationsAs is customary in our industry and as provided for in local law in the U.S. and other jurisdictions, many of our standard contracts provide remedies to our customers and others with whom we enter into contracts, such as defense, settlement, or payment of judgment for IP claims related to the use of our products. From time to time, we indemnify customers, as well as our suppliers, contractors, lessors, lessees, companies that purchase our businesses or assets and others with whom we enter into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and the use of our products, the use of their goods and services, the use of facilities and state of our owned facilities, the state of the assets and businesses that we sell and other matters covered by such contracts, usually up to a specified maximum amount. In addition, from time to time we also provide protection to these parties against claims related to undiscovered liabilities, additional product liabilities or environmental obligations. In our experience, claims made under such indemnifications are rare and the associated estimated fair value of the liability is not material.85Table of Contents 14. Restructuring and Other Charges Restructuring ChargesFrom time to time, we initiate cost reduction activities to integrate acquired businesses, align our workforce with strategic business activities, or improve efficiencies in our operations. We recognized charges of $36 million, $55 million and $149 million during fiscal years 2023, 2022 and 2021, respectively. These charges were primarily recognized in operating expenses.The following table summarizes the significant activities within, and components of, the restructuring liabilities:Employee Termination CostsOther Exit CostsTotal(In millions)Balance as of November 1, 2020$34 $— $34 Restructuring charges10013113Utilization(130)(13)(143)Balance as of October 31, 20214 — 4 Restructuring charges24630Utilization(24)(4)(28)Balance as of October 30, 20224 2 6 Restructuring charges20 9 29Utilization(22)(11)(33)Balance as of October 29, 2023$2 $— $2 Restructuring charges in our consolidated statement of operations for the fiscal years 2023, 2022 and 2021 included $7 million, $25 million and $36 million respectively, for the write-down of certain lease-related ROU assets and other lease-related charges. As of each October 29, 2023 and October 30, 2022, short-term and long-term lease liabilities included $44 million and $52 million of liabilities related to restructuring activities.Other ChargesDuring fiscal year 2023, other charges included $204 million of non-recurring charges related to IP litigation and $8 million of impairment and disposal charges primarily related to property, plant and equipment. During fiscal years 2022 and 2021, other charges included impairment and disposal charges of $7 million and $16 million, respectively, primarily related to leasehold improvements.15. Subsequent Events Acquisition of VMware, Inc.On November 22, 2023, we completed the acquisition of VMware in a cash-and-stock transaction (the “VMware Merger”). Pursuant to the Agreement and Plan of Merger, each share of VMware common stock issued and outstanding immediately prior to the effective time of the VMware Merger was indirectly converted into the right to receive, at the election of the holder of such share of VMware common stock, either $142.50 in cash, without interest, or 0.2520 shares of Broadcom common stock. The stockholder election was prorated, such that the total number of shares of VMware common stock entitled to receive cash and the total number of shares of VMware common stock entitled to receive Broadcom common stock, in each case, was equal to 50% of the aggregate number of shares of VMware common stock issued and outstanding. Based on the VMware stockholders’ elections, the VMware stockholders received approximately $30.8 billion in cash and 54.4 million shares of Broadcom common stock in aggregate. We assumed all outstanding VMware RSU awards and performance stock unit awards held by continuing employees. The assumed awards were converted into approximately 5 million Broadcom RSU awards. All outstanding in-the-money VMware stock options and RSU awards held by non-employee directors were accelerated and converted into the right to receive cash and shares of Broadcom common stock, in equal parts. VMware was a leading provider of multi-cloud services for all applications, enabling digital innovation with enterprise control. We acquired VMware to enhance our infrastructure software capabilities.86Table of ContentsPreliminary Purchase Consideration(In millions)Fair value of Broadcom common stock issued for outstanding VMware common stock$53,398 Cash paid for outstanding VMware common stock30,788 Cash paid by Broadcom to retire VMware’s term loan1,257 Fair value of partially vested assumed equity awards805 Fair value of Broadcom common stock issued for accelerated VMware equity awards23 Cash paid for accelerated VMware equity awards13 Effective settlement of pre-existing relationships6 Total purchase consideration86,290 Less: cash acquired6,642 Total purchase consideration, net of cash acquired$79,648 We funded the cash portion of the VMware Merger with the net proceeds from the issuance of the 2023 Term Loans, as discussed in further detail below, as well as cash on hand. We assumed $8,250 million of VMware’s outstanding senior unsecured notes. We are currently evaluating the purchase price allocation following the consummation of the VMware Merger. It is not practicable to disclose the preliminary purchase price allocation or unaudited pro forma combined financial information for this transaction, given the short period of time between the acquisition date and the issuance of these consolidated financial statements.2023 Term LoansOn August 15, 2023, we entered into a credit agreement (the “2023 Credit Agreement”), which provided us with the ability to borrow term loans in connection with the VMware Merger. In connection with entering into the 2023 Credit Agreement, we terminated the commitment letter for a senior unsecured bridge facility in an aggregate principal amount of $32 billion that we entered into on May 26, 2022. Upon completion of the VMware Merger, we entered an $11,195 million unsecured term A-2 facility (the "Term A-2 Loan”), an $11,195 million unsecured term A-3 facility (the “Term A-3 Loan”), and an $8,000 million unsecured term A-5 facility (the “Term A-5 Loan”, collectively, the “2023 Term Loans”). The term loans under the Term A-2 Loan, Term A-3 Loan and Term A-5 Loan bear interest at floating interest rates and will mature and be payable on the second, third or fifth anniversary, respectively, of the date of the VMware Merger. Our obligations under the 2023 Credit Agreement are unsecured and are not guaranteed by any of our subsidiaries.Cash Dividends DeclaredOn December 5, 2023, our Board of Directors declared a quarterly cash dividend of $5.25 per share on our common stock, payable on December 29, 2023 to stockholders of record on December 20, 2023.87Table of ContentsSchedule II — Valuation and Qualifying AccountsBalance atBeginningof PeriodAdditions to AllowancesChargesUtilized/Write-offsBalance atEnd ofPeriod (In millions)Accounts receivable allowances:Distributor credit allowances (a)Fiscal year ended October 29, 2023$125 $502 $(494)$133 Fiscal year ended October 30, 2022$128 $484 $(487)$125 Fiscal year ended October 31, 2021$149 $756 $(777)$128 Other accounts receivable allowances (b) Fiscal year ended October 29, 2023$1 $5 $(2)$4 Fiscal year ended October 30, 2022$2 $10 $(11)$1 Fiscal year ended October 31, 2021$28 $14 $(40)$2 Income tax valuation allowances: Fiscal year ended October 29, 2023$1,777 $117 $(105)$1,789 Fiscal year ended October 30, 2022$1,782 $118 $(123)$1,777 Fiscal year ended October 31, 2021$1,707 $121 $(46)$1,782 ________________________________(a)Distributor credit allowances relate to price adjustments and other allowances.(b)Other accounts receivable allowances primarily include sales returns and allowance for doubtful accounts.ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENot applicable.ITEM 9A.CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of October 29, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of October 29, 2023, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.88Table of ContentsManagement’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by the Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:•pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets;•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of us are being made only in accordance with authorizations of management and directors; and•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Our management assessed the effectiveness of our internal control over financial reporting as of October 29, 2023. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on this assessment, our management concluded that, as of October 29, 2023, our internal control over financial reporting is effective based on those criteria.The effectiveness of our internal control over financial reporting as of October 29, 2023 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in Part II, Item 8. of this Annual Report on Form 10-K.Changes in Internal Control over Financial ReportingNo change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fourth quarter ended October 29, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B.OTHER INFORMATIONNone.ITEM 9C.DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONSNot applicable.89Table of ContentsPART IIIITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by Item 10 is incorporated herein by reference from sections entitled “Board of Directors,” “Corporate Governance” and “Proposal 1 — Election of Directors” in our definitive Proxy Statement for our 2024 Annual Meeting of Stockholders. Our executive officers are listed at the end of Item 1 of this Annual Report on Form 10-K.ITEM 11.EXECUTIVE COMPENSATIONThe information required by Item 11 is incorporated herein by reference from sections entitled “Board of Directors — Director Compensation,” “Board of Directors — Board Committees — Compensation Committee — Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation,” “CEO Pay Ratio” and “Pay versus Performance” in our definitive Proxy Statement for our 2024 Annual Meeting of Stockholders.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by Item 12 is incorporated herein by reference from sections entitled “Stockholder Information — Security Ownership of Certain Beneficial Owners, Directors and Executive Officers” and “Equity Compensation Plan Information” in our definitive Proxy Statement for our 2024 Annual Meeting of Stockholders.ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by Item 13 is incorporated herein by reference from sections entitled “Board of Directors” and “Certain Relationships and Related Party Transactions” in our definitive Proxy Statement for our 2024 Annual Meeting of Stockholders.ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by Item 14 is incorporated herein by reference from the section entitled “Proposal 2 — Ratification of Appointment of Independent Registered Public Accounting Firm” in our definitive Proxy Statement for our 2024 Annual Meeting of Stockholders.90Table of ContentsPART IVITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) The following are filed as part of this Annual Report on Form 10-K:1. Financial StatementsThe following consolidated financial statements are included in Item 8 of this Annual Report on Form 10-K: PageReports of Independent Registered Public Accounting Firm49Consolidated Balance Sheets50Consolidated Statements of Operations51Consolidated Statements of Comprehensive Income52Consolidated Statements of Cash Flows53Consolidated Statements of Stockholders’ Equity54Notes to Consolidated Financial Statements55 2. Financial Statement SchedulesThe financial statement schedule of the Registrant and its subsidiaries for fiscal years 2023, 2022 and 2021 required by Item 15(a) (Schedule II, Valuation and Qualifying Accounts) is included in Item 8 of this Annual Report on Form 10-K: PageSchedule II - Valuation and Qualifying Accounts88Schedules not filed have been omitted because they are not applicable, are not required or the information required to be set forth therein is included in the financial statements or notes thereto.3. ExhibitsThe documents set forth below are filed herewith or incorporated by reference to the location indicated.Incorporated by ReferenceExhibit NumberDescriptionFormFile No.ExhibitFiling DateFiled Herewith2.1 Agreement and Plan of Merger, dated as of May 26, 2022, by and among Broadcom Inc., VMware, Inc., Verona Holdco, Inc., Verona Merger Sub, Inc., Barcelona Merger Sub 2, Inc. and Barcelona Merger Sub 3, LLC.Broadcom Inc. Current Report on Form 8-K001-384492.105-26-20223.1 Amended and Restated Certificate of Incorporation.Broadcom Inc. Current Report on Form 8-K12B 001-384493.104-04-20183.2 Certificate of Designation of the 8.00% Mandatory Convertible Preferred Stock, Series A.Broadcom Inc. Current Report on Form 8-K001-384493.109-30-20193.3 Amended and Restated Bylaws.Broadcom Inc. Current Report on Form 8-K12B001-384493.204-04-20184.1 Form of Common Stock Certificate.Broadcom Inc. Quarterly Report on Form 10-Q001-384494.106-14-20184.2 Description of Common Stock.Broadcom Inc. Annual Report on Form 10-K001-384494.312-20-201991Table of ContentsIncorporated by ReferenceExhibit NumberDescriptionFormFile No.ExhibitFiling DateFiled Herewith4.3 Indenture, dated as of January 19, 2017, by and among the Broadcom Corporation and Broadcom Cayman Finance Limited (the “Co-Issuers”), the guarantors and Wilmington Trust, National Association, as trustee.Broadcom Limited Current Report on Form 8-K001-376904.101-20-20174.4 Supplement Indenture to the January 2017 Indenture, dated as of April 9, 2018.Broadcom Inc. Current Report on Form 8-K001-384494.104-09-20184.5 Second Supplement Indenture to the January 2017 Indenture, dated as of January 25, 2019.Broadcom Inc. Current Report on Form 8-K001-384494.101-25-20194.6 Form of 3.625% Senior Notes due 2024 (included in Exhibit 4.5).Broadcom Limited Current Report on Form 8-K 001-376904.101-20-20174.7 Form of 3.875% Senior Notes due 2027 (included in Exhibit 4.5).Broadcom Limited Current Report on Form 8-K 001-376904.101-20-20174.8 Indenture, dated as of October 17, 2017, by and among the Co-Issuers, the guarantors and Wilmington Trust, National Association, as trustee.Broadcom Limited Current Report on Form 8-K 001-376904.110-17-20174.9 Supplemental Indenture to October 2017 Indenture, dated as of April 9, 2018.Broadcom Inc. Current Report on Form 8-K001-384494.204-09-20184.10 Second Supplemental Indenture to October 2017 Indenture, dates as of January 25, 2019.Broadcom Inc. Current Report on Form 8-K001-384494.201-25-20194.11 Form of 2.650% Senior Notes due 2023 (included in Exhibit 4.11).Broadcom Limited Current Report on Form 8-K 001-376904.110-17-20174.12 Form of 3.125% Senior Notes due 2025 (included in Exhibit 4.11).Broadcom Limited Current Report on Form 8-K 001-376904.110-17-20174.13 Form of 3.500% Senior Notes due 2028 (included in Exhibit 4.11).Broadcom Limited Current Report on Form 8-K 001-376904.110-17-20174.14 Indenture, dated as of April 5, 2019, by and among the Company, as Issuer, Broadcom Technologies Inc., Broadcom Corporation and Broadcom Cayman Finance Limited (the “2019 Guarantors”), and Wilmington Trust, National Association, as trustee.Broadcom Inc. Current Report on Form 8-K001-384494.104-05-20194.15 Form of 3.625% Senior Notes due 2024 (included in Exhibit 4.17).Broadcom Inc. Current Report on Form 8-K001-384494.104-05-20194.16 Form of 4.750% Senior Notes due 2029 (included in Exhibit 4.17).Broadcom Inc. Current Report on Form 8-K001-384494.104-05-20194.17 Indenture, dated as of April 9, 2020, by and among the Company, as Issuer, Broadcom Technologies Inc. and Broadcom Corporation (the “2020 Guarantors”), and Wilmington Trust, National Association, as trustee.Broadcom Inc. Current Report on Form 8-K001-384494.104-09-202092Table of ContentsIncorporated by ReferenceExhibit NumberDescriptionFormFile No.ExhibitFiling DateFiled Herewith4.18 Form of 5.000% Senior Notes due 2030 (included in Exhibit 4.21).Broadcom Inc. Current Report on Form 8-K 001-384494.104-09-20204.19 Indenture, dated as of May 8, 2020, by and among the Company, as Issuer, the 2020 Guarantors, and Wilmington Trust, National Association, as trustee.Broadcom Inc. Current Report on Form 8-K001-384494.105-08-20204.20 Form of 2.250% Senior Notes due 2023 (included in Exhibit 4.24).Broadcom Inc. Current Report on Form 8-K 001-384494.105-08-20204.21 Form of 3.150% Senior Notes due 2025 (included in Exhibit 4.24).Broadcom Inc. Current Report on Form 8-K 001-384494.105-08-20204.22 Form of 4.150% Senior Notes due 2030 (included in Exhibit 4.24).Broadcom Inc. Current Report on Form 8-K 001-384494.105-08-20204.23 Form of 4.300% Senior Notes due 2032 (included in Exhibit 4.24).Broadcom Inc. Current Report on Form 8-K 001-384494.105-08-20204.24 Indenture, dated as of May 21, 2020, by and among the Company, the 2020 Guarantors and Wilmington Trust, National Association, as trustee.Broadcom Inc. Current Report on Form 8-K 001-384494.105-21-20204.25 Form of 3.459% Senior Notes due 2026 (included in Exhibit 4.29).Broadcom Inc. Current Report on Form 8-K 001-384494.105-21-20204.26 Form of 4.110% Senior Notes due 2028 (included in Exhibit 4.29).Broadcom Inc. Current Report on Form 8-K 001-384494.105-21-20204.27 Indenture, dated as of January 19, 2021, by and among the Company, the 2020 Guarantors and Wilmington Trust, National Association, as Trustee.Broadcom Inc. Current Report on Form 8-K 001-384494.101-19-20214.28 Form of 1.950% Senior Notes due 2028 (included in Exhibit 4.32).Broadcom Inc. Current Report on Form 8-K 001-384494.101-19-20214.29 Form of 2.450% Senior Notes due 2031 (included in Exhibit 4.32).Broadcom Inc. Current Report on Form 8-K 001-384494.101-19-20214.30 Form of 2.600% Senior Notes due 2033 (included in Exhibit 4.32).Broadcom Inc. Current Report on Form 8-K 001-384494.101-19-20214.31 Form of 3.500% Senior Notes due 2041 (included in Exhibit 4.32).Broadcom Inc. Current Report on Form 8-K 001-384494.101-19-20214.32 Form of 3.750% Senior Notes due 2051 (included in Exhibit 4.32).Broadcom Inc. Current Report on Form 8-K 001-384494.101-19-202193Table of ContentsIncorporated by ReferenceExhibit NumberDescriptionFormFile No.ExhibitFiling DateFiled Herewith4.33 Registration Rights Agreement, dated as of January 19, 2021, by and among the Company, the 2020 Guarantors and Morgan Stanley & Co. LLC, BNP Paribas Securities Corp., RBC Capital Markets, LLC, SMBC Nikko Securities America, Inc., and Truist Securities, Inc., as representatives of the several initial purchasers of the January 2021 Senior Notes.Broadcom Inc. Current Report on Form 8-K 001-384494.701-19-20214.34 Indenture, dated as of March 31, 2021, by and between the Company and Wilmington Trust, National Association, as Trustee.Broadcom Inc. Current Report on Form 8-K 001-384494.103-31-20214.35 Form of 3.419% Senior Notes due 2033 (included in Exhibit 4.39).Broadcom Inc. Current Report on Form 8-K 001-384494.103-31-20214.36 Form of 3.469% Senior Notes due 2034 (included in Exhibit 4.39).Broadcom Inc. Current Report on Form 8-K 001-384494.103-31-20214.37 Registration Rights Agreement, dated as of March 31, 2021, by and among the Company and BofA Securities, Inc. and HSBC Securities (USA) Inc., as dealer-managers in connection with the March 2021 Exchange Offer.Broadcom Inc. Current Report on Form 8-K 001-384494.403-31-20214.38 Indenture, dated as of September 30, 2021, by and between the Company and Wilmington Trust, National Association, as Trustee.Broadcom Inc. Current Report on Form 8-K 001-384494.109-30-20214.39 Form of 3.137% Senior Notes due 2035 (included in Exhibit 4.43).Broadcom Inc. Current Report on Form 8-K 001-384494.109-30-20214.40 Form of 3.187% Senior Notes due 2036 (included in Exhibit 4.43).Broadcom Inc. Current Report on Form 8-K 001-384494.109-30-20214.41 Registration Rights Agreement, dated as of September 30, 2021, by and among the Company and BNP Paribas Securities Corp., J.P. Morgan Securities LLC and TD Securities (USA) LLC, as dealer-mangers in connection with the September 2021 exchange offer.Broadcom Inc. Current Report on Form 8-K 001-384494.409-30-20214.42 Indenture, dated April 14, 2022, between the Company and Wilmington Trust, National Association, as trustee.Broadcom Inc. Current Report on Form 8-K 001-384494.104-15-20224.43 Form of 4.00% Senior Notes due 2029 (included in Exhibit 4.47).Broadcom Inc. Current Report on Form 8-K 001-384494.104-15-20224.44 Form of 4.15% Senior Notes due 2032 (included in Exhibit 4.47).Broadcom Inc. Current Report on Form 8-K 001-384494.104-15-202294Table of ContentsIncorporated by ReferenceExhibit NumberDescriptionFormFile No.ExhibitFiling DateFiled Herewith4.45 Registration Rights Agreement, dated as of April 14, 2022, between the Company and BofA Securities, Inc., HSBC Securities (USA) Inc., and RBC Capital Markets, LLC, as representatives of the several initial purchasers of the April 2022 Senior Notes.Broadcom Inc. Current Report on Form 8-K 001-384494.404-15-20224.46 Indenture, dated April 18, 2022, between the Company and Wilmington Trust, National Association, as trustee.Broadcom Inc. Current Report on Form 8-K 001-384494.104-18-20224.47 Form of 4.926% Senior Notes due 2037 (included in Exhibit 4.51).Broadcom Inc. Current Report on Form 8-K 001-384494.104-18-20224.48 Registration Rights Agreement, dated April 18, 2022, between the Company and Barclays Capital Inc., BBVA Securities Inc., BNP Paribas Securities Corp. and J.P. Morgan Securities LLC, as dealer-managers in connection with the April 2022 Exchange Offer.Broadcom Inc. Current Report on Form 8-K 001-384494.304-18-202210.1Form of Indemnification and Advancement Agreement (effective April 4, 2018).Broadcom Inc. Current Report on Form 8-K12B001-3844910.104-04-201810.2Credit Agreement, dated as of May 7, 2019, among Broadcom Inc., the lenders and other parties party thereto, and Bank of America, N.A., as Administrative Agent.Broadcom Inc. Current Report on Form 8-K 001-3844910.105-07-201910.3Credit Agreement, dated as of November 4, 2019, among Broadcom Inc., the lenders and other parties party thereto, and Bank of America, N.A., as Administrative Agent.Broadcom Inc. Current Report on Form 8-K 001-3844910.111-04-201910.4Credit Agreement, dated as of January 19, 2021, among the Company, the lenders and other parties party thereto, and Bank of America, N.A., as Administrative Agent.Broadcom Inc. Current Report on Form 8-K001-3844910.101-19-202110.5Amendment No. 1, dated April 18, 2023, among Broadcom Inc., the lenders and other parties thereto, and Bank of America, N.A., as Administrative Agent, to the Credit Agreement, dated as of January 19, 2021.Broadcom Inc. Quarterly Report on Form 10-Q 001-3844910.106-07-202310.6Credit Agreement, dated as of August 15, 2023, among Broadcom, the lenders and other parties party thereto, and Bank of America, N.A., as Administrative Agent.Broadcom Inc. Current Report on Form 8-K001-3844910.108-16-202310.7Lease Agreement dated August 10, 2017 between Five Point Office Venture I, LLC and Broadcom Corporation.Broadcom Limited Annual Report on Form 10-K 001-3769010.2912-21-201710.8First Amendment to Lease Agreement by and between Five Point Office Venture 1, LLC and Broadcom Corporation.Broadcom Inc. Annual Report on Form 10-K 001-3844910.1212-18-202095Table of ContentsIncorporated by ReferenceExhibit NumberDescriptionFormFile No.ExhibitFiling DateFiled Herewith10.9+Settlement and Patent License and Non-Assert Agreement by and between Qualcomm Incorporated and Broadcom Corporation.Broadcom CorporationCurrent Report onForm 8-K/A 000-2399310.107-23-200910.10+Avago Technologies Limited 2009 Equity Incentive Award Plan.Avago Technologies Limited Amendment No. 5 to Registration Statement on Form S-1 333-15312710.1807-27-200910.11+Broadcom Inc. Employee Stock Purchase Plan (as amended and restated on April 1, 2019).Broadcom Inc. Definitive Proxy Statement on Schedule 14A 001-38449Appendix B-102-19-201910.12+LSI Corporation 2003 Equity Incentive Plan, as amended.Avago Technologies Limited Registration Statement on Form S-8 333-1957414.105-06-201410.13+Amendment to the LSI Corporation 2003 Equity Incentive Plan (effective February 1, 2016).Broadcom Limited Annual Report on Form 10-K 001-3769010.4512-23-201610.14+Amendment to the LSI Corporation 2003 Equity Incentive Plan (effective April 4, 2018).Broadcom Inc. Current Report on Form 8-K12B 001-3844910.1004-04-201810.15+Broadcom Inc. 2012 Stock Incentive Plan (as amended and restated on April 5, 2021).Broadcom Inc. Quarterly Report on Form 10-Q 001-3844910.106-11-202110.16+Form of Annual Bonus Plan for Executive Employees.Broadcom Limited Annual Report on Form 10-K 001-3769010.5312-23-201610.17+Form of Option Agreement under Avago Technologies Limited 2009 Equity Incentive Plan.Avago Technologies Limited Amendment No. 5 to Registration Statement on Form S-1333-15312710.6107-27-200910.18+Form of Restricted Stock Unit Agreement (Sell to Cover) Under Avago Technologies Limited 2009 Equity Incentive Award Plan (effective December 5, 2017).Broadcom Limited Annual Report on Form 10-K 001-3769010.4912-21-201710.19+Form of Agreement for Multi-Year Equity Award of Restricted Stock Unit Award under the Avago Technologies Limited 2009 Equity Incentive Award Plan).Broadcom Inc. Current Report on Form 8-K 001-3844910.112-06-201810.20+Form of Performance Share Unit Agreement (Relative TSR) under Avago Technologies Limited 2009 Equity Incentive Plan (effective March 13, 2018).Broadcom Limited Quarterly Report on Form 10-Q 001-3769010.203-15-201810.21+Form of Agreement for Multi-Year Equity Award of Performance Stock Units under the Avago Technologies Limited 2009 Equity Incentive Award Plan).Broadcom Inc. Current Report on Form 8-K 001-3844910.212-06-201896Table of ContentsIncorporated by ReferenceExhibit NumberDescriptionFormFile No.ExhibitFiling DateFiled Herewith10.22+Form of Restricted Stock Unit Award Agreement under LSI Corporation 2003 Equity Incentive Plan, as amended (effective December 8, 2020).Broadcom Inc. Annual Report on Form 10-K 001-3844910.5112-18-202010.23+Form of Performance Stock Unit Agreement (Relative TSR) under LSI Corporation 2003 Equity Incentive Plan, as amended (effective December 8, 2020).Broadcom Inc. Annual Report on Form 10-K 001-3844910.5212-18-202010.24+Form of Restricted Stock Unit Award Agreement under Broadcom Corporation 2012 Stock Incentive Plan (effective December 5, 2017).Broadcom Limited Annual Report on Form 10-K001-3769010.6112-21-201710.25+Form of Restricted Stock Unit Award Agreement under Broadcom Inc. 2012 Stock Incentive Plan (effective April 5, 2021).Broadcom Inc. Quarterly Report on Form 10-Q 001-3844910.306-11-202110.26+Form of Performance Share Unit Agreement (Relative TSR) under Broadcom Corporation 2012 Stock Incentive Plan (effective March 15, 2018).Broadcom Limited Quarterly Report on Form 10-Q 001-3769010.503-15-201810.27+Form of Performance Stock Unit Award Agreement under the Broadcom Inc. 2012 Stock Incentive Plan (effective April 5, 2021).Broadcom Inc. Quarterly Report on Form 10-Q001-3844910.406-11-202110.28+Form of Performance Stock Unit Award Agreement (Price Contingency) under Broadcom Inc. 2012 Stock Incentive Plan.Broadcom Inc. Current Report on Form 8-K 001-3844910.111-02-202210.29+Performance Stock Unit Award Agreement, dated April 5, 2021, between Broadcom Inc. and Hock E. Tan.Broadcom Inc. Quarterly Report on Form 10-Q 001-3844910.206-11-202110.30+Policy on Acceleration of Executive Staff Equity Awards in the Event of Permanent Disability (as amended June 2, 2021).Broadcom Inc. Current Report on Form 8-K 001-3844910.106-03-202110.31+Policy on Acceleration of Equity Awards in the Event of Death (as amended January 1, 2023).Broadcom Inc. Quarterly Report on Form 10-Q001-3844910.209-06-202310.32+Amended and Restated Severance Benefits Agreement, dated December 10, 2020, between Broadcom Inc. and Hock E. Tan.Broadcom Inc. Current Report on Form 8-K001-3844910.112-10-202010.33+Amended and Restated Severance Benefits Agreement, dated December 10, 2020, between Broadcom Inc. and Charlie B. Kawwas.Broadcom Inc. Current Report on Form 8-K001-3844910.212-10-202010.34+Severance Benefits Agreement, dated September 26, 2017, between Broadcom Limited and Mark Brazeal.Broadcom Inc. Quarterly Report on Form 10-Q001-3844910.1806-16-201810.35+Severance Benefits Agreement, dated December 10, 2020, between Broadcom Inc. and Kirsten M. Spears.Broadcom Inc. Current Report on Form 8-K001-3844910.512-10-202021.1 List of Subsidiaries.X97Table of ContentsIncorporated by ReferenceExhibit NumberDescriptionFormFile No.ExhibitFiling DateFiled Herewith23.1 Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.X24.1 Power of Attorney (see signature page to this Form 10-K).X31.1 Certification of Principal Executive Officer of Broadcom Inc. Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X31.2 Certification of Principal Financial Officer of Broadcom Inc. Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.X32.1 Certification of Principal Executive Officer of Broadcom Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.X32.2 Certification of Principal Financial Officer of Broadcom Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.X97.1Clawback Policy.X101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.X101.SCHXBRL Schema Document.X101.CALXBRL Calculation Linkbase Document.X101.DEFXBRL Definition Linkbase Document.X101.LABXBRL Labels Linkbase Document.X101.PREXBRL Presentation Linkbase Document.X104Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.XNotes:+Indicates a management contract or compensatory plan or arrangement.#Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Broadcom Inc. hereby undertakes to furnish supplementally copies of any omitted schedules upon request by the SEC.*Certain information omitted pursuant to a request for confidential treatment filed with the SEC.ITEM 16.FORM 10-K SUMMARYNone.98Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.BROADCOM INC. By: /s/ Hock E. TanName:Hock E. TanTitle:President and Chief Executive Officer Date: December 14, 2023POWER OF ATTORNEYEach person whose individual signature appears below hereby authorizes and appoints Hock E. Tan, Kirsten M. Spears and Mark D. Brazeal, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.99Table of ContentsPursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities indicated and on the dates indicated.Signature Title Date/s/ Hock E. TanPresident, Chief ExecutiveOfficer and Director(Principal Executive Officer)December 14, 2023Hock E. Tan /s/ Kirsten M. SpearsChief Financial Officer(Principal Financial Officer and Principal Accounting Officer)December 14, 2023Kirsten M. Spears/s/ Henry SamueliChairman of the Board of DirectorsDecember 14, 2023Henry Samueli/s/ Eddy W. HartensteinLead Independent DirectorDecember 14, 2023Eddy W. Hartenstein/s/ Diane M. BryantDirectorDecember 14, 2023Diane M. Bryant/s/ Gayla J. DellyDirectorDecember 14, 2023Gayla J. Delly/s/ Raul F. FernandezDirectorDecember 14, 2023Raul F. Fernandez/s/ Check Kian LowDirectorDecember 14, 2023Check Kian Low/s/ Justine F. PageDirectorDecember 14, 2023Justine F. Page/s/ Harry L. YouDirectorDecember 14, 2023Harry L. You100
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8-K
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d209946d8k.htm
FORM 8-K
Form 8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT Pursuant to Section 13 OR
15(d) of The Securities Exchange Act of 1934 June 7, 2016
Date of Report (date of earliest event reported)
Apple Inc.
(Exact name of Registrant as specified in its charter)
California
001-36743
94-2404110
(State or other jurisdiction
of incorporation)
(Commission File
Number)
(IRS. Employer
Identification No.)
1 Infinite Loop
Cupertino, California 95014 (Address of principal
executive offices) (Zip Code) (408) 996-1010
(Registrants telephone number, including area code)
Not applicable (Former name or former address,
if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant
under any of the following provisions:
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 8.01
Other Events.
On June 22, 2016 Apple Inc. (Apple) consummated the issuance and sale of $1,377,000,000 aggregate principal amount of its 4.15% Notes due 2046
(the Notes), pursuant to a subscription agreement dated June 7, 2016 among Apple, and Deutsche Bank AG, Taipei Branch and KGI Securities Co. Ltd., as the managers named therein.
The Notes are being issued pursuant to an indenture, dated as of April 29, 2013 (the Indenture), between Apple and The Bank of New York
Mellon Trust Company, N.A., as trustee, together with the officers certificate dated as of June 22, 2016 issued pursuant to the Indenture establishing the terms of the Notes (the Officers Certificate).
The Notes are being issued pursuant to Apples Registration Statement on Form S-3 filed with the Securities and Exchange Commission on April 28,
2016 (Reg. No. 333-210983) (the Registration Statement). Interest on the Notes will be payable semi-annually on June 22 and
December 22 of each year, beginning on December 22, 2016 and on the maturity date of June 22, 2046. The Notes will be Apples senior
unsecured obligations and will rank equally with Apples other unsecured and unsubordinated debt from time to time outstanding. The foregoing
description of the Notes and related agreements is qualified in its entirety by the terms of the Subscription Agreement, the Indenture and the Officers Certificate (including the form of the Notes). Apple is furnishing the Subscription
Agreement and the Officers Certificate (including the form of the Notes) attached hereto as Exhibits 1.1 and 4.1 through 4.2, respectively, and they are incorporated herein by reference. The Indenture is filed as Exhibit 4.1 to Apples
Registration Statement on Form S-3 filed with the Securities and Exchange Commission on April 29, 2013 (Reg. No. 333-188191). The computation of Apples ratio of earnings to fixed charges is filed as Exhibit 12.1 to the Registration Statement.
Item 9.01
Financial Statements and Exhibits.
(d)
Exhibits.
Exhibit
Number
Exhibit Description
1.1
Subscription Agreement, dated as of June 7, 2016, among Apple Inc. and Deutsche Bank AG, Taipei Branch and KGI Securities Co. Ltd., as managers
4.1
Officers Certificate of Apple Inc., dated June 22, 2016
4.2
Form of Global Note (included in Exhibit 4.1)
5.1
Opinion of Shearman & Sterling LLP
23.1
Consent of Shearman & Sterling LLP (included in the opinion filed as Exhibit 5.1)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
Date: June 22, 2016
Apple Inc.
By:
/s/ Gary Wipfler
Gary Wipfler Vice President and Corporate Treasurer
EXHIBIT INDEX
Exhibit
Number
Exhibit Description
1.1
Subscription Agreement, dated as of June 7, 2016, among Apple Inc. and Deutsche Bank AG, Taipei Branch and KGI Securities Co. Ltd., as managers
4.1
Officers Certificate of Apple Inc., dated June 22, 2016
4.2
Form of Global Note (included in Exhibit 4.1)
5.1
Opinion of Shearman & Sterling LLP
23.1
Consent of Shearman & Sterling LLP (included in the opinion filed as Exhibit 5.1)
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of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 ____________________________________FORM 10-K ____________________________________ (Mark One)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2021 or☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 ofincorporation or organization) (I.R.S. EmployerIdentification No.)410 Terry Avenue North Seattle, Washington 98109-5210(206) 266-1000 (Address and telephone number, including area code, of registrant’s principal executive offices)Securities registered pursuant to Section 12(b) of the Act:Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which RegisteredCommon Stock, par value $.01 per shareAMZNNasdaq Global Select MarketSecurities registered pursuant to Section 12(g) of the Act:None ____________________________________Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Large accelerated filer☒Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒Aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2021$1,507,362,696,975 Number of shares of common stock outstanding as of January 26, 2022508,844,410 ____________________________________ DOCUMENTS INCORPORATED BY REFERENCEThe information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held in 2022, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.Table of ContentsAMAZON.COM, INC.FORM 10-KFor the Fiscal Year Ended December 31, 2021 INDEX PagePART IItem 1.Business3Item 1A.Risk Factors6Item 1B.Unresolved Staff Comments15Item 2.Properties16Item 3.Legal Proceedings16Item 4.Mine Safety Disclosures16PART IIItem 5.Market for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of Equity Securities17Item 6.Reserved17Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations18Item 7A.Quantitative and Qualitative Disclosures About Market Risk31Item 8.Financial Statements and Supplementary Data33Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure68Item 9A.Controls and Procedures68Item 9B.Other Information70Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections70PART IIIItem 10.Directors, Executive Officers, and Corporate Governance70Item 11.Executive Compensation70Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters70Item 13.Certain Relationships and Related Transactions, and Director Independence70Item 14.Principal Accountant Fees and Services70PART IVItem 15.Exhibits, Financial Statement Schedules71Item 16.Form 10-K Summary73Signatures742Table of ContentsAMAZON.COM, INC.PART IItem 1.BusinessThis Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on expectations, estimates, and projections as of the date of this filing. Actual results and outcomes may differ materially from those expressed in forward-looking statements. See Item 1A of Part I — “Risk Factors.” As used herein, “Amazon.com,” “we,” “our,” and similar terms include Amazon.com, Inc. and its subsidiaries, unless the context indicates otherwise.GeneralWe seek to be Earth’s most customer-centric company. We are guided by four principles: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking. In each of our segments, we serve our primary customer sets, consisting of consumers, sellers, developers, enterprises, content creators, advertisers, and employees.We have organized our operations into three segments: North America, International, and Amazon Web Services (“AWS”). These segments reflect the way the Company evaluates its business performance and manages its operations. Information on our net sales is contained in Item 8 of Part II, “Financial Statements and Supplementary Data — Note 10 — Segment Information.”ConsumersWe serve consumers through our online and physical stores and focus on selection, price, and convenience. We design our stores to enable hundreds of millions of unique products to be sold by us and by third parties across dozens of product categories. Customers access our offerings through our websites, mobile apps, Alexa, devices, streaming, and physically visiting our stores. We also manufacture and sell electronic devices, including Kindle, Fire tablet, Fire TV, Echo, and Ring, and we develop and produce media content. We seek to offer our customers low prices, fast and free delivery, easy-to-use functionality, and timely customer service. In addition, we offer subscription services such as Amazon Prime, a membership program that includes fast, free shipping on millions of items, access to award-winning movies and series, and other benefits.We fulfill customer orders in a number of ways, including through: North America and International fulfillment networks that we operate; co-sourced and outsourced arrangements in certain countries; digital delivery; and through our physical stores. We operate customer service centers globally, which are supplemented by co-sourced arrangements. See Item 2 of Part I, “Properties.”SellersWe offer programs that enable sellers to grow their businesses, sell their products in our stores, and fulfill orders through us. We are not the seller of record in these transactions. We earn fixed fees, a percentage of sales, per-unit activity fees, interest, or some combination thereof, for our seller programs.Developers and EnterprisesWe serve developers and enterprises of all sizes, including start-ups, government agencies, and academic institutions, through AWS, which offers a broad set of on-demand technology services, including compute, storage, database, analytics, and machine learning, and other services. Content CreatorsWe serve authors and independent publishers with Kindle Direct Publishing, an online service that lets independent authors and publishers choose a royalty option and make their books available in the Kindle Store, along with Amazon’s own publishing arm, Amazon Publishing. We also offer programs that allow authors, musicians, filmmakers, Twitch streamers, skill and app developers, and others to publish and sell content.AdvertisersWe provide advertising services to sellers, vendors, publishers, authors, and others, through programs such as sponsored ads, display, and video advertising.3Table of ContentsCompetitionOur businesses encompass a large variety of product types, service offerings, and delivery channels. The worldwide marketplace in which we compete is evolving rapidly and intensely competitive, and we face a broad array of competitors from many different industry sectors around the world. Our current and potential competitors include: (1) physical, e-commerce, and omnichannel retailers, publishers, vendors, distributors, manufacturers, and producers of the products we offer and sell to consumers and businesses; (2) publishers, producers, and distributors of physical, digital, and interactive media of all types and all distribution channels; (3) web search engines, comparison shopping websites, social networks, web portals, and other online and app-based means of discovering, using, or acquiring goods and services, either directly or in collaboration with other retailers; (4) companies that provide e-commerce services, including website development and hosting, omnichannel sales, inventory and supply chain management, advertising, fulfillment, customer service, and payment processing; (5) companies that provide fulfillment and logistics services for themselves or for third parties, whether online or offline; (6) companies that provide information technology services or products, including on-premises or cloud-based infrastructure and other services; (7) companies that design, manufacture, market, or sell consumer electronics, telecommunication, and electronic devices; (8) companies that sell grocery products online and in physical stores; and (9) companies that provide advertising services, whether in digital or other formats. We believe that the principal competitive factors in our retail businesses include selection, price, and convenience, including fast and reliable fulfillment. Additional competitive factors for our seller and enterprise services include the quality, speed, and reliability of our services and tools, as well as customers’ ability and willingness to change business practices. Some of our current and potential competitors have greater resources, longer histories, more customers, greater brand recognition, and greater control over inputs critical to our various businesses. They may secure better terms from suppliers, adopt more aggressive pricing, pursue restrictive distribution agreements that restrict our access to supply, direct consumers to their own offerings instead of ours, lock-in potential customers with restrictive terms, and devote more resources to technology, infrastructure, fulfillment, and marketing. The Internet facilitates competitive entry and comparison shopping, which enhances the ability of new, smaller, or lesser-known businesses to compete against us. Each of our businesses is also subject to rapid change and the development of new business models and the entry of new and well-funded competitors. Other companies also may enter into business combinations or alliances that strengthen their competitive positions.Intellectual PropertyWe regard our trademarks, service marks, copyrights, patents, domain names, trade dress, trade secrets, proprietary technologies, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and patent law, trade-secret protection, and confidentiality and/or license agreements with our employees, customers, partners, and others to protect our proprietary rights. We have registered, or applied for the registration of, a number of U.S. and international domain names, trademarks, service marks, and copyrights. Additionally, we have filed U.S. and international patent applications covering certain of our proprietary technology. SeasonalityOur business is affected by seasonality, which historically has resulted in higher sales volume during our fourth quarter, which ends December 31. Human CapitalOur employees are critical to our mission of being Earth’s most customer-centric company. As of December 31, 2021, we employed approximately 1,608,000 full-time and part-time employees. Additionally, we use independent contractors and temporary personnel to supplement our workforce. Competition for qualified personnel is intense, particularly for software engineers, computer scientists, and other technical staff, and constrained labor markets have increased competition for personnel across other parts of our business.As we strive to be Earth’s best employer, we focus on investment and innovation, inclusion and diversity, safety, and engagement to hire and develop the best talent. We rely on numerous and evolving initiatives to implement these objectives and invent mechanisms for talent development, including competitive pay and benefits, flexible work arrangements, and skills training and educational programs such as Amazon Career Choice (funded education for hourly employees) and the Amazon Technical Academy (software development engineer training). We also provide mentorship and support resources to our employees, and have deployed numerous programs that advance employee engagement, communication, and feedback.4Table of ContentsAvailable InformationOur investor relations website is amazon.com/ir and we encourage investors to use it as a way of easily finding information about us. We promptly make available on this website, free of charge, the reports that we file or furnish with the Securities and Exchange Commission (“SEC”), corporate governance information (including our Code of Business Conduct and Ethics), and select press releases.Executive Officers and DirectorsThe following tables set forth certain information regarding our Executive Officers and Directors as of January 26, 2022:Information About Our Executive OfficersNameAgePositionJeffrey P. Bezos58Executive Chair Andrew R. Jassy54President and Chief Executive OfficerDavid H. Clark49CEO Worldwide ConsumerBrian T. Olsavsky58Senior Vice President and Chief Financial OfficerShelley L. Reynolds57Vice President, Worldwide Controller, and Principal Accounting OfficerAdam N. Selipsky55CEO Amazon Web ServicesDavid A. Zapolsky58Senior Vice President, General Counsel, and SecretaryJeffrey P. Bezos. Mr. Bezos founded Amazon.com in 1994 and has served as Executive Chair since July 2021. He has served as Chair of the Board since 1994 and served as Chief Executive Officer from May 1996 until July 2021, and as President from 1994 until June 1999 and again from October 2000 to July 2021.Andrew R. Jassy. Mr. Jassy has served as President and Chief Executive Officer since July 2021, CEO Amazon Web Services from April 2016 until July 2021, and Senior Vice President, Amazon Web Services, from April 2006 until April 2016.David H. Clark. Mr. Clark has served as CEO Worldwide Consumer since January 2021, and Senior Vice President, Worldwide Operations, from May 2014 until January 2021.Brian T. Olsavsky. Mr. Olsavsky has served as Senior Vice President and Chief Financial Officer since June 2015, Vice President, Finance for the Global Consumer Business from December 2011 to June 2015, and numerous financial leadership roles across Amazon with global responsibility since April 2002. Shelley L. Reynolds. Ms. Reynolds has served as Vice President, Worldwide Controller, and Principal Accounting Officer since April 2007.Adam N. Selipsky. Mr. Selipsky has served as CEO Amazon Web Services since July 2021, Senior Vice President, Amazon Web Services from May 2021 until July 2021, President and CEO of Tableau Software from September 2016 until May 2021, and Vice President, Marketing, Sales and Support of Amazon Web Services from May 2005 to September 2016.David A. Zapolsky. Mr. Zapolsky has served as Senior Vice President, General Counsel, and Secretary since May 2014, Vice President, General Counsel, and Secretary from September 2012 to May 2014, and as Vice President and Associate General Counsel for Litigation and Regulatory matters from April 2002 until September 2012.Board of DirectorsNameAgePositionJeffrey P. Bezos58Executive Chair Andrew R. Jassy54President and Chief Executive OfficerKeith B. Alexander70Co-CEO, President, and Chair of IronNet Cybersecurity, Inc.Edith W. Cooper60Former Executive Vice President, Goldman Sachs Group, Inc.Jamie S. Gorelick71Partner, Wilmer Cutler Pickering Hale and Dorr LLPDaniel P. Huttenlocher63Dean, MIT Schwarzman College of ComputingJudith A. McGrath69Former Chair and CEO, MTV NetworksIndra K. Nooyi66Former Chief Executive Officer, PepsiCo, Inc.Jonathan J. Rubinstein65Former co-CEO, Bridgewater Associates, LPPatricia Q. Stonesifer65Former President and Chief Executive Officer, Martha’s TableWendell P. Weeks62Chief Executive Officer, Corning Incorporated5Table of ContentsItem 1A.Risk FactorsPlease carefully consider the following discussion of significant factors, events, and uncertainties that make an investment in our securities risky. The events and consequences discussed in these risk factors could, in circumstances we may or may not be able to accurately predict, recognize, or control, have a material adverse effect on our business, growth, reputation, prospects, financial condition, operating results (including components of our financial results), cash flows, liquidity, and stock price. These risk factors do not identify all risks that we face; our operations could also be affected by factors, events, or uncertainties that are not presently known to us or that we currently do not consider to present significant risks to our operations. In addition to the effects of the COVID-19 pandemic and resulting global disruptions on our business and operations discussed in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in the risk factors below, the global economic climate and additional or unforeseen circumstances, developments, or events may give rise to or amplify many of the risks discussed below.Business and Industry RisksWe Face Intense CompetitionOur businesses are rapidly evolving and intensely competitive, and we have many competitors across geographies, including cross-border competition, and in different industries, including physical, e-commerce, and omnichannel retail, e-commerce services, web and infrastructure computing services, electronic devices, digital content, advertising, grocery, and transportation and logistics services. Some of our current and potential competitors have greater resources, longer histories, more customers, and/or greater brand recognition, particularly with our newly-launched products and services and in our newer geographic regions. They may secure better terms from vendors, adopt more aggressive pricing, and devote more resources to technology, infrastructure, fulfillment, and marketing.Competition continues to intensify, including with the development of new business models and the entry of new and well-funded competitors, and as our competitors enter into business combinations or alliances and established companies in other market segments expand to become competitive with our business. In addition, new and enhanced technologies, including search, web and infrastructure computing services, digital content, and electronic devices continue to increase our competition. The Internet facilitates competitive entry and comparison shopping, which enhances the ability of new, smaller, or lesser known businesses to compete against us. As a result of competition, our product and service offerings may not be successful, we may fail to gain or may lose business, and we may be required to increase our spending or lower prices, any of which could materially reduce our sales and profits.Our Expansion into New Products, Services, Technologies, and Geographic Regions Subjects Us to Additional RisksWe may have limited or no experience in our newer market segments, and our customers may not adopt our product or service offerings. These offerings, which can present new and difficult technology challenges, may subject us to claims if customers of these offerings experience service disruptions or failures or other quality issues. In addition, profitability, if any, in our newer activities may not meet our expectations, and we may not be successful enough in these newer activities to recoup our investments in them. Failure to realize the benefits of amounts we invest in new technologies, products, or services could result in the value of those investments being written down or written off. In addition, our sustainability initiatives may be unsuccessful for a variety of reasons, including if we are unable to realize the expected benefits of new technologies or if we do not successfully plan or execute new strategies, which could harm our business or damage our reputation.Our International Operations Expose Us to a Number of RisksOur international activities are significant to our revenues and profits, and we plan to further expand internationally. In certain international market segments, we have relatively little operating experience and may not benefit from any first-to-market advantages or otherwise succeed. It is costly to establish, develop, and maintain international operations and stores, and promote our brand internationally. Our international operations may not become profitable on a sustained basis.In addition to risks described elsewhere in this section, our international sales and operations are subject to a number of risks, including:•local economic and political conditions;•government regulation (such as regulation of our product and service offerings and of competition); restrictive governmental actions (such as trade protection measures, including export duties and quotas and custom duties and tariffs); nationalization; and restrictions on foreign ownership;•restrictions on sales or distribution of certain products or services and uncertainty regarding liability for products, services, and content, including uncertainty as a result of less Internet-friendly legal systems, local laws, lack of legal 6Table of Contentsprecedent, and varying rules, regulations, and practices regarding the physical and digital distribution of media products and enforcement of intellectual property rights;•business licensing or certification requirements, such as for imports, exports, web services, and electronic devices;•limitations on the repatriation and investment of funds and foreign currency exchange restrictions;•limited fulfillment and technology infrastructure;•shorter payable and longer receivable cycles and the resultant negative impact on cash flow;•laws and regulations regarding privacy, data use, data protection, data security, network security, consumer protection, payments, advertising, and restrictions on pricing or discounts;•lower levels of use of the Internet;•lower levels of consumer spending and fewer opportunities for growth compared to the U.S.;•lower levels of credit card usage and increased payment risk;•difficulty in staffing, developing, and managing foreign operations as a result of distance, language, and cultural differences;•different employee/employer relationships and the existence of works councils and labor unions;•compliance with the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties;•laws and policies of the U.S. and other jurisdictions affecting trade, foreign investment, loans, and taxes; and•geopolitical events, including war and terrorism.As international physical, e-commerce, and omnichannel retail, cloud services, and other services grow, competition will intensify, including through adoption of evolving business models. Local companies may have a substantial competitive advantage because of their greater understanding of, and focus on, the local customer, as well as their more established local brand names. The inability to hire, train, retain, and manage sufficient required personnel may limit our international growth.The People’s Republic of China (“PRC”) and India regulate Amazon’s and its affiliates’ businesses and operations in country through regulations and license requirements that may restrict (i) foreign investment in and operation of the Internet, IT infrastructure, data centers, retail, delivery, and other sectors, (ii) Internet content, and (iii) the sale of media and other products and services. For example, in order to meet local ownership, regulatory licensing, and cybersecurity requirements, we provide certain technology services in China through contractual relationships with third parties that hold PRC licenses to provide services. In India, the government restricts the ownership or control of Indian companies by foreign entities involved in online multi-brand retail trading activities. For www.amazon.in, we provide certain marketing tools and logistics services to third-party sellers to enable them to sell online and deliver to customers, and we hold indirect minority interests in entities that are third-party sellers on the www.amazon.in marketplace. Although we believe these structures and activities comply with existing laws, they involve unique risks, and the PRC and India may from time to time consider and implement additional changes in their regulatory, licensing, or other requirements that could impact these structures and activities. There are substantial uncertainties regarding the interpretation of PRC and Indian laws and regulations, and it is possible that these governments will ultimately take a view contrary to ours. In addition, our Chinese and Indian businesses and operations may be unable to continue to operate if we or our affiliates are unable to access sufficient funding or, in China, enforce contractual relationships we or our affiliates have in place. Violation of any existing or future PRC, Indian, or other laws or regulations or changes in the interpretations of those laws and regulations could result in our businesses in those countries being subject to fines and other financial penalties, having licenses revoked, or being forced to restructure our operations or shut down entirely. The Variability in Our Retail Business Places Increased Strain on Our OperationsDemand for our products and services can fluctuate significantly for many reasons, including as a result of seasonality, promotions, product launches, or unforeseeable events, such as in response to natural or human-caused disasters (including public health crises) or extreme weather (including as a result of climate change), or geopolitical events. For example, we expect a disproportionate amount of our retail sales to occur during our fourth quarter. Our failure to stock or restock popular products in sufficient amounts such that we fail to meet customer demand could significantly affect our revenue and our future growth. When we overstock products, we may be required to take significant inventory markdowns or write-offs and incur commitment costs, which could materially reduce profitability. We regularly experience increases in our net shipping cost due to complimentary upgrades, split-shipments, and additional long-zone shipments necessary to ensure timely delivery for the holiday season. If too many customers access our websites within a short period of time due to increased demand, we may experience system interruptions that make our websites unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we offer or sell and the attractiveness of our products and services. In addition, we may be unable 7Table of Contentsto adequately staff our fulfillment network and customer service centers during these peak periods and delivery and other fulfillment companies and customer service co-sourcers may be unable to meet the seasonal demand. Risks described elsewhere in this Item 1A relating to fulfillment network optimization and inventory are magnified during periods of high demand.We generally have payment terms with our retail vendors that extend beyond the amount of time necessary to collect proceeds from our consumer customers. As a result of holiday sales, as of December 31 of each year, our cash, cash equivalents, and marketable securities balances typically reach their highest level (other than as a result of cash flows provided by or used in investing and financing activities). This operating cycle results in a corresponding increase in accounts payable as of December 31. Our accounts payable balance generally declines during the first three months of the year, resulting in a corresponding decline in our cash, cash equivalents, and marketable securities balances.We Are Impacted by Fraudulent or Unlawful Activities of SellersThe law relating to the liability of online service providers is currently unsettled. In addition, governmental agencies have in the past and could in the future require changes in the way this business is conducted. Under our seller programs, we maintain policies and processes designed to prevent sellers from collecting payments, fraudulently or otherwise, when buyers never receive the products they ordered or when the products received are materially different from the sellers’ descriptions, and to prevent sellers in our stores or through other stores from selling unlawful, counterfeit, pirated, or stolen goods, selling goods in an unlawful or unethical manner, violating the proprietary rights of others, or otherwise violating our policies. When these policies and processes are circumvented or fail to operate sufficiently, it can harm our business or damage our reputation and we could face civil or criminal liability for unlawful activities by our sellers. Under our A2Z Guarantee, we reimburse buyers for payments up to certain limits in these situations, and as our third-party seller sales grow, the cost of this program will increase and could negatively affect our operating results. We Face Risks Related to Adequately Protecting Our Intellectual Property Rights and Being Accused of Infringing Intellectual Property Rights of Third PartiesWe regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and patent law, trade secret protection, and confidentiality and/or license agreements with our employees, customers, and others to protect our proprietary rights. Effective intellectual property protection is not available in every country in which our products and services are made available. We also may not be able to acquire or maintain appropriate domain names in all countries in which we do business. Furthermore, regulations governing domain names may not protect our trademarks and similar proprietary rights. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon, or diminish the value of our trademarks and other proprietary rights.We are not always able to discover or determine the extent of any unauthorized use of our proprietary rights. Actions taken by third parties that license our proprietary rights may materially diminish the value of our proprietary rights or reputation. The protection of our intellectual property requires the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property do not always adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or other intellectual property rights.We have been subject to, and expect to continue to be subject to, claims and legal proceedings regarding alleged infringement by us of the intellectual property rights of third parties. Such claims, whether or not meritorious, have in the past, and may in the future, result in the expenditure of significant financial and managerial resources, injunctions against us, or significant payments for damages, including to satisfy indemnification obligations or to obtain licenses from third parties who allege that we have infringed their rights. Such licenses may not be available on terms acceptable to us or at all. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims.Our digital content offerings depend in part on effective digital rights management technology to control access to digital content. Breach or malfunctioning of the digital rights management technology that we use could subject us to claims, and content providers may be unwilling to include their content in our service.We Have Foreign Exchange RiskThe results of operations of, and certain of our intercompany balances associated with, our international stores and product and service offerings are exposed to foreign exchange rate fluctuations. Due to these fluctuations, operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances. As we have expanded our international operations, our exposure to exchange rate fluctuations has increased. We also hold cash equivalents and/or marketable securities in foreign currencies such as British Pounds, Canadian Dollars, Euros, and 8Table of ContentsJapanese Yen. When the U.S. Dollar strengthens compared to these currencies, cash equivalents, and marketable securities balances, when translated, may be materially less than expected and vice versa.Operating RisksOur Expansion Places a Significant Strain on our Management, Operational, Financial, and Other ResourcesWe are continuing to rapidly and significantly expand our global operations, including increasing our product and service offerings and scaling our infrastructure to support our retail and services businesses. The complexity of the current scale of our business can place significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions, and our expansion increases these factors. Failure to manage growth effectively could damage our reputation, limit our growth, and negatively affect our operating results.We Experience Significant Fluctuations in Our Operating Results and Growth RateWe are not always able to accurately forecast our growth rate. We base our expense levels and investment plans on sales estimates. A significant portion of our expenses and investments is fixed, and we are not always able to adjust our spending quickly enough if our sales are less than expected.Our revenue growth may not be sustainable, and our percentage growth rates may decrease. Our revenue and operating profit growth depends on the continued growth of demand for the products and services offered by us or our sellers, and our business is affected by general economic and business conditions worldwide. A softening of demand, whether caused by changes in customer preferences or a weakening of the U.S. or global economies, may result in decreased revenue or growth.Our sales and operating results will also fluctuate for many other reasons, including due to factors described elsewhere in this section and the following:•our ability to retain and increase sales to existing customers, attract new customers, and satisfy our customers’ demands;•our ability to retain and expand our network of sellers;•our ability to offer products on favorable terms, manage inventory, and fulfill orders;•the introduction of competitive stores, websites, products, services, price decreases, or improvements;•changes in usage or adoption rates of the Internet, e-commerce, electronic devices, and web services, including outside the U.S.;•timing, effectiveness, and costs of expansion and upgrades of our systems and infrastructure;•the success of our geographic, service, and product line expansions;•the extent to which we finance, and the terms of any such financing for, our current operations and future growth;•the outcomes of legal proceedings and claims, which may include significant monetary damages or injunctive relief and could have a material adverse impact on our operating results;•variations in the mix of products and services we sell;•variations in our level of merchandise and vendor returns;•the extent to which we offer fast and free delivery, continue to reduce prices worldwide, and provide additional benefits to our customers;•factors affecting our reputation or brand image (including any actual or perceived inability to achieve our goals or commitments, whether related to sustainability, customers, employees, or other topics);•the extent to which we invest in technology and content, fulfillment, and other expense categories;•increases in the prices of fuel and gasoline, energy products, commodities like paper and packing supplies and hardware products, and technology infrastructure products;•constrained labor markets, which increase our payroll costs;•the extent to which operators of the networks between our customers and our stores successfully charge fees to grant our customers unimpaired and unconstrained access to our online services;•our ability to collect amounts owed to us when they become due;•the extent to which new and existing technologies, or industry trends, restrict online advertising or affect our ability to customize advertising or otherwise tailor our product and service offerings;9Table of Contents•the extent to which use of our services is affected by spyware, viruses, phishing and other spam emails, denial of service attacks, data theft, computer intrusions, outages, and similar events; and•disruptions from natural or human-caused disasters (including public health crises) or extreme weather (including as a result of climate change), geopolitical events and security issues (including terrorist attacks and armed hostilities), labor or trade disputes, and similar events.We Face Risks Related to Successfully Optimizing and Operating Our Fulfillment Network and Data CentersFailures to adequately predict customer demand or otherwise optimize and operate our fulfillment network and data centers successfully from time to time result in excess or insufficient fulfillment or data center capacity, service interruptions, increased costs, and impairment charges, any of which could materially harm our business. As we continue to add fulfillment and data center capability or add new businesses with different requirements, our fulfillment and data center networks become increasingly complex and operating them becomes more challenging. There can be no assurance that we will be able to operate our networks effectively.In addition, failure to optimize inventory or staffing in our fulfillment network increases our net shipping cost by requiring long-zone or partial shipments. We and our co-sourcers may be unable to adequately staff our fulfillment network and customer service centers. For example, productivity across our fulfillment network currently is being affected by global supply chain constraints and constrained labor markets, which increase payroll costs and make it difficult to hire, train, and deploy a sufficient number of people to operate our fulfillment network as efficiently as we would like. We are also subject to labor union efforts to organize groups of our employees from time to time and, if successful, those organizational efforts may decrease our operational flexibility, which could adversely affect our fulfillment network operating efficiency.Under some of our commercial agreements, we maintain the inventory of other companies, thereby increasing the complexity of tracking inventory and operating our fulfillment network. Our failure to properly handle such inventory or the inability of the other businesses on whose behalf we perform inventory fulfillment services to accurately forecast product demand may result in us being unable to secure sufficient storage space or to optimize our fulfillment network or cause other unexpected costs and other harm to our business and reputation.We rely on a limited number of shipping companies to deliver inventory to us and completed orders to our customers. An inability to negotiate acceptable terms with these companies or performance problems, staffing limitations, or other difficulties experienced by these companies or by our own transportation systems, including as a result of labor market constraints and related costs, could negatively impact our operating results and customer experience. In addition, our ability to receive inbound inventory efficiently and ship completed orders to customers also may be negatively affected by natural or human-caused disasters (including public health crises) or extreme weather (including as a result of climate change), geopolitical events and security issues, labor or trade disputes, and similar events.We Could Be Harmed by Data Loss or Other Security BreachesBecause we collect, process, store, and transmit large amounts of data, including confidential, sensitive, proprietary, and business and personal information, failure to prevent or mitigate data loss, theft, misuse, or other security breaches or vulnerabilities affecting our or our vendors’ or customers’ technology, products, and systems, could: expose us or our customers to a risk of loss, disclosure, or misuse of such information; adversely affect our operating results; result in litigation, liability, or regulatory action (including under laws related to privacy, data use, data protection, data security, network security, and consumer protection); deter customers or sellers from using our stores, products, and services; and otherwise harm our business and reputation. We use third-party technology and systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery to customers, back-office support, and other functions. Some of our systems have experienced past security breaches, and, although they did not have a material adverse effect on our operating results, there can be no assurance that future incidents will not have material adverse effects on our operations or financial results. Although we have developed systems and processes that are designed to protect customer data and prevent such incidents, including systems and processes designed to reduce the impact of a security breach at a third-party vendor or customer, such measures cannot provide absolute security and may fail to operate as intended or be circumvented.We Face Risks Related to System Interruption and Lack of RedundancyWe experience occasional system interruptions and delays that make our websites and services unavailable or slow to respond and prevent us from efficiently accepting or fulfilling orders or providing services to customers and third parties, which may reduce our net sales and the attractiveness of our products and services. Steps we take to add software and hardware, upgrade our systems and network infrastructure, and improve the stability and efficiency of our systems may not be sufficient to avoid system interruptions or delays that could adversely affect our operating results.10Table of ContentsOur computer and communications systems and operations in the past have been, or in the future could be, damaged or interrupted due to events such as natural or human-caused disasters (including public health crises) or extreme weather (including as a result of climate change), geopolitical events and security issues (including terrorist attacks and armed hostilities), computer viruses, physical or electronic break-ins, operational failures, and similar events or disruptions. Any of these events could cause system interruption, delays, and loss of critical data, and could prevent us from accepting and fulfilling customer orders and providing services, which could make our product and service offerings less attractive and subject us to liability. Our systems are not fully redundant and our disaster recovery planning may not be sufficient. In addition, our insurance may not provide sufficient coverage to compensate for related losses. Any of these events could damage our reputation and be expensive to remedy.The Loss of Key Senior Management Personnel or the Failure to Hire and Retain Highly Skilled and Other Key Personnel Could Negatively Affect Our BusinessWe depend on our senior management and other key personnel, including our President and CEO. We do not have “key person” life insurance policies. We also rely on other highly skilled personnel. Competition for qualified personnel in the industries in which we operate, as well as senior management, has historically been intense. For example, we experience significant competition in the technology industry, particularly for software engineers, computer scientists, and other technical staff. In addition, changes we make to our current and future work environments may not meet the needs or expectations of our employees or may be perceived as less favorable compared to other companies’ policies, which could negatively impact our ability to hire and retain qualified personnel. The loss of any of our executive officers or other key employees, the failure to successfully transition key roles, or the inability to hire, train, retain, and manage qualified personnel, could harm our business.Our Supplier Relationships Subject Us to a Number of RisksWe have significant suppliers, including content and technology licensors, and in some cases, limited or single-sources of supply, that are important to our sourcing, services, manufacturing, and any related ongoing servicing of merchandise and content. We do not have long-term arrangements with most of our suppliers to guarantee availability of merchandise, content, components, or services, particular payment terms, or the extension of credit limits. Decisions by our current suppliers to limit or stop selling or licensing merchandise, content, components, or services to us on acceptable terms, or delay delivery, including as a result of one or more supplier bankruptcies due to poor economic conditions, as a result of natural or human-caused disasters (including public health crises), or for other reasons, may result in our being unable to procure alternatives from other suppliers in a timely and efficient manner and on acceptable terms, or at all. In addition, violations by our suppliers or other vendors of applicable laws, regulations, contractual terms, intellectual property rights of others, or our Supply Chain Standards, as well as products or practices regarded as unethical, unsafe, or hazardous, could expose us to claims, damage our reputation, limit our growth, and negatively affect our operating results.Our Commercial Agreements, Strategic Alliances, and Other Business Relationships Expose Us to RisksWe provide physical, e-commerce, and omnichannel retail, cloud services, and other services to businesses through commercial agreements, strategic alliances, and business relationships. Under these agreements, we provide web services, technology, fulfillment, computing, digital storage, and other services, as well as enable sellers to offer products or services through our stores. These arrangements are complex and require substantial infrastructure capacity, personnel, and other resource commitments, which may limit the amount of business we can service. We may not be able to implement, maintain, and develop the components of these commercial relationships, which may include web services, fulfillment, customer service, inventory management, tax collection, payment processing, hardware, content, and third-party software, and engaging third parties to perform services. The amount of compensation we receive under certain of our commercial agreements is partially dependent on the volume of the other company’s sales. Therefore, when the other company’s offerings are not successful, the compensation we receive may be lower than expected or the agreement may be terminated. Moreover, we may not be able to enter into additional or alternative commercial relationships and strategic alliances on favorable terms. We also may be subject to claims from businesses to which we provide these services if we are unsuccessful in implementing, maintaining, or developing these services.As our agreements terminate, we may be unable to renew or replace these agreements on comparable terms, or at all. We may in the future enter into amendments on less favorable terms or encounter parties that have difficulty meeting their contractual obligations to us, which could adversely affect our operating results.Our present and future commercial agreements, strategic alliances, and business relationships create additional risks such as:•disruption of our ongoing business, including loss of management focus on existing businesses;•impairment of other relationships;11Table of Contents•variability in revenue and income from entering into, amending, or terminating such agreements or relationships; and•difficulty integrating under the commercial agreements.Our Business Suffers When We Are Unsuccessful in Making, Integrating, and Maintaining Acquisitions and InvestmentsWe have acquired and invested in a number of companies, and we may in the future acquire or invest in or enter into joint ventures with additional companies. These transactions create risks such as:•disruption of our ongoing business, including loss of management focus on existing businesses;•problems retaining key personnel;•additional operating losses and expenses of the businesses we acquired or in which we invested;•the potential impairment of tangible and intangible assets and goodwill, including as a result of acquisitions;•the potential impairment of customer and other relationships of the company we acquired or in which we invested or our own customers as a result of any integration of operations;•the difficulty of completing such transactions and achieving anticipated benefits within expected timeframes, or at all; •the difficulty of incorporating acquired operations, technology, and rights into our offerings, and unanticipated expenses related to such integration;•the difficulty of integrating a new company’s accounting, financial reporting, management, information and data security, human resource, and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not successfully implemented;•losses we may incur as a result of declines in the value of an investment or as a result of incorporating an investee’s financial performance into our financial results;•for investments in which an investee’s financial performance is incorporated into our financial results, either in full or in part, or investments for which we are required to file financial statements or provide financial information, the dependence on the investee’s accounting, financial reporting, and similar systems, controls, and processes;•the difficulty of implementing at companies we acquire the controls, procedures, and policies appropriate for a larger public company;•the risks associated with businesses we acquire or invest in, which may differ from or be more significant than the risks our other businesses face;•potential unknown liabilities associated with a company we acquire or in which we invest; and•for foreign transactions, additional risks related to the integration of operations across different cultures and languages, and the economic, political, and regulatory risks associated with specific countries.As a result of future acquisitions or mergers, we might need to issue additional equity securities, spend our cash, or incur debt, contingent liabilities, or amortization expenses related to intangible assets, any of which could reduce our profitability and harm our business or only be available on unfavorable terms, if at all. In addition, valuations supporting our acquisitions and strategic investments could change rapidly. We could determine that such valuations have experienced impairments or other-than-temporary declines in fair value which could adversely impact our financial results.We Face Significant Inventory RiskIn addition to risks described elsewhere in this Item 1A relating to fulfillment network and inventory optimization by us and third parties, we are exposed to significant inventory risks that may adversely affect our operating results as a result of seasonality, new product launches, rapid changes in product cycles and pricing, defective merchandise, changes in consumer demand and consumer spending patterns, changes in consumer tastes with respect to our products, spoilage, and other factors. We endeavor to accurately predict these trends and avoid overstocking or understocking products we manufacture and/or sell. Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale. In addition, when we begin selling or manufacturing a new product, it may be difficult to establish vendor relationships, determine appropriate product or component selection, and accurately forecast demand. The acquisition of certain types of inventory or components requires significant lead-time and prepayment and they may not be returnable. We carry a broad selection and significant inventory levels of certain products, such as consumer electronics, and at times we are unable to sell products in sufficient quantities or to meet demand during the relevant selling seasons. Any one of the inventory risk factors set forth above may adversely affect our operating results.12Table of ContentsWe Are Subject to Payments-Related RisksWe accept payments using a variety of methods, including credit card, debit card, credit accounts (including promotional financing), gift cards, direct debit from a customer’s bank account, consumer invoicing, physical bank check, and payment upon delivery. For existing and future payment options we offer to our customers, we currently are subject to, and may become subject to additional, regulations and compliance requirements (including obligations to implement enhanced authentication processes that could result in significant costs and reduce the ease of use of our payments products), as well as fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide certain Amazon-branded payment methods and payment processing services, including the processing of credit cards, debit cards, electronic checks, and promotional financing. In each case, it could disrupt our business if these companies become unwilling or unable to provide these services to us. We also offer co-branded credit card programs, which could adversely affect our operating results if renewed on less favorable terms or terminated. We are also subject to payment card association operating rules, including data security rules, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. Failure to comply with these rules or requirements, as well as any breach, compromise, or failure to otherwise detect or prevent fraudulent activity involving our data security systems, could result in our being liable for card issuing banks’ costs, subject to fines and higher transaction fees, and loss of our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected.In addition, we provide regulated services in certain jurisdictions because we enable customers to keep account balances with us and transfer money to third parties, and because we provide services to third parties to facilitate payments on their behalf. Jurisdictions subject us to requirements for licensing, regulatory inspection, bonding and capital maintenance, the use, handling, and segregation of transferred funds, consumer disclosures, maintaining or processing data, and authentication. We are also subject to or voluntarily comply with a number of other laws and regulations relating to payments, money laundering, international money transfers, privacy, data use, data protection, data security, network security, consumer protection, and electronic fund transfers. If we were found to be in violation of applicable laws or regulations, we could be subject to additional requirements and civil and criminal penalties, or forced to cease providing certain services.We Have a Rapidly Evolving Business Model and Our Stock Price Is Highly VolatileWe have a rapidly evolving business model. The trading price of our common stock fluctuates significantly in response to, among other risks, the risks described elsewhere in this Item 1A, as well as:•changes in interest rates;•conditions or trends in the Internet and the industry segments we operate in;•quarterly variations in operating results;•fluctuations in the stock market in general and market prices for Internet-related companies in particular;•changes in financial estimates by us or decisions to increase or decrease future spending or investment levels; •changes in financial estimates and recommendations by securities analysts;•changes in our capital structure, including issuance of additional debt or equity to the public;•changes in the valuation methodology of, or performance by, other e-commerce or technology companies; and•transactions in our common stock by major investors and certain analyst reports, news, and speculation.Volatility in our stock price could adversely affect our business and financing opportunities and force us to increase our cash compensation to employees or grant larger stock awards than we have historically, which could hurt our operating results or reduce the percentage ownership of our existing stockholders, or both.Legal and Regulatory RisksGovernment Regulation Is Evolving and Unfavorable Changes Could Harm Our BusinessWe are subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet, physical, e-commerce, and omnichannel retail, digital content, web services, electronic devices, advertising, artificial intelligence technologies and services, and other products and services that we offer or sell. These regulations and laws cover taxation, privacy, data use, data protection, data security, network security, consumer protection, pricing, content, copyrights, distribution, transportation, mobile communications, electronic device certification, electronic waste, energy consumption, environmental regulation, electronic contracts and other communications, competition, employment, trade and protectionist measures, web services, the provision of online payment services, registration, licensing, and information reporting 13Table of Contentsrequirements, unencumbered Internet access to our services or access to our facilities, the design and operation of websites, health, safety, and sanitation standards, the characteristics, legality, and quality of products and services, product labeling, the commercial operation of unmanned aircraft systems, healthcare, and other matters. It is not clear how existing laws governing issues such as property ownership, libel, privacy, data use, data protection, data security, network security, and consumer protection apply to aspects of our operations such as the Internet, e-commerce, digital content, web services, electronic devices, advertising, and artificial intelligence technologies and services. A large number of jurisdictions regulate our operations, and the extent, nature, and scope of such regulations is evolving and expanding as the scope of our businesses expand. We are regularly subject to formal and informal reviews and investigations by governments and regulatory authorities under existing laws, regulations, or interpretations or pursuing new and novel approaches to regulate our operations. For example, we face a number of open investigations based on claims that aspects of our operations violate competition rules, including aspects of Amazon’s European marketplace for sellers, particularly with respect to use of data, fulfillment services, and featured offers. Unfavorable regulations, laws, decisions, or interpretations by government or regulatory authorities applying those laws and regulations, or inquiries, investigations, or enforcement actions threatened or initiated by them, could cause us to incur substantial costs, expose us to unanticipated civil and criminal liability or penalties (including substantial monetary fines), diminish the demand for, or availability of, our products and services, increase our cost of doing business, require us to change our business practices in a manner materially adverse to our business, damage our reputation, impede our growth, or otherwise have a material effect on our operations. The media, political, and regulatory scrutiny we face, which may continue to increase, amplifies these risks. Claims, Litigation, Government Investigations, and Other Proceedings May Adversely Affect Our Business and Results of OperationsAs an innovative company offering a wide range of consumer and business products and services around the world, we are regularly subject to actual and threatened claims, litigation, reviews, investigations, and other proceedings, including proceedings by governments and regulatory authorities, involving a wide range of issues, including patent and other intellectual property matters, taxes, labor and employment, competition and antitrust, privacy, data use, data protection, data security, network security, consumer protection, commercial disputes, goods and services offered by us and by third parties, and other matters. The number and scale of these proceedings have increased over time as our businesses have expanded in scope and geographic reach and our products, services, and operations have become more complex and available to, and used by, more people. Any of these types of proceedings can have an adverse effect on us because of legal costs, disruption of our operations, diversion of management resources, negative publicity, and other factors. The outcomes of these matters are inherently unpredictable and subject to significant uncertainties. Determining legal reserves or possible losses from such matters involves judgment and may not reflect the full range of uncertainties and unpredictable outcomes. Until the final resolution of such matters, we may be exposed to losses in excess of the amount recorded, and such amounts could be material. Should any of our estimates and assumptions change or prove to have been incorrect, it could have a material effect on our business, consolidated financial position, results of operations, or cash flows. In addition, it is possible that a resolution of one or more such proceedings, including as a result of a settlement, could involve licenses, sanctions, consent decrees, or orders requiring us to make substantial future payments, preventing us from offering certain products or services, requiring us to change our business practices in a manner materially adverse to our business, requiring development of non-infringing or otherwise altered products or technologies, damaging our reputation, or otherwise having a material effect on our operations. We Are Subject to Product Liability Claims When People or Property Are Harmed by the Products We Sell or ManufactureSome of the products we sell or manufacture expose us to product liability or food safety claims relating to personal injury or illness, death, or environmental or property damage, and can require product recalls or other actions. Third parties who sell products using our services and stores also expose us to product liability claims. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. Although we impose contractual terms on sellers that are intended to prohibit sales of certain type of products, we may not be able to detect, enforce, or collect sufficient damages for breaches of such agreements. In addition, some of our agreements with our vendors and sellers do not indemnify us from product liability.We Face Additional Tax Liabilities and Collection ObligationsWe are subject to a variety of taxes and tax collection obligations in the U.S. (federal and state) and numerous foreign jurisdictions. We may recognize additional tax expense and be subject to additional tax liabilities, including other liabilities for tax collection obligations due to changes in laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions. Such changes could come about as a result of economic, political, and other conditions. An increasing number of jurisdictions are considering or have adopted laws or administrative practices that impose new tax measures, including revenue-based taxes, targeting online commerce and the remote selling of goods and services. These include new obligations to collect sales, 14Table of Contentsconsumption, value added, or other taxes on online marketplaces and remote sellers, or other requirements that may result in liability for third party obligations. For example, non-U.S. jurisdictions have proposed or enacted taxes on online advertising and marketplace service revenues. Proliferation of these or similar unilateral tax measures may continue unless broader international tax reform is implemented. Our results of operations and cash flows could be adversely affected by additional taxes imposed on us prospectively or retroactively or additional taxes or penalties resulting from the failure to comply with any collection obligations or failure to provide information about our customers, suppliers, and other third parties for tax reporting purposes to various government agencies. In some cases we also may not have sufficient notice to enable us to build systems and adopt processes to properly comply with new reporting or collection obligations by the effective date.Our tax expense and liabilities are also affected by other factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, losses incurred in jurisdictions for which we are not able to realize related tax benefits, the applicability of special or extraterritorial tax regimes, changes in foreign currency exchange rates, changes in our stock price, changes to our forecasts of income and loss and the mix of jurisdictions to which they relate, and changes in our tax assets and liabilities and their valuation. In the ordinary course of our business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Significant judgment is required in evaluating and estimating our tax expense, assets, and liabilities.We are also subject to tax controversies in various jurisdictions that can result in tax assessments against us. Developments in an audit, investigation, or other tax controversy can have a material effect on our operating results or cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods. We regularly assess the likelihood of an adverse outcome resulting from these proceedings to determine the adequacy of our tax accruals. Although we believe our tax estimates are reasonable, the final outcome of audits, investigations, and any other tax controversies could be materially different from our historical tax accruals.We Are Subject to Risks Related to Government Contracts and Related Procurement RegulationsOur contracts with U.S., as well as state, local, and foreign, government entities are subject to various procurement regulations and other requirements relating to their formation, administration, and performance. We are subject to audits and investigations relating to our government contracts, and any violations could result in various civil and criminal penalties and administrative sanctions, including termination of contract, refunding or suspending of payments, forfeiture of profits, payment of fines, and suspension or debarment from future government business. In addition, some of these contracts are subject to periodic funding approval and/or provide for termination by the government at any time, without cause.Item 1B.Unresolved Staff CommentsNone.15Table of ContentsItem 2.PropertiesAs of December 31, 2021, we operated the following facilities (in thousands):Description of UseLeased Square Footage (1)Owned Square FootageLocationOffice space27,5196,138North AmericaOffice space20,9831,802InternationalPhysical stores (2)22,396662North AmericaPhysical stores (2)235—InternationalFulfillment, data centers, and other370,39216,663North AmericaFulfillment, data centers, and other129,0359,601InternationalTotal570,56034,866 ___________________(1)For leased properties, represents the total leased space excluding sub-leased space.(2)This includes 672 North America and 7 International stores as of December 31, 2021. SegmentLeased Square Footage (1)Owned Square Footage (1)North America383,6609,863International124,2465,103AWS14,15211,960Total522,05826,926 ___________________(1)Segment amounts exclude corporate facilities. Shared facilities are allocated among the segments based on usage and primarily relate to facilities that hold our technology infrastructure. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 10 — Segment Information.”We own and lease our corporate headquarters in Washington’s Puget Sound region and Arlington, Virginia.Item 3.Legal ProceedingsSee Item 8 of Part II, “Financial Statements and Supplementary Data — Note 7 — Commitments and Contingencies — Legal Proceedings.”Item 4.Mine Safety DisclosuresNot applicable.16Table of ContentsPART IIItem 5.Market for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of Equity SecuritiesMarket InformationOur common stock is traded on the Nasdaq Global Select Market under the symbol “AMZN.” HoldersAs of January 26, 2022, there were 7,282 shareholders of record of our common stock, although there is a much larger number of beneficial owners.Recent Sales of Unregistered SecuritiesNone.Issuer Purchases of Equity SecuritiesNone.Item 6.Reserved17Table of ContentsItem 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsForward-Looking StatementsThis Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects, or future results of operations or financial position, made in this Annual Report on Form 10-K are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results and outcomes could differ materially for a variety of reasons, including, among others, fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, inflation, labor market and global supply chain constraints, 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 claims, litigation, government investigations, and other proceedings, fulfillment, sortation, delivery, and data center optimization, risks of inventory management, variability in demand, the degree to which we enter into, maintain, and develop commercial agreements, proposed and completed acquisitions and strategic transactions, payments risks, and risks of fulfillment throughput and productivity. In addition, the global economic climate and additional or unforeseen effects from the COVID-19 pandemic amplify many of these risks. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results or outcomes to differ significantly from management’s expectations, are described in greater detail in Item 1A of Part I, “Risk Factors.”OverviewOur primary source of revenue is the sale of a wide range of products and services to customers. The products offered through our stores include merchandise and content we have purchased for resale and products offered by third-party sellers, and we also manufacture and sell electronic devices and produce media content. Generally, we recognize gross revenue from items we sell from our inventory as product sales and recognize our net share of revenue of items sold by third-party sellers as service sales. We seek to increase unit sales across our stores, through increased product selection, across numerous product categories. We also offer other services such as compute, storage, and database offerings, fulfillment, advertising, publishing, and digital content subscriptions.Our financial focus is on long-term, sustainable growth in free cash flows. Free cash flows are driven primarily by increasing operating income and efficiently managing accounts receivable, inventory, accounts payable, and cash capital expenditures, including our decision to purchase or lease property and equipment. Increases in operating income primarily result from increases in sales of products and services and efficiently managing our operating costs, partially offset by investments we make in longer-term strategic initiatives, including capital expenditures focused on improving the customer experience. To increase sales of products and services, we focus on improving all aspects of the customer experience, including lowering prices, improving availability, offering faster delivery and performance times, increasing selection, producing original content, increasing product categories and service offerings, expanding product information, improving ease of use, improving reliability, and earning customer trust. See “Results of Operations — Non-GAAP Financial Measures” below for additional information on our non-GAAP free cash flows financial measures.We seek to reduce our variable costs per unit and work to leverage our fixed costs. Our variable costs include product and content costs, payment processing and related transaction costs, picking, packaging, and preparing orders for shipment, transportation, customer service support, costs necessary to run AWS, and a portion of our marketing costs. Our fixed costs include the costs necessary to build and run our technology infrastructure; to build, enhance, and add features to our online stores, web services, electronic devices, and digital offerings; and to build and optimize our fulfillment networks and related facilities. Variable costs generally change directly with sales volume, while fixed costs generally are dependent on the timing of capacity needs, geographic expansion, category expansion, and other factors. To decrease our variable costs on a per unit basis and enable us to lower prices for customers, we seek to increase our direct sourcing, increase discounts from suppliers, and reduce defects in our processes. To minimize unnecessary growth in fixed costs, we seek to improve process efficiencies and maintain a lean culture.Because of our model we are able to turn our inventory quickly and have a cash-generating operating cycle1. On average, our high inventory velocity means we generally collect from consumers before our payments to suppliers come due. We expect variability in inventory turnover over time since it is affected by numerous factors, including our product mix, the mix of sales 1 The operating cycle is the number of days of sales in inventory plus the number of days of sales in accounts receivable minus accounts payable days.18Table of Contentsby us and by third-party sellers, our continuing focus on in-stock inventory availability and selection of product offerings, our investment in new geographies and product lines, and the extent to which we choose to utilize third-party fulfillment providers. We also expect some variability in accounts payable days over time since they are affected by several factors, including the mix of product sales, the mix of sales by third-party sellers, the mix of suppliers, seasonality, and changes in payment terms over time, including the effect of balancing pricing and timing of payment terms with suppliers.We expect spending in technology and content will increase over time as we add computer scientists, designers, software and hardware engineers, and merchandising employees. 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 seek to invest efficiently in several areas of technology and content, including AWS, and expansion of new and existing product categories and service offerings, as well as in technology infrastructure to enhance the customer experience and improve our process efficiencies. We believe that advances in technology, specifically the speed and reduced cost of processing power, data storage and analytics, improved wireless connectivity, and the practical applications of artificial intelligence and machine learning, will continue to improve users’ experience on the Internet and increase its ubiquity in people’s lives. To best take advantage of these continued advances in technology, we are investing in AWS, which offers a broad set of on-demand technology services, including compute, storage, database, analytics, and machine learning, and other services, to developers and enterprises of all sizes. We are also investing in initiatives to build and deploy innovative and efficient software and electronic devices. We seek to efficiently manage shareholder dilution while maintaining the flexibility to issue shares for strategic purposes, such as financings, acquisitions, and aligning employee compensation with shareholders’ interests. We utilize restricted stock units as our primary vehicle for equity compensation because we believe this compensation model aligns the long-term interests of our shareholders and employees. In measuring shareholder dilution, we include all vested and unvested stock awards outstanding, without regard to estimated forfeitures. Total shares outstanding plus outstanding stock awards were 518 million and 523 million as of December 31, 2020 and 2021.Our financial reporting currency is the U.S. Dollar and changes in foreign exchange rates significantly affect our reported results and consolidated trends. For example, if the U.S. Dollar weakens year-over-year relative to currencies in our international locations, our consolidated net sales and operating expenses will be higher than if currencies had remained constant. Likewise, if the U.S. Dollar strengthens year-over-year relative to currencies in our international locations, our consolidated net sales and operating expenses will be lower than if currencies had remained constant. We believe that our increasing diversification beyond the U.S. economy through our growing international businesses benefits our shareholders over the long-term. We also believe it is useful to evaluate our operating results and growth rates before and after the effect of currency changes.In addition, the remeasurement of our intercompany balances can result in significant gains and losses associated with the effect of movements in foreign currency exchange rates. Currency volatilities may continue, which may significantly impact (either positively or negatively) our reported results and consolidated trends and comparisons.For additional information about each line item addressed above, refer to Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business, Accounting Policies, and Supplemental Disclosures.”Our Annual Report on Form 10-K for the year ended December 31, 2020 includes a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2019 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”Critical Accounting JudgmentsThe preparation of financial statements in conformity with generally accepted accounting principles of the United States (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. 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, Accounting Policies, and Supplemental Disclosures.” Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.19Table of ContentsInventoriesInventories, 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 December 31, 2021, we would have recorded an additional cost of sales of approximately $370 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 TaxesWe are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, administrative practices, principles, and interpretations in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. In addition, our actual and forecasted earnings are subject to change due to economic, political, and other conditions and significant judgment is required in determining our ability to use our deferred tax assets. Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize related tax benefits, the applicability of special tax regimes, changes in foreign currency exchange rates, changes in our stock price, changes to our forecasts of income and loss and the mix of jurisdictions to which they relate, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions. In addition, a number of countries have enacted or are actively pursuing changes to their tax laws applicable to corporate multinationals. We are also currently subject to tax controversies in various jurisdictions, and these jurisdictions may assess additional income tax liabilities against us. Developments in an audit, investigation, or other tax controversy could have a material effect on our operating results or cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods. We regularly assess the likelihood of an adverse outcome resulting from these proceedings to determine the adequacy of our tax accruals. Although we believe our tax estimates are reasonable, the final outcome of audits, investigations, and any other tax controversies could be materially different from our historical income tax provisions and accruals.Liquidity and Capital ResourcesCash flow information is as follows (in millions): Year Ended December 31, 20202021Cash provided by (used in):Operating activities$66,064 $46,327 Investing activities(59,611)(58,154)Financing activities(1,104)6,291 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 $84.4 billion and $96.0 billion as of December 31, 2020 and 2021. Amounts held in foreign currencies were $23.5 billion and $22.7 billion as of December 31, 2020 and 2021, and were primarily British Pounds, Euros, Japanese Yen, and Canadian Dollars. Cash provided by (used in) operating activities was $66.1 billion and $46.3 billion in 2020 and 2021. Our operating cash flows result primarily from cash received from our consumer, seller, developer, enterprise, and content creator customers, and advertisers, offset by cash payments we make for products and services, employee compensation, payment processing and related transaction costs, operating leases, and interest payments 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 decrease in operating cash flow in 2021, compared to the prior year, was 20Table of Contentsprimarily due to changes in working capital, partially offset by the increase in net income, excluding non-cash expenses. Working capital at any specific point in time is subject to many variables, including variability in demand, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates.Cash provided by (used in) investing activities corresponds with cash capital expenditures, including leasehold improvements, incentives received from property and equipment vendors, proceeds from asset sales, cash outlays for acquisitions, investments in other companies and intellectual property rights, and purchases, sales, and maturities of marketable securities. Cash provided by (used in) investing activities was $(59.6) billion and $(58.2) billion in 2020 and 2021, with the variability caused primarily by our decision to purchase or lease property and equipment and purchases, sales, and maturities of marketable securities. Cash capital expenditures were $35.0 billion, and $55.4 billion in 2020 and 2021, which primarily reflect investments in additional capacity to support our fulfillment operations and in support of continued business growth in technology infrastructure (the majority of which is to support AWS), which investments we expect to continue over time. We made cash payments, net of acquired cash, related to acquisition and other investment activity of $2.3 billion and $2.0 billion in 2020 and 2021.Cash provided by (used in) financing activities was $(1.1) billion and $6.3 billion in 2020 and 2021. Cash inflows from financing activities resulted from proceeds from short-term debt, and other and long-term-debt of $17.3 billion and $27.0 billion in 2020 and 2021. Cash outflows from financing activities resulted from payments of short-term debt, and other, long-term debt, finance leases, and financing obligations of $18.4 billion and $20.7 billion in 2020 and 2021. Property and equipment acquired under finance leases was $11.6 billion and $7.1 billion in 2020 and 2021, reflecting investments in support of continued business growth primarily due to investments in technology infrastructure for AWS.We had no borrowings outstanding under the unsecured revolving credit facility, $725 million of borrowings outstanding under the commercial paper programs, and $803 million of borrowings outstanding under our secured revolving credit facility (the “Credit Facility”) as of December 31, 2021. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 6 — Debt” for additional information. As of December 31, 2021, cash, cash equivalents, and marketable securities held by foreign subsidiaries were $7.6 billion. We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts.Tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions are reducing our U.S. taxable income. U.S. tax rules provide for enhanced accelerated depreciation deductions by allowing the election of full expensing of qualified property, primarily equipment, through 2022. Our federal tax provision included the election of full expensing of qualified property for 2019 and a partial election for 2020 and 2021. Cash taxes paid (net of refunds) were $1.7 billion and $3.7 billion for 2020 and 2021. Effective January 1, 2022, research and development expenses are required to be capitalized and amortized for U.S. tax purposes, which will delay the deductibility of these expenses and potentially increase the amount of cash taxes we pay. As of December 31, 2020 and 2021, restricted cash, cash equivalents, and marketable securities were $257 million and $260 million. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 6 — Debt” and “Financial Statements and Supplementary Data — Note 7 — Commitments and Contingencies” for additional discussion of our principal contractual commitments, as well as our pledged assets. Additionally, we have purchase obligations and open purchase orders, including for inventory and capital expenditures, that support normal operations and are primarily due in the next twelve months. These purchase obligations and open purchase orders are generally cancellable in full or in part through the contractual provisions.We believe that cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, as well as our borrowing arrangements, will be sufficient to meet our anticipated operating cash needs for at least the next twelve months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. See Item 1A of Part I, “Risk Factors.” We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities, obtain finance and operating lease arrangements, enter into financing obligations, repurchase common stock, pay dividends, or repurchase, refinance, or otherwise restructure our debt for strategic reasons or to further strengthen our financial position. We expect to fund the acquisition of MGM Holdings Inc. with cash on hand. The sale of additional equity or convertible debt securities would be dilutive to our shareholders. In addition, we will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, capital infrastructure, and technologies, which might affect our liquidity requirements or cause us to secure additional financing, or issue additional equity or debt securities. There can be no assurance that additional credit lines or financing instruments will be available in amounts or on terms acceptable to us, if at all.21Table of ContentsResults of OperationsWe have organized our operations into three segments: North America, International, and AWS. These segments reflect the way the Company evaluates its business performance and manages its operations. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 10 — Segment Information.” OverviewAs reflected in the discussion below, ongoing direct and indirect impacts of the COVID-19 pandemic and actions taken in response to them had varying effects on our 2021 results of operations, although some effects, including customer demand, are mitigating or becoming more difficult to isolate or quantify. Moreover, it is not possible to determine the duration and scope of the pandemic, the scale and rate of economic recovery from the pandemic, any ongoing effects on consumer demand and spending patterns, supply chain disruptions, and labor availability and costs, or the impact of other indirect factors that may be attributable to the pandemic, and the extent to which these or other currently unanticipated consequences of the pandemic are reasonably likely to materially affect our results of operations. However, we expect our net sales growth rate to decelerate in Q1 2022 compared to the increase we experienced in Q1 2021. In addition, these direct and indirect factors can make it difficult to isolate and quantify the portion of our costs that are a direct result of the pandemic and costs arising from factors that may have been influenced by the pandemic, including increased wage rates and incentives, increased carrier rates, and fulfillment network inefficiencies resulting from constrained labor markets and global supply chain constraints. We expect these factors and their effects on our operations to continue into Q1 2022.22Table of ContentsNet SalesNet sales include product and service sales. Product sales represent revenue from the sale of products and related shipping fees and digital media content where we record revenue gross. Service sales primarily represent third-party seller fees, which includes commissions and any related fulfillment and shipping fees, AWS sales, advertising services, Amazon Prime membership fees, and certain digital content subscriptions. Net sales information is as follows (in millions): Year Ended December 31, 20202021Net Sales:North America$236,282 $279,833 International104,412 127,787 AWS45,370 62,202 Consolidated$386,064 $469,822 Year-over-year Percentage Growth:North America38 %18 %International40 22 AWS30 37 Consolidated38 22 Year-over-year Percentage Growth, excluding the effect of foreign exchange rates:North America38 %18 %International38 20 AWS30 37 Consolidated37 21 Net sales mix:North America61 %60 %International27 27 AWS12 13 Consolidated100 %100 %Sales increased 22% in 2021, compared to the prior year. Changes in foreign currency exchange rates impacted net sales by $1.4 billion and $3.8 billion for 2020 and 2021. For a discussion of the effect of foreign exchange rates on sales growth, see “Effect of Foreign Exchange Rates” below.North America sales increased 18% in 2021, compared to the prior year. The sales growth primarily reflects increased unit sales, including sales by third-party sellers, and advertising sales. Increased unit sales were driven largely by our continued efforts to reduce prices for our customers, including from our shipping offers, and increased demand, partially offset by fulfillment network inefficiencies and supply chain constraints. We expect our North America sales growth rate to decelerate in Q1 2022 compared to the increase we experienced in Q1 2021.International sales increased 22% in 2021, compared to the prior year. The sales growth primarily reflects increased unit sales, including sales by third-party sellers, and advertising sales. Increased unit sales were driven largely by our continued efforts to reduce prices for our customers, including from our shipping offers, and increased demand, partially offset by fulfillment network inefficiencies and supply chain constraints. We expect our International sales growth rate to decelerate in Q1 2022 compared to the increase we experienced in Q1 2021. Changes in foreign currency exchange rates impacted International net sales by $1.7 billion and $3.0 billion in 2020 and 2021.AWS sales increased 37% in 2021, compared to the prior year. 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.23Table of ContentsOperating Income (Loss) Operating income (loss) by segment is as follows (in millions):Year Ended December 31,20202021Operating Income (Loss):North America$8,651 $7,271 International717 (924)AWS13,531 18,532 Consolidated$22,899 $24,879 Operating income was $22.9 billion and $24.9 billion for 2020 and 2021. We believe that operating income (loss) is a more meaningful measure than gross profit and gross margin due to the diversity of our product categories and services.The decrease in North America operating income in absolute dollars in 2021, compared to the prior year, is primarily due to increased shipping and fulfillment costs, due in part to increased investments in our fulfillment network, increased wage rates and incentives, increased carrier rates, and fulfillment network inefficiencies, and growth in certain operating expenses, including marketing, partially offset by increased unit sales, including sales by third-party sellers, and advertising sales. Changes in foreign exchange rates impacted operating income by $8 million and $88 million for 2020 and 2021.The International operating loss in 2021, as compared to the operating income in the prior year, is primarily due to increased shipping and fulfillment costs, due in part to increased investments in our fulfillment network, increased wage rates and incentives, and increased carrier rates, and growth in certain operating expenses, including marketing, partially offset by increased unit sales, including sales by third-party sellers, and advertising sales. Changes in foreign exchange rates impacted operating income (loss) by $411 million and $435 million for 2020 and 2021. The increase in AWS operating income in absolute dollars in 2021, compared to the prior year, is primarily due to increased customer usage and cost structure productivity, partially offset by increased spending on technology infrastructure and payroll and related expenses, all of which were primarily driven by additional investments to support the business growth, and reduced prices for our customers. Changes in foreign exchange rates impacted operating income by $30 million and $(372) million for 2020 and 2021.24Table of ContentsOperating ExpensesInformation about operating expenses is as follows (in millions): Year Ended December 31, 20202021Operating expenses:Cost of sales$233,307 $272,344 Fulfillment58,517 75,111 Technology and content42,740 56,052 Marketing22,008 32,551 General and administrative6,668 8,823 Other operating expense (income), net(75)62 Total operating expenses$363,165 $444,943 Year-over-year Percentage Growth:Cost of sales41 %17 %Fulfillment45 28 Technology and content19 31 Marketing17 48 General and administrative28 32 Other operating expense (income), net(137)(183)Percent of Net Sales:Cost of sales60.4 %58.0 %Fulfillment15.2 16.0 Technology and content11.1 11.9 Marketing5.7 6.9 General and administrative1.7 1.9 Other operating expense (income), net— — Cost of SalesCost of sales primarily consists of the purchase price of consumer products, inbound and outbound shipping costs, including costs related to sortation and delivery centers and where we are the transportation service provider, and digital media content costs where we record revenue gross, including video and music.The increase in cost of sales in absolute dollars in 2021, compared to the prior year, is primarily due to increased product and shipping costs resulting from increased sales, costs from expanding our fulfillment network, as well as increased carrier rates, increased wage rates and incentives, and fulfillment network inefficiencies resulting from a constrained labor market and global supply chain constraints.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 centers and transportation costs, were $61.1 billion and $76.7 billion in 2020 and 2021. We expect our cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate, we use more expensive shipping methods, including faster delivery, 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.FulfillmentFulfillment costs primarily consist of those costs incurred in operating and staffing our North America and International fulfillment centers, physical stores, and customer service centers and payment processing costs. While AWS payment processing and related transaction costs are included in “Fulfillment,” AWS costs are primarily classified as “Technology and 25Table of Contentscontent.” Fulfillment costs as a percentage of net sales may vary due to several factors, such as payment processing and related transaction costs, our level of productivity and accuracy, changes in volume, size, and weight of units received and fulfilled, the extent to which third party sellers utilize Fulfillment by Amazon services, timing of fulfillment network and physical store expansion, the extent we utilize fulfillment services provided by third parties, mix of products and services sold, and our ability to affect customer service contacts per unit by implementing improvements in our operations and enhancements to our customer self-service features. Additionally, sales by our sellers have higher payment processing and related transaction costs as a percentage of net sales compared to our retail sales because payment processing costs are based on the gross purchase price of underlying transactions.The increase in fulfillment costs in absolute dollars in 2021, compared to the prior year, is primarily due to variable costs corresponding with increased product and service sales volume and inventory levels, increased wage rates and incentives and fulfillment network inefficiencies resulting from a constrained labor market and global supply chain constraints, and costs from expanding our fulfillment network.We seek to expand our fulfillment network to accommodate a greater selection and in-stock inventory levels and to meet anticipated shipment volumes from sales of our own products as well as sales by third parties for which we provide the fulfillment services. We regularly evaluate our facility requirements.Technology and ContentTechnology 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 stores, curation and display of products and services made available in our online stores, and infrastructure costs. Infrastructure costs include servers, networking equipment, and data center related depreciation and amortization, rent, utilities, and other expenses necessary to support AWS and other Amazon businesses. Collectively, these costs reflect the investments we make in order to offer a wide variety of products and services to our customers.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 2021, compared to the prior year, 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. We expect technology and content costs to grow at a slower rate in 2022 due to increases in the estimated useful lives of our servers and networking equipment, which will primarily impact our AWS segment. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business, Accounting Policies, and Supplemental Disclosures — Use of Estimates” for additional information on the change in estimated useful lives of our servers and networking equipment.MarketingMarketing costs include advertising and payroll and related expenses for personnel engaged in marketing and selling activities, including sales commissions related to AWS. We direct customers to our stores primarily through a number of marketing channels, such as our sponsored search, social and online advertising, third party customer referrals, television advertising, and other initiatives. Our marketing costs are largely variable, based on growth in sales and changes in rates. To the extent there is increased or decreased competition for these traffic sources, or to the extent our mix of these channels shifts, we would expect to see a corresponding change in our marketing costs.The increase in marketing costs in absolute dollars in 2021, compared to the prior year, is primarily due to higher marketing spend, which was constrained in 2020 in response to COVID-19, and increased payroll and related expenses for personnel engaged in marketing and selling activities.While costs associated with Amazon Prime membership benefits and other shipping offers are not included in marketing expense, we view these offers as effective worldwide marketing tools, and intend to continue offering them indefinitely.General and AdministrativeThe increase in general and administrative costs in absolute dollars in 2021, compared to the prior year, is primarily due to increases in payroll and related expenses and professional fees.26Table of ContentsOther Operating Expense (Income), NetOther operating expense (income), net was $(75) million and $62 million during 2020 and 2021, and was primarily related to a benefit from accelerated vesting of warrants to acquire equity of a vendor in 2020, offset by a lease impairment in 2020 and the amortization of intangible assets.Interest Income and ExpenseOur interest income was $555 million and $448 million during 2020 and 2021. We generally invest our excess cash in AAA-rated money market funds and investment grade short- to intermediate-term fixed income securities. Our interest income corresponds with the average balance of invested funds based on the prevailing rates, which vary depending on the geographies and currencies in which they are invested.Interest expense was $1.6 billion and $1.8 billion in 2020 and 2021 and was primarily related to debt and finance leases.Our long-term lease liabilities were $52.6 billion and $67.7 billion as of December 31, 2020 and 2021. Our long-term debt was $31.8 billion and $48.7 billion as of December 31, 2020 and 2021. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 4 — Leases and Note 6 — Debt” for additional information.Other Income (Expense), NetOther income (expense), net was $2.4 billion and $14.6 billion during 2020 and 2021. The primary components of other income (expense), net are related to equity securities valuations and adjustments, equity warrant valuations, and foreign currency. Included in other income (expense), net in 2021 is a valuation gain of $11.8 billion from our equity securities of Rivian Automotive, Inc., which completed an initial public offering in November 2021.Income TaxesOur effective tax rate is subject to significant variation due to several factors, including variability in our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, intercompany transactions, the applicability of special tax regimes, changes in how we do business, acquisitions, investments, audit-related developments, changes in our stock price, changes in our deferred tax assets and liabilities and their valuation, foreign currency gains (losses), changes in statutes, regulations, case law, and administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions, and relative changes of expenses or losses for which tax benefits are not recognized. In addition, we record valuation allowances against deferred tax assets when there is uncertainty about our ability to generate future income in relevant jurisdictions. We recorded a provision for income taxes of $2.9 billion and $4.8 billion in 2020 and 2021. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 9 — Income Taxes” for additional information.Non-GAAP Financial MeasuresRegulation G, Conditions for Use of Non-GAAP Financial Measures, and other SEC regulations define and prescribe the conditions for use of certain non-GAAP financial information. Our measures of free cash flows and the effect of foreign exchange rates on our consolidated statements of operations meet the definition of non-GAAP financial measures. We provide multiple measures of free cash flows because we believe these measures provide additional perspective on the impact of acquiring property and equipment with cash and through finance leases and financing obligations.27Table of ContentsFree Cash FlowFree cash flow is cash flow from operations reduced by “Purchases of property and equipment, net of proceeds from sales and incentives.” The following is a reconciliation of free cash flow to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for 2020 and 2021 (in millions): Year Ended December 31, 20202021Net cash provided by (used in) operating activities$66,064 $46,327 Purchases of property and equipment, net of proceeds from sales and incentives(35,044)(55,396)Free cash flow$31,020 $(9,069)Net cash provided by (used in) investing activities$(59,611)$(58,154)Net cash provided by (used in) financing activities$(1,104)$6,291 Free Cash Flow Less Principal Repayments of Finance Leases and Financing ObligationsFree cash flow less principal repayments of finance leases and financing obligations is free cash flow reduced by “Principal repayments of finance leases” and “Principal repayments of financing obligations.” Principal repayments of finance leases and financing obligations approximates the actual payments of cash for our finance leases and financing obligations. The following is a reconciliation of free cash flow less principal repayments of finance leases and financing obligations to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for 2020 and 2021 (in millions): Year Ended December 31, 20202021Net cash provided by (used in) operating activities$66,064 $46,327 Purchases of property and equipment, net of proceeds from sales and incentives(35,044)(55,396)Free cash flow31,020 (9,069)Principal repayments of finance leases(10,642)(11,163)Principal repayments of financing obligations(53)(162)Free cash flow less principal repayments of finance leases and financing obligations$20,325 $(20,394)Net cash provided by (used in) investing activities$(59,611)$(58,154)Net cash provided by (used in) financing activities$(1,104)$6,291 28Table of ContentsFree Cash Flow Less Equipment Finance Leases and Principal Repayments of All Other Finance Leases and Financing Obligations Free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations is free cash flow reduced by equipment acquired under finance leases, which is included in “Property and equipment acquired under finance leases,” principal repayments of all other finance lease liabilities, which is included in “Principal repayments of finance leases,” and “Principal repayments of financing obligations.” All other finance lease liabilities and financing obligations consists of property. In this measure, equipment acquired under finance leases is reflected as if these assets had been purchased with cash, which is not the case as these assets have been leased. The following is a reconciliation of free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for 2020 and 2021 (in millions): Year Ended December 31, 20202021Net cash provided by (used in) operating activities$66,064 $46,327 Purchases of property and equipment, net of proceeds from sales and incentives(35,044)(55,396)Free cash flow31,020 (9,069)Equipment acquired under finance leases (1)(9,104)(4,422)Principal repayments of all other finance leases (2)(427)(687)Principal repayments of financing obligations(53)(162)Free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations$21,436 $(14,340)Net cash provided by (used in) investing activities$(59,611)$(58,154)Net cash provided by (used in) financing activities$(1,104)$6,291 ___________________(1)For the year ended December 31, 2020 and 2021, this amount relates to equipment included in “Property and equipment acquired under finance leases” of $11,588 million and $7,061 million. (2)For the year ended December 31, 2020 and 2021, this amount relates to property included in “Principal repayments of finance leases” of $10,642 million and $11,163 million. All of these free cash flows measures have limitations as they omit certain components of the overall cash flow statement and do not represent the residual cash flow available for discretionary expenditures. For example, these measures of free cash flows do not incorporate the portion of payments representing principal reductions of debt or cash payments for business acquisitions. Additionally, our mix of property and equipment acquisitions with cash or other financing options may change over time. Therefore, we believe it is important to view free cash flows measures only as a complement to our entire consolidated statements of cash flows.Effect of Foreign Exchange RatesInformation regarding the effect of foreign exchange rates, versus the U.S. Dollar, on our net sales, operating expenses, and operating income is provided to show reported period operating results had the foreign exchange rates remained the same as those in effect in the comparable prior year period. The effect on our net sales, operating expenses, and operating income from changes in our foreign exchange rates versus the U.S. Dollar is as follows (in millions): Year Ended December 31, 2020Year Ended December 31, 2021 AsReportedExchangeRateEffect (1)At PriorYearRates (2)AsReportedExchangeRateEffect (1)At PriorYearRates (2)Net sales$386,064 $(1,438)$384,626 $469,822 $(3,804)$466,018 Operating expenses363,165 (989)362,176 444,943 (3,653)441,290 Operating income22,899 (449)22,450 24,879 (151)24,728 ___________________(1)Represents the change in reported amounts resulting from changes in foreign exchange rates from those in effect in the comparable prior year period for operating results.(2)Represents the outcome that would have resulted had foreign exchange rates in the reported period been the same as those in effect in the comparable prior year period for operating results.29Table of ContentsGuidanceWe provided guidance on February 3, 2022, in our earnings release furnished on Form 8-K as set forth below. These forward-looking statements reflect Amazon.com’s expectations as of February 3, 2022, and are subject to substantial uncertainty. Our results are inherently unpredictable and may be materially affected by many factors, such as uncertainty regarding the impacts of the COVID-19 pandemic, fluctuations in foreign exchange rates, changes in global economic conditions and customer demand and spending, inflation, labor market and global supply chain constraints, world events, the rate of growth of the Internet, online commerce, and cloud services, as well as those outlined in Item 1A of Part I, “Risk Factors.” This guidance reflects our estimates as of February 3, 2022 regarding the impacts of the COVID-19 pandemic on our operations as well as the effect of other factors discussed above. First Quarter 2022 Guidance•Net sales are expected to be between $112.0 billion and $117.0 billion, or to grow between 3% and 8% compared with first quarter 2021. This guidance anticipates an unfavorable impact of approximately 150 basis points from foreign exchange rates. •Operating income is expected to be between $3.0 billion and $6.0 billion, compared with $8.9 billion in first quarter 2021. This guidance includes approximately $1.0 billion lower depreciation expense due to increases in the estimated useful lives of our servers and networking equipment beginning on January 1, 2022. •This guidance assumes, among other things, that no additional business acquisitions, restructurings, or legal settlements are concluded.30Table of ContentsItem 7A.Quantitative and Qualitative Disclosures About Market RiskWe are exposed to market risk for the effect of interest rate changes, foreign currency fluctuations, and changes in the market values of our investments. Information relating to quantitative and qualitative disclosures about market risk is set forth below and in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”Interest Rate RiskOur exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our long-term debt. Our long-term debt is carried at amortized cost and fluctuations in interest rates do not impact our consolidated financial statements. However, the fair value of our debt, which pays interest at a fixed rate, will generally fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest. We generally invest our excess cash in AAA-rated money market funds and investment grade short- to intermediate-term fixed income securities. Fixed income securities may have their fair market value adversely affected due to a rise in interest rates, and we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. The following table provides information about our cash equivalents and marketable fixed income securities, including principal cash flows by expected maturity and the related weighted-average interest rates as of December 31, 2021 (in millions, except percentages):20222023202420252026ThereafterTotalEstimated Fair Value as of December 31, 2021Money market funds$20,312 $— $— $— $— $— $20,312 $20,312 Weighted average interest rate(0.02)%— %— %— %— %— %(0.02)%Corporate debt securities18,063 6,253 8,231 2,044 921 — 35,512 35,764 Weighted average interest rate0.34 %1.02 %1.02 %1.35 %1.22 %— %0.70 %U.S. government and agency securities1,584 837 561 672 558 61 4,273 4,300 Weighted average interest rate0.30 %0.39 %1.00 %1.14 %0.99 %1.01 %0.65 %Asset-backed securities1,237 1,966 1,722 959 312 500 6,696 6,738 Weighted average interest rate1.19 %0.93 %1.28 %1.27 %0.99 %1.14 %1.14 %Foreign government and agency securities105 52 22 — — — 179 181 Weighted average interest rate0.97 %1.12 %0.74 %— %— %— %0.98 %Other fixed income securities142 264 222 57 — — 685 686 Weighted average interest rate0.65 %0.93 %0.68 %1.35 %— %— %0.83 %$41,443 $9,372 $10,758 $3,732 $1,791 $561 $67,657 Cash equivalents and marketable fixed income securities$67,981 As of December 31, 2021, we had long-term debt with a face value of $50.6 billion, including the current portion, primarily consisting of fixed rate unsecured senior notes. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 6 — Debt” for additional information.31Table of ContentsForeign Exchange RiskDuring 2021, net sales from our International segment accounted for 27% of our consolidated revenues. Net sales and related expenses generated from our internationally-focused stores, including within Canada and Mexico (which are included in our North America segment), are primarily denominated in the functional currencies of the corresponding stores and primarily include Euros, British Pounds, and Japanese Yen. The results of operations of, and certain of our intercompany balances associated with, our internationally-focused stores and AWS are exposed to foreign exchange rate fluctuations. Upon consolidation, as foreign exchange rates vary, net sales and other operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances. For example, as a result of fluctuations in foreign exchange rates throughout the year compared to rates in effect the prior year, International segment net sales increased by $3.0 billion in comparison with the prior year.We have foreign exchange risk related to foreign-denominated cash, cash equivalents, and marketable securities (“foreign funds”). Based on the balance of foreign funds as of December 31, 2021, of $22.7 billion, an assumed 5%, 10%, and 20% adverse change to foreign exchange would result in fair value declines of $1.1 billion, $2.3 billion, and $4.5 billion. Fluctuations in fair value are recorded in “Accumulated other comprehensive income (loss),” a separate component of stockholders’ equity. Equity securities with readily determinable fair values are included in “Marketable securities” on our consolidated balance sheets and are measured at fair value with changes recognized in net income.We have foreign exchange risk related to our intercompany balances denominated in various foreign currencies. Based on the intercompany balances as of December 31, 2021, an assumed 5%, 10%, and 20% adverse change to foreign exchange rates would result in losses of $285 million, $575 million, and $1.1 billion, recorded to “Other income (expense), net.”See Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Effect of Foreign Exchange Rates” for additional information on the effect on reported results of changes in foreign exchange rates.Equity Investment RiskAs of December 31, 2021, our recorded value in equity and equity warrant investments in public and private companies was $22.3 billion. Our equity and equity warrant investments in publicly traded companies, which primarily relate to Rivian Automotive, Inc., represent $20.3 billion of our investments as of December 31, 2021, and are recorded at fair value, which is subject to market price volatility. We record our equity warrant investments in private companies at fair value and adjust our equity investments in private companies for observable price changes or impairments. Valuations of private companies are inherently more complex due to the lack of readily available market data. The current global economic climate provides additional uncertainty. As such, we believe that market sensitivities are not practicable. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business, Accounting Policies, and Supplemental Disclosures” for additional information.32Table of ContentsItem 8.Financial Statements and Supplementary DataINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Ernst & Young LLP, Independent Registered Public Accounting Firm (PCAOB ID: 42)34Consolidated Statements of Cash Flows36Consolidated Statements of Operations37Consolidated Statements of Comprehensive Income38Consolidated Balance Sheets39Consolidated Statements of Stockholders’ Equity40Notes to Consolidated Financial Statements4133Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and ShareholdersAmazon.com, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Amazon.com, Inc. (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 3, 2022 expressed an unqualified opinion thereon.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.Critical Audit MatterThe critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.34Table of ContentsIncome TaxesDescription ofthe MatterAs discussed in Notes 1 and 9 of the consolidated financial statements, the Company is subject to income taxes in the U.S. and numerous foreign jurisdictions and during the ordinary course of business, there are many tax positions for which the ultimate tax determination is uncertain. As a result, significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. The Company uses significant judgment in (1) determining whether a tax position’s technical merits are more likely than not to be sustained and (2) measuring the amount of tax benefit that qualifies for recognition.Auditing the recognition and measurement of the Company’s tax contingencies was challenging because the evaluation of whether a tax position is more likely than not to be sustained and the measurement of the benefit of various tax positions can be complex and involves significant auditor judgment. Management’s evaluation of tax positions may involve the use of valuation methodologies and assumptions, including forecasts of income or loss, and is based on interpretations of tax laws and legal rulings.How We Addressed the Matter in Our AuditWe tested controls over the Company’s process to assess the technical merits of its tax contingencies, including controls over the assessment as to whether a tax position is more likely than not to be sustained; measurement of the benefit of its tax positions, including the selection of valuation methodologies and assumptions; determination of forecasts of income or loss; and development of the related disclosures. We involved our international tax, transfer pricing, and research and development tax professionals in assessing the technical merits of certain of the Company’s tax positions. Depending on the nature of the specific tax position and, as applicable, developments with the relevant tax authorities relating thereto, our procedures included obtaining and examining the Company’s analysis including the Company’s correspondence with such tax authorities and evaluating the underlying facts upon which the tax positions are based. We used our knowledge of and experience with international, transfer pricing, and other income tax laws by the relevant income tax authorities to evaluate the Company’s accounting for its tax contingencies. We evaluated developments in the applicable regulatory environments to assess potential effects on the Company’s positions, including recent decisions in relevant court cases. We analyzed the appropriateness of the Company’s valuation methodologies and assumptions, including the determination of forecasts of income or loss, and the accuracy of the Company’s calculations and data used to determine the amount of tax benefits to recognize. We have also evaluated the Company’s income tax disclosures in relation to these matters./s/ Ernst & Young LLPWe have served as the Company’s auditor since 1996. Seattle, WashingtonFebruary 3, 2022 35Table of ContentsAMAZON.COM, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in millions) Year Ended December 31, 201920202021CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD$32,173 $36,410 $42,377 OPERATING ACTIVITIES:Net income11,588 21,331 33,364 Adjustments to reconcile net income to net cash from operating activities:Depreciation and amortization of property and equipment and capitalized content costs, operating lease assets, and other21,789 25,251 34,296 Stock-based compensation6,864 9,208 12,757 Other operating expense (income), net164 (71)137 Other expense (income), net(249)(2,582)(14,306)Deferred income taxes796 (554)(310)Changes in operating assets and liabilities:Inventories(3,278)(2,849)(9,487)Accounts receivable, net and other(7,681)(8,169)(18,163)Accounts payable8,193 17,480 3,602 Accrued expenses and other(1,383)5,754 2,123 Unearned revenue1,711 1,265 2,314 Net cash provided by (used in) operating activities38,514 66,064 46,327 INVESTING ACTIVITIES:Purchases of property and equipment(16,861)(40,140)(61,053)Proceeds from property and equipment sales and incentives4,172 5,096 5,657 Acquisitions, net of cash acquired, and other(2,461)(2,325)(1,985)Sales and maturities of marketable securities22,681 50,237 59,384 Purchases of marketable securities(31,812)(72,479)(60,157)Net cash provided by (used in) investing activities(24,281)(59,611)(58,154)FINANCING ACTIVITIES:Proceeds from short-term debt, and other1,402 6,796 7,956 Repayments of short-term debt, and other(1,518)(6,177)(7,753)Proceeds from long-term debt871 10,525 19,003 Repayments of long-term debt(1,166)(1,553)(1,590)Principal repayments of finance leases(9,628)(10,642)(11,163)Principal repayments of financing obligations(27)(53)(162)Net cash provided by (used in) financing activities(10,066)(1,104)6,291 Foreign currency effect on cash, cash equivalents, and restricted cash70 618 (364)Net increase (decrease) in cash, cash equivalents, and restricted cash4,237 5,967 (5,900)CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD$36,410 $42,377 $36,477 See accompanying notes to consolidated financial statements.36Table of ContentsAMAZON.COM, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in millions, except per share data) Year Ended December 31, 201920202021Net product sales$160,408 $215,915 $241,787 Net service sales120,114 170,149 228,035 Total net sales280,522 386,064 469,822 Operating expenses:Cost of sales165,536 233,307 272,344 Fulfillment40,232 58,517 75,111 Technology and content35,931 42,740 56,052 Marketing18,878 22,008 32,551 General and administrative5,203 6,668 8,823 Other operating expense (income), net201 (75)62 Total operating expenses265,981 363,165 444,943 Operating income14,541 22,899 24,879 Interest income832 555 448 Interest expense(1,600)(1,647)(1,809)Other income (expense), net203 2,371 14,633 Total non-operating income (expense)(565)1,279 13,272 Income before income taxes13,976 24,178 38,151 Provision for income taxes(2,374)(2,863)(4,791)Equity-method investment activity, net of tax(14)16 4 Net income$11,588 $21,331 $33,364 Basic earnings per share$23.46 $42.64 $65.96 Diluted earnings per share$23.01 $41.83 $64.81 Weighted-average shares used in computation of earnings per share:Basic494 500 506 Diluted504 510 515 See accompanying notes to consolidated financial statements.37Table of ContentsAMAZON.COM, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in millions) Year Ended December 31, 201920202021Net income$11,588 $21,331 $33,364 Other comprehensive income (loss):Net change in foreign currency translation adjustments:Foreign currency translation adjustments, net of tax of $(5), $(36), and $4778 561 (819)Reclassification adjustment for foreign currency translation included in “Other operating expense (income), net,” net of tax of $29, $0, and $0(108)— — Net foreign currency translation adjustments(30)561 (819)Net change in unrealized gains (losses) on available-for-sale debt securities:Unrealized gains (losses), net of tax of $(12), $(83), and $7283 273 (343)Reclassification adjustment for losses (gains) included in “Other income (expense), net,” net of tax of $0, $8, and $13(4)(28)(34)Net unrealized gains (losses) on available-for-sale debt securities79 245 (377)Total other comprehensive income (loss)49 806 (1,196)Comprehensive income$11,637 $22,137 $32,168 See accompanying notes to consolidated financial statements.38Table of ContentsAMAZON.COM, INC.CONSOLIDATED BALANCE SHEETS(in millions, except per share data)December 31, 20202021ASSETSCurrent assets:Cash and cash equivalents$42,122 $36,220 Marketable securities42,274 59,829 Inventories23,795 32,640 Accounts receivable, net and other24,542 32,891 Total current assets132,733 161,580 Property and equipment, net113,114 160,281 Operating leases37,553 56,082 Goodwill15,017 15,371 Other assets22,778 27,235 Total assets$321,195 $420,549 LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:Accounts payable$72,539 $78,664 Accrued expenses and other44,138 51,775 Unearned revenue9,708 11,827 Total current liabilities126,385 142,266 Long-term lease liabilities52,573 67,651 Long-term debt31,816 48,744 Other long-term liabilities17,017 23,643 Commitments and contingencies (Note 7)Stockholders’ equity:Preferred stock, $0.01 par value:Authorized shares — 500Issued and outstanding shares — none— — Common stock, $0.01 par value:Authorized shares — 5,000Issued shares — 527 and 532Outstanding shares — 503 and 5095 5 Treasury stock, at cost(1,837)(1,837)Additional paid-in capital42,865 55,538 Accumulated other comprehensive income (loss)(180)(1,376)Retained earnings52,551 85,915 Total stockholders’ equity93,404 138,245 Total liabilities and stockholders’ equity$321,195 $420,549 See accompanying notes to consolidated financial statements.39Table of ContentsAMAZON.COM, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in millions) Common Stock SharesAmountTreasuryStockAdditionalPaid-InCapitalAccumulated Other Comprehensive Income (Loss)RetainedEarningsTotalStockholders’EquityBalance as of January 1, 2019491 $5 $(1,837)$26,791 $(1,035)$19,625 $43,549 Cumulative effect of change in accounting principle related to leases— — — — — 7 7 Net income— — — — — 11,588 11,588 Other comprehensive income (loss)— — — — 49 — 49 Stock-based compensation and issuance of employee benefit plan stock7 — — 6,867 — — 6,867 Balance as of December 31, 2019498 5 (1,837)33,658 (986)31,220 62,060 Net income— — — — — 21,331 21,331 Other comprehensive income (loss)— — — — 806 — 806 Stock-based compensation and issuance of employee benefit plan stock5 — — 9,207 — — 9,207 Balance as of December 31, 2020503 5 (1,837)42,865 (180)52,551 93,404 Net income— — — — — 33,364 33,364 Other comprehensive income (loss)— — — — (1,196)— (1,196)Stock-based compensation and issuance of employee benefit plan stock6 — — 12,673 — — 12,673 Balance as of December 31, 2021509 $5 $(1,837)$55,538 $(1,376)$85,915 $138,245 See accompanying notes to consolidated financial statements.40Table of ContentsAMAZON.COM, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1 — DESCRIPTION OF BUSINESS, ACCOUNTING POLICIES, AND SUPPLEMENTAL DISCLOSURESDescription of BusinessWe seek to be Earth’s most customer-centric company. In each of our segments, we serve our primary customer sets, consisting of consumers, sellers, developers, enterprises, content creators, advertisers, and employees. We serve consumers through our online and physical stores and focus on selection, price, and convenience. We offer programs that enable sellers to grow their businesses, sell their products in our stores, and fulfill orders through us, and programs that allow authors, musicians, filmmakers, Twitch streamers, skill and app developers, and others to publish and sell content. We serve developers and enterprises of all sizes through AWS, which offers a broad set of on-demand technology services, including compute, storage, database, analytics, and machine learning, and other services. We also manufacture and sell electronic devices. In addition, we provide advertising services to sellers, vendors, publishers, authors, and others, through programs such as sponsored ads, display, and video advertising.We have organized our operations into three segments: North America, International, and AWS. See “Note 10 — Segment Information.” Principles of ConsolidationThe consolidated financial statements include the accounts of Amazon.com, Inc. and its consolidated entities (collectively, the “Company”), consisting of its wholly-owned subsidiaries and those entities in which we have a variable interest and of which we are the primary beneficiary, including certain entities in India and certain entities that support our seller lending financing activities. Intercompany balances and transactions between consolidated entities are eliminated.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, income taxes, useful lives of equipment, commitments and contingencies, valuation of acquired intangibles and goodwill, stock-based compensation forfeiture rates, vendor funding, inventory valuation, collectability of receivables, and valuation and impairment of investments. Actual results could differ materially from these estimates. For example, in Q4 2021 we completed a useful life study for our servers and networking equipment and are increasing the useful lives from four years to five years for servers and from five years to six years for networking equipment in January 2022, which, based on servers and networking equipment that are included in “Property and equipment, net” as of December 31, 2021, will have an anticipated impact to our 2022 operating income of $3.1 billion. We had previously increased the useful life of our servers from three years to four years in January 2020.Supplemental Cash Flow InformationThe following table shows supplemental cash flow information (in millions):Year Ended December 31,201920202021SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest on debt$875 $916 $1,098 Cash paid for operating leases$3,361 $4,475 $6,722 Cash paid for interest on finance leases$647 $612 $521 Cash paid for interest on financing obligations$39 $102 $153 Cash paid for income taxes, net of refunds$881 $1,713 $3,688 Assets acquired under operating leases$7,870 $16,217 $25,369 Property and equipment acquired under finance leases$13,723 $11,588 $7,061 Property and equipment acquired under build-to-suit lease arrangements$1,362 $2,267 $5,616 41Table of ContentsEarnings Per ShareBasic 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): Year Ended December 31, 201920202021Shares used in computation of basic earnings per share494 500 506 Total dilutive effect of outstanding stock awards10 10 9 Shares used in computation of diluted earnings per share504 510 515 RevenueRevenue 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 in our stores, 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 digital video, audiobooks, digital music, e-books, and other non-AWS subscription services. Prime memberships provide our customers with access to an evolving suite of benefits that represent a single stand-ready obligation. Subscriptions are paid for at the time of or in advance of delivering the services. Revenue from such arrangements is recognized over the subscription period.Advertising services - We provide advertising services to sellers, vendors, publishers, authors, and others, through programs such as sponsored ads, display, and video advertising. Revenue is recognized as ads are delivered based on the number of clicks or impressions.AWS - Our AWS arrangements include global sales of compute, storage, database, and other services. Revenue is allocated to services using stand-alone selling prices and is primarily recognized when the customer uses these services, based on the quantity of services rendered, such as compute or storage capacity delivered on-demand. Certain services, including compute and database, are also offered as a fixed quantity over a specified term, for which revenue is recognized ratably. Sales commissions we pay in connection with contracts that exceed one year are capitalized and amortized over the contract term.Other - Other revenue includes sales related to various other service offerings, which are recognized as or when those services are performed.Return Allowances Return allowances, which reduce revenue and cost of sales, are estimated using historical experience. Liabilities for return allowances are included in “Accrued expenses and other” and were $712 million, $859 million, and $1.0 billion as of December 31, 2019, 2020, and 2021. Additions to the allowance were $2.5 billion, $3.5 billion, and $5.1 billion and deductions from the allowance were $2.5 billion, $3.6 billion, and $4.9 billion in 2019, 2020, and 2021. Included in “Inventories” on our consolidated balance sheets are assets totaling $629 million, $852 million, and $882 million as of December 31, 2019, 2020, and 2021, for the rights to recover products from customers associated with our liabilities for return allowances. 42Table of ContentsCost of SalesCost of sales primarily consists of the purchase price of consumer products, inbound and outbound shipping costs, including costs related to sortation and delivery centers and where we are the transportation service provider, and digital media content costs where we record revenue gross, including video and music. Shipping costs to receive products from our suppliers are included in our inventory, and recognized as cost of sales upon sale of products to our customers. Payment processing and related transaction costs, including those associated with seller transactions, are classified in “Fulfillment” on our consolidated statements of operations.Vendor AgreementsWe have agreements with our vendors to receive consideration primarily for cooperative marketing efforts, promotions, incentives, and volume rebates. We generally consider these amounts received from vendors to be a reduction of the prices we pay for their goods, including property and equipment, or services, and are recorded as a reduction of the cost of inventory, cost of services, or cost of property and equipment. Volume rebates typically depend on reaching minimum purchase thresholds. We evaluate the likelihood of reaching purchase thresholds using past experience and current year forecasts. When volume rebates can be reasonably estimated, we record a portion of the rebate as we make progress towards the purchase threshold.FulfillmentFulfillment costs primarily consist of those costs incurred in operating and staffing our North America and International segments’ fulfillment centers, physical stores, and customer service centers, including facilities and equipment expenses, such as depreciation and amortization, and rent; costs attributable to buying, receiving, inspecting, and warehousing inventories; picking, packaging, and preparing customer orders for shipment; payment processing and related transaction costs, including costs associated with our guarantee for certain seller transactions; responding to inquiries from customers; and supply chain management for our manufactured electronic devices. Fulfillment costs also include amounts paid to third parties that assist us in fulfillment and customer service operations.Technology and ContentTechnology 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 stores, curation and display of products and services made available in our online stores, and infrastructure costs. Infrastructure costs include servers, networking equipment, and data center related depreciation and amortization, rent, utilities, and other expenses necessary to support AWS and other Amazon businesses. Collectively, these costs reflect the investments we make in order to offer a wide variety of products and services to our customers. Technology and content costs are generally expensed as incurred.MarketingMarketing costs primarily consist of advertising and payroll and related expenses for personnel engaged in marketing and selling activities, including sales commissions related to AWS. We pay commissions to third parties when their customer referrals result in sales. We also participate in cooperative advertising arrangements with certain of our vendors, and other third parties.Advertising and other promotional costs to market our products and services are expensed as incurred and were $11.0 billion, $10.9 billion, and $16.9 billion in 2019, 2020, and 2021. General and AdministrativeGeneral and administrative expenses primarily consist of costs for corporate functions, including payroll and related expenses; facilities and equipment expenses, such as depreciation and amortization expense and rent; and professional fees.Stock-Based CompensationCompensation cost for all equity-classified stock awards expected to vest is measured at fair value on the date of grant and recognized over the service period. The fair value of restricted stock units is determined based on the number of shares granted and the quoted price of our common stock. Such value is recognized as expense over the service period, net of estimated forfeitures, using the accelerated method. The estimated number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including historical forfeiture experience and employee level. Additionally, stock-based compensation includes stock 43Table of Contentsappreciation rights that are expected to settle in cash. These liability-classified awards are remeasured to fair value at the end of each reporting period until settlement or expiration. Other Operating Expense (Income), NetOther operating expense (income), net, consists primarily of a benefit from accelerated vesting of warrants to acquire equity of a vendor in Q4 2020, offset by a lease impairment in Q2 2020 and the amortization of intangible assets. Other Income (Expense), NetOther income (expense), net, is as follows (in millions):Year Ended December 31,201920202021Marketable equity securities valuation gains (losses)$7 $525 $11,526 Equity warrant valuation gains (losses)11 1,527 1,315 Upward adjustments relating to equity investments in private companies328 342 1,866 Foreign currency gains (losses)(20)35 (55)Other, net(123)(58)(19)Total other income (expense), net203 2,371 14,633 Included in other income (expense), net in 2021 is a marketable equity securities valuation gain of $11.8 billion from our equity investment in Rivian Automotive, Inc. (“Rivian”). Our investment in Rivian’s preferred stock was accounted for at cost, with adjustments for observable changes in prices or impairments, prior to Rivian’s initial public offering in November 2021, which resulted in the conversion of our preferred stock to Class A common stock. As of December 31, 2021, we held 158 million shares of Rivian’s Class A common stock, representing an approximate 18% ownership interest, and an approximate 16% voting interest. We determined that we have the ability to exercise significant influence over Rivian through our equity investment, our commercial arrangement for the purchase of electric vehicles, and one of our employees serving on Rivian’s board of directors. We elected the fair value option to account for our equity investment in Rivian, and the 2021 valuation gain is primarily comprised of the gain recognized upon the initial public offering, and also includes subsequent changes in fair value through December 31, 2021. As of December 31, 2021, our equity investment in Rivian had a fair value of $15.6 billion, which reflects a discount for lack of marketability until Q1 2022 of approximately $800 million due to regulatory sales restrictions, and is included in “Marketable securities” on our consolidated balance sheets. Summarized financial information of Rivian as disclosed in its SEC filings is as follows (in millions):Year Ended December 31, 2019Year Ended December 31, 2020Nine Months EndedSeptember 30, 2021Revenues$— $— $1 Gross profit— — (82)Loss from operations(409)(1,021)(1,766)Net loss(426)(1,018)(2,227)December 31, 2020September 30, 2021Total current assets$3,016 $5,345 Total assets4,602 8,488 Total current liabilities611 1,047 Total liabilities742 4,201 Contingently redeemable convertible preferred stock5,244 7,894 44Table of ContentsIncome TaxesIncome tax expense includes U.S. (federal and state) and foreign income taxes. Certain foreign subsidiary earnings and losses are subject to current U.S. taxation and the subsequent repatriation of those earnings is not subject to tax in the U.S. We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as net operating loss and tax credit carryforwards, and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered.Deferred tax assets represent amounts available to reduce income taxes payable in future periods. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent we believe they will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative loss experience and expectations of future earnings, capital gains and investment in such jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. We utilize a two-step approach to recognizing and measuring uncertain income tax positions (tax contingencies). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating our tax positions and estimating our tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. We include interest and penalties related to our tax contingencies in income tax expense.Fair Value of Financial InstrumentsFair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets.Level 2 — Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.Level 3 — Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.We measure the fair value of money market funds and certain marketable equity securities based on quoted prices in active markets for identical assets or liabilities. Other marketable securities were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. We did not hold significant amounts of marketable securities categorized as Level 3 assets as of December 31, 2020 and 2021.We hold equity warrants giving us the right to acquire stock of other companies. As of December 31, 2020 and 2021, these warrants had a fair value of $3.0 billion and $3.4 billion, and are recorded within “Other assets” on our consolidated balance sheets with gains and losses recognized in “Other income (expense), net” on our consolidated statements of operations. These warrants are primarily classified as Level 2 assets. Cash and Cash EquivalentsWe classify all highly liquid instruments with an original maturity of three months or less as cash equivalents.InventoriesInventories, consisting of products available for sale, are primarily accounted for using the first-in, first-out method, and are valued at the lower of cost and net realizable value. This valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category. The inventory valuation allowance, representing a write-down of inventory, was $2.3 billion and $2.6 billion as of December 31, 2020 and 2021.45Table of ContentsWe provide Fulfillment by Amazon services in connection with certain of our sellers’ programs. Third-party sellers maintain ownership of their inventory, regardless of whether fulfillment is provided by us or the third-party sellers, and therefore these products are not included in our inventories.We also purchase electronic device components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate supply, we enter into agreements with contract manufacturers and suppliers for certain electronic device components. A portion of our reported purchase commitments arising from these agreements consists of firm, non-cancellable commitments. These commitments are based on forecasted customer demand. If we reduce these commitments, we may incur additional costs. We also have firm, non-cancellable commitments for certain products offered in our Whole Foods Market stores. Accounts Receivable, Net and OtherIncluded in “Accounts receivable, net and other” on our consolidated balance sheets are amounts primarily related to customers, vendors, and sellers. As of December 31, 2020 and 2021, customer receivables, net, were $14.8 billion and $20.2 billion, vendor receivables, net, were $4.8 billion and $5.3 billion, and seller receivables, net, were $381 million and $1.0 billion. Seller receivables are amounts due from sellers related to our seller lending program, which provides funding to sellers primarily to procure inventory.We estimate losses on receivables based on expected losses, including our historical experience of actual losses. 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 $718 million, $1.1 billion, and $1.1 billion as of December 31, 2019, 2020, and 2021. Additions to the allowance were $1.0 billion, $1.4 billion, and $1.0 billion, and deductions to the allowance were $793 million, $1.0 billion, and $1.1 billion in 2019, 2020, and 2021.Software Development CostsWe incur software development costs related to products to be sold, leased, or marketed to external users, internal-use software, and our websites. Software development costs capitalized were not significant for the years presented. All other costs, including those related to design or maintenance, are expensed as incurred. Property and Equipment, NetProperty and equipment are stated at cost less accumulated depreciation and amortization. Incentives that we receive from property and equipment vendors are recorded as a reduction to our costs. Property includes buildings and land that we own, along with property we have acquired under build-to-suit lease arrangements when we have control over the building during the construction period and finance lease arrangements. Equipment includes assets such as servers and networking equipment, heavy equipment, and other fulfillment equipment. Depreciation and amortization is recorded on a straight-line basis over the estimated useful lives of the assets (generally the lesser of 40 years or the remaining life of the underlying building, three years prior to January 1, 2020 and four years subsequent to January 1, 2020 for our servers, five years for networking equipment, ten years for heavy equipment, and three to ten years for other fulfillment equipment). Depreciation and amortization expense is classified within the corresponding operating expense categories on our consolidated statements of operations. LeasesWe categorize leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those leases that allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance leases are recorded in “Property and equipment, net.” All other leases are categorized as operating leases. Our leases generally have terms that range from one to ten years for equipment and one to twenty years for property.Certain lease contracts include obligations to pay for other services, such as operations and maintenance. For leases of property, we account for these other services as a component of the lease. For substantially all other leases, the services are accounted for separately and we allocate payments to the lease and other services components based on estimated stand-alone prices.Lease liabilities are recognized at the present value of the fixed lease payments, reduced by landlord incentives using a discount rate based on similarly secured borrowings available to us. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives, plus any direct costs from executing the leases or lease prepayments reclassified from “Other assets” upon lease commencement. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.46Table of ContentsWhen we have the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and it is reasonably certain that we will exercise the option, we consider the option in determining the classification and measurement of the lease. Our leases may include variable payments based on measures that include changes in price indices, market interest rates, or the level of sales at a physical store, which are expensed as incurred. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease. Finance lease assets are amortized within operating expenses on a straight-line basis over the shorter of the estimated useful lives of the assets or, in the instance where title does not transfer at the end of the lease term, the lease term. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term.We establish assets and liabilities for the present value of estimated future costs to retire long-lived assets at the termination or expiration of a lease. Such assets are amortized over the lease period into operating expense, and the recorded liabilities are accreted to the future value of the estimated retirement costs.Financing ObligationsWe record assets and liabilities for estimated construction costs under build-to-suit lease arrangements when we have control over the building during the construction period. If we continue to control the building after the construction period, the arrangement is classified as a financing obligation instead of a lease. The building is depreciated over the shorter of its useful life or the term of the obligation. If we do not control the building after the construction period ends, the assets and liabilities for construction costs are derecognized, and we classify the lease as operating. Goodwill and Indefinite-Lived Intangible AssetsWe evaluate goodwill and indefinite-lived intangible assets for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. We may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying value and if so, we perform a quantitative test. We compare the carrying value of each reporting unit and indefinite-lived intangible asset to its estimated fair value and if the fair value is determined to be less than the carrying value, we recognize an impairment loss for the difference. We estimate the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on expected category expansion, pricing, market segment share, and general economic conditions.We completed the required annual impairment test of goodwill for all reporting units and indefinite-lived intangible assets as of April 1, 2021, resulting in no impairments. The fair value of our reporting units substantially exceeded their carrying value. There were no events that caused us to update our annual impairment test. See “Note 5 — Acquisitions, Goodwill, and Acquired Intangible Assets.”Other AssetsIncluded in “Other assets” on our consolidated balance sheets are amounts primarily related to video and music content, net of accumulated amortization; acquired intangible assets, net of accumulated amortization; equity warrant assets; long-term deferred tax assets; and certain equity investments.Digital Video and Music ContentWe obtain video content, inclusive of episodic television and movies, and music content for customers through licensing agreements that have a wide range of licensing provisions including both fixed and variable payment schedules. When the license fee for a specific video or music title is determinable or reasonably estimable and the content is available to us, we recognize an asset and a corresponding liability for the amounts owed. We reduce the liability as payments are made and we amortize the asset to “Cost of sales” on an accelerated basis, based on estimated usage or viewing patterns, or on a straight-line basis. If the licensing fee is not determinable or reasonably estimable, no asset or liability is recorded and licensing costs are expensed as incurred. We also develop original video content for which the production costs are capitalized and amortized to “Cost of sales” predominantly on an accelerated basis that follows the viewing patterns associated with the content. The weighted average remaining life of our capitalized video content is 2.6 years.Our produced and licensed video content is primarily monetized together as a unit, referred to as a film group, in each major geography where we offer Amazon Prime memberships. These film groups are evaluated for impairment whenever an event occurs or circumstances change indicating the fair value is less than the carrying value. The total capitalized costs of video, which is primarily released content, and music as of December 31, 2020 and 2021 were $6.8 billion and $10.7 billion. 47Table of ContentsTotal video and music expense was $11.0 billion and $13.0 billion for the year ended December 31, 2020 and 2021. Total video and music expense includes licensing and production costs associated with content offered within Amazon Prime memberships, and costs associated with digital subscriptions and sold or rented content.InvestmentsWe generally invest our excess cash in AAA-rated money market funds and investment grade short- to intermediate-term fixed income securities. Such investments are included in “Cash and cash equivalents” or “Marketable securities” on the accompanying consolidated balance sheets. Marketable fixed income securities are classified as available-for-sale and reported at fair value with unrealized gains and losses included in “Accumulated other comprehensive income (loss).” Each reporting period, we evaluate whether declines in fair value below carrying value are due to expected credit losses, as well as our ability and intent to hold the investment until a forecasted recovery occurs. Expected credit losses are recorded as an allowance through “Other income (expense), net” on our consolidated statements of operations. Equity investments in private companies for which we do not have the ability to exercise significant influence are accounted for at cost, with adjustments for observable changes in prices or impairments, and are classified as “Other assets” on our consolidated balance sheets with adjustments recognized in “Other income (expense), net” on our consolidated statements of operations. Each reporting period, we perform a qualitative assessment to evaluate whether the investment is impaired. Our assessment includes a review of recent operating results and trends, recent sales/acquisitions of the investee securities, and other publicly available data. If the investment is impaired, we write it down to its estimated fair value. As of December 31, 2020 and 2021, these investments had a carrying value of $2.7 billion and $603 million.Equity investments are accounted for using the equity method of accounting, or at fair value if we elect the fair value option, if the investment gives us the ability to exercise significant influence, but not control, over an investee. Equity-method investments are included within “Other assets” on our consolidated balance sheets. Our share of the earnings or losses as reported by equity-method investees, amortization of basis differences, related gains or losses, and impairments, if any, are recognized in “Equity-method investment activity, net of tax” on our consolidated statements of operations. Each reporting period, we evaluate whether declines in fair value below carrying value are other-than-temporary and if so, we write down the investment to its estimated fair value. Equity investments that have readily determinable fair values, including investments for which we have elected the fair value option, are included in “Marketable securities” on our consolidated balance sheets and measured at fair value with changes recognized in “Other income (expense), net” on our consolidated statements of operations. Long-Lived AssetsLong-lived assets, other than goodwill and indefinite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable.For long-lived assets used in operations, including lease assets, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value. Long-lived assets are considered held for sale when certain criteria are met, including when management has committed to a plan to sell the asset, the asset is available for sale in its immediate condition, and the sale is probable within one year of the reporting date. Assets held for sale are reported at the lower of cost or fair value less costs to sell. Assets held for sale were not significant as of December 31, 2020 and 2021.Accrued Expenses and OtherIncluded in “Accrued expenses and other” on our consolidated balance sheets are liabilities primarily related to leases and asset retirement obligations, tax-related liabilities, payroll and related expenses, unredeemed gift cards, customer liabilities, marketing liabilities, current debt, acquired digital media content, and other operating expenses.As of December 31, 2020 and 2021, our liabilities for payroll related expenses were $7.6 billion and $9.1 billion and our liabilities for unredeemed gift cards were $4.7 billion and $5.2 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.48Table of ContentsUnearned RevenueUnearned revenue is recorded when payments are received or due in advance of performing our service obligations and is recognized over the service period. Unearned revenue primarily relates to prepayments of AWS services and Amazon Prime memberships. Our total unearned revenue as of December 31, 2020 was $11.6 billion, of which $9.3 billion was recognized as revenue during the year ended December 31, 2021 and our total unearned revenue as of December 31, 2021 was $14.0 billion. Included in “Other long-term liabilities” on our consolidated balance sheets was $1.9 billion and $2.2 billion of unearned revenue as of December 31, 2020 and 2021. Additionally, we have performance obligations, primarily related to AWS, associated with commitments in customer contracts for future services that have not yet been recognized in our financial statements. For contracts with original terms that exceed one year, those commitments not yet recognized were $80.4 billion as of December 31, 2021. The weighted average remaining life of our long-term contracts is 3.8 years. However, the amount and timing of revenue recognition is largely driven by customer usage, which can extend beyond the original contractual term.Other Long-Term LiabilitiesIncluded in “Other long-term liabilities” on our consolidated balance sheets are liabilities primarily related to financing obligations, asset retirement obligations, deferred tax liabilities, unearned revenue, tax contingencies, and digital video and music content.Foreign CurrencyWe have internationally-focused stores for which the net sales generated, as well as most of the related expenses directly incurred from those operations, are denominated in local functional currencies. The functional currency of our subsidiaries that either operate or support these stores is generally the same as the local currency. Assets and liabilities of these subsidiaries are translated into U.S. Dollars at period-end foreign exchange rates, and revenues and expenses are translated at average rates prevailing throughout the period. Translation adjustments are included in “Accumulated other comprehensive income (loss),” a separate component of stockholders’ equity, and in the “Foreign currency effect on cash, cash equivalents, and restricted cash,” on our consolidated statements of cash flows. Transaction gains and losses including intercompany transactions denominated in a currency other than the functional currency of the entity involved are included in “Other income (expense), net” on our consolidated statements of operations. In connection with the settlement and remeasurement of intercompany balances, we recorded gains (losses) of $(95) million, $(118) million, and $19 million in 2019, 2020, and 2021.49Table of ContentsNote 2 — FINANCIAL INSTRUMENTSCash, Cash Equivalents, Restricted Cash, and Marketable SecuritiesAs of December 31, 2020 and 2021, our cash, cash equivalents, restricted cash, and marketable securities primarily consisted of cash, AAA-rated money market funds, U.S. and foreign government and agency securities, other investment grade securities, and marketable equity securities. Cash equivalents and marketable securities are recorded at fair value. The following table summarizes, by major security type, our cash, cash equivalents, restricted cash, and marketable securities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in millions): December 31, 2020 Cost orAmortizedCostGrossUnrealizedGainsGrossUnrealizedLossesTotalEstimatedFair ValueCash$10,063 $— $— $10,063 Level 1 securities:Money market funds27,430 — — 27,430 Equity securities (1)617 Level 2 securities:Foreign government and agency securities5,130 1 — 5,131 U.S. government and agency securities7,410 30 (1)7,439 Corporate debt securities29,684 305 (1)29,988 Asset-backed securities3,206 32 (3)3,235 Other fixed income securities701 9 — 710 Equity securities (1)40 $83,624 $377 $(5)$84,653 Less: Restricted cash, cash equivalents, and marketable securities (2)(257)Total cash, cash equivalents, and marketable securities$84,396 50Table of Contents December 31, 2021 Cost orAmortizedCostGrossUnrealizedGainsGrossUnrealizedLossesTotalEstimatedFair ValueCash$10,942 $— $— $10,942 Level 1 securities:Money market funds20,312 — — 20,312 Equity securities (1)1,646 Level 2 securities:Foreign government and agency securities181 — — 181 U.S. government and agency securities4,316 9 (25)4,300 Corporate debt securities35,810 75 (121)35,764 Asset-backed securities6,763 7 (32)6,738 Other fixed income securities688 2 (4)686 Equity securities (1)(3)15,740 $79,012 $93 $(182)$96,309 Less: Restricted cash, cash equivalents, and marketable securities (2)(260)Total cash, cash equivalents, and marketable securities$96,049 ___________________(1)The related unrealized gain (loss) recorded in “Other income (expense), net” was $4 million, $448 million, and $11.6 billion for the years ended December 31, 2019, 2020, and 2021. (2)We are required to pledge or otherwise restrict a portion of our cash, cash equivalents, and marketable fixed income securities primarily as collateral for real estate, amounts due to third-party sellers in certain jurisdictions, debt, and standby and trade letters of credit. We classify cash, cash equivalents, and marketable fixed income 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 7 — Commitments and Contingencies.”(3)Our equity investment in Rivian of $15.6 billion reflects a discount for lack of marketability until Q1 2022 due to regulatory sales restrictions. In addition, we are subject to contractual sales restrictions until Q2 2022.The following table summarizes gross gains and gross losses realized on sales of marketable fixed income securities (in millions):Year Ended December 31,201920202021Realized gains$11 $92 $85 Realized losses7 56 38 The following table summarizes the remaining contractual maturities of our cash equivalents and marketable fixed income securities as of December 31, 2021 (in millions):AmortizedCostEstimatedFair ValueDue within one year$39,070 $39,075 Due after one year through five years22,790 22,712 Due after five years through ten years2,124 2,121 Due after ten years4,086 4,073 Total$68,070 $67,981 Actual maturities may differ from the contractual maturities because borrowers may have certain prepayment conditions.51Table of ContentsConsolidated Statements of Cash Flows ReconciliationThe 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, 2020December 31, 2021Cash and cash equivalents$42,122 $36,220 Restricted cash included in accounts receivable, net and other233 242 Restricted cash included in other assets22 15 Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows$42,377 $36,477 Note 3 — PROPERTY AND EQUIPMENTProperty and equipment, at cost, consisted of the following (in millions): December 31, 20202021Gross property and equipment (1):Land and buildings$57,324 $81,104 Equipment97,224 128,683 Other assets3,772 4,118 Construction in progress15,228 24,895 Gross property and equipment173,548 238,800 Total accumulated depreciation and amortization (1)60,434 78,519 Total property and equipment, net$113,114 $160,281 __________________(1)Includes the original cost and accumulated depreciation of fully-depreciated assets.Depreciation and amortization expense on property and equipment was $15.1 billion, $16.2 billion, and $22.9 billion which includes amortization of property and equipment acquired under finance leases of $10.1 billion, $8.5 billion, and $9.9 billion for 2019, 2020, and 2021. 52Table of ContentsNote 4 — LEASESWe have entered into non-cancellable operating and finance leases for fulfillment, delivery, office, physical store, data center, and sortation facilities as well as server and networking equipment, vehicles, and aircraft. Gross assets acquired under finance leases, inclusive of those where title transfers at the end of the lease, are recorded in “Property and equipment, net” and were $68.1 billion and $72.2 billion as of December 31, 2020 and 2021. Accumulated amortization associated with finance leases was $36.5 billion and $43.4 billion as of December 31, 2020 and 2021. Lease cost recognized in our consolidated statements of operations is summarized as follows (in millions): Year Ended December 31,201920202021Operating lease cost$3,669 $5,019 $7,199 Finance lease cost:Amortization of lease assets10,094 8,452 9,857 Interest on lease liabilities695 617 473 Finance lease cost10,789 9,069 10,330 Variable lease cost966 1,238 1,556 Total lease cost$15,424 $15,326 $19,085 Other information about lease amounts recognized in our consolidated financial statements is as follows: December 31, 2020December 31, 2021 Weighted-average remaining lease term – operating leases10.7 years11.3 yearsWeighted-average remaining lease term – finance leases6.2 years8.1 yearsWeighted-average discount rate – operating leases2.5 %2.2 %Weighted-average discount rate – finance leases2.1 %2.0 %Our lease liabilities were as follows (in millions):December 31, 2020 Operating LeasesFinance LeasesTotalGross lease liabilities$44,833 $30,437 $75,270 Less: imputed interest(5,734)(2,003)(7,737)Present value of lease liabilities39,099 28,434 67,533 Less: current portion of lease liabilities(4,586)(10,374)(14,960)Total long-term lease liabilities$34,513 $18,060 $52,573 December 31, 2021 Operating LeasesFinance LeasesTotalGross lease liabilities$66,269 $25,866 $92,135 Less: imputed interest(7,939)(2,113)(10,052)Present value of lease liabilities58,330 23,753 82,083 Less: current portion of lease liabilities(6,349)(8,083)(14,432)Total long-term lease liabilities$51,981 $15,670 $67,651 Note 5 — ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS2019 Acquisition Activity During 2019, we acquired certain companies for an aggregate purchase price of $315 million, net of cash acquired. 53Table of Contents2020 Acquisition Activity During 2020, we acquired certain companies for an aggregate purchase price of $1.2 billion, net of cash acquired, of which $1.1 billion was capitalized to in-process research and development intangible assets (“IPR&D”).2021 Acquisition Activity During 2021, we acquired certain companies for an aggregate purchase price of $496 million, net of cash acquired. The primary reason for all acquisitions was to acquire technologies and know-how to enable Amazon to serve customers more effectively. Acquisition-related costs were expensed as incurred. Pro forma results of operations have not been presented because the effects of 2021 acquisitions, individually and in the aggregate, were not material to our consolidated results of operations.GoodwillThe 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 the acquired companies is generally not deductible for tax purposes. The following summarizes our goodwill activity in 2020 and 2021 by segment (in millions):NorthAmericaInternationalAWSConsolidatedGoodwill - January 1, 2020$12,264 $1,300 $1,190 $14,754 New acquisitions 204 6 2 212 Other adjustments (1)59 (18)10 51 Goodwill - December 31, 202012,527 1,288 1,202 15,017 New acquisitions230 60 76 366 Other adjustments (1)1 (21)8 (12)Goodwill - December 31, 2021$12,758 $1,327 $1,286 $15,371 ___________________(1)Primarily includes changes in foreign exchange rates.54Table of ContentsIntangible AssetsAcquired identifiable intangible assets are valued primarily by using discounted cash flows. These assets are included within “Other assets” on our consolidated balance sheets and consist of the following (in millions): December 31, 20202021 AcquiredIntangibles,Gross (1)AccumulatedAmortization (1)AcquiredIntangibles,NetAcquiredIntangibles,Gross (1)AccumulatedAmortization (1)AcquiredIntangibles,NetWeightedAverage LifeRemainingFinite-lived intangible assets (2): Marketing-related$2,289 $(445)$1,844 $2,286 $(548)$1,738 19.3Contract-based1,917 (418)1,499 2,327 (565)1,762 8.9Technology- and content-based948 (555)393 976 (610)366 3.1Customer-related179 (77)102 197 (103)94 2.9Total finite-lived intangible assets$5,333 $(1,495)$3,838 $5,786 $(1,826)$3,960 12.8IPR&D and other (3)$1,143 $1,143 $1,147 $1,147 Total acquired intangibles $6,476 $(1,495)$4,981 $6,933 $(1,826)$5,107 ___________________(1)Excludes the original cost and accumulated amortization of fully-amortized intangibles.(2)Finite-lived intangible assets have estimated useful lives of between one and twenty-five years, and are being amortized to operating expenses on a straight-line basis.(3)Intangible assets acquired in a business combination that are in-process and used in research and development activities are considered indefinite-lived until the completion or abandonment of the research and development efforts. Once the research and development efforts are completed, we determine the useful life and begin amortizing the assets.Amortization expense for acquired finite-lived intangibles was $565 million, $509 million, and $512 million in 2019, 2020, and 2021. Expected future amortization expense of acquired finite-lived intangible assets as of December 31, 2021 is as follows (in millions): Year Ended December 31,2022$528 2023452 2024378 2025318 2026290 Thereafter1,994 $3,960 55Table of ContentsNote 6 — DEBTAs of December 31, 2021, we had $49.7 billion of unsecured senior notes outstanding (the “Notes”). We issued $18.5 billion of Notes in May 2021, of which $1.0 billion was issued for green or social projects, such as projects related to clean transportation, renewable energy, sustainable buildings, affordable housing, or socioeconomic advancement and empowerment, and the remainder for general corporate purposes. We also had other long-term debt and borrowings under our credit facility of $924 million and $803 million as of December 31, 2020 and 2021. Our total long-term debt obligations are as follows (in millions):Maturities (1)Stated Interest RatesEffective Interest RatesDecember 31, 2020December 31, 20212012 Notes issuance of $3.0 billion20222.50%2.66%1,250 1,250 2014 Notes issuance of $6.0 billion2024 - 20443.80% - 4.95%3.90% - 5.11%5,000 4,000 2017 Notes issuance of $17.0 billion2023 - 20572.40% - 5.20%2.56% - 4.33%16,000 16,000 2020 Notes issuance of $10.0 billion2023 - 20600.40% - 2.70%0.56% - 2.77%10,000 10,000 2021 Notes issuance of $18.5 billion2023 - 20610.25% - 3.25%0.35% - 3.31%— 18,500 Credit Facility338 803 Other long-term debt586 — Total face value of long-term debt33,174 50,553 Unamortized discount and issuance costs, net(203)(318)Less current portion of long-term debt(1,155)(1,491)Long-term debt$31,816 $48,744 ___________________(1)The weighted-average remaining lives of the 2012, 2014, 2017, 2020 and 2021 Notes were 0.9, 13.6, 15.2, 17.7 and 14.3 years as of December 31, 2021. The combined weighted-average remaining life of the Notes was 14.9 years as of December 31, 2021.Interest on the Notes is payable semi-annually in arrears. We may redeem the Notes at any time in whole, or from time to time, in part at specified redemption prices. We are not subject to any financial covenants under the Notes. The estimated fair value of the Notes was approximately $37.7 billion and $53.3 billion as of December 31, 2020 and 2021, which is based on quoted prices for our debt as of those dates. We have a $1.0 billion secured revolving credit facility with a lender that is secured by certain seller receivables, which we increased from $740 million in November 2021 and may from time to time increase in the future subject to lender approval (the “Credit Facility”). The Credit Facility is available until October 2022, bears interest at the London interbank offered rate (“LIBOR”) plus 1.40%, and has a commitment fee of 0.50% on the undrawn portion. There were $338 million and $803 million of borrowings outstanding under the Credit Facility as of December 31, 2020 and 2021, which had a weighted-average interest rate of 3.0% and 2.7%, respectively. As of December 31, 2020 and 2021, we have pledged $398 million and $918 million of our cash and seller receivables as collateral for debt related to our Credit Facility. The estimated fair value of the Credit Facility, which is based on Level 2 inputs, approximated its carrying value as of December 31, 2020 and 2021.As of December 31, 2021, future principal payments for our total long-term debt were as follows (in millions):Year Ended December 31,2022$1,493 20233,560 20245,750 20252,250 20262,750 Thereafter34,750 $50,553 We have U.S. Dollar and Euro commercial paper programs (the “Commercial Paper Programs”) under which we may from time to time issue unsecured commercial paper up to a total of $10.0 billion (including up to €3.0 billion) at the date of issue, with individual maturities that may vary but will not exceed 397 days from the date of issue. There were $725 million of borrowings outstanding under the Commercial Paper Programs as of December 31, 2020 and 2021, which were included in “Accrued expenses and other” on our consolidated balance sheets and had a weighted-average effective interest rate, including 56Table of Contentsissuance costs, of 0.11% and 0.08%, respectively. We use the net proceeds from the issuance of commercial paper for general corporate purposes.We also have a $7.0 billion unsecured revolving credit facility with a syndicate of lenders with a term that extends to June 2023, which was amended in November 2021 to replace LIBOR as the applicable benchmark rate for loans denominated in certain foreign currencies (the “Credit Agreement”). 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 Credit Agreement is the applicable benchmark rate specified in the Credit Agreement 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, 2020 and 2021.We also utilize other short-term credit facilities for working capital purposes. These amounts are included in “Accrued expenses and other” on our consolidated balance sheets. In addition, we had $7.2 billion of unused letters of credit as of December 31, 2021. Note 7 — COMMITMENTS AND CONTINGENCIESCommitmentsThe following summarizes our principal contractual commitments, excluding open orders for purchases that support normal operations and are generally cancellable, as of December 31, 2021 (in millions): Year Ended December 31, 20222023202420252026ThereafterTotalLong-term debt principal and interest$2,841 $4,852 $7,014 $3,400 $3,829 $52,784 $74,720 Operating lease liabilities7,838 7,178 6,649 6,128 5,574 32,902 66,269 Finance lease liabilities, including interest8,278 4,772 2,278 1,355 1,220 7,963 25,866 Financing obligations, including interest (1)423 422 419 410 417 6,404 8,495 Leases not yet commenced1,206 1,902 2,094 2,145 2,237 21,571 31,155 Unconditional purchase obligations (2)5,969 5,910 5,158 4,213 4,159 9,493 34,902 Other commitments (3)(4)2,905 1,620 1,290 1,006 1,137 11,325 19,283 Total commitments$29,460 $26,656 $24,902 $18,657 $18,573 $142,442 $260,690 ___________________(1)Includes non-cancellable financing obligations for fulfillment, sortation, and data center facilities. Excluding interest, current financing obligations of $111 million and $196 million are recorded within “Accrued expenses and other” and $3.4 billion and $6.2 billion are recorded within “Other long-term liabilities” as of December 31, 2020 and 2021. The weighted-average remaining term of the financing obligations was 19.0 and 18.8 years and the weighted-average imputed interest rate was 3.8% and 3.2% as of December 31, 2020 and 2021.(2)Includes unconditional purchase obligations related to long-term agreements to acquire and license digital media content that are not reflected on the consolidated balance sheets and certain products offered in our Whole Foods Market stores. 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.(3)Includes the estimated timing and amounts of payments for rent and tenant improvements associated with build-to-suit lease arrangements that are under construction, asset retirement obligations, and liabilities associated with digital media content agreements with initial terms greater than one year.(4)Excludes approximately $3.2 billion of accrued tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period of payment, if any.In addition, in May 2021, we entered into an agreement to acquire MGM Holdings Inc. (“MGM”) for approximately $8.5 billion, including MGM’s debt, subject to customary closing conditions. We expect to fund this acquisition with cash on hand.SuppliersDuring 2021, no vendor accounted for 10% or more of our purchases. We generally do not have long-term contracts or arrangements with our vendors to guarantee the availability of merchandise, particular payment terms, or the extension of credit limits.57Table of ContentsOther ContingenciesWe are disputing claims and denials of refunds or credits related to various non-income taxes (such as sales, value added, consumption, service, and similar taxes), including in jurisdictions in which we already collect and remit these taxes. These non-income tax controversies typically relate to (i) the taxability of products and services, including cross-border intercompany transactions, (ii) collection and withholding on transactions with third parties, and (iii) the adequacy of compliance with reporting obligations, including evolving documentation requirements. Due to the inherent complexity and uncertainty of these matters and the judicial and regulatory processes in certain jurisdictions, the final outcome of any such controversies may be materially different from our expectations.Legal ProceedingsThe Company is involved from time to time in claims, proceedings, and litigation, including the following:In November 2015, Eolas Technologies, Inc. filed a complaint against Amazon.com, Inc. in the United States District Court for the Eastern District of Texas. The complaint alleges, among other things, that the use of “interactive features” on www.amazon.com, including “search suggestions and search results,” infringes U.S. Patent No. 9,195,507, entitled “Distributed Hypermedia Method and System for Automatically Invoking External Application Providing Interaction and Display of Embedded Objects Within A Hypermedia Document.” The complaint sought a judgment of infringement together with costs and attorneys’ fees. In February 2016, Eolas filed an amended complaint seeking, among other things, an unspecified amount of damages. In February 2017, Eolas alleged in its damages report that in the event of a finding of liability Amazon could be subject to $130-$250 million in damages. In April 2017, the case was transferred to the United States District Court for the Northern District of California. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter.In May 2018, Rensselaer Polytechnic Institute and CF Dynamic Advances LLC filed a complaint against Amazon.com, Inc. in the United States District Court for the Northern District of New York. The complaint alleges, among other things, that “Alexa Voice Software and Alexa enabled devices” infringe U.S. Patent No. 7,177,798, entitled “Natural Language Interface Using Constrained Intermediate Dictionary of Results.” The complaint seeks an injunction, an unspecified amount of damages, enhanced damages, an ongoing royalty, pre- and post-judgment interest, attorneys’ fees, and costs. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter.In December 2018, Kove IO, Inc. filed a complaint against Amazon Web Services, Inc. in the United States District Court for the Northern District of Illinois. The complaint alleges, among other things, that Amazon S3 and DynamoDB infringe U.S. Patent Nos. 7,814,170 and 7,103,640, both entitled “Network Distributed Tracking Wire Transfer Protocol,” and 7,233,978, entitled “Method And Apparatus For Managing Location Information In A Network Separate From The Data To Which The Location Information Pertains.” The complaint seeks an unspecified amount of damages, enhanced damages, attorneys’ fees, costs, interest, and injunctive relief. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter.Beginning in March 2020, with Frame-Wilson v. Amazon.com, Inc. filed in the United States District Court for the Western District of Washington, a number of cases have been filed in the U.S. and Canada alleging, among other things, price fixing arrangements between Amazon.com, Inc. and third-party sellers in Amazon’s stores, monopolization and attempted monopolization, and consumer protection and unjust enrichment claims. Some of the cases include allegations of several distinct purported classes, including consumers who purchased a product through Amazon’s stores and consumers who purchased a product offered by Amazon through another e-commerce retailer. The complaints seek billions of dollars of alleged actual damages, treble damages, punitive damages, and injunctive relief. Individuals have also initiated arbitrations based on substantially similar allegations. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in these matters.In November 2020, the European Commission issued a Statement of Objections alleging that Amazon uses data relating to our marketplace sellers in a manner that infringes EU competition rules. The Statement of Objections seeks to impose unspecified fines and remedial actions. We disagree with the preliminary assertions of the European Commission and intend to defend ourselves vigorously in this matter.In July 2021, the Luxembourg National Commission for Data Protection (the “CNPD”) issued a decision against Amazon Europe Core S.à r.l. claiming that Amazon’s processing of personal data did not comply with the EU General Data Protection Regulation. The decision imposes a fine of €746 million and corresponding practice revisions. We believe the CNPD’s decision to be without merit and intend to defend ourselves vigorously in this matter.In November 2021, Jawbone Innovations, LLC filed a complaint against Amazon.com, Inc. and Amazon.com Services, Inc. in the United States District Court for the Eastern District of Texas. The complaint alleges, among other things, that Amazon Echo smart speakers and displays, Fire TV Cube, and Echo Buds infringe U.S. Patent Nos. 7,246,058, entitled “Detecting Voiced and Unvoiced Speech Using Both Acoustic and Nonacoustic Sensors”; 8,019,091, entitled “Voice Activity 58Table of ContentsDetector (VAD)-Based Multiple-Microphone Acoustic Noise Suppression”; 8,280,072, entitled “Microphone Array with Rear Venting”; 8,321,213 and 8,326,611, both entitled “Acoustic Voice Activity Detection (AVAD) for Electronic Systems”; 8,467,543, entitled “Microphone and Voice Activity Detection (VAD) Configurations for Use with Communications Systems”; 10,779,080, entitled “Dual Omnidirectional Microphone Array (DOMA)”; and 11,122,357, entitled “Forming Virtual Microphone Arrays Using Dual Omnidirectional Microphone Array (DOMA).” The complaint seeks an unspecified amount of damages, enhanced damages, attorneys’ fees, costs, interest, and injunctive relief. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. In December 2021, the Italian Competition Authority (the “ICA”) issued a decision against Amazon Services Europe S.à r.l., Amazon Europe Core S.à r.l., Amazon EU S.à r.l., Amazon Italia Services S.r.l., and Amazon Italia Logistica S.r.l. claiming that certain of our marketplace and logistics practices in Italy infringed EU competition rules. The decision imposes a fine of €1.13 billion and remedial actions. We believe the ICA’s decision to be without merit and intend to defend ourselves vigorously in this matter. In January 2022, VideoLabs, Inc. and VL Collective IP LLC filed a complaint against Amazon.com, Inc. and Amazon Web Services, Inc. in the United States District Court for the Western District of Texas. The complaint alleges, among other things, that Amazon Prime Video, Amazon Glow, Amazon Echo Show, Fire TV, Fire TV Cube, Fire TV Stick, Fire Tablets, AWS Elemental MediaConvert, AWS Elemental Live, AWS Elemental Server, AWS Elemental MediaPackage, AWS Elemental MediaLive, and Amazon Elastic Transcoder infringe U.S. Patent Nos. 7,769,238 and 8,139,878, both entitled “Picture Coding Method and Picture Decoding Method”; and 7,970,059, entitled “Variable Length Coding Method and Variable Length Decoding Method”; that Amazon Prime Video, AWS Elemental MediaConvert, AWS Elemental Live, AWS Elemental Server, AWS Elemental MediaPackage, AWS Elemental MediaLive, Amazon Elastic Transcoder, and Amazon Kinesis Video Streams infringe U.S. Patent No. 8,605,794, entitled “Method for Synchronizing Content-Dependent Data Segments of Files”; that Amazon Echo Show, Amazon Echo Spot, Amazon Connect, Amazon Chime, and Amazon Kinesis Video Streams infringe U.S. Patent No. 7,266,682, entitled “Method and System for Transmitting Data from a Transmitter to a Receiver and Transmitter and Receiver Therefore”; that AWS Auto Scaling and Amazon EC2 Auto Scaling infringe U.S. Patent No. 6,880,156, entitled “Demand Responsive Method and Apparatus to Automatically Activate Spare Servers”; and that Amazon Prime Video infringes U.S. Patent No. 7,440,559, entitled “System and Associated Terminal, Method and Computer Program Product for Controlling the Flow of Content.” The complaint seeks an unspecified amount of damages, enhanced damages, attorneys’ fees, costs, interest, and injunctive relief. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter.In addition, we are regularly subject to claims, litigation, and other proceedings, including potential regulatory proceedings, involving patent and other intellectual property matters, taxes, labor and employment, competition and antitrust, privacy and data protection, consumer protection, commercial disputes, goods and services offered by us and by third parties, and other matters.The outcomes of our legal proceedings and other contingencies are inherently unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular period. We evaluate, on a regular basis, developments in our legal proceedings and other contingencies that could affect the amount of liability, including amounts in excess of any previous accruals and reasonably possible losses disclosed, and make adjustments and changes to our accruals and disclosures as appropriate. For the matters we disclose that do not include an estimate of the amount of loss or range of losses, such an estimate is not possible or is immaterial, and we may be unable to estimate the possible loss or range of losses that could potentially result from the application of non-monetary remedies. Until the final resolution of such matters, if any of our estimates and assumptions change or prove to have been incorrect, we may experience losses in excess of the amounts recorded, which could have a material effect on our business, consolidated financial position, results of operations, or cash flows.See also “Note 9 — Income Taxes.”Note 8 — STOCKHOLDERS’ EQUITYPreferred StockWe have authorized 500 million shares of $0.01 par value preferred stock. No preferred stock was outstanding for any year presented.Common StockCommon shares outstanding plus shares underlying outstanding stock awards totaled 512 million, 518 million, and 523 million, as of December 31, 2019, 2020, and 2021. These totals include all vested and unvested stock awards outstanding, including those awards we estimate will be forfeited.59Table of ContentsStock Repurchase ActivityIn 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 in 2019, 2020, or 2021. During the period from January 1, 2022 through February 2, 2022, we repurchased 0.5 million shares of our common stock for $1.3 billion. Stock Award PlansEmployees vest in restricted stock unit awards over the corresponding service term, generally between two and five years.Stock Award ActivityStock-based compensation expense is as follows (in millions):Year Ended December 31,201920202021Cost of sales$149 $283 $540 Fulfillment1,182 1,357 1,946 Technology and content3,725 5,061 6,645 Marketing1,135 1,710 2,530 General and administrative673 797 1,096 Total stock-based compensation expense (1)$6,864 $9,208 $12,757 ___________________(1)The related tax benefits were $1.4 billion, $1.9 billion, and $2.7 billion for 2019, 2020, and 2021. The following table summarizes our restricted stock unit activity (in millions):Number of UnitsWeighted AverageGrant-DateFair ValueOutstanding as of January 1, 201915.9 $1,024 Units granted6.7 1,808 Units vested(6.6)827 Units forfeited(1.7)1,223 Outstanding as of December 31, 201914.3 1,458 Units granted8.0 2,373 Units vested(5.8)1,239 Units forfeited(1.3)1,642 Outstanding as of December 31, 202015.2 2,004 Units granted6.3 3,348 Units vested(5.4)1,704 Units forfeited(2.1)2,314 Outstanding as of December 31, 202114.0 2,684 Scheduled vesting for outstanding restricted stock units as of December 31, 2021, is as follows (in millions): Year Ended 20222023202420252026ThereafterTotalScheduled vesting — restricted stock units5.4 5.2 2.2 0.9 0.1 0.2 14.0 As of December 31, 2021, there was $16.6 billion of net unrecognized compensation cost related to unvested stock-based compensation arrangements. This compensation is recognized on an accelerated basis with approximately half of the compensation expected to be expensed in the next twelve months, and has a remaining weighted-average recognition period of 1.1 years. The estimated forfeiture rate as of December 31, 2019, 2020, and 2021 was 27%. Changes in our estimates and assumptions relating to forfeitures may cause us to realize material changes in stock-based compensation expense in the future. During 2019, 2020, and 2021, the fair value of restricted stock units that vested was $11.7 billion, $15.5 billion, and $18.2 billion.60Table of ContentsCommon Stock Available for Future IssuanceAs of December 31, 2021, common stock available for future issuance to employees is 97 million shares.Note 9 — INCOME TAXESIn 2019, 2020, and 2021, we recorded net tax provisions of $2.4 billion, $2.9 billion, and $4.8 billion. Tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions are reducing our U.S. taxable income. Cash taxes paid, net of refunds, were $881 million, $1.7 billion, and $3.7 billion for 2019, 2020, and 2021.Certain foreign subsidiary earnings and losses are subject to current U.S. taxation and the subsequent repatriation of those earnings is not subject to tax in the U.S. The U.S. tax rules also provide for enhanced accelerated depreciation deductions by allowing the election of full expensing of qualified property, primarily equipment, through 2022. Our federal tax provision included the election of full expensing of qualified property for 2019 and a partial election for 2020 and 2021. The components of the provision for income taxes, net are as follows (in millions): Year Ended December 31,201920202021U.S. Federal:Current$162 $1,835 $2,129 Deferred914 (151)155 Total1,076 1,684 2,284 U.S. State:Current276 626 763 Deferred8 (190)(178)Total284 436 585 International:Current1,140 956 2,209 Deferred(126)(213)(287)Total1,014 743 1,922 Provision for income taxes, net$2,374 $2,863 $4,791 U.S. and international components of income before income taxes are as follows (in millions): Year Ended December 31, 201920202021U.S.$13,285 $20,219 $35,879 International691 3,959 2,272 Income before income taxes$13,976 $24,178 $38,151 61Table of ContentsThe items accounting for differences between income taxes computed at the federal statutory rate and the provision recorded for income taxes are as follows (in millions): Year Ended December 31, 201920202021Income taxes computed at the federal statutory rate$2,935 $5,078 $8,012 Effect of:Tax impact of foreign earnings and losses453 (538)(1,349)State taxes, net of federal benefits221 343 465 Tax credits(466)(639)(1,136)Stock-based compensation (1)(850)(1,107)(1,094)Foreign income deduction (2)(72)(372)(301)Other, net153 98 194 Total$2,374 $2,863 $4,791 ___________________(1)Includes non-deductible stock-based compensation and excess tax benefits from stock-based compensation. Our tax provision includes $1.4 billion, $1.8 billion, and $1.9 billion of excess tax benefits from stock-based compensation for 2019, 2020, and 2021.(2)U.S. companies are eligible for a deduction that lowers the effective tax rate on certain foreign income. This regime is referred to as the Foreign-Derived Intangible Income deduction (“FDII”).Our provision for income taxes in 2020 was higher than in 2019 primarily due to an increase in pretax income. This was partially offset by the impact of developments in our ongoing global tax controversies on taxes related to our foreign earnings and losses, an increase in excess tax benefits from stock-based compensation, and an increase in our foreign income deduction under FDII. In addition, our Luxembourg operations generated earnings in 2020 and utilized deferred tax assets previously subject to valuation allowances.Our provision for income taxes in 2021 was higher than in 2020 primarily due to an increase in pretax income. This was partially offset by an increase in U.S. federal research and development credits and the impact of the distribution of certain intangible assets from Luxembourg to the U.S. in Q4 2021, resulting in the utilization of $2.6 billion of Luxembourg deferred tax assets previously subject to a valuation allowance.We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts.62Table of ContentsDeferred income tax assets and liabilities are as follows (in millions): December 31, 20202021Deferred tax assets (1):Loss carryforwards U.S. - Federal/States245 228 Loss carryforwards - Foreign3,876 2,417 Accrued liabilities, reserves, and other expenses2,457 2,821 Stock-based compensation2,033 2,738 Depreciation and amortization1,886 941 Operating lease liabilities10,183 15,399 Other items559 603 Tax credits207 626 Total gross deferred tax assets21,446 25,773 Less valuation allowances (2)(5,803)(3,596)Deferred tax assets, net of valuation allowances15,643 22,177 Deferred tax liabilities:Depreciation and amortization(5,508)(3,562)Operating lease assets(9,539)(14,422)Assets held for investment(569)(4,019)Other items(893)(668)Net deferred tax assets (liabilities), net of valuation allowances$(866)$(494) ___________________(1)Deferred tax assets are presented after tax effects and net of tax contingencies.(2)Relates primarily to deferred tax assets that would only be realizable upon the generation of net income in certain foreign taxing jurisdictions.Our valuation allowances primarily relate to foreign deferred tax assets, including substantially all of our foreign net operating loss carryforwards as of December 31, 2021. Our foreign net operating loss carryforwards for income tax purposes as of December 31, 2021 were approximately $9.2 billion before tax effects and certain of these amounts are subject to annual limitations under applicable tax law. If not utilized, a portion of these losses will begin to expire in 2022. Tax ContingenciesWe are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.The reconciliation of our tax contingencies is as follows (in millions): December 31, 201920202021Gross tax contingencies – January 1$3,414 $3,923 $2,820 Gross increases to tax positions in prior periods216 88 403 Gross decreases to tax positions in prior periods(181)(465)(354)Gross increases to current period tax positions707 507 507 Settlements with tax authorities(207)(1,207)(60)Lapse of statute of limitations(26)(26)(74)Gross tax contingencies – December 31 (1)$3,923 $2,820 $3,242 ___________________(1)As of December 31, 2021, we had approximately $3.2 billion of accrued tax contingencies of which $1.6 billion, if fully recognized, would decrease our effective tax rate. 63Table of ContentsAs of December 31, 2020 and 2021, we had accrued interest and penalties, net of federal income tax benefit, related to tax contingencies of $83 million and $110 million. Interest and penalties, net of federal income tax benefit, recognized for the years ended December 31, 2019, 2020, and 2021 was $4 million, $(48) million, and $28 million.We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for the calendar year 2016 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. We resolved the audits of tax years 2007 through 2015 with the IRS for amounts that were materially consistent with our accrual.In October 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Luxembourg with regard to the corporate income tax paid by certain of our subsidiaries comply with European Union rules on state aid. On October 4, 2017, the European Commission announced its decision that determinations by the tax authorities in Luxembourg did not comply with European Union rules on state aid. Based on that decision the European Commission announced an estimated recovery amount of approximately €250 million, plus interest, for the period May 2006 through June 2014, and ordered Luxembourg tax authorities to calculate the actual amount of additional taxes subject to recovery. Luxembourg computed an initial recovery amount, consistent with the European Commission’s decision, which 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. On May 12, 2021, the European Union General Court annulled the European Commission’s state aid decision. In July 2021, the European Commission appealed the decision to the European Court of Justice. We will continue to defend ourselves vigorously in this matter. We are also subject to taxation in various states and other foreign jurisdictions including China, France, Germany, India, Japan, Luxembourg, and the United Kingdom. We are under, or may be subject to, audit or examination and additional assessments by the relevant authorities in respect of these particular jurisdictions primarily for 2009 and thereafter.Changes in tax laws, regulations, administrative practices, principles, and interpretations may impact our tax contingencies. The timing of the resolution of income tax controversies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next twelve months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax controversies in one or more jurisdictions. These assessments or settlements could result in changes to our contingencies related to positions on prior years’ tax filings. The actual amount of any change could vary significantly depending on the ultimate timing and nature of any settlements. We cannot currently provide an estimate of the range of possible outcomes.Note 10 — SEGMENT INFORMATIONWe have organized our operations into three segments: North America, International, and AWS. We allocate to segment results the operating expenses “Fulfillment,” “Technology and content,” “Marketing,” and “General and administrative” based on usage, which is generally reflected in the segment in which the costs are incurred. The majority of technology infrastructure costs are allocated to the AWS segment based on usage. The majority of the remaining non-infrastructure technology costs are incurred in the U.S. and are allocated to our North America segment. There are no internal revenue transactions between our reportable segments. These segments reflect the way our chief operating decision maker evaluates the Company’s business performance and manages its operations.North AmericaThe North America segment primarily consists of amounts earned from retail sales of consumer products (including from sellers) and subscriptions through North America-focused online and physical stores. This segment includes export sales from these online stores.InternationalThe International segment primarily consists of amounts earned from retail sales of consumer products (including from sellers) and subscriptions through internationally-focused online stores. This segment includes export sales from these internationally-focused online stores (including export sales from these online stores to customers in the U.S., Mexico, and Canada), but excludes export sales from our North America-focused online stores.AWSThe AWS segment consists of amounts earned from global sales of compute, storage, database, and other services for start-ups, enterprises, government agencies, and academic institutions.64Table of ContentsInformation on reportable segments and reconciliation to consolidated net income (loss) is as follows (in millions): Year Ended December 31, 201920202021North AmericaNet sales$170,773 $236,282 $279,833 Operating expenses163,740 227,631 272,562 Operating income$7,033 $8,651 $7,271 InternationalNet sales$74,723 $104,412 $127,787 Operating expenses76,416 103,695 128,711 Operating income (loss)$(1,693)$717 $(924)AWSNet sales$35,026 $45,370 $62,202 Operating expenses25,825 31,839 43,670 Operating income$9,201 $13,531 $18,532 ConsolidatedNet sales$280,522 $386,064 $469,822 Operating expenses265,981 363,165 444,943 Operating income14,541 22,899 24,879 Total non-operating income (expense)(565)1,279 13,272 Provision for income taxes(2,374)(2,863)(4,791)Equity-method investment activity, net of tax(14)16 4 Net income$11,588 $21,331 $33,364 Net sales by groups of similar products and services, which also have similar economic characteristics, is as follows (in millions): Year Ended December 31, 201920202021Net Sales:Online stores (1)$141,247 $197,346 $222,075 Physical stores (2)17,192 16,227 17,075 Third-party seller services (3)53,762 80,461 103,366 Subscription services (4)19,210 25,207 31,768 Advertising services (5)12,625 19,773 31,160 AWS35,026 45,370 62,202 Other (6)1,460 1,680 2,176 Consolidated$280,522 $386,064 $469,822 ___________________(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, videos, games, music, and software. These product sales include digital products sold on a transactional basis. Digital product subscriptions that provide unlimited viewing or usage rights are included in “Subscription services.” (2)Includes product sales where our customers physically select items in a store. Sales to customers who order goods online for delivery or pickup at our physical stores are included in “Online stores.” (3)Includes commissions and any related fulfillment and shipping fees, and other third-party seller services. (4)Includes annual and monthly fees associated with Amazon Prime memberships, as well as digital video, audiobook, digital music, e-book, and other non-AWS subscription services.(5)Includes sales of advertising services to sellers, vendors, publishers, authors, and others, through programs such as sponsored ads, display, and video advertising.(6)Includes sales related to various other service offerings. 65Table of ContentsNet sales are attributed to countries primarily based on country-focused online and physical stores or, for AWS purposes, the selling entity. Net sales attributed to countries that represent a significant portion of consolidated net sales are as follows (in millions): Year Ended December 31, 201920202021United States$193,636 $263,520 $314,006 Germany22,232 29,565 37,326 United Kingdom17,527 26,483 31,914 Japan16,002 20,461 23,071 Rest of world31,125 46,035 63,505 Consolidated$280,522 $386,064 $469,822 Total segment assets exclude corporate assets, such as cash and cash equivalents, marketable securities, other long-term investments, corporate facilities, goodwill and other acquired intangible assets, and tax assets. Technology infrastructure assets are allocated among the segments based on usage, with the majority allocated to the AWS segment. Total segment assets reconciled to consolidated amounts are as follows (in millions): December 31, 201920202021North America (1)$72,277 $108,405 $161,255 International (1)30,709 42,212 57,983 AWS (2)36,500 47,574 63,835 Corporate85,762 123,004 137,476 Consolidated$225,248 $321,195 $420,549 ___________________(1)North America and International segment assets primarily consist of property and equipment, operating leases, inventory, and accounts receivable.(2)AWS segment assets primarily consist of property and equipment and accounts receivable.Property and equipment, net by segment is as follows (in millions): December 31, 201920202021North America$31,719 $54,912 $83,640 International9,566 15,375 21,718 AWS23,481 32,151 43,245 Corporate7,939 10,676 11,678 Consolidated$72,705 $113,114 $160,281 Total net additions to property and equipment by segment are as follows (in millions): Year Ended December 31, 201920202021North America (1)$11,752 $29,889 $37,397 International (1)3,298 8,072 10,259 AWS (2)13,058 16,530 22,047 Corporate1,910 3,485 2,622 Consolidated$30,018 $57,976 $72,325 ___________________(1)Includes property and equipment added under finance leases of $3.8 billion, $5.6 billion, and $3.6 billion in 2019, 2020, and 2021, and under build-to-suit lease arrangements of $1.3 billion, $2.7 billion, and $5.6 billion in 2019, 2020, and 2021.(2)Includes property and equipment added under finance leases of $10.6 billion, $7.7 billion, and $3.5 billion in 2019, 2020, and 2021, and under build-to-suit lease arrangements of $0 million, $130 million, and $51 million in 2019, 2020, and 2021.66Table of ContentsU.S. property and equipment, net and operating leases were $69.8 billion, $109.5 billion, and $155.0 billion, in 2019, 2020, and 2021, and non-U.S. property and equipment, net and operating leases were $28.0 billion, $41.2 billion, and $61.3 billion in 2019, 2020, and 2021. Except for the U.S., property and equipment, net and operating leases in any single country were less than 10% of consolidated property and equipment, net and operating leases.Depreciation and amortization expense on property and equipment, including corporate property and equipment, are allocated to all segments based on usage. Total depreciation and amortization expense, by segment, is as follows (in millions): Year Ended December 31, 201920202021North America$5,106 $6,421 $9,234 International1,886 2,215 3,022 AWS8,158 7,603 10,653 Consolidated$15,150 $16,239 $22,909 67Table of ContentsItem 9.Changes in and Disagreements with Accountants On Accounting and Financial DisclosureNone.Item 9A.Controls and ProceduresEvaluation of Disclosure Controls and Procedures We carried out an evaluation required by the Securities Exchange Act of 1934 (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the 1934 Act, as of December 31, 2021. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2021, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.Management’s Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the 1934 Act. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2021 based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this assessment, management concluded that, as of December 31, 2021, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Ernst & Young has independently assessed the effectiveness of our internal control over financial reporting and its report is included below. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting during the quarter ended December 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Limitations on Controls Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. 68Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and Shareholders Amazon.com, Inc. Opinion on Internal Control Over Financial ReportingWe have audited Amazon.com, Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Amazon.com, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021 and the related notes and our report dated February 3, 2022 expressed an unqualified opinion thereon. Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLPSeattle, Washington February 3, 202269Table of ContentsItem 9B.Other InformationNot applicable.Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent InspectionsNot applicable.PART IIIItem 10.Directors, Executive Officers, and Corporate GovernanceInformation regarding our Executive Officers required by Item 10 of Part III is set forth in Item 1 of Part I “Business — Information About Our Executive Officers.” Information required by Item 10 of Part III regarding our Directors and any material changes to the process by which security holders may recommend nominees to the Board of Directors is included in our Proxy Statement relating to our 2022 Annual Meeting of Shareholders, and is incorporated herein by reference. Information relating to our Code of Business Conduct and Ethics and, to the extent applicable, compliance with Section 16(a) of the 1934 Act is set forth in our Proxy Statement relating to our 2022 Annual Meeting of Shareholders and is incorporated herein by reference. To the extent permissible under Nasdaq rules, we intend to disclose amendments to our Code of Business Conduct and Ethics, as well as waivers of the provisions thereof, on our investor relations website under the heading “Corporate Governance” at amazon.com/ir. Item 11.Executive CompensationInformation required by Item 11 of Part III is included in our Proxy Statement relating to our 2022 Annual Meeting of Shareholders and is incorporated herein by reference. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Shareholder MattersInformation required by Item 12 of Part III is included in our Proxy Statement relating to our 2022 Annual Meeting of Shareholders and is incorporated herein by reference. Item 13.Certain Relationships and Related Transactions, and Director IndependenceInformation required by Item 13 of Part III is included in our Proxy Statement relating to our 2022 Annual Meeting of Shareholders and is incorporated herein by reference. Item 14.Principal Accountant Fees and ServicesInformation required by Item 14 of Part III is included in our Proxy Statement relating to our 2022 Annual Meeting of Shareholders and is incorporated herein by reference. 70Table of ContentsPART IV Item 15.Exhibits, Financial Statement Schedules(a) List of Documents Filed as a Part of This Report: (1) Index to Consolidated Financial Statements: Report of Ernst & Young LLP, Independent Registered Public Accounting Firm Consolidated Statements of Cash Flows for each of the three years ended December 31, 2021 Consolidated Statements of Operations for each of the three years ended December 31, 2021 Consolidated Statements of Comprehensive Income for each of the three years ended December 31, 2021 Consolidated Balance Sheets as of December 31, 2020 and 2021 Consolidated Statements of Stockholders’ Equity for each of the three years ended December 31, 2021 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Registered Public Accounting Firm (2) Index to Financial Statement Schedules: All schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or because it is not required. (3) Index to Exhibits See exhibits listed under Part (b) below. (b) Exhibits:Exhibit NumberDescription 3.1Restated Certificate of Incorporation of the Company (incorporated by reference to the Company’s Current Report on Form 8-K, filed May 29, 2020).3.2Amended and Restated Bylaws of the Company (incorporated by reference to the Company’s Current Report on Form 8-K, filed May 29, 2020).4.1Indenture, dated as of November 29, 2012, between Amazon.com, Inc. and Wells Fargo Bank, National Association, as trustee, and Form of 0.650% Note due 2015, Form of 1.200% Note due 2017, and Form of 2.500% Note due 2022 (incorporated by reference to the Company’s Current Report on Form 8-K, filed November 29, 2012).4.2Officers’ Certificate of Amazon.com, Inc., dated as of December 5, 2014, containing Form of 2.600% Note due 2019, Form of 3.300% Note due 2021, Form of 3.800% Note due 2024, Form of 4.800% Note due 2034, and Form of 4.950% Note due 2044 (incorporated by reference to the Company’s Current Report on Form 8-K, filed December 5, 2014).4.3Officers’ Certificate of Amazon.com, Inc., dated as of August 22, 2017, containing Form of 1.900% Note due 2020, Form of 2.400% Note due 2023, Form of 2.800% Note due 2024, Form of 3.150% Note due 2027, Form of 3.875% Note due 2037, Form of 4.050% Note due 2047, and Form of 4.250% Note due 2057 (incorporated by reference to the Company’s Current Report on Form 8-K, filed August 22, 2017).4.4Officers’ Certificate of Amazon.com, Inc., dated as of December 20, 2017, containing Form of 5.200% Note due 2025 (incorporated by reference to the Company’s Current Report on Form 8-K, filed December 20, 2017).4.5Officers’ Certificate of Amazon.com, Inc., dated as of June 3, 2020, containing Form of 0.400% Note due 2023, Form of 0.800% Note due 2025, Form of 1.200% Note due 2027, Form of 1.500% Note due 2030, Form of 2.500% Note due 2050, and Form of 2.700% Note due 2060 (incorporated by reference to the Company’s Current Report on Form 8-K, filed June 3, 2020).71Table of Contents4.6Officers’ Certificate of Amazon.com, Inc., dated as of May 12, 2021, containing Form of 0.250% Note due 2023, Form of 0.450% Note due 2024, Form of 1.000% Note due 2026, Form of 1.650% Note due 2028, Form of 2.100% Note due 2031, Form of 2.875% Note due 2041, Form of 3.100% Note due 2051, and Form of 3.250% Note due 2061 (incorporated by reference to the Company’s Current Report on Form 8-K, filed May 12, 2021).4.7Description of Securities (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2019).10.1†1997 Stock Incentive Plan (amended and restated) (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2013).10.2†1999 Nonofficer Employee Stock Option Plan (amended and restated) (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2013).10.3†Form of Indemnification Agreement between the Company and each of its Directors (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (Registration No. 333-23795) filed March 24, 1997, as amended on April 21, 1997).10.4†Form of Restricted Stock Unit Agreement for Officers and Employees (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2002).10.5†Form of Restricted Stock Unit Agreement for Directors (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2002).10.6†Form of Restricted Stock Agreement (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2001).10.7†Form of Global Restricted Stock Unit Award Agreement for Executive Officers.10.8Amended and Restated Credit Agreement, dated as of June 23, 2020, as amended by the First Amendment thereto, dated as of November 24, 2021, among Amazon.com, Inc., JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto.21.1List of Significant Subsidiaries.23.1Consent of Independent Registered Public Accounting Firm.31.1Certification of Andrew R. Jassy, President and Chief Executive Officer of Amazon.com, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.31.2Certification of Brian T. Olsavsky, Senior Vice President and Chief Financial Officer of Amazon.com, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.32.1Certification of Andrew R. Jassy, President and Chief Executive Officer of Amazon.com, Inc., pursuant to 18 U.S.C. Section 1350.32.2Certification of Brian T. Olsavsky, Senior Vice President and Chief Financial Officer of Amazon.com, Inc., pursuant to 18 U.S.C. Section 1350.101The following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in XBRL: (i) Consolidated Statements of Cash Flows, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Balance Sheets, (v) Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Company has not filed with this Annual Report on Form 10-K certain instruments defining the rights of holders of long-term debt of the Company and its subsidiaries because the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of such agreements to the Commission upon request.72Table of Contents104The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in iXBRL (included as Exhibit 101).__________________† Executive Compensation Plan or Agreement.Item 16.Form 10-K SummaryNone.73Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, as of February 3, 2022. AMAZON.COM, INC.By:/s/ Andrew R. JassyAndrew R. JassyPresident and Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of February 3, 2022. SignatureTitle/s/ Andrew R. JassyAndrew R. JassyPresident and Chief Executive Officer (Principal Executive Officer)/s/ Brian T. OlsavskyBrian T. OlsavskySenior Vice President and Chief Financial Officer (Principal Financial Officer)/s/ Shelley L. ReynoldsShelley L. ReynoldsVice President, Worldwide Controller (Principal Accounting Officer)/s/ Jeffrey P. BezosJeffrey P. BezosExecutive Chair /s/ Keith B. AlexanderKeith B. AlexanderDirector/s/ Edith W. CooperEdith W. CooperDirector/s/ Jamie S. GorelickJamie S. GorelickDirector/s/ Daniel P. HuttenlocherDaniel P. HuttenlocherDirector/s/ Judith A. McGrathJudith A. McGrathDirector/s/ Indra K. NooyiIndra K. NooyiDirector/s/ Jonathan J. RubinsteinJonathan J. RubinsteinDirector/s/ Patricia Q. StonesiferPatricia Q. StonesiferDirector/s/ Wendell P. WeeksWendell P. WeeksDirector74
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nvda-202008190001045810false00010458102020-08-192020-08-19UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549______________FORM 8-K CURRENT REPORTPURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934Date of Report (Date of earliest event reported): August 19, 2020 NVIDIA CORPORATION(Exact name of registrant as specified in its charter)Delaware0-2398594-3177549(State or other jurisdiction(Commission(IRS Employerof incorporation)File Number)Identification No.) 2788 San Tomas Expressway, Santa Clara, CA 95051 (Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (408) 486-2000 Not Applicable(Former name or former address, if changed since last report)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock, $0.001 par value per shareNVDAThe Nasdaq Global Select MarketIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐Item 2.02 Results of Operations and Financial Condition.On August 19, 2020, NVIDIA Corporation, or the Company, issued a press release announcing its results for the quarter ended July 26, 2020. The press release is attached as Exhibit 99.1 and is incorporated herein by reference.Attached hereto as Exhibit 99.2 and incorporated by reference herein is financial information and commentary by Colette M. Kress, Executive Vice President and Chief Financial Officer of the Company, regarding results of the quarter ended July 26, 2020, or the CFO Commentary. The CFO Commentary will be posted to http://investor.nvidia.com immediately after the filing of this Current Report.The press release and CFO Commentary are furnished and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or subject to the liabilities of that Section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended. The information in this Current Report shall not be incorporated by reference in any filing with the U.S. Securities and Exchange Commission made by the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.Item 9.01 Financial Statements and Exhibits.(d) Exhibits Exhibit Description99.1 Press Release, dated August 19, 2020, entitled "NVIDIA Announces Financial Results for Second Quarter Fiscal 2021"99.2 CFO Commentary on Second Quarter Fiscal 2021 ResultsSIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NVIDIA CorporationDate: August 19, 2020By: /s/ Colette M. Kress Colette M. Kress Executive Vice President and Chief Financial Officer
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10-K
1
d17062d10k.htm
FORM 10-K
Form 10-K
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 26, 2015
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period
from to
Commission File
Number: 001-36743
Apple Inc.
(Exact name of Registrant as specified in its charter)
California
94-2404110
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1 Infinite Loop
Cupertino, California
95014
(Address of principal executive offices)
(Zip Code)
(408) 996-1010
(Registrants telephone number, including area code)
Securities registered pursuant
to Section 12(b) of the Act:
Common Stock, $0.00001 par value per share
1.000% Notes due 2022 1.625%
Notes due 2026 3.05% Notes due 2029
3.60% Notes due 2042
1.375% Notes due 2024 2.000%
Notes due 2027
The NASDAQ Stock Market LLC
New York Stock Exchange LLC New York Stock
Exchange LLC New York Stock Exchange LLC
New York Stock Exchange LLC New York Stock
Exchange LLC New York Stock Exchange LLC
(Title of class)
(Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the
Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x 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 and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes x No ¨ Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer
¨
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x The aggregate market value of the voting and non-voting
stock held by non-affiliates of the Registrant, as of March 27, 2015, the last business day of the Registrants most recently completed second fiscal quarter, was approximately $709,923,000,000. Solely for purposes of this disclosure,
shares of common stock held by executive officers and directors of the Registrant as of such date have been excluded because such persons may be deemed to be affiliates. This determination of executive officers and directors as affiliates is not
necessarily a conclusive determination for any other purposes. 5,575,331,000 shares of common stock were issued and outstanding as of October 9,
2015. DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement relating to its 2016 annual meeting of shareholders (the 2016 Proxy Statement)
are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 2016 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this
report relates.
Table of Contents
Apple Inc.
Form 10-K For the Fiscal Year Ended
September 26, 2015 TABLE OF CONTENTS
Page
Part I
Item 1.
Business
1
Item 1A.
Risk Factors
8
Item 1B.
Unresolved Staff Comments
18
Item 2.
Properties
18
Item 3.
Legal Proceedings
18
Item 4.
Mine Safety Disclosures
18
Part II
Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
19
Item 6.
Selected Financial Data
22
Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations
23
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
36
Item 8.
Financial Statements and Supplementary Data
38
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
71
Item 9A.
Controls and Procedures
71
Item 9B.
Other Information
71
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
72
Item 11.
Executive Compensation
72
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
72
Item 13.
Certain Relationships and Related Transactions and Director Independence
72
Item 14.
Principal Accounting Fees and Services
72
Part IV
Item 15.
Exhibits, Financial Statement Schedules
73
Table of Contents
This Annual Report on Form 10-K (Form 10-K) contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Many of the forward-looking statements are located in Part II,
Item 7 of this Form 10-K under the heading Managements Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements provide current expectations of future events based on certain
assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as future, anticipates, believes,
estimates, expects, intends, will, would, could, can, may, and similar terms. Forward-looking statements are not guarantees of future performance and the
Companys actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed
in Part I, Item 1A of this Form 10-K under the heading Risk Factors, which are incorporated herein by reference. All information presented herein is based on the Companys fiscal
calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to the Companys fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Each of the terms the
Company and Apple as used herein refers collectively to Apple Inc. and its wholly-owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any
reason, except as required by law. PART I
Item 1.
Business Company Background
The Company designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players, and sells a
variety of related software, services, accessories, networking solutions and third-party digital content and applications. The Companys products and services include iPhone®, iPad®, Mac®, iPod®, Apple
Watch®, Apple TV®, a portfolio of consumer and professional software applications, iOS, OS X® and watchOS operating systems, iCloud®, Apple Pay® and a variety of
accessory, service and support offerings. In September 2015, the Company announced a new Apple TV, tvOS operating system and Apple TV App Store®, which are expected to be available by
the end of October 2015. The Company sells and delivers digital content and applications through the iTunes Store®, App Store, Mac App Store, iBooks Store and Apple Music
(collectively Internet Services). The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added
resellers. In addition, the Company sells a variety of third-party Apple compatible products, including application software and various accessories through its online and retail stores. The Company sells to consumers, small and mid-sized businesses
and education, enterprise and government customers. The Companys fiscal year is the 52 or 53-week period that ends on the last Saturday of September. The Company is a California corporation established in 1977.
Business Strategy The Company is committed to bringing the
best user experience to its customers through its innovative hardware, software and services. The Companys business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software and
services to provide its customers products and solutions with innovative design, superior ease-of-use and seamless integration. As part of its strategy, the Company continues to expand its platform for the discovery and delivery of digital content
and applications through its Internet Services, which allows customers to discover and download digital content, iOS, Mac and Apple Watch applications, and books through either a Mac or Windows-based computer or through iPhone, iPad and iPod touch® devices (iOS devices) and Apple Watch. The Company also supports a community for the development of third-party software and hardware products and digital content that complement the
Companys offerings. The Company believes a high-quality buying experience with knowledgeable salespersons who can convey the value of the Companys products and services greatly enhances its ability to attract and retain customers.
Therefore, the Companys strategy also includes building and expanding its own retail and online stores and its third-party distribution network to effectively reach more customers and provide them with a high-quality sales and post-sales
support experience. The Company believes ongoing investment in research and development (R&D), marketing and advertising is critical to the development and sale of innovative products and technologies.
Apple Inc. | 2015 Form 10-K | 1
Table of Contents
Business Organization
The Company manages its business primarily on a geographic basis. In 2015, the Company changed its reportable operating segments as management began
reporting business performance and making decisions primarily on a geographic basis, including the results of its retail stores in each respective geographic segment. Accordingly, the Companys reportable operating segments consist of the
Americas, Europe, Greater China, Japan and Rest of Asia Pacific. The Americas segment includes both North and South America. The Europe segment includes European countries, as well as India, the Middle East and Africa. The Greater China segment
includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and those Asian countries not included in the Companys other reportable operating segments. Although each reportable operating segment provides similar
hardware and software products and similar services, they are managed separately to better align with the location of the Companys customers and distribution partners and the unique market dynamics of each geographic region. Further
information regarding the Companys reportable operating segments may be found in Part II, Item 7 of this Form 10-K under the subheading Segment Operating Performance, and in Part II,
Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 11, Segment Information and Geographic Data. Products
iPhone iPhone is the Companys line of
smartphones based on its iOS operating system. iPhone includes Siri®, a voice activated intelligent assistant, and Apple Pay and Touch ID on qualifying devices. In September 2015, the
Company introduced iPhone 6s and 6s Plus, featuring 3D Touch, which senses force to access features and interact with content and apps. iPhone works with the iTunes Store, App Store and iBooks Store for purchasing, organizing and playing digital
content and apps. iPhone is compatible with both Mac and Windows personal computers and Apples iCloud services, which provide synchronization across users devices.
iPad iPad is the Companys line of multi-purpose tablets
based on its iOS operating system, which includes iPad Air® and iPad mini. iPad includes Siri and also includes Touch ID on qualifying devices. In September 2015, the Company announced
the new iPad Pro, featuring a 12.9-inch Retina® display, which is expected to be available in November 2015. iPad works with the iTunes Store, App Store and iBooks Store for purchasing,
organizing and playing digital content and apps. iPad is compatible with both Mac and Windows personal computers and Apples iCloud services. Mac
Mac is the Companys line of desktop and portable personal computers based on its OS X operating system. The Companys desktop computers include
iMac®, 21.5 iMac with Retina 4K Display, 27 iMac with Retina 5K Display, Mac Pro® and Mac mini. The Companys portable
computers include MacBook®, MacBook Air®, MacBook Pro® and MacBook Pro with
Retina display. Operating System Software iOS
iOS is the Companys Multi-Touch operating system that serves as the foundation for iOS devices. Devices running iOS are compatible with both
Mac and Windows personal computers and Apples iCloud services. In September 2015, the Company released iOS 9, which provides more search abilities and improved Siri features. iOS 9 also introduced new multitasking features designed
specifically for iPad, including Slide Over and Split View, which allow users to work with two apps simultaneously, and Picture-in-Picture that allows users to watch a video while using another application.
OS X OS X is the Companys Mac operating system and is built on
an open-source UNIX-based foundation and provides an intuitive and integrated computer experience. Support for iCloud is built into OS X so users can access content and information from Mac, iOS devices and other supported devices and access
downloaded content and apps from the iTunes Store. OS X El Capitan, released in September 2015, is the 12th major release of OS X and incorporates additional window management features, including
Split View and the new Spaces Bar in Mission Control®, which provides users an intuitive way to group applications.
Apple Inc. | 2015 Form 10-K | 2
Table of Contents
watchOS watchOS is the
Companys operating system for Apple Watch. Released in September 2015, watchOS 2 is the first major software update for Apple Watch, providing users with new features, including new watch faces, the ability to add third-party app information
on watch faces, Time Travel, and additional communication capabilities in Mail, Friends and Digital Touch. watchOS 2 also gives developers the ability to build native apps for Apple Watch.
tvOS In September 2015, the Company announced tvOS, its operating
system for the new Apple TV, which is expected to be available at the end of October 2015. The tvOS operating system is based on the Companys iOS platform and will enable developers to create new apps and games specifically for Apple TV and
deliver them to customers through the new Apple TV App Store. Application Software
The Companys application software includes iLife®, iWork® and various other software, including Final Cut Pro®, Logic® Pro X and
FileMaker® Pro. iLife is the Companys consumer-oriented digital lifestyle software application suite included with all Mac computers and features iMovie®, a digital video editing application, and GarageBand®, a music creation application that allows users to play, record and create music.
iWork is the Companys integrated productivity suite included with all Mac computers and is designed to help users create, present and publish documents through Pages®, presentations
through Keynote® and spreadsheets through Numbers®. The Company also has Multi-Touch versions of iLife and iWork applications designed
specifically for use on iOS devices, which are available as free downloads for all new iPhones and iPads. Services
Internet Services The iTunes Store, available for iOS devices, Mac and
Windows personal computers and Apple TV, allows customers to purchase and download music and TV shows, rent or purchase movies and download free podcasts. The App Store, available for iOS devices, allows customers to discover and download apps and
purchase in-app content. The Mac App Store, available for Mac computers, allows customers to discover, download and install Mac applications. The iBooks Store, available for iOS devices and Mac computers, features e-books from major and independent
publishers. Apple Music offers users a curated listening experience with on-demand radio stations that evolve based on a users play or download activity and a subscription-based internet streaming service that also provides unlimited access to
the Apple Music library. In September 2015, the Company announced the Apple TV App Store, which provides customers access to apps and games specifically for the new Apple TV.
iCloud iCloud is the Companys cloud service which stores music,
photos, contacts, calendars, mail, documents and more, keeping them up-to-date and available across multiple iOS devices, Mac and Windows personal computers and Apple TV. iCloud services include iCloud DriveSM, iCloud Photo Library, Family Sharing, Find My iPhone, Find My Friends, Notes, iCloud Keychain® and iCloud Backup for iOS devices.
AppleCare
AppleCare® offers a range of support options for the Companys customers. These
include assistance that is built into software products, printed and electronic product manuals, online support including comprehensive product information as well as technical assistance, the AppleCare Protection Plan (APP) and the
AppleCare+ Protection Plan (AC+). APP is a fee-based service that typically extends the service coverage of phone support, hardware repairs and dedicated web-based support resources for Mac, Apple TV and display products. AC+ is a
fee-based service offering additional coverage under some circumstances for instances of accidental damage in addition to the services offered by APP and is available in certain countries for iPhone, iPad, Apple Watch and iPod.
Apple Pay Apple Pay is the Companys mobile payment service
available in the U.S. and U.K. that offers an easy, secure and private way to pay. Apple Pay allows users to pay for purchases in stores accepting contactless payments and to pay for purchases within participating apps on qualifying devices. Apple
Pay accepts credit and debit cards across major card networks and also supports reward programs and store-issued credit and debit cards.
Apple Inc. | 2015 Form 10-K | 3
Table of Contents
Other Products Accessories
The Company sells a variety of Apple-branded and third-party Mac-compatible and iOS-compatible accessories, including Apple TV, Apple Watch, headphones,
displays, storage devices, Beats products, and various other connectivity and computing products and supplies. Apple TV
Apple TV connects to consumers TVs and enables them to access digital content directly for streaming high definition video, playing music and games,
and viewing photos. Content from Apple Music and other media services are also available on Apple TV. Apple TV allows streaming digital content from Mac and Windows personal computers through Home Share and through AirPlay® from compatible Mac and iOS devices. In September 2015, the Company announced the new Apple TV running on the Companys tvOS operating system and based on apps built for the television.
Additionally, the new Apple TV remote features Siri, allowing users to search and access content with their voice. The new Apple TV is expected to be available at the end of October 2015.
Apple Watch Apple Watch is a personal electronic device that combines
the watchOS user interface and technologies created specifically for a smaller device, including the Digital Crown, a unique navigation tool that allows users to seamlessly scroll, zoom and navigate, and Force Touch, a technology that senses the
difference between a tap and a press and allows users to access controls within apps. Apple Watch enables users to communicate in new ways from their wrist, track their health and fitness through activity and workout apps, and includes Siri and
Apple Pay. iPod iPod is the Companys line of portable
digital music and media players, which includes iPod touch, iPod nano® and iPod shuffle®. All iPods work with iTunes to purchase and
synchronize content. iPod touch, based on the Companys iOS operating system, is a flash-memory-based iPod that works with the iTunes Store, App Store and iBooks Store for purchasing and playing digital content and apps.
Developer Programs The Companys developer programs
support app developers with building, testing and distributing apps for iOS, Mac, Apple Watch and the new Apple TV. Developer program membership provides access to beta software, the ability to integrate advanced app capabilities (e.g.,
iCloud, Game Center and Apple Pay), distribution on the App Store, access to App Analytics, and code-level technical support. Developer programs also exist for businesses creating apps for internal use (the Apple Developer Enterprise
Program) and developers creating accessories for Apple devices (the MFi Program). All developers, even those who are not developer program members, can sign in with their Apple ID to post on the Apple Developer Forums and use Xcode®, the Companys integrated development environment for creating apps for Apple platforms. Xcode includes project management tools; analysis tools to collect, display and compare app
performance data; simulation tools to locally run, test and debug apps; and tools to simplify the design and development of user interfaces. All developers also have access to extensive technical documentation and sample code.
Markets and Distribution The Companys customers are
primarily in the consumer, small and mid-sized business, education, enterprise and government markets. The Company sells its products and resells third-party products in most of its major markets directly to consumers and small and mid-sized
businesses through its retail and online stores and its direct sales force. The Company also employs a variety of indirect distribution channels, such as third-party cellular network carriers, wholesalers, retailers and value-added resellers. During
2015, the Companys net sales through its direct and indirect distribution channels accounted for 26% and 74%, respectively, of total net sales.
The Company believes that sales of its innovative and differentiated products are enhanced by knowledgeable salespersons who can convey the value of the
hardware and software integration and demonstrate the unique solutions that are available on its products. The Company further believes providing direct contact with its targeted customers is an effective way to demonstrate the advantages of its
products over those of its competitors and providing a high-quality sales and after-sales support experience is critical to attracting new and retaining existing customers.
To ensure a high-quality buying experience for its products in which service and education are emphasized, the Company continues to build and improve its
distribution capabilities by expanding the number of its own retail stores worldwide. The Companys retail stores are typically located at high-traffic locations in quality shopping malls and urban shopping districts. By operating its own
stores and locating them in desirable high-traffic locations the Company is better positioned to ensure a high quality customer buying experience and attract new customers. The stores are designed to simplify and enhance the presentation and
marketing of the Companys products and related solutions. The retail stores employ experienced and knowledgeable personnel who provide product advice, service and training and offer a wide selection of third-party hardware, software and other
accessories that complement the Companys products.
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The Company has also invested in programs to enhance reseller sales by placing high-quality Apple fixtures,
merchandising materials and other resources within selected third-party reseller locations. Through the Apple Premium Reseller Program, certain third-party resellers focus on the Apple platform by providing a high level of product expertise,
integration and support services. The Company is committed to delivering solutions to help educators teach and students learn. The Company believes
effective integration of technology into classroom instruction can result in higher levels of student achievement and has designed a range of products, services and programs to address the needs of education customers. The Company also supports
mobile learning and real-time distribution of, and access to, education related materials through iTunes U, a platform that allows students and teachers to share and distribute educational media online. The Company sells its products to the
education market through its direct sales force, select third-party resellers and its online and retail stores. The Company also sells its hardware
and software products to enterprise and government customers in each of its reportable operating segments. The Companys products are deployed in these markets because of their performance, productivity, ease of use and seamless integration
into information technology environments. The Companys products are compatible with thousands of third-party business applications and services, and its tools enable the development and secure deployment of custom applications as well as
remote device administration. No single customer accounted for more than 10% of net sales in 2015, 2014 or 2013.
Competition The markets for the Companys products and
services are highly competitive and the Company is confronted by aggressive competition in all areas of its business. These markets are characterized by frequent product introductions and rapid technological advances that have substantially
increased the capabilities and use of mobile communication and media devices, personal computers and other digital electronic devices. The Companys competitors that sell mobile devices and personal computers based on other operating systems
have aggressively cut prices and lowered their product margins to gain or maintain market share. The Companys financial condition and operating results can be adversely affected by these and other industry-wide downward pressures on gross
margins. Principal competitive factors important to the Company include price, product features (including security features), relative price and performance, product quality and reliability, design innovation, a strong third-party software and
accessories ecosystem, marketing and distribution capability, service and support and corporate reputation. The Company is focused on expanding its
market opportunities related to personal computers and mobile communication and media devices. These markets are highly competitive and include many large, well-funded and experienced participants. The Company expects competition in these markets to
intensify significantly as competitors attempt to imitate some of the features of the Companys products and applications within their own products or, alternatively, collaborate with each other to offer solutions that are more competitive than
those they currently offer. These markets are characterized by aggressive pricing practices, frequent product introductions, evolving design approaches and technologies, rapid adoption of technological and product advancements by competitors and
price sensitivity on the part of consumers and businesses. The Companys digital content services have faced significant competition from other
companies promoting their own digital music and content products and services, including those offering free peer-to-peer music and video services.
The Companys future financial condition and operating results depend on the Companys ability to continue to develop and offer new innovative
products and services in each of the markets in which it competes. The Company believes it offers superior innovation and integration of the entire solution including the hardware (iOS devices, Mac, Apple Watch and Apple TV), software (iOS, OS X,
watchOS and tvOS), online services and distribution of digital content and applications (Internet Services). Some of the Companys current and potential competitors have substantial resources and may be able to provide such products and
services at little or no profit or even at a loss to compete with the Companys offerings. Supply of Components
Although most components essential to the Companys business are generally available from multiple sources, a number of components are currently
obtained from single or limited sources. In addition, the Company competes for various components with other participants in the markets for mobile communication and media devices and personal computers. Therefore, many components used by the
Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant pricing fluctuations that could materially adversely affect the Companys financial condition and operating
results.
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The Company uses some custom components that are not commonly used by its competitors, and the Company often
utilizes custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers yields have matured or manufacturing capacity has increased. If the
Companys supply of components were delayed or constrained, or if an outsourcing partner delayed shipments of completed products to the Company, the Companys financial condition and operating results could be materially adversely
affected. The Companys business and financial performance could also be materially adversely affected depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from
an alternative source. Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers concentrated on the production of common components instead of components customized to meet the Companys
requirements. The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the Company will be
able to extend or renew these agreements on similar terms, or at all. Therefore, the Company remains subject to significant risks of supply shortages and price increases that could materially adversely affect its financial condition and operating
results. While some Mac computers are manufactured in the U.S. and Ireland, substantially all of the Companys hardware products are currently
manufactured by outsourcing partners that are located primarily in Asia. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. Certain of these outsourcing
partners are the sole-sourced suppliers of components and manufacturers for many of the Companys products. Although the Company works closely with its outsourcing partners on manufacturing schedules, the Companys operating results could
be adversely affected if its outsourcing partners were unable to meet their production commitments. The Companys purchase commitments typically cover its requirements for periods up to 150 days.
Research and Development Because the industries in which the
Company competes are characterized by rapid technological advances, the Companys ability to compete successfully depends heavily upon its ability to ensure a continual and timely flow of competitive products, services and technologies to the
marketplace. The Company continues to develop new technologies to enhance existing products and to expand the range of its product offerings through R&D, licensing of intellectual property and acquisition of third-party businesses and
technology. Total R&D expense was $8.1 billion, $6.0 billion and $4.5 billion in 2015, 2014 and 2013, respectively. Patents, Trademarks, Copyrights and
Licenses The Company currently holds rights to patents and copyrights relating to certain aspects of its hardware devices, accessories, software
and services. The Company has registered or has applied for trademarks and service marks in the U.S. and a number of foreign countries. Although the Company believes the ownership of such patents, copyrights, trademarks and service marks is an
important factor in its business and that its success does depend in part on such ownership, the Company relies primarily on the innovative skills, technical competence and marketing abilities of its personnel.
The Company regularly files patent applications to protect innovations arising from its research, development and design, and is currently pursuing
thousands of patent applications around the world. Over time, the Company has accumulated a large portfolio of issued patents around the world. The Company holds copyrights relating to certain aspects of its products and services. No
single patent or copyright is solely responsible for protecting the Companys products. The Company believes the duration of its patents is adequate relative to the expected lives of its products.
Many of the Companys products are designed to include intellectual property obtained from third parties. It may be necessary in the future to seek
or renew licenses relating to various aspects of its products, processes and services. While the Company has generally been able to obtain such licenses on commercially reasonable terms in the past, there is no guarantee that such licenses could be
obtained in the future on reasonable terms or at all. Because of technological changes in the industries in which the Company competes, current extensive patent coverage and the rapid rate of issuance of new patents, it is possible that certain
components of the Companys products, processes and services may unknowingly infringe existing patents or intellectual property rights of others. From time to time, the Company has been notified that it may be infringing certain patents or
other intellectual property rights of third parties. Foreign and Domestic Operations and Geographic Data
During 2015, the Companys domestic and international net sales accounted for 35% and 65%, respectively, of total net
sales. Information regarding financial data by geographic segment is set forth in Part II, Item 7 of this Form 10-K under the subheading Segment Operating Performance, and in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 11, Segment Information and Geographic Data.
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While some Mac computers are manufactured in the U.S. and Ireland, substantially all of the Companys
hardware products are currently manufactured by outsourcing partners that are located primarily in Asia. The supply and manufacture of a number of components is performed by sole-sourced outsourcing partners in the U.S., Asia and Europe. Margins on
sales of the Companys products in foreign countries and on sales of products that include components obtained from foreign suppliers, can be adversely affected by foreign currency exchange rate fluctuations and by international trade
regulations, including tariffs and antidumping penalties. Information regarding concentration in the available sources of supply of materials and products is set forth in Part II, Item 8 of this Form 10-K
in the Notes to Consolidated Financial Statements in Note 10, Commitments and Contingencies. Business Seasonality and Product Introductions
The Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part to seasonal
holiday demand. Additionally, new product introductions can significantly impact net sales, product costs and operating expenses. Product introductions can also impact the Companys net sales to its indirect distribution channels as these
channels are filled with new product inventory following a product introduction, and often, channel inventory of a particular product declines as the next related major product launch approaches. Net sales can also be affected when consumers and
distributors anticipate a product introduction. However, neither historical seasonal patterns nor historical patterns of product introductions should be considered reliable indicators of the Companys future pattern of product introductions,
future net sales or financial performance. Warranty The
Company offers a limited parts and labor warranty on most of its hardware products. The basic warranty period is typically one year from the date of purchase by the original end-user. The Company also offers a
90-day basic warranty for its service parts used to repair the Companys hardware products. In certain jurisdictions, local law requires that manufacturers guarantee their products for a period prescribed
by statute, typically at least two years. In addition, where available, consumers may purchase APP or AC+, which extends service coverage on many of the Companys hardware products.
Backlog In the Companys experience, the actual amount of
product backlog at any particular time is not a meaningful indication of its future business prospects. In particular, backlog often increases immediately following new product introductions as customers anticipate shortages. Backlog is often
reduced once customers believe they can obtain sufficient supply. Because of the foregoing, backlog should not be considered a reliable indicator of the Companys ability to achieve any particular level of revenue or financial performance.
Employees As of September 26, 2015, the Company had
approximately 110,000 full-time equivalent employees. Available Information
The Companys Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), are filed with the Securities and Exchange Commission (the SEC). The Company is subject to the informational requirements of the
Exchange Act and files or furnishes reports, proxy statements and other information with the SEC. Such reports and other information filed by the Company with the SEC are available free of charge on the Companys website at
investor.apple.com/sec.cfm when such reports are available on the SECs website. The public may read and copy any materials filed by the Company with the SEC at the SECs Public Reference Room at 100 F Street, NE, Room 1580,
Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Companys references to website URLs are intended to be inactive
textual references only.
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Item 1A.
Risk Factors The following discussion of risk factors contains forward-looking statements. These
risk factors may be important to understanding other statements in this Form 10-K. The following information should be read in conjunction with Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results
of Operations and the consolidated financial statements and related notes in Part II, Item 8, Financial Statements and Supplementary Data of this Form 10-K.
The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown,
including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Companys actual financial condition and operating results to vary materially from past, or from anticipated future, financial
condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Companys business, financial condition, operating results and stock price.
Because of the following factors, as well as other factors affecting the Companys financial condition and operating results, past financial
performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Global and regional economic conditions could materially adversely affect the Company.
The Companys operations and performance depend significantly on global and regional economic conditions. Uncertainty about global and regional
economic conditions poses a risk as consumers and businesses may postpone spending in response to tighter credit, higher unemployment, financial market volatility, government austerity programs, negative financial news, declines in income or
asset values and/or other factors. These worldwide and regional economic conditions could have a material adverse effect on demand for the Companys products and services. Demand also could differ materially from the Companys expectations
as a result of currency fluctuations because the Company generally raises prices on goods and services sold outside the U.S. to correspond with the effect of a strengthening of the U.S. dollar. Other factors that could influence worldwide or
regional demand include changes in fuel and other energy costs, conditions in the real estate and mortgage markets, unemployment, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer
spending behavior. These and other economic factors could materially adversely affect demand for the Companys products and services. In the
event of financial turmoil affecting the banking system and financial markets, additional consolidation of the financial services industry, or significant financial service institution failures, there could be tightening in the
credit markets, low liquidity and extreme volatility in fixed income, credit, currency and equity markets. This could have a number of effects on the Companys business, including the insolvency or financial instability of
outsourcing partners or suppliers or their inability to obtain credit to finance development and/or manufacture products resulting in product delays; inability of customers, including channel partners, to obtain credit to finance purchases
of the Companys products; failure of derivative counterparties and other financial institutions; and restrictions on the Companys ability to issue new debt. Other income and expense also could vary materially from expectations
depending on gains or losses realized on the sale or exchange of financial instruments; impairment charges resulting from revaluations of debt and equity securities and other investments; changes in interest rates; increases or
decreases in cash balances; volatility in foreign exchange rates; and changes in fair value of derivative instruments. Increased volatility in the financial markets and overall economic uncertainty would increase the risk of the actual
amounts realized in the future on the Companys financial instruments differing significantly from the fair values currently assigned to them.
Global markets for the Companys products and services are highly competitive and subject to rapid technological change, and the
Company may be unable to compete effectively in these markets. The Companys products and services compete in highly competitive global
markets characterized by aggressive price cutting and resulting downward pressure on gross margins, frequent introduction of new products, short product life cycles, evolving industry standards, continual improvement in product price/performance
characteristics, rapid adoption of technological and product advancements by competitors and price sensitivity on the part of consumers. The
Companys ability to compete successfully depends heavily on its ability to ensure a continuing and timely introduction of innovative new products, services and technologies to the marketplace. The Company believes it is unique in that it
designs and develops nearly the entire solution for its products, including the hardware, operating system, numerous software applications and related services. As a result, the Company must make significant investments in R&D. The Company
currently holds a significant number of patents and copyrights and has registered and/or has applied to register numerous patents, trademarks and service marks. In contrast, many of the Companys competitors seek to compete primarily through
aggressive pricing and very low cost structures, and emulating the Companys products and infringing on its intellectual property. If the Company is unable to continue to develop and sell innovative new products with
attractive margins or if competitors infringe on the Companys intellectual property, the Companys ability to maintain a competitive advantage could be adversely affected.
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The Company markets certain mobile communication and media devices based on the iOS mobile operating system
and also markets related third-party digital content and applications. The Company faces substantial competition in these markets from companies that have significant technical, marketing, distribution and other resources, as well as established
hardware, software and digital content supplier relationships; and the Company has a minority market share in the global smartphone market. Additionally, the Company faces significant price competition as competitors reduce their selling prices and
attempt to imitate the Companys product features and applications within their own products or, alternatively, collaborate with each other to offer solutions that are more competitive than those they currently offer. The Company competes with
business models that include content provided to users for free. The Company also competes with illegitimate ways to obtain third-party digital content and applications. Some of the Companys competitors have greater experience, product breadth
and distribution channels than the Company. Because some current and potential competitors have substantial resources and/or experience and a lower cost structure, they may be able to provide products and services at little or no profit or even at a
loss. The Company also expects competition to intensify as competitors attempt to imitate the Companys approach to providing components seamlessly within their individual offerings or work collaboratively to offer integrated solutions. The
Companys financial condition and operating results depend substantially on the Companys ability to continually improve iOS and iOS devices in order to maintain their functional and design advantages.
The Company is the only authorized maker of hardware using OS X, which has a minority market share in the personal computer market. This market has been
contracting and is dominated by computer makers using competing operating systems, most notably Windows. In the market for personal computers and accessories, the Company faces a significant number of competitors, many of which have broader product
lines, lower priced products and a larger installed customer base. Historically, consolidation in this market has resulted in larger competitors. Price competition has been particularly intense as competitors selling Windows-based personal computers
have aggressively cut prices and lowered product margins. An increasing number of internet-enabled devices that include software applications and are smaller and simpler than traditional personal computers compete for market share with the
Companys existing products. The Companys financial condition and operating results also depend on its ability to continually improve the Mac platform to maintain its functional and design advantages.
There can be no assurance the Company will be able to continue to provide products and services that compete effectively.
To remain competitive and stimulate customer demand, the Company must successfully manage frequent product introductions and transitions.
Due to the highly volatile and competitive nature of the industries in which the Company competes, the Company must continually introduce new
products, services and technologies, enhance existing products and services, effectively stimulate customer demand for new and upgraded products and successfully manage the transition to these new and upgraded products. The success of new product
introductions depends on a number of factors including, but not limited to, timely and successful product development, market acceptance, the Companys ability to manage the risks associated with new product production ramp-up issues, the
availability of application software for new products, the effective management of purchase commitments and inventory levels in line with anticipated product demand, the availability of products in appropriate quantities and at expected costs to
meet anticipated demand and the risk that new products may have quality or other defects or deficiencies in the early stages of introduction. Accordingly, the Company cannot determine in advance the ultimate effect of new product introductions and
transitions. The Company depends on the performance of distributors, carriers and other resellers.
The Company distributes its products through cellular network carriers, wholesalers, national and regional retailers and value-added resellers, many of
whom distribute products from competing manufacturers. The Company also sells its products and third-party products in most of its major markets directly to education, enterprise and government customers and consumers and small and mid-sized
businesses through its online and retail stores. Carriers providing cellular network service for iPhone typically subsidize users purchases of
the device. There is no assurance that such subsidies will be continued at all or in the same amounts upon renewal of the Companys agreements with these carriers or in agreements the Company enters into with new carriers.
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Many resellers have narrow operating margins and have been adversely affected in the past by weak economic
conditions. Some resellers have perceived the expansion of the Companys direct sales as conflicting with their business interests as distributors and resellers of the Companys products. Such a perception could discourage resellers from
investing resources in the distribution and sale of the Companys products or lead them to limit or cease distribution of those products. The Company has invested and will continue to invest in programs to enhance reseller sales, including
staffing selected resellers stores with Company employees and contractors, and improving product placement displays. These programs could require a substantial investment while providing no assurance of return or incremental revenue. The
financial condition of these resellers could weaken, these resellers could stop distributing the Companys products, or uncertainty regarding demand for some or all of the Companys products could cause resellers to reduce their ordering
and marketing of the Companys products. The Company faces substantial inventory and other asset risk in addition to purchase
commitment cancellation risk. The Company records a write-down for product and component inventories that have become obsolete or exceed
anticipated demand or net realizable value and accrues necessary cancellation fee reserves for orders of excess products and components. The Company also reviews its long-lived assets, including capital assets held at its suppliers facilities
and inventory prepayments, for impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. If the Company determines that impairment has occurred, it records a write-down equal to the amount by which
the carrying value of the assets exceeds its fair value. Although the Company believes its provisions related to inventory, capital assets, inventory prepayments and other assets and purchase commitments are currently adequate, no assurance can be
given that the Company will not incur additional related charges given the rapid and unpredictable pace of product obsolescence in the industries in which the Company competes.
The Company must order components for its products and build inventory in advance of product announcements and shipments. Consistent with industry
practice, components are normally acquired through a combination of purchase orders, supplier contracts and open orders, in each case based on projected demand. Where appropriate, the purchases are applied to inventory component
prepayments that are outstanding with the respective supplier. Purchase commitments typically cover forecasted component and manufacturing requirements for periods up to 150 days. Because the Companys markets are volatile,
competitive and subject to rapid technology and price changes, there is a risk the Company will forecast incorrectly and order or produce excess or insufficient amounts of components or products, or not fully utilize firm purchase commitments.
Future operating results depend upon the Companys ability to obtain components in sufficient quantities.
Because the Company currently obtains components from single or limited sources, the Company is subject to significant supply and pricing risks. Many
components, including those that are available from multiple sources, are at times subject to industry-wide shortages and significant commodity pricing fluctuations. While the Company has entered into agreements for the supply of many components,
there can be no assurance that the Company will be able to extend or renew these agreements on similar terms, or at all. A number of suppliers of components may suffer from poor financial conditions, which can lead to business failure for the
supplier or consolidation within a particular industry, further limiting the Companys ability to obtain sufficient quantities of components. The effects of global or regional economic conditions on the Companys suppliers, described
in Global and regional economic conditions could materially adversely affect the Company above, also could affect the Companys ability to obtain components. Therefore, the Company remains subject to significant risks
of supply shortages and price increases. The Company and other participants in the markets for mobile communication and media devices and personal
computers also compete for various components with other industries that have experienced increased demand for their products. The Company uses some custom components that are not common to the rest of these industries. The Companys new
products often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers yields have matured or manufacturing capacity has increased.
Continued availability of these components at acceptable prices, or at all, may be affected for any number of reasons, including if those suppliers decide to concentrate on the production of common components instead of components customized to meet
the Companys requirements. The supply of components for a new or existing product could be delayed or constrained, or a key manufacturing vendor could delay shipments of completed products to the Company.
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The Company depends on component and product manufacturing and logistical services provided by
outsourcing partners, many of which are located outside of the U.S. Substantially all of the Companys manufacturing is performed in
whole or in part by a few outsourcing partners located primarily in Asia. The Company has also outsourced much of its transportation and logistics management. While these arrangements may lower operating costs, they also reduce the Companys
direct control over production and distribution. It is uncertain what effect such diminished control will have on the quality or quantity of products or services, or the Companys flexibility to respond to changing conditions. Although
arrangements with these partners may contain provisions for warranty expense reimbursement, the Company may remain responsible to the consumer for warranty service in the event of product defects and could experience an unanticipated product defect
or warranty liability. While the Company relies on its partners to adhere to its supplier code of conduct, material violations of the supplier code of conduct could occur.
The Company relies on sole-sourced outsourcing partners in the U.S., Asia and Europe to supply and manufacture many critical components, and on
outsourcing partners primarily located in Asia, for final assembly of substantially all of the Companys hardware products. Any failure of these partners to perform may have a negative impact on the Companys cost or supply of components
or finished goods. In addition, manufacturing or logistics in these locations or transit to final destinations may be disrupted for a variety of reasons including, but not limited to, natural and man-made disasters, information technology system
failures, commercial disputes, military actions or economic, business, labor, environmental, public health, or political issues. The Company has
invested in manufacturing process equipment, much of which is held at certain of its outsourcing partners, and has made prepayments to certain of its suppliers associated with long-term supply agreements. While these arrangements help ensure the
supply of components and finished goods, if these outsourcing partners or suppliers experience severe financial problems or other disruptions in their business, such continued supply could be reduced or terminated and the net realizable value of
these assets could be negatively impacted. The Companys products and services may experience quality problems from time to time
that can result in decreased sales and operating margin and harm to the Companys reputation. The Company sells complex hardware and
software products and services that can contain design and manufacturing defects. Sophisticated operating system software and applications, such as those sold by the Company, often contain bugs that can unexpectedly interfere with the
softwares intended operation. The Companys online services may from time to time experience outages, service slowdowns, or errors. Defects may also occur in components and products the Company purchases from third parties. There can be
no assurance the Company will be able to detect and fix all defects in the hardware, software and services it sells. Failure to do so could result in lost revenue, significant warranty and other expenses and harm to the Companys reputation.
The Company relies on access to third-party digital content, which may not be available to the Company on commercially reasonable terms
or at all. The Company contracts with numerous third parties to offer their digital content. This includes the right to sell currently
available music, movies, TV shows and books. The licensing or other distribution arrangements with these third parties are for relatively short terms and do not guarantee the continuation or renewal of these arrangements on reasonable terms, if at
all. Some third-party content providers and distributors currently or in the future may offer competing products and services, and could take action to make it more difficult or impossible for the Company to license or otherwise distribute their
content in the future. Other content owners, providers or distributors may seek to limit the Companys access to, or increase the cost of, such content. The Company may be unable to continue to offer a wide variety of content at reasonable
prices with acceptable usage rules, or continue to expand its geographic reach. Failure to obtain the right to make available third-party digital content, or to make available such content on commercially reasonable terms, could have a material
adverse impact on the Companys financial condition and operating results. Some third-party digital content providers require the Company to
provide digital rights management and other security solutions. If requirements change, the Company may have to develop or license new technology to provide these solutions. There is no assurance the Company will be able to develop or license such
solutions at a reasonable cost and in a timely manner. In addition, certain countries have passed or may propose and adopt legislation that would force the Company to license its digital rights management, which could lessen the protection of
content and subject it to piracy and also could negatively affect arrangements with the Companys content providers.
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The Companys future performance depends in part on support from third-party software developers. The Company believes decisions by customers to purchase its hardware
products depend in part on the availability of third-party software applications and services. There is no assurance that third-party developers will continue to develop and maintain software applications and
services for the Companys products. If third-party software applications and services cease to be developed and maintained for the Companys products, customers may choose not to buy the Companys products.
With respect to its Mac products, the Company believes the availability of third-party software applications and
services depends in part on the developers perception and analysis of the relative benefits of developing, maintaining and upgrading such software for the Companys products compared to Windows-based products. This analysis may be based
on factors such as the market position of the Company and its products, the anticipated revenue that may be generated, expected future growth of Mac sales and the costs of developing such applications and services. If the Companys minority
share of the global personal computer market causes developers to question the Macs prospects, developers could be less inclined to develop or upgrade software for the Companys Mac products and more inclined to devote their resources to
developing and upgrading software for the larger Windows market. With respect to iOS devices, the Company relies on the continued availability and
development of compelling and innovative software applications, which are distributed through a single distribution channel, the App Store. iOS devices are subject to rapid technological change, and, if third-party developers are unable to or choose
not to keep up with this pace of change, third-party applications might not successfully operate and may result in dissatisfied customers. As with applications for the Companys Mac products, the availability and development of these
applications also depend on developers perceptions and analysis of the relative benefits of developing, maintaining or upgrading software for the Companys iOS devices rather than its competitors platforms, such as Android. If
developers focus their efforts on these competing platforms, the availability and quality of applications for the Companys iOS devices may suffer.
The Company relies on access to third-party intellectual property, which may not be available to the Company on commercially reasonable
terms or at all. Many of the Companys products include third-party intellectual property, which requires licenses from those third
parties. Based on past experience and industry practice, the Company believes such licenses generally can be obtained on reasonable terms. There is, however, no assurance that the necessary licenses can be obtained on acceptable terms or at all.
Failure to obtain the right to use third-party intellectual property, or to use such intellectual property on commercially reasonable terms, could preclude the Company from selling certain products or otherwise have a material adverse impact on the
Companys financial condition and operating results. The Company could be impacted by unfavorable results of legal proceedings,
such as being found to have infringed on intellectual property rights. The Company is subject to various legal proceedings and claims that
have not yet been fully resolved and that have arisen in the ordinary course of business, and additional claims may arise in the future. For
example, technology companies, including many of the Companys competitors, frequently enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies
seek to monetize patents they have purchased or otherwise obtained. As the Company has grown, the intellectual property rights claims against it have increased and may continue to increase. In particular, the Companys cellular enabled products
compete with products from mobile communication and media device companies that hold significant patent portfolios, and the number of patent claims against the Company has significantly increased. The Company is vigorously defending
infringement actions in courts in a number of U.S. jurisdictions and before the U.S. International Trade Commission, as well as internationally in various countries. The plaintiffs in these actions frequently seek injunctions and substantial
damages. Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or
actual litigants, the Company may have to engage in protracted litigation. If the Company is found to infringe one or more patents or other intellectual property rights, regardless of whether it can develop non-infringing technology, it may be
required to pay substantial damages or royalties to a third-party, or it may be subject to a temporary or permanent injunction prohibiting the Company from marketing or selling certain products.
In certain cases, the Company may consider the desirability of entering into licensing agreements, although no assurance can be given that such licenses
can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase the Companys operating expenses.
Apple Inc. | 2015 Form 10-K | 12
Table of Contents
Regardless of the merit of particular claims, litigation may be expensive, time-consuming, disruptive to the
Companys operations and distracting to management. In recognition of these considerations, the Company may enter into arrangements to settle litigation.
In managements opinion, there is not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess
of a recorded accrual, with respect to loss contingencies, including matters related to infringement of intellectual property rights. However, the outcome of litigation is inherently uncertain.
Although management considers the likelihood of such an outcome to be remote, if one or more legal matters were resolved against the Company in a
reporting period for amounts in excess of managements expectations, the Companys consolidated financial statements for that reporting period could be materially adversely affected. Further, such an outcome could result in significant
compensatory, punitive or trebled monetary damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief against the Company that could materially adversely affect its financial condition and operating results.
The Company is subject to laws and regulations worldwide, changes to which could increase the Companys costs and individually or in
the aggregate adversely affect the Companys business. The Company is subject to laws and regulations affecting its domestic and
international operations in a number of areas. These U.S. and foreign laws and regulations affect the Companys activities including, but not limited to, in areas of labor, advertising, digital content, consumer protection, real estate,
billing, e-commerce, promotions, quality of services, telecommunications, mobile communications and media, television, intellectual property ownership and infringement, tax, import and export requirements, anti-corruption, foreign exchange controls
and cash repatriation restrictions, data privacy requirements, anti-competition, environmental, health and safety. By way of example, laws and
regulations related to mobile communications and media devices in the many jurisdictions in which the Company operates are extensive and subject to change. Such changes could include, among others, restrictions on the production, manufacture,
distribution and use of devices, locking devices to a carriers network, or mandating the use of devices on more than one carriers network. These devices are also subject to certification and regulation by governmental and standardization
bodies, as well as by cellular network carriers for use on their networks. These certification processes are extensive and time consuming, and could result in additional testing requirements, product modifications, or delays in product shipment
dates, or could preclude the Company from selling certain products. Compliance with these laws, regulations and similar requirements may be onerous
and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance and doing business. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in
their interpretation, could individually or in the aggregate make the Companys products and services less attractive to the Companys customers, delay the introduction of new products in one or more regions, or cause the Company to change
or limit its business practices. The Company has implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that the Companys employees, contractors, or agents will not
violate such laws and regulations or the Companys policies and procedures. The Companys business is subject to the risks of
international operations. The Company derives a significant portion of its revenue and earnings from its international operations. Compliance
with applicable U.S. and foreign laws and regulations, such as import and export requirements, anti-corruption laws, tax laws, foreign exchange controls and cash repatriation restrictions, data privacy requirements, environmental laws, labor laws
and anti-competition regulations, increases the costs of doing business in foreign jurisdictions. Although the Company has implemented policies and procedures to comply with these laws and regulations, a violation by the Companys employees,
contractors, or agents could nevertheless occur. Violations of these laws and regulations could materially adversely affect the Companys brand, international growth efforts and business.
The Company also could be significantly affected by other risks associated with international activities including, but not limited to, economic and
labor conditions, increased duties, taxes and other costs and political instability. Margins on sales of the Companys products in foreign countries, and on sales of products that include components obtained from foreign suppliers, could be
materially adversely affected by international trade regulations, including duties, tariffs and antidumping penalties. The Company is also exposed to credit and collectability risk on its trade receivables with customers in certain international
markets. There can be no assurance the Company can effectively limit its credit risk and avoid losses.
Apple Inc. | 2015 Form 10-K | 13
Table of Contents
The Companys retail stores have required and will continue to require a substantial
investment and commitment of resources and are subject to numerous risks and uncertainties. The Companys retail stores have required
substantial investment in equipment and leasehold improvements, information systems, inventory and personnel. The Company also has entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to
serve as high-profile venues to promote brand awareness and serve as vehicles for corporate sales and marketing activities. Because of their unique design elements, locations and size, these stores require substantially more investment than the
Companys more typical retail stores. Due to the high cost structure associated with the Companys retail stores, a decline in sales or the closure or poor performance of individual or multiple stores could result in significant lease
termination costs, write-offs of equipment and leasehold improvements and severance costs. Many factors unique to retail operations, some of which
are beyond the Companys control, pose risks and uncertainties. These risks and uncertainties include, but are not limited to, macro-economic factors that could have an adverse effect on general retail activity, as well as the Companys
inability to manage costs associated with store construction and operation, the Companys failure to manage relationships with its existing retail partners, more challenging environments in managing retail operations outside the U.S., costs
associated with unanticipated fluctuations in the value of retail inventory, and the Companys inability to obtain and renew leases in quality retail locations at a reasonable cost.
Investment in new business strategies and acquisitions could disrupt the Companys ongoing business and present risks not originally
contemplated. The Company has invested, and in the future may invest, in new business strategies or acquisitions. Such endeavors may involve
significant risks and uncertainties, including distraction of management from current operations, greater than expected liabilities and expenses, inadequate return of capital and unidentified issues not discovered in the Companys due
diligence. These new ventures are inherently risky and may not be successful. The Companys business and reputation may be
impacted by information technology system failures or network disruptions. The Company may be subject to information technology system
failures and network disruptions. These may be caused by natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, or other events or disruptions.
System redundancy may be ineffective or inadequate, and the Companys disaster recovery planning may not be sufficient for all eventualities. Such failures or disruptions could, among other things, prevent access to the Companys online
stores and services, preclude retail store transactions, compromise Company or customer data, and result in delayed or cancelled orders. System failures and disruptions could also impede the manufacturing and shipping of products, delivery of online
services, transactions processing and financial reporting. There may be breaches of the Companys information technology systems
that materially damage business partner and customer relationships, curtail or otherwise adversely impact access to online stores and services, or subject the Company to significant reputational, financial, legal and operational consequences.
The Companys business requires it to use and store customer, employee and business partner personally identifiable information
(PII). This may include, among other information, names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers and payment account information. Although malicious attacks to gain access to PII affect
many companies across various industries, the Company is at a relatively greater risk of being targeted because of its high profile and the amount of PII it manages.
The Company requires user names and passwords in order to access its information technology systems. The Company also uses encryption and authentication
technologies designed to secure the transmission and storage of data and prevent access to Company data or accounts. As with all companies, these security measures are subject to third-party security breaches, employee error, malfeasance, faulty
password management, or other irregularities. For example, third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be used to access the
Companys information technology systems. To help protect customers and the Company, the Company monitors accounts and systems for unusual activity and may freeze accounts under suspicious circumstances, which may result in the delay or loss of
customer orders.
Apple Inc. | 2015 Form 10-K | 14
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The Company devotes significant resources to network security, data encryption and other security measures
to protect its systems and data, but these security measures cannot provide absolute security. To the extent the Company was to experience a breach of its systems and was unable to protect sensitive data, such a breach could materially damage
business partner and customer relationships, and curtail or otherwise adversely impact access to online stores and services. Moreover, if a computer security breach affects the Companys systems or results in the unauthorized release of PII,
the Companys reputation and brand could be materially damaged, use of the Companys products and services could decrease, and the Company could be exposed to a risk of loss or litigation and possible liability. While the Company maintains
insurance coverage that, subject to policy terms and conditions and subject to a significant self-insured retention, is designed to address certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses or all types
of claims that may arise in the continually evolving area of cyber risk. The Companys business is subject to a variety of U.S.
and international laws, rules, policies and other obligations regarding data protection. The Company is subject to federal, state and
international laws relating to the collection, use, retention, security and transfer of PII. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between the Company and its subsidiaries, and
among the Company, its subsidiaries and other parties with which the Company has commercial relations. Several jurisdictions have passed laws in this area, and other jurisdictions are considering imposing additional restrictions. These laws continue
to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing international requirements may cause the Company to incur substantial costs or require the Company to change its business practices.
Noncompliance could result in penalties or significant legal liability. The Companys privacy policy, which includes related practices
concerning the use and disclosure of data, is posted on its website. Any failure by the Company, its suppliers or other parties with whom the Company does business to comply with its posted privacy policy or with other federal, state or
international privacy-related or data protection laws and regulations could result in proceedings against the Company by governmental entities or others.
The Company is also subject to payment card association rules and obligations under its contracts with payment card processors. Under these rules and
obligations, if information is compromised, the Company could be liable to payment card issuers for associated expenses and penalties. In addition, if the Company fails to follow payment card industry security standards, even if no customer
information is compromised, the Company could incur significant fines or experience a significant increase in payment card transaction costs.
The Companys success depends largely on the continued service and availability of key personnel.
Much of the Companys future success depends on the continued availability and service of key personnel, including its Chief Executive Officer,
executive team and other highly skilled employees. Experienced personnel in the technology industry are in high demand and competition for their talents is intense, especially in Silicon Valley, where most of the Companys key personnel are
located. The Companys business may be impacted by political events, war, terrorism, public health issues, natural disasters and
other business interruptions. War, terrorism, geopolitical uncertainties, public health issues and other business interruptions have caused
and could cause damage or disruption to international commerce and the global economy, and thus could have a material adverse effect on the Company, its suppliers, logistics providers, manufacturing vendors and customers, including channel partners.
The Companys business operations are subject to interruption by, among others, natural disasters, whether as a result of climate change or otherwise, fire, power shortages, nuclear power plant accidents, terrorist attacks and other hostile
acts, labor disputes, public health issues and other events beyond its control. Such events could decrease demand for the Companys products, make it difficult or impossible for the Company to make and deliver products to its customers,
including channel partners, or to receive components from its suppliers, and create delays and inefficiencies in the Companys supply chain. Should major public health issues, including pandemics, arise, the Company could be adversely affected
by more stringent employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between regions, delays in production ramps of new products and disruptions in the operations of the
Companys manufacturing vendors and component suppliers. The majority of the Companys R&D activities, its corporate headquarters, information technology systems and other critical business operations, including certain component
suppliers and manufacturing vendors, are in locations that could be affected by natural disasters. In the event of a natural disaster, the Company could incur significant losses, require substantial recovery time and experience significant
expenditures in order to resume operations.
Apple Inc. | 2015 Form 10-K | 15
Table of Contents
The Company expects its quarterly revenue and operating results to fluctuate.
The Companys profit margins vary across its products and distribution channels. The Companys software, accessories, and service and support
contracts generally have higher gross margins than certain of the Companys other products. Gross margins on the Companys hardware products vary across product lines and can change over time as a result of product transitions, pricing and
configuration changes, and component, warranty, and other cost fluctuations. The Companys direct sales generally have higher associated gross margins than its indirect sales through its channel partners. In addition, the Companys gross
margin and operating margin percentages, as well as overall profitability, may be materially adversely impacted as a result of a shift in product, geographic or channel mix, component cost increases, the strengthening U.S. dollar, price competition,
or the introduction of new products, including those that have higher cost structures with flat or reduced pricing. The Company has typically
experienced higher net sales in its first quarter compared to other quarters due in part to seasonal holiday demand. Additionally, new product introductions can significantly impact net sales, product costs and operating expenses. Further, the
Company generates a majority of its net sales from a single product and a decline in demand for that product could significantly impact quarterly net sales. The Company could also be subject to unexpected developments late in a quarter, such as
lower-than-anticipated demand for the Companys products, issues with new product introductions, an internal systems failure, or failure of one of the Companys logistics, components supply, or manufacturing partners.
The Companys stock price is subject to volatility.
The Companys stock price has experienced substantial price volatility in the past and may continue to do so in the future. Additionally, the
Company, the technology industry and the stock market as a whole have experienced extreme stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to these companies operating performance. Price
volatility over a given period may cause the average price at which the Company repurchases its own stock to exceed the stocks price at a given point in time. The Company believes its stock price should reflect expectations of future growth
and profitability. The Company also believes its stock price should reflect expectations that its cash dividend will continue at current levels or grow and that its current share repurchase program will be fully consummated. Future dividends are
subject to declaration by the Companys Board of Directors, and the Companys share repurchase program does not obligate it to acquire any specific number of shares. If the Company fails to meet expectations related to future growth,
profitability, dividends, share repurchases or other market expectations, its stock price may decline significantly, which could have a material adverse impact on investor confidence and employee retention.
The Companys financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local
currencies. The Companys primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar-denominated sales
and operating expenses worldwide. Weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of the Companys foreign currency-denominated sales and earnings, and generally leads the Company to raise
international pricing, potentially reducing demand for the Companys products. Margins on sales of the Companys products in foreign countries and on sales of products that include components obtained from foreign suppliers, could be
materially adversely affected by foreign currency exchange rate fluctuations. In some circumstances, for competitive or other reasons, the Company may decide not to raise local prices to fully offset the dollars strengthening, or at all, which
would adversely affect the U.S. dollar value of the Companys foreign currency-denominated sales and earnings. Conversely, a strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to the Companys
foreign currency-denominated sales and earnings, could cause the Company to reduce international pricing and incur losses on its foreign currency derivative instruments, thereby limiting the benefit. Additionally, strengthening of foreign currencies
may also increase the Companys cost of product components denominated in those currencies, thus adversely affecting gross margins. The Company
uses derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any, or more than a portion, of the
adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. The Company
is exposed to credit risk and fluctuations in the market values of its investment portfolio. Given the global nature of its business, the
Company has both domestic and international investments. Credit ratings and pricing of the Companys investments can be negatively affected by liquidity, credit deterioration, financial results, economic risk, political risk, sovereign risk or
other factors. As a result, the value and liquidity of the Companys cash, cash equivalents and marketable securities may fluctuate substantially. Therefore, although the Company has not realized any significant losses on its cash, cash
equivalents and marketable securities, future fluctuations in their value could result in a significant realized loss.
Apple Inc. | 2015 Form 10-K | 16
Table of Contents
The Company is exposed to credit risk on its trade accounts receivable, vendor non-trade
receivables and prepayments related to long-term supply agreements, and this risk is heightened during periods when economic conditions worsen.
The Company distributes its products through third-party cellular network carriers, wholesalers, retailers and value-added resellers. The Company also
sells its products directly to small and mid-sized businesses and education, enterprise and government customers. A substantial majority of the Companys outstanding trade receivables are not covered by collateral, third-party financing
arrangements or credit insurance. The Companys exposure to credit and collectability risk on its trade receivables is higher in certain international markets and its ability to mitigate such risks may be limited. The Company also has unsecured
vendor non-trade receivables resulting from purchases of components by outsourcing partners and other vendors that manufacture sub-assemblies or assemble final products for the Company. In addition, the Company has made prepayments associated with
long-term supply agreements to secure supply of inventory components. As of September 26, 2015, a significant portion of the Companys trade receivables was concentrated within cellular network carriers, and its vendor non-trade
receivables and prepayments related to long-term supply agreements were concentrated among a few individual vendors located primarily in Asia. While the Company has procedures to monitor and limit exposure to credit risk on its trade and vendor
non-trade receivables, as well as long-term prepayments, there can be no assurance such procedures will effectively limit its credit risk and avoid losses.
The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to
additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number
of the Companys subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Companys effective tax rates could be affected by changes in the mix of
earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European
Commission opened a formal investigation of Ireland to examine whether decisions by the tax authorities with regard to the corporate income tax to be paid by two of the Companys Irish subsidiaries comply with European Union rules on state aid.
If the European Commission were to conclude against Ireland, it could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid, and such amount could be material.
The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and
governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If
the Companys effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Companys taxes owed is for an amount in excess of amounts previously accrued, the Companys financial
condition, operating results and cash flows could be adversely affected.
Apple Inc. | 2015 Form 10-K | 17
Table of Contents
Item 1B.
Unresolved Staff Comments None.
Item 2.
Properties The Companys headquarters are located in Cupertino, California. As of
September 26, 2015, the Company owned or leased 25.6 million square feet of building space, primarily in the U.S. The Company also owned or leased building space in various locations, including throughout Europe, China, Singapore and
Japan. Of the total owned or leased building space 18.5 million square feet was leased building space, which includes approximately 5.3 million square feet related to retail store space. Additionally, the Company owns a total of 1,757
acres of land in various locations. As of September 26, 2015, the Company owned a manufacturing facility in Cork, Ireland that also housed a
customer support call center; facilities in Elk Grove, California that included warehousing and distribution operations and a customer support call center; and a facility in Mesa, Arizona. The Company also owned land in Austin, Texas where it is
expanding its existing office space and customer support call center. In addition, the Company owned facilities and land for R&D and corporate functions in San Jose, California and Cupertino, California, including land that is being developed
for the Companys second corporate campus. The Company also owned data centers in Newark, California; Maiden, North Carolina; Prineville, Oregon; and Reno, Nevada. Outside the U.S., the Company owned additional facilities for various purposes.
The Company believes its existing facilities and equipment, which are used by all operating segments, are in good operating condition and are
suitable for the conduct of its business. The Company has invested in internal capacity and strategic relationships with outside manufacturing vendors and continues to make investments in capital equipment as needed to meet anticipated demand for
its products.
Item 3.
Legal Proceedings The Company is subject to the legal proceedings and claims discussed below as
well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred
a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. However, the outcome of legal proceedings and claims brought against the Company is subject to significant
uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of managements
expectations, the Companys consolidated financial statements for that reporting period could be materially adversely affected. See the risk factor The Company could be impacted by unfavorable results of legal proceedings, such as
being found to have infringed on intellectual property rights in Part I, Item 1A of this Form 10-K under the heading Risk Factors. The Company settled certain matters during the fourth quarter of 2015 that did not
individually or in the aggregate have a material impact on the Companys financial condition or operating results. Apple eBooks
Antitrust Litigation (United States of America v. Apple Inc., et al.) On April 11, 2012, the U.S. Department of Justice filed a civil
antitrust action against the Company and five major book publishers in the U.S. District Court for the Southern District of New York, alleging an unreasonable restraint of interstate trade and commerce in violation of §1 of the Sherman Act and
seeking, among other things, injunctive relief, the District Courts declaration that the Companys agency agreements with the publishers are null and void and/or the District Courts reformation of such agreements. On July 10,
2013, the District Court found, following a bench trial, that the Company conspired to restrain trade in violation of §1 of the Sherman Act and relevant state statutes to the extent those laws are congruent with §1 of the Sherman
Act. The District Court entered a permanent injunction, which took effect on October 6, 2013 and will be in effect for five years unless the judgment is overturned on appeal. The Company has taken the necessary steps to comply with the
terms of the District Courts order, including renegotiating agreements with the five major eBook publishers, updating its antitrust training program and completing a two-year monitorship with a court-appointed antitrust compliance monitor,
whose appointment the District Court ended in October 2015. The Company appealed the District Courts decision. Pursuant to a settlement agreement reached in June 2014, any damages the Company may be obligated to pay will be determined by the
outcome of the final adjudication following exhaustion of all appeals.
Item 4.
Mine Safety Disclosures Not applicable.
Apple Inc. | 2015 Form 10-K | 18
Table of Contents
PART II
Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Companys common stock is traded on the NASDAQ Stock Market LLC (NASDAQ) under the symbol AAPL.
Price Range of Common Stock The price range per share of
common stock presented below represents the highest and lowest intraday sales prices for the Companys common stock on the NASDAQ during each quarter of the two most recent years.
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2015 price range per share
$
132.97 - $ 92.00
$
134.54 - $ 123.10
$
133.60 - $ 104.63
$
119.75 - $ 95.18
2014 price range per share
$
103.74 - $ 92.09
$
95.05 - $ 73.05
$
80.18 - $ 70.51
$
82.16 - $ 67.77
Holders As of October 9,
2015, there were 25,924 shareholders of record. Dividends
The Company paid a total of $11.4 billion and $11.0 billion in dividends during 2015 and 2014, respectively, and expects to pay quarterly dividends of
$0.52 per common share each quarter, subject to declaration by the Board of Directors. The Company also plans to increase its dividend on an annual basis, subject to declaration by the Board of Directors.
Apple Inc. | 2015 Form 10-K | 19
Table of Contents
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share repurchase activity during the three months ended September 26, 2015 was as follows (in millions, except number of shares, which are reflected
in thousands, and per share amounts):
Periods
Total Numberof SharesPurchased
AveragePrice Paid Per Share
Total Numberof SharesPurchasedas Part ofPubliclyAnnouncedPlans
orPrograms
ApproximateDollar Value ofShares ThatMay Yet BePurchasedUnder thePlans
orPrograms (1)
June 28, 2015 to August 1, 2015:
May 2015 ASR
9,973
(2)
(2)
9,973
(2)
Open market and privately negotiated purchases
15,882
$
124.66
15,882
August 2, 2015 to August 29, 2015:
Open market and privately negotiated purchases
68,526
$
114.15
68,526
August 30, 2015 to September 26, 2015:
Open market and privately negotiated purchases
37,394
$
112.94
37,394
Total
131,775
$
36,024
(1)
In 2012, the Companys Board of Directors authorized a program to repurchase up to $10 billion of the Companys common stock beginning in 2013. The
Companys Board of Directors increased the authorization to repurchase the Companys common stock to $60 billion in April 2013, to $90 billion in April 2014 and to $140 billion in April 2015. As of September 26, 2015, $104 billion of
the $140 billion had been utilized. The remaining $36 billion in the table represents the amount available to repurchase shares under the authorized repurchase program as of September 26, 2015. The Companys share repurchase program
does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
(2)
In May 2015, the Company entered into an accelerated share repurchase arrangement (ASR) to purchase up to $6.0 billion of the Companys
common stock. In July 2015, the purchase period for this ASR ended and an additional 10.0 million shares were delivered and retired. In total, 48.3 million net shares were delivered under this ASR at an average repurchase price of $124.24.
Apple Inc. | 2015 Form 10-K | 20
Table of Contents
Company Stock Performance
The following graph shows a comparison of cumulative total shareholder return, calculated on a dividend reinvested basis, for the Company, the S&P 500
Index, the S&P Information Technology Index and the Dow Jones U.S. Technology Supersector Index for the five years ended September 26, 2015. The graph assumes $100 was invested in each of the Companys common stock, the S&P 500
Index, the S&P Information Technology Index and the Dow Jones U.S. Technology Supersector Index as of the market close on September 24, 2010. Note that historic stock price performance is not necessarily indicative of future stock price
performance.
*
$100 invested on 9/25/10 in stock or index, including reinvestment of dividends. Data points are the last day of each fiscal year for the Companys
common stock and September 30th for indexes.
Copyright© 2015
S&P, a division of McGraw Hill Financial. All rights reserved. Copyright© 2015 Dow Jones & Co. All rights reserved.
September2010
September2011
September2012
September2013
September2014
September2015
Apple Inc.
$
100
$
138
$
229
$
170
$
254
$
294
S&P 500 Index
$
100
$
101
$
132
$
157
$
188
$
187
S&P Information Technology Index
$
100
$
104
$
137
$
147
$
190
$
194
Dow Jones U.S. Technology Supersector Index
$
100
$
103
$
134
$
141
$
183
$
183
Apple Inc. | 2015 Form 10-K | 21
Table of Contents
Item 6.
Selected Financial Data The information set forth below for the five years ended
September 26, 2015, is not necessarily indicative of results of future operations, and should be read in conjunction with Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and related notes thereto included in Part II, Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the
information presented below (in millions, except number of shares, which are reflected in thousands, and per share amounts).
2015
2014
2013
2012
2011
Net sales
$
233,715
$
182,795
$
170,910
$
156,508
$
108,249
Net income
$
53,394
$
39,510
$
37,037
$
41,733
$
25,922
Earnings per share:
Basic
$
9.28
$
6.49
$
5.72
$
6.38
$
4.01
Diluted
$
9.22
$
6.45
$
5.68
$
6.31
$
3.95
Cash dividends declared per share
$
1.98
$
1.82
$
1.64
$
0.38
$
0
Shares used in computing earnings per share:
Basic
5,753,421
6,085,572
6,477,320
6,543,726
6,469,806
Diluted
5,793,069
6,122,663
6,521,634
6,617,483
6,556,514
Total cash, cash equivalents and marketable securities
$
205,666
$
155,239
$
146,761
$
121,251
$
81,570
Total assets
$
290,479
$
231,839
$
207,000
$
176,064
$
116,371
Commercial paper
$
8,499
$
6,308
$
0
$
0
$
0
Total term debt (2)
$
55,963
$
28,987
$
16,960
$
0
$
0
Other long-term obligations (1)
$
33,427
$
24,826
$
20,208
$
16,664
$
10,100
Total liabilities
$
171,124
$
120,292
$
83,451
$
57,854
$
39,756
Total shareholders equity
$
119,355
$
111,547
$
123,549
$
118,210
$
76,615
(1)
Other long-term obligations exclude non-current deferred revenue.
(2)
Includes current and long-term portion of term debt.
Apple Inc. | 2015 Form 10-K | 22
Table of Contents
Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations This
section and other parts of this Annual Report on Form 10-K (Form 10-K) contain forward-looking statements, within the
meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not
directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as future, anticipates, believes, estimates, expects, intends,
plans, predicts, will, would, could, can, may, and similar terms. Forward-looking statements are not guarantees of future performance and the Companys actual
results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A
of this Form 10-K under the heading Risk Factors, which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II,
Item 8 of this Form 10-K. All information presented herein is based on the Companys fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to the
Companys fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Each of the terms the Company and Apple as used herein refers collectively to Apple Inc. and its
wholly-owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Overview and Highlights The Company designs, manufactures and
markets mobile communication and media devices, personal computers and portable digital music players, and sells a variety of related software, services, accessories, networking solutions and third-party digital content and applications. The Company
sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added resellers. In addition, the Company sells a variety of
third-party Apple compatible products, including application software and various accessories through its online and retail stores. The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers.
Fiscal 2015 Highlights Net sales rose 28% or $50.9
billion during 2015 compared to 2014, driven by a 52% year-over-year increase in iPhone® net sales. iPhone net sales and unit sales in 2015 increased in all of the Companys reportable
operating segments. The Company also experienced year-over-year net sales increases in Mac®, Services and Other Products. Apple Watch®,
which launched during the third quarter of 2015, accounted for more than 100% of the year-over-year growth in net sales of Other Products. Net sales growth during 2015 was partially offset by the effect of weakness in most foreign currencies
relative to the U.S. dollar and lower iPad® net sales. Total net sales increased in each of the Companys reportable operating segments, with particularly strong growth in Greater China
where year-over-year net sales increased 84%. In April 2015, the Company announced a significant increase to its capital return program by raising
the expected total size of the program to $200 billion through March 2017. This included increasing its share repurchase authorization to $140 billion and raising its quarterly dividend to $0.52 per share beginning in May 2015. During 2015, the
Company spent $36.0 billion to repurchase shares of its common stock and paid dividends and dividend equivalents of $11.6 billion. Additionally, the Company issued $14.5 billion of U.S. dollar-denominated,
4.8 billion of euro-denominated, SFr1.3 billion of Swiss franc-denominated, £1.3 billion of British pound-denominated, A$2.3 billion of Australian dollar-denominated and ¥250.0 billion
of Japanese yen-denominated term debt during 2015. Fiscal 2014 Highlights
Net sales rose 7% or $11.9 billion during 2014 compared to 2013. This was driven by increases in net sales of iPhone, Mac and Services. Net sales and unit
sales increased for iPhone primarily due to the successful introduction of iPhone 5s and 5c in the latter half of calendar year 2013, the successful launch of iPhone 6 and 6 Plus beginning in the fourth quarter of 2014, and expanded distribution.
Mac net sales and unit sales increased primarily due to strong demand for MacBook Air® and MacBook Pro® which were updated in 2014 with
faster processors and offered at lower prices. Net sales of Services grew primarily due to increased revenue from sales through the App Store®, AppleCare® and licensing. Growth in these areas was partially offset by the year-over-year decline in net sales for iPad due to lower unit sales in many markets, and a decline in net sales of Other
Products. All of the Companys operating segments other than the Rest of Asia Pacific segment experienced increased net sales in 2014, with growth being strongest in the Greater China and Japan operating segments.
During 2014, the Company completed various business acquisitions, including the acquisitions of Beats Music, LLC, which offers a subscription streaming
music service, and Beats Electronics, LLC, which makes Beats® headphones, speakers and audio software.
Apple Inc. | 2015 Form 10-K | 23
Table of Contents
In April 2014, the Company increased its share repurchase authorization to $90 billion and the quarterly
dividend was raised to $0.47 per common share, resulting in an overall increase in its capital return program from $100 billion to over $130 billion. During 2014, the Company utilized $45 billion to repurchase its common stock and paid dividends and
dividend equivalents of $11.1 billion. The Company also issued $12.0 billion of long-term debt during 2014, with varying maturities through 2044, and launched a commercial paper program, with $6.3 billion outstanding as of September 27, 2014.
Sales Data The following table shows net sales by
operating segment and net sales and unit sales by product during 2015, 2014 and 2013 (dollars in millions and units in thousands):
2015
Change
2014
Change
2013
Net Sales by Operating Segment:
Americas
$
93,864
17%
$
80,095
4%
$
77,093
Europe
50,337
14%
44,285
8%
40,980
Greater China
58,715
84%
31,853
18%
27,016
Japan
15,706
3%
15,314
11%
13,782
Rest of Asia Pacific
15,093
34%
11,248
(7)%
12,039
Total net sales
$
233,715
28%
$
182,795
7%
$
170,910
Net Sales by Product:
iPhone (1)
$
155,041
52%
$
101,991
12%
$
91,279
iPad (1)
23,227
(23)%
30,283
(5)%
31,980
Mac (1)
25,471
6%
24,079
12%
21,483
Services (2)
19,909
10%
18,063
13%
16,051
Other Products (1)(3)
10,067
20%
8,379
(17)%
10,117
Total net sales
$
233,715
28%
$
182,795
7%
$
170,910
Unit Sales by Product:
iPhone
231,218
37%
169,219
13%
150,257
iPad
54,856
(19)%
67,977
(4)%
71,033
Mac
20,587
9%
18,906
16%
16,341
(1)
Includes deferrals and amortization of related software upgrade rights and non-software services.
(2)
Includes revenue from the iTunes Store®, App Store, Mac App Store, iBooks Store and Apple
Music (collectively Internet Services), AppleCare, Apple Pay®, licensing and other services.
(3)
Includes sales of Apple TV®, Apple Watch, Beats products, iPod and Apple-branded and third-party
accessories.
Apple Inc. | 2015 Form 10-K | 24
Table of Contents
Product Performance iPhone
The following table presents iPhone net sales and unit sales information for 2015, 2014 and 2013 (dollars in millions and units in thousands):
2015
Change
2014
Change
2013
Net sales
$
155,041
52%
$
101,991
12%
$
91,279
Percentage of total net sales
66%
56%
53%
Unit sales
231,218
37%
169,219
13%
150,257
The year-over-year growth in iPhone net sales and unit sales during 2015 primarily resulted from strong demand for iPhone
6 and 6 Plus during 2015. Overall average selling prices (ASPs) for iPhone increased by 11% during 2015 compared to 2014, due primarily to the introduction of iPhone 6 and 6 Plus in September 2014, partially offset by the effect of
weakness in most foreign currencies relative to the U.S. dollar. The year-over-year growth in iPhone net sales and unit sales in 2014 resulted
primarily from the successful introduction of new iPhones in the latter half of calendar year 2013, the successful launch of iPhone 6 and 6 Plus beginning in September 2014, and expanded distribution. iPhone unit sales grew in all of the
Companys operating segments, while iPhone net sales grew in all segments except Rest of Asia Pacific. Overall ASPs for iPhone were relatively flat in 2014 compared to 2013, with growth in ASPs in the Americas segment being offset by a decline
in ASPs in the Greater China, Japan and Rest of Asia Pacific segments. iPad
The following table presents iPad net sales and unit sales information for 2015, 2014 and 2013 (dollars in millions and units in thousands):
2015
Change
2014
Change
2013
Net sales
$
23,227
(23)%
$
30,283
(5)%
$
31,980
Percentage of total net sales
10%
17%
19%
Unit sales
54,856
(19)%
67,977
(4)%
71,033
Net sales and unit sales for iPad declined during 2015 compared to 2014. The Company believes the decline in iPad sales
is due in part to a longer repurchase cycle for iPads and some level of cannibalization from the Companys other products. iPad ASPs declined by 5% during 2015 compared to 2014, primarily as a result of the effect of weakness in most foreign
currencies relative to the U.S. dollar and a shift in mix to lower-priced iPads. Net sales and unit sales for iPad declined in 2014 compared to
2013. iPad net sales and unit sales grew in the Greater China and Japan segments but this growth was more than offset by a decline in all other segments. Overall iPad ASPs were relatively flat in 2014 compared to 2013 with a shift in mix to
higher-priced iPads being offset by the October 2013 price reduction of iPad mini. ASPs increased in the Japan and Rest of Asia Pacific segments but were slightly down in other segments.
Mac The following table presents Mac net sales and unit sales
information for 2015, 2014 and 2013 (dollars in millions and units in thousands):
2015
Change
2014
Change
2013
Net sales
$
25,471
6%
$
24,079
12%
$
21,483
Percentage of total net sales
11%
13%
13%
Unit sales
20,587
9%
18,906
16%
16,341
The year-over-year growth in Mac net sales and unit sales during 2015 was driven by strong demand for Mac portables. Mac
ASPs declined 3% during 2015 compared to 2014 largely due to the effect of weakness in most foreign currencies relative to the U.S. dollar. The
year-over-year growth in Mac net sales and unit sales for 2014 was primarily driven by increased sales of MacBook Air, MacBook Pro and Mac Pro. Mac net sales and unit sales increased in all of the Companys operating segments. Mac ASPs
decreased during 2014 compared to 2013 primarily due to price reductions on certain Mac models and a shift in mix towards Mac portable systems.
Apple Inc. | 2015 Form 10-K | 25
Table of Contents
Services The following table
presents net sales information of Services for 2015, 2014 and 2013 (dollars in millions):
2015
Change
2014
Change
2013
Net sales
$
19,909
10%
$
18,063
13%
$
16,051
Percentage of total net sales
9%
10%
9%
The increase in net sales of Services during 2015 compared to 2014 was primarily due to growth from Internet Services and
licensing. The App Store, included within Internet Services, generated strong year-over-year net sales growth of 29%. The increase in net sales of
Services in 2014 compared to 2013 was primarily due to growth in net sales from Internet Services, AppleCare and licensing. Internet Services generated a total of $10.2 billion in net sales during 2014 compared to $9.3 billion during 2013. Growth in
net sales from Internet Services was driven by increases in revenue from app sales reflecting continued growth in the installed base of iOS devices and the expanded offerings of iOS apps and related in-app purchases. This was partially offset by a
decline in sales of digital music. Segment Operating Performance
The Company manages its business primarily on a geographic basis. The Companys reportable operating segments consist of the Americas, Europe,
Greater China, Japan and Rest of Asia Pacific. The Americas segment includes both North and South America. The Europe segment includes European countries, as well as India, the Middle East and Africa. The Greater China segment includes China, Hong
Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and those Asian countries not included in the Companys other reportable operating segments. Although, each reportable operating segment provides similar hardware and software
products and similar services, they are managed separately to better align with the location of the Companys customers and distribution partners and the unique market dynamics of each geographic region. Further information regarding the
Companys reportable operating segments can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 11, Segment Information and Geographic Data.
Americas The following table presents Americas net sales
information for 2015, 2014 and 2013 (dollars in millions):
2015
Change
2014
Change
2013
Net sales
$
93,864
17%
$
80,095
4%
$
77,093
Percentage of total net sales
40%
44%
45%
The year-over-year growth in Americas net sales during 2015 was driven primarily by growth in net sales and unit sales of
iPhone, partially offset by a decline in net sales and unit sales of iPad. The growth in the Americas segment in 2014 was due to increased net sales
of iPhone, Mac and Services that was partially offset by a decline in net sales of iPad and Other Products and weakness in foreign currencies relative to the U.S. dollar compared to 2013. iPhone growth resulted primarily from the successful
introduction of iPhone 5s and 5c in September 2013 and the successful launch of iPhone 6 and 6 Plus in September 2014. Mac growth was driven primarily by increased net sales and unit sales of MacBook Air and Mac Pro.
Europe The following table presents Europe net sales
information for 2015, 2014 and 2013 (dollars in millions):
2015
Change
2014
Change
2013
Net sales
$
50,337
14%
$
44,285
8%
$
40,980
Percentage of total net sales
22%
24%
24%
The year-over-year increase in Europe net sales during 2015 was driven primarily by growth in net sales and unit sales of
iPhone, partially offset by the effect of weakness in foreign currencies relative to the U.S. dollar and a decline in net sales and unit sales of iPad.
The growth in the Europe segment in 2014 was due to increased net sales of iPhone, Mac and Services, as well as strength in European currencies relative
to the U.S. dollar, partially offset by a decline in net sales of iPad. iPhone growth resulted primarily from the successful introduction of iPhone 5s and 5c in the second half of calendar 2013 and the successful launch of iPhone 6 and 6 Plus in
over 20 countries in Europe in September 2014. Mac growth was driven primarily by increased net sales and unit sales of MacBook Air, MacBook Pro and Mac Pro.
Apple Inc. | 2015 Form 10-K | 26
Table of Contents
Greater China The
following table presents Greater China net sales information for 2015, 2014 and 2013 (dollars in millions):
2015
Change
2014
Change
2013
Net sales
$
58,715
84%
$
31,853
18%
$
27,016
Percentage of total net sales
25%
17%
16%
Greater China experienced strong year-over-year increases in net sales during 2015 driven primarily by iPhone sales.
The Greater China segment experienced year-over-year growth in net sales in 2014 that was significantly higher than the growth rate for the Company
overall. Greater China growth was driven by higher unit sales and net sales of all major product categories, in addition to higher net sales of Services. Growth in net sales and unit sales of iPhone was especially strong, driven by the successful
launch of iPhone 5s and 5c in Mainland China and Hong Kong in September 2013, the successful launch of iPhone 6 and 6 Plus in Hong Kong in September 2014, increased demand for the Companys entry-priced iPhones and the addition of a significant
new carrier in the second quarter of 2014. Japan The
following table presents Japan net sales information for 2015, 2014 and 2013 (dollars in millions):
2015
Change
2014
Change
2013
Net sales
$
15,706
3%
$
15,314
11%
$
13,782
Percentage of total net sales
7%
8%
8%
The year-over-year increase in Japan net sales during 2015 was driven primarily by growth in Services largely associated
with strong App Store sales, partially offset by the effect of weakness in the Japanese yen relative to the U.S. dollar. In 2014 the Japan segment
generated year-over-year increases in net sales and unit sales of every major product category and experienced growth in net sales of Services. The year-over-year growth in iPhone was driven by the successful launch of iPhone 5s and 5c in September
2013, the successful launch of iPhone 6 and 6 Plus in September 2014, increased demand for the Companys entry-priced iPhones and the addition of a significant new carrier in the fourth quarter of 2013. These positive factors were partially
offset by weakness in the Japanese Yen relative to the U.S. dollar. Rest of Asia Pacific
The following table presents Rest of Asia Pacific net sales information for 2015, 2014 and 2013 (dollars in millions):
2015
Change
2014
Change
2013
Net sales
$
15,093
34%
$
11,248
(7)%
$
12,039
Percentage of total net sales
6%
6%
7%
The year-over-year increase in Rest of Asia Pacific net sales during 2015 primarily reflects strong growth in net sales
and unit sales of iPhone, partially offset by the effect of weakness in foreign currencies relative to the U.S. dollar and a decline in net sales and unit sales of iPad.
Net sales in the Rest of Asia Pacific segment declined in 2014 compared to 2013 due to year-over-year reductions in net sales in all major product
categories except Mac and reductions in unit sales of iPad. Net sales in 2014 were also negatively affected by the weakness in several foreign currencies relative to the U.S. dollar, including the Australian dollar.
Apple Inc. | 2015 Form 10-K | 27
Table of Contents
Gross Margin
Gross margin for 2015, 2014 and 2013 is as follows (dollars in millions):
2015
2014
2013
Net sales
$
233,715
$
182,795
$
170,910
Cost of sales
140,089
112,258
106,606
Gross margin
$
93,626
$
70,537
$
64,304
Gross margin percentage
40.1%
38.6%
37.6%
The year-over-year increase in the gross margin percentage in 2015 was driven primarily by a favorable shift in mix to
products with higher margins and, to a lesser extent, by improved leverage on fixed costs from higher net sales. These positive factors were partially offset primarily by higher product cost structures and, to a lesser extent, by the effect of
weakness in most foreign currencies relative to the U.S. dollar. The year-over-year increase in the gross margin percentage in 2014 was driven by
multiple factors including lower commodity costs, a favorable shift in mix to products with higher margins and improved leverage on fixed costs from higher net sales, which was partially offset by the weakness in several foreign currencies relative
to the U.S. dollar, price reductions on select products and higher cost structures on certain new products. The Company anticipates gross margin
during the first quarter of 2016 to be between 39% and 40%. The foregoing statement regarding the Companys expected gross margin percentage in the first quarter of 2016 is forward-looking and could differ from actual results. The
Companys future gross margins can be impacted by multiple factors including, but not limited to, those set forth in Part I, Item 1A of this Form 10-K under the heading Risk Factors and those described in this paragraph. In
general, the Company believes gross margins will remain under downward pressure due to a variety of factors, including continued industry wide global product pricing pressures, increased competition, compressed product life cycles, product
transitions, potential increases in the cost of components, and potential strengthening of the U.S. dollar, as well as potential increases in the costs of outside manufacturing services and a potential shift in the Companys sales mix towards
products with lower gross margins. In response to competitive pressures, the Company expects it will continue to take product pricing actions, which would adversely affect gross margins. Gross margins could also be affected by the Companys
ability to manage product quality and warranty costs effectively and to stimulate demand for certain of its products. Due to the Companys significant international operations, its financial condition and operating results, including gross
margins, could be significantly affected by fluctuations in exchange rates. Operating Expenses
Operating expenses for 2015, 2014 and 2013 are as follows (dollars in millions):
2015
Change
2014
Change
2013
Research and development
$
8,067
34%
$
6,041
35%
$
4,475
Percentage of total net sales
3%
3%
3%
Selling, general and administrative
$
14,329
19%
$
11,993
11%
$
10,830
Percentage of total net sales
6%
7%
6%
Total operating expenses
$
22,396
24%
$
18,034
18%
$
15,305
Percentage of total net sales
10%
10%
9%
Research and Development The
year-over-year growth in R&D expense in 2015 and 2014 was driven primarily by an increase in headcount and related expenses, including share-based compensation costs, and material costs to support expanded R&D activities. The Company
continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace and are directly related to timely development of new and updated products that are central to the Companys
core business strategy. Selling, General and Administrative
The year-over-year growth in selling, general and administrative expense in 2015 and 2014 was primarily due to increased headcount and related expenses,
including share-based compensation costs, and higher spending on marketing and advertising.
Apple Inc. | 2015 Form 10-K | 28
Table of Contents
Other Income/(Expense), Net
Other income/(expense), net for 2015, 2014 and 2013 are as follows (dollars in millions):
2015
Change
2014
Change
2013
Interest and dividend income
$
2,921
$
1,795
$
1,616
Interest expense
(733
)
(384
)
(136
)
Other expense, net
(903
)
(431
)
(324
)
Total other income/(expense), net
$
1,285
31%
$
980
(15)%
$
1,156
The increase in other income/(expense), net during 2015 compared to 2014 was due primarily to higher interest income,
partially offset by higher expenses associated with foreign exchange activity and higher interest expense on debt. The decrease in other income and expense during 2014 compared to 2013 was due primarily to higher interest expense on debt and higher
expenses associated with foreign exchange rate movements, partially offset by lower premium expenses on foreign exchange contracts and higher interest income. The weighted-average interest rate earned by the Company on its cash, cash equivalents and
marketable securities was 1.49%, 1.11% and 1.03% in 2015, 2014 and 2013, respectively. Provision for Income Taxes
Provision for income taxes and effective tax rates for 2015, 2014 and 2013 are as follows (dollars in millions):
2015
2014
2013
Provision for income taxes
$
19,121
$
13,973
$
13,118
Effective tax rate
26.4%
26.1%
26.2%
The Companys effective tax rates for 2015, 2014 and 2013 differ from the statutory federal income tax rate of 35%
due primarily to certain undistributed foreign earnings, a substantial portion of which was generated by subsidiaries organized in Ireland, for which no U.S. taxes are provided when such earnings are intended to be indefinitely reinvested outside
the U.S. The higher effective tax rate during 2015 compared to 2014 was due primarily to higher foreign taxes. The effective tax rate in 2014 compared to 2013 was relatively flat.
As of September 26, 2015, the Company had deferred tax assets arising from deductible temporary differences, tax losses and tax credits of $7.8
billion and deferred tax liabilities of $24.1 billion. Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of
existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets. The Company will continue to evaluate the realizability of deferred tax assets quarterly by assessing the need for and the amount of a valuation
allowance. The U.S. Internal Revenue Service is currently examining the years 2010 through 2012, and all years prior to 2010 are closed. In
addition, the Company is subject to audits by state, local and foreign tax authorities. In major states and major foreign jurisdictions, the years subsequent to 2003 generally remain open and could be subject to examination by the taxing
authorities. Management believes that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Companys
tax audits are resolved in a manner not consistent with managements expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the
Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commissions assertions are without merit. If the European
Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of
September 26, 2015 the Company is unable to estimate the impact.
Apple Inc. | 2015 Form 10-K | 29
Table of Contents
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue
from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to
be entitled when products are transferred to customers. The original effective date for ASU 2014-09 would have required the Company to adopt
beginning in its first quarter of 2018. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for one year and
permits early adoption as early as the original effective date of ASU 2014-09. Accordingly, the Company may adopt the standard in either its first quarter of 2018 or 2019. The new revenue standard may be applied retrospectively to each prior period
presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the timing of its adoption and the impact of adopting the new revenue standard on its consolidated financial
statements. Liquidity and Capital Resources The following
table presents selected financial information and statistics as of and for the years ended September 26, 2015, September 27, 2014 and September 28, 2013 (in millions):
2015
2014
2013
Cash, cash equivalents and marketable securities
$
205,666
$
155,239
$
146,761
Property, plant and equipment, net
$
22,471
$
20,624
$
16,597
Commercial paper
$
8,499
$
6,308
$
0
Total term debt
$
55,963
$
28,987
$
16,960
Working capital
$
8,768
$
5,083
$
29,628
Cash generated by operating activities
$
81,266
$
59,713
$
53,666
Cash used in investing activities
$
(56,274
)
$
(22,579
)
$
(33,774
)
Cash used in financing activities
$
(17,716
)
$
(37,549
)
$
(16,379
)
The Company believes its existing balances of cash, cash equivalents and marketable securities will be sufficient to
satisfy its working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with its existing operations over the next 12 months. The Company currently anticipates the cash used for future
dividends, the share repurchase program and debt repayments will come from its current domestic cash, cash generated from on-going U.S. operating activities and from borrowings.
As of September 26, 2015 and September 27, 2014, the Companys cash, cash equivalents and marketable securities held by foreign
subsidiaries were $186.9 billion and $137.1 billion, respectively, and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income
taxation on repatriation to the U.S. The Companys marketable securities investment portfolio is invested primarily in highly-rated securities and its investment policy generally limits the amount of credit exposure to any one issuer. The
policy requires investments generally to be investment grade with the objective of minimizing the potential risk of principal loss. During 2015,
cash generated from operating activities of $81.3 billion was a result of $53.4 billion of net income, non-cash adjustments to net income of $16.2 billion and an increase in the net change in operating assets and liabilities of $11.7 billion. Cash
used in investing activities of $56.3 billion during 2015 consisted primarily of cash used for purchases of marketable securities, net of sales and maturities, of $44.4 billion and cash used to acquire property, plant and equipment of $11.2 billion.
Cash used in financing activities of $17.7 billion during 2015 consisted primarily of cash used to repurchase common stock of $35.3 billion and cash used to pay dividends and dividend equivalents of $11.6 billion, partially offset by net proceeds
from the issuance of term debt of $27.1 billion. During 2014, cash generated from operating activities of $59.7 billion was a result of $39.5
billion of net income, non-cash adjustments to net income of $13.2 billion and an increase in net change in operating assets and liabilities of $7.0 billion. Cash used in investing activities of $22.6 billion during 2014 consisted primarily of cash
used for purchases of marketable securities, net of sales and maturities, of $9.0 billion; cash used to acquire property, plant and equipment of $9.6 billion; and cash paid for business acquisitions, net of cash acquired, of $3.8 billion. Cash used
in financing activities of $37.5 billion during 2014 consisted primarily of cash used to repurchase common stock of $45.0 billion and cash used to pay dividends and dividend equivalents of $11.1 billion, partially offset by net proceeds from the
issuance of term debt and commercial paper of $12.0 billion and $6.3 billion, respectively.
Apple Inc. | 2015 Form 10-K | 30
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Capital Assets
The Companys capital expenditures were $11.2 billion during 2015. The Company anticipates utilizing approximately $15.0 billion for capital
expenditures during 2016, which includes product tooling and manufacturing process equipment; data centers; corporate facilities and infrastructure, including information systems hardware, software and enhancements; and retail store facilities.
Debt In 2014, the Board of Directors authorized the Company to
issue unsecured short-term promissory notes (Commercial Paper) pursuant to a commercial paper program. The Company intends to use the net proceeds from the commercial paper program for general corporate purposes, including dividends and
share repurchases. As of September 26, 2015, the Company had $8.5 billion of Commercial Paper outstanding, with a weighted-average interest rate of 0.14% and maturities generally less than nine months.
As of September 26, 2015, the Company has outstanding floating- and fixed-rate notes for an aggregate principal amount of $55.7 billion
(collectively the Notes). The Company has entered, and in the future may enter, into interest rate swaps to manage interest rate risk on the Notes. In addition, the Company has entered, and in the future may enter, into currency swaps to
manage foreign currency risk on the Notes. The future principal payments for the Companys Notes as of September 26, 2015 are as follows (in millions):
2016
$
2,500
2017
3,500
2018
6,000
2019
3,775
2020
5,581
Thereafter
34,345
Total term debt
$
55,701
Further information regarding the Companys debt issuances and related hedging activity can be found in Part II,
Item 8 of this Form 10-K in the Notes to the Consolidated Financial Statements in Note 2, Financial Instruments and Note 6, Debt.
Capital Return Program In April 2015, the Companys Board
of Directors increased the share repurchase program authorization from $90 billion to $140 billion of the Companys common stock, increasing the expected total size of the capital return program to $200 billion. The Company expects to execute
the capital return program by the end of March 2017 by paying dividends and dividend equivalents, repurchasing shares and remitting withheld taxes related to net share settlement of restricted stock units. To assist in funding its capital return
program, the Company expects to continue to access the debt markets, both domestically and internationally. As of September 26, 2015, $104 billion of the share repurchase program has been utilized. The Companys share repurchase program
does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of
1934, as amended. In April 2015, the Companys Board of Directors raised the quarterly cash dividend by 11%. The Company plans to increase its
dividend on an annual basis subject to declaration by the Board of Directors. The following table presents the Companys dividends, dividend
equivalents, share repurchases and net share settlement activity from the start of the capital return program in August 2012 through September 26, 2015 (in millions):
Dividends andDividendEquivalents Paid
Accelerated ShareRepurchases
Open MarketShareRepurchases
Taxes Relatedto Settlement ofEquity Awards
Total
2015
$
11,561
$
6,000
$
30,026
$
1,499
$
49,086
2014
11,126
21,000
24,000
1,158
57,284
2013
10,564
13,950
9,000
1,082
34,596
2012
2,488
0
0
56
2,544
Total
$
35,739
$
40,950
$
63,026
$
3,795
$
143,510
Apple Inc. | 2015 Form 10-K | 31
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Off-Balance Sheet Arrangements and Contractual Obligations
The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retained
interests, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing,
liquidity, market risk, or credit risk support to the Company, or engages in leasing, hedging, or R&D services with the Company. The following
table presents certain payments due by the Company under contractual obligations with minimum firm commitments as of September 26, 2015, and excludes amounts already recorded on the Consolidated Balance Sheet, except for term debt (in
millions):
Payments Due inLess Than 1 Year
Payments Due in1-3 Years
Payments Due in4-5 Years
Payments Due inMore Than 5 Years
Total
Term debt
$
2,500
$
9,500
$
9,356
$
34,345
$
55,701
Operating leases
772
1,518
1,389
2,592
6,271
Purchase commitments
29,464
0
0
0
29,464
Other obligations
4,553
1,898
53
757
7,261
Total
$
37,289
$
12,916
$
10,798
$
37,694
$
98,697
Operating Leases The
Companys major facility leases are typically for terms not exceeding 10 years and generally contain multi-year renewal options. As of September 26, 2015, the Company had a total of 463 retail stores. Leases for retail space are for terms
ranging from five to 20 years, the majority of which are for 10 years, and often contain multi-year renewal options. As of September 26, 2015, the Companys total future minimum lease payments under noncancelable operating leases were $6.3
billion, of which $3.6 billion related to leases for retail space. Purchase Commitments
The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Companys products and to perform final assembly and testing
of finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. The Company also obtains individual components for its products
from a wide variety of individual suppliers. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. Where
appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier. As of September 26, 2015, the Company had outstanding off-balance sheet third-party
manufacturing commitments and component purchase commitments of $29.5 billion. Other Obligations
The Companys other off-balance sheet obligations were comprised of commitments to acquire capital assets, including product tooling and
manufacturing process equipment, and commitments related to inventory prepayments, advertising, licensing, R&D, internet and telecommunications services, energy and other obligations.
The Companys other non-current liabilities in the Consolidated Balance Sheets consist primarily of deferred tax liabilities, gross unrecognized tax
benefits and the related gross interest and penalties. As of September 26, 2015, the Company had non-current deferred tax liabilities of $24.1 billion. Additionally, as of September 26, 2015, the Company had gross unrecognized tax benefits
of $6.9 billion and an additional $1.3 billion for gross interest and penalties classified as non-current liabilities. At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years in
connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligation table. Indemnification
The Company generally does not indemnify end-users of its operating system and application software against legal claims that the software infringes
third-party intellectual property rights. Other agreements entered into by the Company sometimes include indemnification provisions under which the Company could be subject to costs and/or damages in the event of an infringement claim against the
Company or an indemnified third-party. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss with respect to indemnification of end-users of its operating system or application
software for infringement of third-party intellectual property rights. The Company did not record a liability for infringement costs related to indemnification as of September 26, 2015 or September 27, 2014.
Apple Inc. | 2015 Form 10-K | 32
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In September 2015, the Company introduced the iPhone Upgrade Program, which is available to customers who
purchase an iPhone 6s and 6s Plus in one of its U.S. physical retail stores and activate the purchased iPhone with one of the four national carriers. The iPhone Upgrade Program provides customers the right to trade in that iPhone for a new iPhone,
provided certain conditions are met. One of the conditions of this program requires the customer to finance the initial purchase price of the iPhone with a third-party lender. Upon exercise of the trade-in right and purchase of a new iPhone, the
Company satisfies the customers outstanding balance due to the third-party lender on the original device. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such
right with subsequent changes to the guarantee liability recognized within revenue. The Company has entered into indemnification agreements with its
directors and executive officers. Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers and to advance
expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of
prior indemnification claims and the unique facts and circumstances involved in each claim. However, the Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations.
Critical Accounting Policies and Estimates The preparation of
financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (GAAP) and the Companys discussion and analysis of its financial condition and operating results require the
Companys management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1, Summary of Significant Accounting Policies, of the Notes to
Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Companys consolidated financial statements. Management bases its estimates on
historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from
these estimates, and such differences may be material. Management believes the Companys critical accounting policies and estimates are those
related to revenue recognition, valuation and impairment of marketable securities, inventory valuation and valuation of manufacturing-related assets and estimated purchase commitment cancellation fees, warranty costs, income taxes, and legal and
other contingencies. Management considers these policies critical because they are both important to the portrayal of the Companys financial condition and operating results, and they require management to make judgments and estimates about
inherently uncertain matters. The Companys senior management has reviewed these critical accounting policies and related disclosures with the Audit and Finance Committee of the Companys Board of Directors.
Revenue Recognition Net sales consist primarily of revenue
from the sale of hardware, software, digital content and applications, accessories, and service and support contracts. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed
or determinable and collection is probable. Product is considered delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have been transferred. For most of the Companys product sales, these criteria
are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company
retains a portion of the risk of loss on these sales during transit. For payment terms in excess of the Companys standard payment terms, revenue is recognized as payments become due unless the Company has positive evidence that the sales price
is fixed or determinable, such as a successful history of collection, without concession, on comparable arrangements. The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is essential to the
functionality of the hardware and third-party digital content sold on the iTunes Store in accordance with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry-specific software accounting
guidance for the following types of sales transactions: (i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.
For multi-element arrangements that include hardware products containing software essential to the hardware products functionality,
undelivered software elements that relate to the hardware products essential software and/or undelivered non-software services, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances,
the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence of selling price
(TPE) and (iii) best estimate of selling price (ESP). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the
Companys best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis.
Apple Inc. | 2015 Form 10-K | 33
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For sales of qualifying versions of iOS devices, Mac, Apple Watch and Apple TV, the Company has indicated it
may from time to time provide future unspecified software upgrades to the devices essential software and/or non-software services free of charge. Because the Company has neither VSOE nor TPE for the unspecified software upgrade rights or the
non-software services, revenue is allocated to these rights and services based on the Companys ESPs. Revenue allocated to the unspecified software upgrade rights and non-software services based on the Companys ESPs is deferred and
recognized on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided. The
Companys process for determining ESPs involves managements judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable. Should future facts and
circumstances change, the Companys ESPs and the future rate of related amortization for unspecified software upgrades and non-software services related to future sales of these devices could change. Factors subject to change include the
unspecified software upgrade rights and non-software services offered, the estimated value of unspecified software upgrade rights and non-software services and the estimated period unspecified software upgrades and non-software services are expected
to be provided. The Company records reductions to revenue for estimated commitments related to price protection and other customer incentive
programs. For transactions involving price protection, the Company recognizes revenue net of the estimated amount to be refunded, provided the refund amount can be reasonably and reliably estimated and the other conditions for revenue recognition
have been met. The Companys policy requires that, if refunds cannot be reliably estimated, revenue is not recognized until reliable estimates can be made or the price protection lapses. For the Companys other customer incentive programs,
the estimated cost is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. The Company also records reductions to revenue for expected future product returns based on the
Companys historical experience. Future market conditions and product transitions may require the Company to increase customer incentive programs that could result in reductions to future revenue. Additionally, certain customer incentive
programs require management to estimate the number of customers who will actually redeem the incentive. Managements estimates are based on historical experience and the specific terms and conditions of particular incentive programs. If a
greater than estimated proportion of customers redeems such incentives, the Company would be required to record additional reductions to revenue, which would have an adverse impact on the Companys operating results.
Valuation and Impairment of Marketable Securities The
Companys investments in available-for-sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair value of securities are recognized in accumulated other comprehensive income, net of tax, in the
Companys Consolidated Balance Sheets. Changes in the fair value of available-for-sale securities impact the Companys net income only when such securities are sold or an other-than-temporary impairment is recognized. Realized gains and
losses on the sale of securities are determined by specific identification of each securitys cost basis. The Company regularly reviews its investment portfolio to determine if any security is other-than-temporarily impaired, which would
require the Company to record an impairment charge in the period any such determination is made. In making this judgment, the Company evaluates, among other things, the duration and extent to which the fair value of a security is less than its cost;
the financial condition of the issuer and any changes thereto; and the Companys intent to sell, or whether it will more likely than not be required to sell, the security before recovery of its amortized cost basis. The Companys
assessment on whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security, which would have an adverse impact on the Companys operating
results. Inventory Valuation and Valuation of Manufacturing-Related Assets and Estimated Purchase Commitment Cancellation Fees
The Company must purchase components and build inventory in advance of product shipments and has invested in manufacturing-related assets, including
capital assets held at its suppliers facilities. In addition, the Company has made prepayments to certain of its suppliers associated with long-term supply agreements to secure supply of inventory components. The Company records a write-down
for inventories of components and products, including third-party products held for resale, which have become obsolete or are in excess of anticipated demand or net realizable value. The Company performs a detailed review of inventory that considers
multiple factors including demand forecasts, product life cycle status, product development plans, current sales levels and component cost trends. The Company also reviews its manufacturing-related capital assets and inventory prepayments for
impairment whenever events or circumstances indicate the carrying amount of such assets may not be recoverable. If the Company determines that an asset is not recoverable, it records an impairment loss equal to the amount by which the carrying value
of such an asset exceeds its fair value. The industries in which the Company competes are subject to a rapid and unpredictable pace of product and
component obsolescence and demand changes. In certain circumstances the Company may be required to record additional write-downs of inventory and/or manufacturing-related assets. These circumstances include future demand or market conditions for the
Companys products being less favorable than forecasted, unforeseen technological changes or changes to the Companys product development plans that negatively impact the utility of any of these assets, or significant deterioration in the
financial condition of one or more of the Companys suppliers that hold any of the Companys manufacturing-related assets or to whom the Company has made an inventory prepayment. Such write-downs would adversely affect the Companys
financial condition and operating results in the period when the write-downs were recorded.
Apple Inc. | 2015 Form 10-K | 34
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The Company accrues for estimated cancellation fees related to inventory orders that have been cancelled or
are expected to be cancelled. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders in each case based on projected demand. Where appropriate, the purchases
are applied to inventory component prepayments that are outstanding with the respective supplier. Purchase commitments typically cover the Companys forecasted component and manufacturing requirements for periods up to 150
days. If there is an abrupt and substantial decline in demand for one or more of the Companys products, a change in the Companys product development plans, or an unanticipated change in technological requirements for any of the
Companys products, the Company may be required to record additional accruals for cancellation fees that would adversely affect its results of operations in the period when the cancellation fees are identified and recorded.
Warranty Costs The Company accrues for the estimated cost of
warranties at the time the related revenue is recognized based on historical and projected warranty claim rates, historical and projected cost-per-claim and knowledge of specific product failures that are outside of the Companys typical
experience. The Company regularly reviews these estimates to assess the adequacy of its recorded warranty liabilities or the current installed base of products subject to warranty protection and adjusts the amounts as necessary. If actual product
failure rates or repair costs differ from estimates, revisions to the estimated warranty liabilities would be required and could materially affect the Companys financial condition and operating results.
Income Taxes The Company records a tax provision for the
anticipated tax consequences of its reported operating results. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences
of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that
apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than
not to be realized. The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will
be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than
50% likelihood of being realized upon ultimate settlement. Management believes it is more likely than not that forecasted income, including income
that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets. In the event that the Company determines all
or part of the net deferred tax assets are not realizable in the future, the Company will record an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made. In addition, the calculation of tax
liabilities involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with managements expectations could have a material
impact on the Companys financial condition and operating results. Legal and Other Contingencies
As discussed in Part I, Item 3 of this Form 10-K under the heading Legal Proceedings and in Part II, Item 8 of this Form 10-K in the
Notes to Consolidated Financial Statements in Note 10, Commitments and Contingencies, the Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company records a liability when it
is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of management,
there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. However, the outcome of legal
proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the
Company in a reporting period for amounts in excess of managements expectations, the Companys consolidated financial statements for that reporting period could be materially adversely affected.
Apple Inc. | 2015 Form 10-K | 35
Table of Contents
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk Interest Rate and Foreign Currency Risk Management
The Company regularly reviews its foreign exchange forward and option positions and interest rate swaps, both on a
stand-alone basis and in conjunction with its underlying foreign currency and interest rate related exposures. Given the effective horizons of the Companys risk management activities and the anticipatory
nature of the exposures, there can be no assurance these positions will offset more than a portion of the financial impact resulting from movements in either foreign exchange or interest rates. Further, the recognition of the gains and losses
related to these instruments may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Companys financial condition and operating results.
Interest Rate Risk The Companys exposure to changes in
interest rates relates primarily to the Companys investment portfolio and outstanding debt. While the Company is exposed to global interest rate fluctuations, the Companys interest income and expense are most sensitive to fluctuations in
U.S. interest rates. Changes in U.S. interest rates affect the interest earned on the Companys cash, cash equivalents and marketable securities and the fair value of those securities, as well as costs associated with hedging and interest paid
on the Companys debt. The Companys investment policy and strategy are focused on preservation of capital and supporting the
Companys liquidity requirements. The Company uses a combination of internal and external management to execute its investment strategy and achieve its investment objectives. The Company typically invests in highly-rated securities, and its
investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade, with the primary objective of minimizing the potential risk of principal loss. To provide a
meaningful assessment of the interest rate risk associated with the Companys investment portfolio, the Company performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment
portfolio assuming a 100 basis point parallel shift in the yield curve. Based on investment positions as of September 26, 2015 and September 27, 2014, a hypothetical 100 basis point increase in interest rates across all maturities would
result in a $4.3 billion and $3.4 billion incremental decline in the fair market value of the portfolio, respectively. Such losses would only be realized if the Company sold the investments prior to maturity.
As of September 26, 2015 and September 27, 2014, the Company had outstanding floating- and fixed-rate notes with varying maturities for an
aggregate carrying amount of $56.0 billion and $29.0 billion, respectively. The Company has entered, and may enter in the future, into interest rate swaps to manage interest rate risk on its outstanding term debt. Interest rate swaps allow the
Company to effectively convert fixed-rate payments into floating-rate payments or floating-rate payments into fixed-rate payments. Gains and losses on these instruments are generally offset by the corresponding losses and gains on the related
hedging instrument. A 100 basis point increase in market interest rates would cause interest expense on the Companys debt as of September 26, 2015 and September 27, 2014 to increase by $200 million and $110 million on an annualized
basis, respectively. Further details regarding the Companys debt is provided in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 6, Debt. Foreign Currency Risk
In general, the Company is a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a
strengthening of the U.S. dollar, will negatively affect the Companys net sales and gross margins as expressed in U.S. dollars. There is a risk that the Company will have to adjust local currency product pricing due to competitive pressures
when there have been significant volatility in foreign currency exchange rates. The Company may enter into foreign currency forward and option
contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries.
In addition, the Company has entered, and may enter in the future, into non-designated foreign currency contracts to partially offset the foreign currency exchange gains and losses on its foreign-denominated debt issuances. The Companys
practice is to hedge a portion of its material foreign exchange exposures, typically for up to 12 months. However, the Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to
accounting considerations and the prohibitive economic cost of hedging particular exposures.
Apple Inc. | 2015 Form 10-K | 36
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To provide a meaningful assessment of the foreign currency risk associated with certain of the
Companys foreign currency derivative positions, the Company performed a sensitivity analysis using a value-at-risk (VAR) model to assess the potential impact of fluctuations in exchange rates. The VAR model consisted of using a
Monte Carlo simulation to generate thousands of random market price paths assuming normal market conditions. The VAR is the maximum expected loss in fair value, for a given confidence interval, to the Companys foreign currency derivative
positions due to adverse movements in rates. The VAR model is not intended to represent actual losses but is used as a risk estimation and management tool. The model assumes normal market conditions. Forecasted transactions, firm commitments and
assets and liabilities denominated in foreign currencies were excluded from the model. Based on the results of the model, the Company estimates with 95% confidence a maximum one-day loss in fair value of $342 million as of September 26, 2015
compared to a maximum one-day loss in fair value of $240 million as of September 27, 2014. Because the Company uses foreign currency instruments for hedging purposes, the loss in fair value incurred on those instruments are generally offset by
increases in the fair value of the underlying exposures. Actual future gains and losses associated with the Companys investment portfolio and
derivative positions may differ materially from the sensitivity analyses performed as of September 26, 2015 due to the inherent limitations associated with predicting the timing and amount of changes in interest rates, foreign currency
exchanges rates and the Companys actual exposures and positions.
Apple Inc. | 2015 Form 10-K | 37
Table of Contents
Item 8.
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Consolidated Statements of Operations for the years ended September 26, 2015, September
27, 2014, and September 28, 2013
39
Consolidated Statements of Comprehensive Income for the years ended September 26, 2015, September
27, 2014, and September 28, 2013
40
Consolidated Balance Sheets as of September 26, 2015 and September 27, 2014
41
Consolidated Statements of Shareholders Equity for the years ended September 26, 2015, September
27, 2014, and September 28, 2013
42
Consolidated Statements of Cash Flows for the years ended September 26, 2015, September
27, 2014, and September 28, 2013
43
Notes to Consolidated Financial Statements
44
Selected Quarterly Financial Information (Unaudited)
68
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm
69
All financial statement schedules have been omitted, since the required information is not applicable or is not present
in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
Apple Inc. | 2015 Form 10-K | 38
Table of Contents
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except number of shares which are reflected in thousands and per share amounts)
Years ended
September 26,2015
September 27,2014
September 28,2013
Net sales
$
233,715
$
182,795
$
170,910
Cost of sales
140,089
112,258
106,606
Gross margin
93,626
70,537
64,304
Operating expenses:
Research and development
8,067
6,041
4,475
Selling, general and administrative
14,329
11,993
10,830
Total operating expenses
22,396
18,034
15,305
Operating income
71,230
52,503
48,999
Other income/(expense), net
1,285
980
1,156
Income before provision for income taxes
72,515
53,483
50,155
Provision for income taxes
19,121
13,973
13,118
Net income
$
53,394
$
39,510
$
37,037
Earnings per share:
Basic
$
9.28
$
6.49
$
5.72
Diluted
$
9.22
$
6.45
$
5.68
Shares used in computing earnings per share:
Basic
5,753,421
6,085,572
6,477,320
Diluted
5,793,069
6,122,663
6,521,634
Cash dividends declared per share
$
1.98
$
1.82
$
1.64
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2015 Form 10-K | 39
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Years ended
September 26,2015
September 27,2014
September 28,2013
Net income
$
53,394
$
39,510
$
37,037
Other comprehensive income/(loss):
Change in foreign currency translation, net of tax effects of $201, $50 and $35, respectively
(411
)
(137
)
(112
)
Change in unrealized gains/losses on derivative instruments:
Change in fair value of derivatives, net of tax benefit/(expense) of $(441), $(297) and $(351), respectively
2,905
1,390
522
Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $630, $(36) and $255, respectively
(3,497
)
149
(458
)
Total change in unrealized gains/losses on derivative instruments, net of tax
(592
)
1,539
64
Change in unrealized gains/losses on marketable securities:
Change in fair value of marketable securities, net of tax benefit/(expense) of $264, $(153) and $458, respectively
(483
)
285
(791
)
Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $(32), $71 and $82, respectively
59
(134
)
(131
)
Total change in unrealized gains/losses on marketable securities, net of tax
(424
)
151
(922
)
Total other comprehensive income/(loss)
(1,427
)
1,553
(970
)
Total comprehensive income
$
51,967
$
41,063
$
36,067
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2015 Form 10-K | 40
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CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands and par value)
September 26,2015
September 27,2014
ASSETS:
Current assets:
Cash and cash equivalents
$
21,120
$
13,844
Short-term marketable securities
20,481
11,233
Accounts receivable, less allowances of $82 and $86, respectively
16,849
17,460
Inventories
2,349
2,111
Deferred tax assets
5,546
4,318
Vendor non-trade receivables
13,494
9,759
Other current assets
9,539
9,806
Total current assets
89,378
68,531
Long-term marketable securities
164,065
130,162
Property, plant and equipment, net
22,471
20,624
Goodwill
5,116
4,616
Acquired intangible assets, net
3,893
4,142
Other assets
5,556
3,764
Total assets
$
290,479
$
231,839
LIABILITIES AND SHAREHOLDERS EQUITY:
Current liabilities:
Accounts payable
$
35,490
$
30,196
Accrued expenses
25,181
18,453
Deferred revenue
8,940
8,491
Commercial paper
8,499
6,308
Current portion of long-term debt
2,500
0
Total current liabilities
80,610
63,448
Deferred revenue, non-current
3,624
3,031
Long-term debt
53,463
28,987
Other non-current liabilities
33,427
24,826
Total liabilities
171,124
120,292
Commitments and contingencies
Shareholders equity:
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 5,578,753 and 5,866,161 shares issued and
outstanding, respectively
27,416
23,313
Retained earnings
92,284
87,152
Accumulated other comprehensive income
(345
)
1,082
Total shareholders equity
119,355
111,547
Total liabilities and shareholders equity
$
290,479
$
231,839
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2015 Form 10-K | 41
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In millions, except number of shares which are reflected in thousands)
Common Stock andAdditional Paid-In Capital
Retained Earnings
AccumulatedOtherComprehensiveIncome/(Loss)
TotalShareholdersEquity
Shares
Amount
Balances as of September 29, 2012
6,574,458
$
16,422
$
101,289
$
499
$
118,210
Net income
0
0
37,037
0
37,037
Other comprehensive income/(loss)
0
0
0
(970
)
(970
)
Dividends and dividend equivalents declared
0
0
(10,676
)
0
(10,676
)
Repurchase of common stock
(328,837
)
0
(22,950
)
0
(22,950
)
Share-based compensation
0
2,253
0
0
2,253
Common stock issued, net of shares withheld for employee taxes
48,873
(143
)
(444
)
0
(587
)
Tax benefit from equity awards, including transfer pricing adjustments
0
1,232
0
0
1,232
Balances as of September 28, 2013
6,294,494
19,764
104,256
(471
)
123,549
Net income
0
0
39,510
0
39,510
Other comprehensive income/(loss)
0
0
0
1,553
1,553
Dividends and dividend equivalents declared
0
0
(11,215
)
0
(11,215
)
Repurchase of common stock
(488,677
)
0
(45,000
)
0
(45,000
)
Share-based compensation
0
2,863
0
0
2,863
Common stock issued, net of shares withheld for employee taxes
60,344
(49
)
(399
)
0
(448
)
Tax benefit from equity awards, including transfer pricing adjustments
0
735
0
0
735
Balances as of September 27, 2014
5,866,161
23,313
87,152
1,082
111,547
Net income
0
0
53,394
0
53,394
Other comprehensive income/(loss)
0
0
0
(1,427
)
(1,427
)
Dividends and dividend equivalents declared
0
0
(11,627
)
0
(11,627
)
Repurchase of common stock
(325,032
)
0
(36,026
)
0
(36,026
)
Share-based compensation
0
3,586
0
0
3,586
Common stock issued, net of shares withheld for employee taxes
37,624
(231
)
(609
)
0
(840
)
Tax benefit from equity awards, including transfer pricing adjustments
0
748
0
0
748
Balances as of September 26, 2015
5,578,753
$
27,416
$
92,284
$
(345
)
$
119,355
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2015 Form 10-K | 42
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Years ended
September 26,2015
September 27,2014
September 28,2013
Cash and cash equivalents, beginning of the year
$
13,844
$
14,259
$
10,746
Operating activities:
Net income
53,394
39,510
37,037
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation and amortization
11,257
7,946
6,757
Share-based compensation expense
3,586
2,863
2,253
Deferred income tax expense
1,382
2,347
1,141
Changes in operating assets and liabilities:
Accounts receivable, net
611
(4,232
)
(2,172
)
Inventories
(238
)
(76
)
(973
)
Vendor non-trade receivables
(3,735
)
(2,220
)
223
Other current and non-current assets
(179
)
167
1,080
Accounts payable
5,400
5,938
2,340
Deferred revenue
1,042
1,460
1,459
Other current and non-current liabilities
8,746
6,010
4,521
Cash generated by operating activities
81,266
59,713
53,666
Investing activities:
Purchases of marketable securities
(166,402
)
(217,128
)
(148,489
)
Proceeds from maturities of marketable securities
14,538
18,810
20,317
Proceeds from sales of marketable securities
107,447
189,301
104,130
Payments made in connection with business acquisitions, net
(343
)
(3,765
)
(496
)
Payments for acquisition of property, plant and equipment
(11,247
)
(9,571
)
(8,165
)
Payments for acquisition of intangible assets
(241
)
(242
)
(911
)
Other
(26
)
16
(160
)
Cash used in investing activities
(56,274
)
(22,579
)
(33,774
)
Financing activities:
Proceeds from issuance of common stock
543
730
530
Excess tax benefits from equity awards
749
739
701
Taxes paid related to net share settlement of equity awards
(1,499
)
(1,158
)
(1,082
)
Dividends and dividend equivalents paid
(11,561
)
(11,126
)
(10,564
)
Repurchase of common stock
(35,253
)
(45,000
)
(22,860
)
Proceeds from issuance of term debt, net
27,114
11,960
16,896
Change in commercial paper, net
2,191
6,306
0
Cash used in financing activities
(17,716
)
(37,549
)
(16,379
)
Increase/(decrease) in cash and cash equivalents
7,276
(415
)
3,513
Cash and cash equivalents, end of the year
$
21,120
$
13,844
$
14,259
Supplemental cash flow disclosure:
Cash paid for income taxes, net
$
13,252
$
10,026
$
9,128
Cash paid for interest
$
514
$
339
$
0
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2015 Form 10-K | 43
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Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
Apple Inc. and its wholly-owned subsidiaries (collectively Apple or the Company) designs, manufactures and
markets mobile communication and media devices, personal computers and portable digital music players, and sells a variety of related software, services, accessories, networking solutions and third-party digital content and applications. The Company
sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added resellers. In addition, the Company sells a variety of
third-party Apple-compatible products, including application software and various accessories through its online and retail stores. The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers.
Basis of Presentation and Preparation
The accompanying consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have
been eliminated. In the opinion of the Companys management, the consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these
consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements
and accompanying notes. Actual results could differ materially from those estimates. The Companys fiscal year is the 52 or 53-week period that
ends on the last Saturday of September. The Companys fiscal years 2015, 2014 and 2013 ended on September 26, 2015, September 27, 2014 and September 28, 2013, respectively. An additional week is included in the first fiscal
quarter approximately every six years to realign fiscal quarters with calendar quarters. Fiscal years 2015, 2014 and 2013 each spanned 52 weeks. Unless otherwise stated, references to particular years, quarters, months and periods refer to the
Companys fiscal years ended in September and the associated quarters, months and periods of those fiscal years.
Revenue Recognition
Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, accessories, and service
and support contracts. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is probable. Product is considered delivered to the customer once
it has been shipped and title, risk of loss and rewards of ownership have been transferred. For most of the Companys product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to
education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit. For payment terms in excess of
the Companys standard payment terms, revenue is recognized as payments become due unless the Company has positive evidence that the sales price is fixed or determinable, such as a successful history of collection, without concession, on
comparable arrangements. The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is essential to the functionality of the hardware and third-party digital content sold on the iTunes Store in accordance
with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry specific software accounting guidance for the following types of sales transactions: (i) standalone sales of software products,
(ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware. For
the sale of most third-party products, the Company recognizes revenue based on the gross amount billed to customers because the Company establishes its own pricing for such products, retains related inventory risk for physical products, is the
primary obligor to the customer and assumes the credit risk for amounts billed to its customers. For third-party applications sold through the App Store and Mac App Store and certain digital content sold through the iTunes Store, the Company does
not determine the selling price of the products and is not the primary obligor to the customer. Therefore, the Company accounts for such sales on a net basis by recognizing in net sales only the commission it retains from each sale. The portion of
the gross amount billed to customers that is remitted by the Company to third-party app developers and certain digital content owners is not reflected in the Companys Consolidated Statements of Operations.
Apple Inc. | 2015 Form 10-K | 44
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The Company records deferred revenue when it receives payments in advance of the delivery of products or the
performance of services. This includes amounts that have been deferred for unspecified and specified software upgrade rights and non-software services that are attached to hardware and software products. The Company sells gift cards redeemable at
its retail and online stores, and also sells gift cards redeemable on iTunes Store, App Store, Mac App Store and iBooks Store for the purchase of digital content and software. The Company records deferred revenue upon the sale of the card, which is
relieved upon redemption of the card by the customer. Revenue from AppleCare service and support contracts is deferred and recognized over the service coverage periods. AppleCare service and support contracts typically include extended phone
support, repair services, web-based support resources and diagnostic tools offered under the Companys standard limited warranty. The Company
records reductions to revenue for estimated commitments related to price protection and other customer incentive programs. For transactions involving price protection, the Company recognizes revenue net of the estimated amount to be refunded. For
the Companys other customer incentive programs, the estimated cost of these programs is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. The Company also records
reductions to revenue for expected future product returns based on the Companys historical experience. Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded
as current liabilities until remitted to the relevant government authority. Revenue Recognition for Arrangements with Multiple Deliverables
For multi-element arrangements that include hardware products containing software essential to the hardware products functionality, undelivered
software elements that relate to the hardware products essential software, and undelivered non-software services, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses
a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE) and
(iii) best estimate of selling price (ESP). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Companys best
estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. For multi-element arrangements accounted for in accordance with industry specific software accounting guidance, the Company allocates
revenue to all deliverables based on the VSOE of each element, and if VSOE does not exist revenue is recognized when elements lacking VSOE are delivered.
For sales of qualifying versions of iPhone, iPad and iPod touch (iOS devices), Mac, Apple Watch and Apple TV, the Company has indicated it
may from time to time provide future unspecified software upgrades to the devices essential software and/or non-software services free of charge. The Company has identified up to three deliverables regularly included in arrangements involving
the sale of these devices. The first deliverable, which represents the substantial portion of the allocated sales price, is the hardware and software essential to the functionality of the hardware device delivered at the time of sale. The second
deliverable is the embedded right included with qualifying devices to receive on a when-and-if-available basis, future unspecified software upgrades relating to the products essential software. The third deliverable is the non-software
services to be provided to qualifying devices. The Company allocates revenue between these deliverables using the relative selling price method. Because the Company has neither VSOE nor TPE for these deliverables, the allocation of revenue is based
on the Companys ESPs. Revenue allocated to the delivered hardware and the related essential software is recognized at the time of sale provided the other conditions for revenue recognition have been met. Revenue allocated to the embedded
unspecified software upgrade rights and the non-software services is deferred and recognized on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided. Cost of sales related to
delivered hardware and related essential software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide non-software services are recognized as cost of sales as incurred, and engineering and sales and
marketing costs are recognized as operating expenses as incurred. The Companys process for determining its ESP for deliverables without VSOE
or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable including, where applicable, prices charged by the Company and market trends in the pricing for similar offerings, product
specific business objectives, length of time a particular version of a device has been available, estimated cost to provide the non-software services and the relative ESP of the upgrade rights and non-software services as compared to the total
selling price of the product. Beginning in September 2015, the Company reduced the combined ESPs for iOS devices and Mac between $5 and $10 to
reflect the increase in competitive offers for similar products at little to no cost for users, which reduces the amount the Company could reasonably charge for these deliverables on a standalone basis.
Shipping Costs Amounts billed to customers related to shipping
and handling are classified as revenue, and the Companys shipping and handling costs are classified as cost of sales.
Apple Inc. | 2015 Form 10-K | 45
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Warranty Costs
The Company generally provides for the estimated cost of hardware and software warranties at the time the related revenue is recognized. The Company
assesses the adequacy of its accrued warranty liabilities and adjusts the amounts as necessary based on actual experience and changes in future estimates.
Software Development Costs Research and development
(R&D) costs are expensed as incurred. Development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a products technological feasibility has been established and
ending when a product is available for general release to customers. In most instances, the Companys products are released soon after technological feasibility has been established and as a result software development costs were expensed as
incurred. Advertising Costs Advertising costs are
expensed as incurred and included in selling, general and administrative expenses. Advertising expense was $1.8 billion, $1.2 billion and $1.1 billion for 2015, 2014 and 2013, respectively.
Share-based Compensation The Company recognizes expense
related to share-based payment transactions in which it receives employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Companys equity instruments or that
may be settled by the issuance of such equity instruments. Share-based compensation cost for restricted stock and restricted stock units (RSUs) is measured based on the closing fair market value of the Companys common stock on the
date of grant. The Company recognizes share-based compensation cost over the awards requisite service period on a straight-line basis for time-based RSUs and on a graded basis for RSUs that are contingent on the achievement of performance
conditions. The Company recognizes a benefit from share-based compensation in the Consolidated Statements of Shareholders Equity if an excess tax benefit is realized. In addition, the Company recognizes the indirect effects of share-based
compensation on R&D tax credits, foreign tax credits and domestic manufacturing deductions in the Consolidated Statements of Operations. Further information regarding share-based compensation can be found in Note 9, Benefit Plans.
Income Taxes The provision for income taxes is computed
using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for
operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be
realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood
of being realized upon settlement. See Note 5, Income Taxes for additional information. Earnings Per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of
additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Companys employee
stock purchase plan, unvested restricted stock and unvested RSUs. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an
increase in the fair market value of the Companys common stock can result in a greater dilutive effect from potentially dilutive securities.
Apple Inc. | 2015 Form 10-K | 46
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The following table shows the computation of basic and diluted earnings per share for 2015, 2014 and 2013
(net income in millions and shares in thousands):
2015
2014
2013
Numerator:
Net income
$
53,394
$
39,510
$
37,037
Denominator:
Weighted-average shares outstanding
5,753,421
6,085,572
6,477,320
Effect of dilutive securities
39,648
37,091
44,314
Weighted-average diluted shares
5,793,069
6,122,663
6,521,634
Basic earnings per share
$
9.28
$
6.49
$
5.72
Diluted earnings per share
$
9.22
$
6.45
$
5.68
Potentially dilutive securities whose effect would have been antidilutive are excluded from the computation of diluted
earnings per share. Financial Instruments Cash Equivalents and
Marketable Securities All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash
equivalents. The Companys marketable debt and equity securities have been classified and accounted for as available-for-sale. Management determines the appropriate
classification of its investments at the time of purchase and reevaluates the classifications at each balance sheet date. The Company classifies its marketable debt securities as either short-term or long-term based on each instruments
underlying contractual maturity date. Marketable debt securities with maturities of 12 months or less are classified as short-term and marketable debt securities with maturities greater than 12 months are classified as long-term. Marketable equity
securities, including mutual funds, are classified as either short-term or long-term based on the nature of each security and its availability for use in current operations. The Companys marketable debt and equity securities are carried at
fair value, with unrealized gains and losses, net of taxes, reported as a component of accumulated other comprehensive income (AOCI) in shareholders equity, with the exception of unrealized losses believed to be
other-than-temporary which are reported in earnings in the current period. The cost of securities sold is based upon the specific identification method.
Derivative Financial Instruments The Company accounts for its
derivative instruments as either assets or liabilities and carries them at fair value. For derivative instruments that hedge the exposure to
variability in expected future cash flows that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI in shareholders equity and reclassified into earnings
in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized in earnings in the current period. To receive hedge accounting
treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge
effectiveness and are recognized in earnings. For derivative instruments that hedge the exposure to changes in the fair value of an asset or a
liability and that are designated as fair value hedges, both the net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item are recognized in earnings in the current period.
For derivative instruments and foreign currency debt that hedge the exposure to changes in foreign currency exchange rates used for translation of the
net investment in a foreign operation and that are designated as a net investment hedge, the net gain or loss on the effective portion of the derivative instrument is reported in the same manner as a foreign currency translation adjustment. For
forward exchange contracts designated as net investment hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its definition of effectiveness. Accordingly, any gains or losses related to this
forward carry component are recognized in earnings in the current period. Derivatives that do not qualify as hedges are adjusted to fair value
through earnings in the current period.
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Allowance for Doubtful Accounts
The Company records its allowance for doubtful accounts based upon its assessment of various factors, including historical experience, age of the accounts
receivable balances, credit quality of the Companys customers, current economic conditions and other factors that may affect the customers ability to pay.
Inventories Inventories are stated at the lower of cost,
computed using the first-in, first-out method and net realizable value. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. As of September 26, 2015 and
September 27, 2014, the Companys inventories consist primarily of finished goods. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed by use of the straight-line method over
the estimated useful lives of the assets, which for buildings is the lesser of 30 years or the remaining life of the underlying building; between one to five years for machinery and equipment, including product tooling and manufacturing process
equipment; and the shorter of lease terms or ten years for leasehold improvements. The Company capitalizes eligible costs to acquire or develop internal-use software that are incurred subsequent to the preliminary project stage. Capitalized costs
related to internal-use software are amortized using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Depreciation and amortization expense on property and equipment was $9.2 billion, $6.9
billion and $5.8 billion during 2015, 2014 and 2013, respectively. Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets
The Company reviews property, plant and equipment, inventory component prepayments and certain identifiable intangibles, excluding goodwill, for
impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts
to future undiscounted cash flows the assets are expected to generate. If property, plant and equipment, inventory component prepayments and certain identifiable intangibles are considered to be impaired, the impairment to be recognized equals the
amount by which the carrying value of the assets exceeds its fair value. The Company does not amortize goodwill and intangible assets with
indefinite useful lives, rather such assets are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired. The Company performs its goodwill and intangible
asset impairment tests in the fourth quarter of each year. The Company did not recognize any impairment charges related to goodwill or indefinite lived intangible assets during 2015, 2014 and 2013. The Company established reporting units based on
its current reporting structure. For purposes of testing goodwill for impairment, goodwill has been allocated to these reporting units to the extent it relates to each reporting unit. In 2015 and 2014, the Companys goodwill was primarily
allocated to the Americas and Europe reporting units. The Company amortizes its intangible assets with definite useful lives over their estimated
useful lives and reviews these assets for impairment. The Company typically amortizes its acquired intangible assets with definite useful lives over periods from three to seven years.
Fair Value Measurements The Company applies fair value
accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be
received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded
at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as
risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within
the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: Level 1 Quoted prices in active markets
for identical assets or liabilities. Level 2 Observable inputs other than quoted prices in active markets for identical assets and
liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Inputs that are generally unobservable and typically reflect managements estimate of assumptions that market participants
would use in pricing the asset or liability.
Apple Inc. | 2015 Form 10-K | 48
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The Companys valuation techniques used to measure the fair value of money market funds and certain
marketable equity securities were derived from quoted prices in active markets for identical assets or liabilities. The valuation techniques used to measure the fair value of the Companys debt instruments and all other financial instruments,
all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.
In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair
value. The Company has not elected the fair value option for any eligible financial instruments. Foreign Currency Translation and Remeasurement
The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect
at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation included in
AOCI in shareholders equity. The Companys subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property and
nonmonetary assets and liabilities at historical rates.
Note 2 Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables show the Companys cash and available-for-sale
securities adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or short- or long-term marketable securities as of September 26, 2015 and
September 27, 2014 (in millions):
2015
AdjustedCost
UnrealizedGains
UnrealizedLosses
FairValue
Cash andCashEquivalents
Short-TermMarketableSecurities
Long-TermMarketableSecurities
Cash
$
11,389
$
0
$
0
$
11,389
$
11,389
$
0
$
0
Level 1:
Money market funds
1,798
0
0
1,798
1,798
0
0
Mutual funds
1,772
0
(144
)
1,628
0
1,628
0
Subtotal
3,570
0
(144
)
3,426
1,798
1,628
0
Level 2:
U.S. Treasury securities
34,902
181
(1
)
35,082
0
3,498
31,584
U.S. agency securities
5,864
14
0
5,878
841
767
4,270
Non-U.S. government securities
6,356
45
(167
)
6,234
43
135
6,056
Certificates of deposit and time deposits
4,347
0
0
4,347
2,065
1,405
877
Commercial paper
6,016
0
0
6,016
4,981
1,035
0
Corporate securities
116,908
242
(985
)
116,165
3
11,948
104,214
Municipal securities
947
5
0
952
0
48
904
Mortgage- and asset-backed securities
16,121
87
(31
)
16,177
0
17
16,160
Subtotal
191,461
574
(1,184
)
190,851
7,933
18,853
164,065
Total
$
206,420
$
574
$
(1,328
)
$
205,666
$
21,120
$
20,481
$
164,065
Apple Inc. | 2015 Form 10-K | 49
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2014
AdjustedCost
UnrealizedGains
UnrealizedLosses
FairValue
Cash andCashEquivalents
Short-TermMarketableSecurities
Long-TermMarketableSecurities
Cash
$
10,232
$
0
$
0
$
10,232
$
10,232
$
0
$
0
Level 1:
Money market funds
1,546
0
0
1,546
1,546
0
0
Mutual funds
2,531
1
(132
)
2,400
0
2,400
0
Subtotal
4,077
1
(132
)
3,946
1,546
2,400
0
Level 2:
U.S. Treasury securities
23,140
15
(9
)
23,146
12
607
22,527
U.S. agency securities
7,373
3
(11
)
7,365
652
157
6,556
Non-U.S. government securities
6,925
69
(69
)
6,925
0
204
6,721
Certificates of deposit and time deposits
3,832
0
0
3,832
1,230
1,233
1,369
Commercial paper
475
0
0
475
166
309
0
Corporate securities
85,431
296
(241
)
85,486
6
6,298
79,182
Municipal securities
940
8
0
948
0
0
948
Mortgage- and asset-backed securities
12,907
26
(49
)
12,884
0
25
12,859
Subtotal
141,023
417
(379
)
141,061
2,066
8,833
130,162
Total
$
155,332
$
418
$
(511
)
$
155,239
$
13,844
$
11,233
$
130,162
The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons
including, but not limited to, anticipation of credit deterioration and duration management. The maturities of the Companys long-term marketable securities generally range from one to five years.
As of September 26, 2015, the Company considers the declines in market value of its marketable securities investment portfolio to be temporary in
nature and does not consider any of its investments other-than-temporarily impaired. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy
generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment
for other-than-temporary impairment the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates
and the Companys intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investments cost basis.
Derivative Financial Instruments The Company may use
derivatives to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, on net investments in certain foreign subsidiaries and on certain existing assets and liabilities. However, the Company
may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than
a portion of the financial impact resulting from movements in foreign currency exchange or interest rates. To help protect gross margins from
fluctuations in foreign currency exchange rates, certain of the Companys subsidiaries whose functional currency is the U.S. dollar may hedge a portion of forecasted foreign currency revenue, and subsidiaries whose functional currency is not
the U.S. dollar and who sell in local currencies may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries functional currencies. The Company may enter into forward contracts, option contracts or other
instruments to manage this risk and may designate these instruments as cash flow hedges. The Company typically hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12
months. To help protect the net investment in a foreign operation from adverse changes in foreign currency exchange rates, the Company may enter
into foreign currency forward and option contracts to offset the changes in the carrying amounts of these investments due to fluctuations in foreign currency exchange rates. In addition, the Company may use non-derivative financial instruments, such
as its foreign currency-denominated debt, as economic hedges of its net investments in certain foreign subsidiaries. In both of these cases, the Company designates these instruments as net investment hedges.
Apple Inc. | 2015 Form 10-K | 50
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The Company may also enter into non-designated foreign currency contracts to partially offset the foreign
currency exchange gains and losses generated by the re-measurement of certain assets and liabilities denominated in non-functional currencies. The
Company may enter into interest rate swaps, options, or other instruments to manage interest rate risk. These instruments may offset a portion of changes in income or expense, or changes in fair value of the Companys term debt or investments.
The Company designates these instruments as either cash flow or fair value hedges. The Companys hedged interest rate transactions as of September 26, 2015 are expected to be recognized within 10 years.
Cash Flow Hedges The effective portions of cash flow hedges
are recorded in AOCI until the hedged item is recognized in earnings. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of net sales in the same period as the related revenue is
recognized, and deferred gains and losses related to cash flow hedges of inventory purchases are recognized as a component of cost of sales in the same period as the related costs are recognized. Deferred gains and losses associated with cash flow
hedges of interest income or expense are recognized in other income/(expense), net in the same period as the related income or expense is recognized. The ineffective portions and amounts excluded from the effectiveness testing of cash flow hedges
are recognized in other income/(expense), net. Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is
probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified
immediately into other income/(expense), net. Any subsequent changes in fair value of such derivative instruments are reflected in other income/(expense), net unless they are re-designated as hedges of other transactions.
Net Investment Hedges The effective portions of net investment
hedges are recorded in other comprehensive income (OCI) as a part of the cumulative translation adjustment. The ineffective portions and amounts excluded from the effectiveness testing of net investment hedges are recognized in other
income/(expense), net. Fair Value Hedges Gains and losses
related to changes in fair value hedges are recognized in earnings along with a corresponding loss or gain related to the change in value of the underlying hedged item.
Non-Designated Derivatives Derivatives that are not designated
as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates. The Company
records all derivatives in the Consolidated Balance Sheets at fair value. The Companys accounting treatment for these derivative instruments is based on its hedge designation. The following tables show the Companys derivative instruments
at gross fair value as of September 26, 2015 and September 27, 2014 (in millions):
2015
Fair Value ofDerivatives Designatedas Hedge Instruments
Fair Value ofDerivatives Not Designatedas Hedge Instruments
TotalFair Value
Derivative assets (1):
Foreign exchange contracts
$
1,442
$
109
$
1,551
Interest rate contracts
$
394
$
0
$
394
Derivative liabilities (2):
Foreign exchange contracts
$
905
$
94
$
999
Interest rate contracts
$
13
$
0
$
13
Apple Inc. | 2015 Form 10-K | 51
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2014
Fair Value ofDerivatives Designatedas Hedge Instruments
Fair Value ofDerivatives Not Designatedas Hedge Instruments
TotalFair Value
Derivative assets (1):
Foreign exchange contracts
$
1,332
$
222
$
1,554
Interest rate contracts
$
81
$
0
$
81
Derivative liabilities (2):
Foreign exchange contracts
$
41
$
40
$
81
(1)
The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets in the Consolidated Balance Sheets.
(2)
The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued expenses in the Consolidated Balance Sheets.
The following table shows the pre-tax gains and losses of the Companys derivative and non-derivative
instruments designated as cash flow, net investment and fair value hedges on OCI and the Consolidated Statements of Operations for 2015, 2014 and 2013 (in millions):
2015
2014
2013
Gains/(Losses) recognized in OCI effective portion:
Cash flow hedges:
Foreign exchange contracts
$
3,592
$
1,750
$
891
Interest rate contracts
(111
)
(15
)
12
Total
$
3,481
$
1,735
$
903
Net investment hedges:
Foreign exchange contracts
$
167
$
53
$
143
Foreign currency debt
(71
)
0
0
Total
$
96
$
53
$
143
Gains/(Losses) reclassified from AOCI into net income effective portion:
Cash flow hedges:
Foreign exchange contracts
$
4,092
$
(154
)
$
676
Interest rate contracts
(17
)
(16
)
(6
)
Total
$
4,075
$
(170
)
$
670
Gains/(Losses) on derivative instruments:
Fair value hedges:
Interest rate contracts
$
337
$
39
$
0
Gains/(Losses) related to hedged items:
Fair value hedges:
Interest rate contracts
$
(337
)
$
(39
)
$
0
The following table shows the notional amounts of the Companys outstanding derivative instruments and credit risk
amounts associated with outstanding or unsettled derivative instruments as of September 26, 2015 and September 27, 2014 (in millions):
2015
2014
Notional Amount
Credit RiskAmount
Notional Amount
Credit RiskAmount
Instruments designated as accounting hedges:
Foreign exchange contracts
$
70,054
$
1,385
$
42,945
$
1,333
Interest rate contracts
$
18,750
$
394
$
12,000
$
89
Instruments not designated as accounting hedges:
Foreign exchange contracts
$
49,190
$
109
$
38,510
$
222
Apple Inc. | 2015 Form 10-K | 52
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The notional amounts for outstanding derivative instruments provide one measure of the transaction volume
outstanding and do not represent the amount of the Companys exposure to credit or market loss. The credit risk amounts represent the Companys gross exposure to potential accounting loss on derivative instruments that are outstanding or
unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency or interest rates at each respective date. The Companys exposure to credit loss
and market risk will vary over time as currency and interest rates change. Although the table above reflects the notional and credit risk amounts of the Companys derivative instruments, it does not reflect the gains or losses associated with
the exposures and transactions that the instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market
conditions during the remaining life of the instruments. The Company generally enters into master netting arrangements, which are designed to reduce
credit risk by permitting net settlement of transactions with the same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net
fair value of certain financial instruments fluctuates from contractually established thresholds. The Company presents its derivative assets and derivative liabilities at their gross fair values in its Consolidated Balance Sheets. The net cash
collateral received by the Company related to derivative instruments under its collateral security arrangements was $1.0 billion as of September 26, 2015 and $2.1 billion as of September 27, 2014.
Under master netting arrangements with the respective counterparties to the Companys derivative contracts, the Company is allowed to net
settle transactions with a single net amount payable by one party to the other. As of September 26, 2015 and September 27, 2014, the potential effects of these rights of set-off associated with the Companys derivative contracts,
including the effects of collateral, would be a reduction to both derivative assets and derivative liabilities of $2.2 billion and $1.6 billion, respectively, resulting in net derivative liabilities of $78 million and $549
million, respectively. Accounts Receivable Trade Receivables
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, value-added resellers,
small and mid-sized businesses and education, enterprise and government customers. The Company generally does not require collateral from its customers; however, the Company will require collateral in certain instances to limit credit risk. In
addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing
arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements.
As of September 26, 2015, the Company had one customer that represented 10% or more of total trade receivables, which accounted for 12%. As of
September 27, 2014, the Company had two customers that represented 10% or more of total trade receivables, one of which accounted for 16% and the other 13%. The Companys cellular network carriers accounted for 71% and 72% of trade
receivables as of September 26, 2015 and September 27, 2014, respectively. Vendor Non-Trade Receivables
The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacture
sub-assemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. Vendor non-trade receivables from three of the Companys vendors accounted for 38%, 18% and 14% of total vendor non-trade
receivables as of September 26, 2015 and three of the Companys vendors accounted for 51%, 16% and 14% of total vendor non-trade receivables as of September 27, 2014.
Note 3 Consolidated Financial Statement Details
The following tables show the Companys consolidated financial statement details as of September 26, 2015 and
September 27, 2014 (in millions): Property, Plant and Equipment, Net
2015
2014
Land and buildings
$
6,956
$
4,863
Machinery, equipment and internal-use software
37,038
29,639
Leasehold improvements
5,263
4,513
Gross property, plant and equipment
49,257
39,015
Accumulated depreciation and amortization
(26,786
)
(18,391
)
Total property, plant and equipment, net
$
22,471
$
20,624
Apple Inc. | 2015 Form 10-K | 53
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Other Non-Current Liabilities
2015
2014
Deferred tax liabilities
$
24,062
$
20,259
Other non-current liabilities
9,365
4,567
Total other non-current liabilities
$
33,427
$
24,826
Other Income/(Expense), Net
The following table shows the detail of other income/(expense), net for 2015, 2014 and 2013 (in millions):
2015
2014
2013
Interest and dividend income
$
2,921
$
1,795
$
1,616
Interest expense
(733
)
(384
)
(136
)
Other expense, net
(903
)
(431
)
(324
)
Total other income/(expense), net
$
1,285
$
980
$
1,156
Note 4 Goodwill and Other Intangible Assets
On July 31, 2014, the Company completed the acquisitions of Beats Music, LLC, which offers a subscription streaming music service,
and Beats Electronics, LLC, which makes Beats® headphones, speakers and audio software (collectively, Beats). The total purchase price consideration for these acquisitions was $2.6
billion, which consisted primarily of cash, of which $2.2 billion was allocated to goodwill, $636 million to acquired intangible assets and $258 million to net liabilities assumed. Concurrent with the close of the acquisitions, the Company repaid
$295 million of existing Beats outstanding debt to third-party creditors. In conjunction with the Beats acquisitions, the Company issued approximately 5.1 million shares of its common stock to certain former equity holders of Beats. The
restricted stock was valued at approximately $485 million based on the Companys common stock on the acquisition date. The majority of these shares, valued at approximately $417 million, will vest over time based on continued employment with
Apple. The Company also completed various other business acquisitions during 2014 for an aggregate cash consideration, net of cash acquired, of $957
million, of which $828 million was allocated to goodwill, $257 million to acquired intangible assets and $128 million to net liabilities assumed.
The Companys acquired intangible assets with definite useful lives primarily consist of patents and licenses and are amortized over periods
typically from three to seven years. The following table summarizes the components of gross and net intangible asset balances as of September 26, 2015 and September 27, 2014 (in millions):
2015
2014
Gross Carrying Amount
AccumulatedAmortization
Net CarryingAmount
Gross Carrying Amount
AccumulatedAmortization
Net CarryingAmount
Definite-lived and amortizable acquired intangible assets
$
8,125
$
(4,332
)
$
3,793
$
7,127
$
(3,085
)
$
4,042
Indefinite-lived and non-amortizable acquired intangible assets
100
0
100
100
0
100
Total acquired intangible assets
$
8,225
$
(4,332
)
$
3,893
$
7,227
$
(3,085
)
$
4,142
Amortization expense related to acquired intangible assets was $1.3 billion, $1.1 billion and $960 million in 2015, 2014
and 2013, respectively. As of September 26, 2015, the remaining weighted-average amortization period for acquired intangible assets is 3.6 years. The expected annual amortization expense related to acquired intangible assets as of
September 26, 2015, is as follows (in millions):
2016
$
1,288
2017
1,033
2018
786
2019
342
2020
166
Thereafter
178
Total
$
3,793
Apple Inc. | 2015 Form 10-K | 54
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Note 5 Income Taxes
The provision for income taxes for 2015, 2014 and 2013, consisted of the following (in millions):
2015
2014
2013
Federal:
Current
$
11,730
$
8,624
$
9,334
Deferred
3,408
3,183
1,878
15,138
11,807
11,212
State:
Current
1,265
855
1,084
Deferred
(220
)
(178
)
(311
)
1,045
677
773
Foreign:
Current
4,744
2,147
1,559
Deferred
(1,806
)
(658
)
(426
)
2,938
1,489
1,133
Provision for income taxes
$
19,121
$
13,973
$
13,118
The foreign provision for income taxes is based on foreign pre-tax earnings of $47.6 billion, $33.6 billion and $30.5
billion in 2015, 2014 and 2013, respectively. The Companys consolidated financial statements provide for any related tax liability on undistributed earnings that the Company does not intend to be indefinitely reinvested outside the U.S.
Substantially all of the Companys undistributed international earnings intended to be indefinitely reinvested in operations outside the U.S. were generated by subsidiaries organized in Ireland, which has a statutory tax rate of 12.5%. As of
September 26, 2015, U.S. income taxes have not been provided on a cumulative total of $91.5 billion of such earnings. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be $30.0 billion.
As of September 26, 2015 and September 27, 2014, $186.9 billion and $137.1 billion, respectively, of the Companys cash, cash
equivalents and marketable securities were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income
taxation on repatriation to the U.S. A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal
income tax rate (35% in 2015, 2014 and 2013) to income before provision for income taxes for 2015, 2014 and 2013, is as follows (dollars in millions):
2015
2014
2013
Computed expected tax
$
25,380
$
18,719
$
17,554
State taxes, net of federal effect
680
469
508
Indefinitely invested earnings of foreign subsidiaries
(6,470
)
(4,744
)
(4,614
)
Domestic production activities deduction
(426
)
(495
)
(308
)
Research and development credit, net
(171
)
(88
)
(287
)
Other
128
112
265
Provision for income taxes
$
19,121
$
13,973
$
13,118
Effective tax rate
26.4%
26.1%
26.2%
The Companys income taxes payable have been reduced by the tax benefits from employee stock plan awards. For stock
options, the Company receives an income tax benefit calculated as the tax effect of the difference between the fair market value of the stock issued at the time of the exercise and the exercise price. For RSUs, the Company receives an income
tax benefit upon the awards vesting equal to the tax effect of the underlying stocks fair market value. The Company had net excess tax benefits from equity awards of $748 million, $706 million and $643 million in 2015, 2014 and 2013,
respectively, which were reflected as increases to common stock.
Apple Inc. | 2015 Form 10-K | 55
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As of September 26, 2015 and September 27, 2014, the significant components of the Companys
deferred tax assets and liabilities were (in millions):
2015
2014
Deferred tax assets:
Accrued liabilities and other reserves
$
4,205
$
3,326
Basis of capital assets and investments
2,238
898
Deferred revenue
1,941
1,787
Deferred cost sharing
667
0
Share-based compensation
575
454
Unrealized losses
564
130
Other
721
227
Total deferred tax assets, net of valuation allowance of $0
10,911
6,822
Deferred tax liabilities:
Unremitted earnings of foreign subsidiaries
26,868
21,544
Other
303
398
Total deferred tax liabilities
27,171
21,942
Net deferred tax liabilities
$
(16,260
)
$
(15,120
)
Deferred tax assets and liabilities reflect the effects of tax losses, credits and the future income tax effects of
temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Uncertain Tax Positions
Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained
upon examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit
that is greater than 50% likely of being realized upon ultimate settlement. The Company classifies gross interest and penalties and unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as
non-current liabilities in the Consolidated Balance Sheets. As of September 26, 2015, the total amount of gross unrecognized tax benefits was
$6.9 billion, of which $2.5 billion, if recognized, would affect the Companys effective tax rate. As of September 27, 2014, the total amount of gross unrecognized tax benefits was $4.0 billion, of which $1.4 billion, if recognized, would
affect the Companys effective tax rate. The aggregate changes in the balance of gross unrecognized tax benefits, which excludes interest and
penalties, for 2015, 2014 and 2013, is as follows (in millions):
2015
2014
2013
Beginning Balance
$
4,033
$
2,714
$
2,062
Increases related to tax positions taken during a prior year
2,056
1,295
745
Decreases related to tax positions taken during a prior year
(345
)
(280
)
(118
)
Increases related to tax positions taken during the current year
1,278
882
626
Decreases related to settlements with taxing authorities
(109
)
(574
)
(592
)
Decreases related to expiration of statute of limitations
(13
)
(4
)
(9
)
Ending Balance
$
6,900
$
4,033
$
2,714
The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes.
As of September 26, 2015 and September 27, 2014, the total amount of gross interest and penalties accrued was $1.3 billion and $630 million, respectively, which is classified as non-current liabilities in the Consolidated Balance Sheets.
In connection with tax matters, the Company recognized interest and penalty expense in 2015, 2014 and 2013 of $709 million, $40 million and $189 million, respectively.
Apple Inc. | 2015 Form 10-K | 56
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The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and in many
state and foreign jurisdictions. The U.S. Internal Revenue Service (the IRS) is currently examining the years 2010 through 2012, and all years prior to 2010 are closed. In addition, the Company is subject to audits by state, local and
foreign tax authorities. In major states and major foreign jurisdictions, the years subsequent to 2003 generally remain open and could be subject to examination by the taxing authorities.
Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax
audits cannot be predicted with certainty. If any issues addressed in the Companys tax audits are resolved in a manner not consistent with managements expectations, the Company could be required to adjust its provision for income taxes
in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next
12 months. On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for
alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commissions assertions are without
merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount
could be material, as of September 26, 2015 the Company is unable to estimate the impact.
Note 6 Debt
Commercial Paper In 2014, the Board of
Directors authorized the Company to issue unsecured short-term promissory notes (Commercial Paper) pursuant to a commercial paper program. The Company intends to use net proceeds from the commercial paper program for general corporate
purposes, including dividends and share repurchases. As of September 26, 2015 and September 27, 2014, the Company had $8.5 billion and $6.3 billion of Commercial Paper outstanding, respectively, with a weighted-average interest rate of
0.14% and 0.12%, respectively, and maturities generally less than nine months. The following table provides a summary of cash flows associated with
the issuance and maturities of Commercial Paper for 2015 and 2014 (in millions):
2015
2014
Maturities less than 90 days:
Proceeds from (repayments of) commercial paper, net
$
5,293
$
1,865
Maturities greater than 90 days:
Proceeds from commercial paper
3,851
4,771
Repayments of commercial paper
(6,953
)
(330
)
Maturities greater than 90 days, net
(3,102
)
4,441
Total change in commercial paper, net
$
2,191
$
6,306
Long-Term Debt As of
September 26, 2015, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $55.7 billion (collectively the Notes). The Notes are senior unsecured obligations, and
interest is payable in arrears, quarterly for the U.S. dollar-denominated and Australian dollar-denominated floating-rate notes, semi-annually for the U.S. dollar-denominated, Australian dollar-denominated, British pound-denominated and Japanese
yen-denominated fixed-rate notes and annually for the euro-denominated and Swiss franc-denominated fixed-rate notes.
Apple Inc. | 2015 Form 10-K | 57
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The following table provides a summary of the Companys term debt as of September 26, 2015 and
September 27, 2014:
2015
2014
Maturities
Amount (in millions)
EffectiveInterest Rate
Amount (in millions)
EffectiveInterest Rate
2013 debt issuance of $17.0 billion:
Floating-rate notes
2016 2018
$
3,000
0.51% 1.10%
$
3,000
0.51% 1.10%
Fixed-rate 0.45% 3.85% notes
2016 2043
14,000
0.51% 3.91%
14,000
0.51% 3.91%
2014 debt issuance of $12.0 billion:
Floating-rate notes
2017 2019
2,000
0.37% 0.60%
2,000
0.31% 0.54%
Fixed-rate 1.05% 4.45% notes
2017 2044
10,000
0.37% 4.48%
10,000
0.30% 4.48%
First quarter 2015 euro-denominated debt issuance of 2.8 billion:
Fixed-rate 1.000% notes
2022
1,558
2.94%
0
0
Fixed-rate 1.625% notes
2026
1,558
3.45%
0
0
Second quarter 2015 debt issuance of $6.5 billion:
Floating-rate notes
2020
500
0.56%
0
0
Fixed-rate 1.55% notes
2020
1,250
0.56%
0
0
Fixed-rate 2.15% notes
2022
1,250
0.87%
0
0
Fixed-rate 2.50% notes
2025
1,500
2.60%
0
0
Fixed-rate 3.45% notes
2045
2,000
3.58%
0
0
Second quarter 2015 Swiss franc-denominated debt issuance of SFr1.25 billion:
Fixed-rate 0.375% notes
2024
895
0.28%
0
0
Fixed-rate 0.750% notes
2030
384
0.74%
0
0
Third quarter 2015 debt issuance of $8.0 billion:
Floating-rate notes
2017
250
0.36%
0
0
Floating-rate notes
2020
500
0.61%
0
0
Fixed-rate 0.900% notes
2017
750
0.35%
0
0
Fixed-rate 2.000% notes
2020
1,250
0.61%
0
0
Fixed-rate 2.700% notes
2022
1,250
0.99%
0
0
Fixed-rate 3.200% notes
2025
2,000
1.22%
0
0
Fixed-rate 4.375% notes
2045
2,000
4.40%
0
0
Third quarter 2015 Japanese yen-denominated debt issuance of ¥250.0 billion:
Fixed-rate 0.35% notes
2020
2,081
0.35%
0
0
Fourth quarter 2015 British pound-denominated debt issuance of £1.25 billion:
Fixed-rate 3.05% notes
2029
1,148
3.79%
0
0
Fixed-rate 3.60% notes
2042
766
4.51%
0
0
Fourth quarter 2015 Australian dollar-denominated debt issuance of A$2.25 billion:
Floating-rate notes
2019
493
1.87%
0
0
Fixed-rate 2.85% notes
2019
282
1.89%
0
0
Fixed-rate 3.70% notes
2022
810
2.79%
0
0
Fourth quarter 2015 euro-denominated debt issuance of 2.0 billion:
Fixed-rate 1.375% notes
2024
1,113
3.30%
0
0
Fixed-rate 2.000% notes
2027
1,113
3.85%
0
0
Total term debt
55,701
29,000
Unamortized discount
(114
)
(52
)
Hedge accounting fair value adjustments
376
39
Less: Current portion of long-term debt
(2,500
)
0
Total long-term debt
$
53,463
$
28,987
To manage foreign currency risk associated with the euro-denominated notes issued in the first quarter of 2015 and the
British pound-denominated, Australian dollar-denominated and euro-denominated notes issued in the fourth quarter of 2015, the Company entered into currency swaps with an aggregate notional amount of $3.5 billion, $1.9 billion, $1.6 billion and $2.2
billion, respectively, which effectively converted these notes to U.S. dollar-denominated notes.
Apple Inc. | 2015 Form 10-K | 58
Table of Contents
To manage interest rate risk on the U.S. dollar-denominated fixed-rate notes issued in the second quarter of
2015 and maturing in 2020 and 2022, the Company entered into interest rate swaps with an aggregate notional amount of $2.5 billion. To manage interest rate risk on the U.S. dollar-denominated fixed-rate notes issued in the third quarter of 2015 and
maturing in 2017, 2020, 2022 and 2025, the Company entered into interest rate swaps with an aggregate notional amount of $4.3 billion. These interest rate swaps effectively converted the fixed interest rates on the U.S. dollar-denominated notes to a
floating interest rate. As of September 26, 2015, ¥250.0 billion of the Japanese yen-denominated notes was designated as a hedge of the
foreign currency exposure of its net investment in a foreign operation. The foreign currency transaction gain or loss on the Japanese yen-denominated debt designated as a hedge is recorded in OCI as a part of the cumulative translation adjustment.
As of September 26, 2015, the carrying value of the debt designated as a net investment hedge was $2.1 billion. For further discussion
regarding the Companys use of derivative instruments see the Derivative Financial Instruments section of Note 2, Financial Instruments.
The effective interest rates for the Notes include the interest on the Notes, amortization of the discount and, if applicable, adjustments related to
hedging. The Company recognized $722 million, $381 million and $136 million of interest expense on its term debt for 2015, 2014 and 2013, respectively.
The future principal payments for the Companys Notes as of September 26, 2015 are as follows (in millions):
2016
$
2,500
2017
3,500
2018
6,000
2019
3,775
2020
5,581
Thereafter
34,345
Total term debt
$
55,701
As of September 26, 2015 and September 27, 2014, the fair value of the Companys Notes, based on
Level 2 inputs, was $54.9 billion and $28.5 billion, respectively.
Note 7 Shareholders Equity
Dividends The Company declared and paid cash
dividends per share during the periods presented as follows:
DividendsPer Share
Amount(in millions)
2015:
Fourth quarter
$
0.52
$
2,950
Third quarter
0.52
2,997
Second quarter
0.47
2,734
First quarter
0.47
2,750
Total cash dividends declared and paid
$
1.98
$
11,431
2014:
Fourth quarter
$
0.47
$
2,807
Third quarter
0.47
2,830
Second quarter
0.44
2,655
First quarter
0.44
2,739
Total cash dividends declared and paid
$
1.82
$
11,031
Future dividends are subject to declaration by the Board of Directors.
Apple Inc. | 2015 Form 10-K | 59
Table of Contents
Share Repurchase Program
In the third quarter of 2015, the Companys Board of Directors increased the share repurchase authorization to $140 billion of the Companys
common stock, of which $104 billion had been utilized as of September 26, 2015. The Companys share repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately
negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the Exchange Act).
The Company has entered, and in the future may enter, into accelerated share repurchase arrangements (ASRs) with financial institutions. In
exchange for up-front payments, the financial institutions deliver shares of the Companys common stock during the purchase periods of each ASR. The total number of shares ultimately delivered, and therefore the average repurchase price paid
per share, is determined at the end of the applicable purchase period of each ASR based on the volume weighted-average price of the Companys common stock during that period. The shares received are retired in the periods they are delivered,
and the up-front payments are accounted for as a reduction to shareholders equity in the Companys Consolidated Balance Sheets in the periods the payments are made. The Company reflects the ASRs as a repurchase of common stock in the
period delivered for purposes of calculating earnings per share and as forward contracts indexed to its own common stock. The ASRs met all of the applicable criteria for equity classification, and therefore were not accounted for as derivative
instruments. The following table shows the Companys ASR activity and related information during the years ended September 26, 2015 and
September 27, 2014:
PurchasePeriod EndDate
Number ofShares(in thousands)
AverageRepurchasePrice PerShare
ASRAmount (in millions)
May 2015 ASR
July 2015
48,293
(1)
$
124.24
$
6,000
August 2014 ASR
February 2015
81,525
(2)
$
110.40
$
9,000
January 2014 ASR
December 2014
134,247
$
89.39
$
12,000
April 2013 ASR
March 2014
172,548
$
69.55
$
12,000
(1)
Includes 38.3 million shares delivered and retired at the beginning of the purchase period, which began in the third quarter of 2015 and
10.0 million shares delivered and retired at the end of the purchase period, which concluded in the fourth quarter of 2015.
(2)
Includes 59.9 million shares delivered and retired at the beginning of the purchase period, which began in the fourth quarter of 2014, 8.3 million
net shares delivered and retired in the first quarter of 2015 and 13.3 million shares delivered and retired at the end of the purchase period, which concluded in the second quarter of 2015.
Additionally, the Company repurchased shares of its common stock in the open market, which were retired upon
repurchase, during the periods presented as follows:
Number of Shares(in thousands)
Average RepurchasePrice Per Share
Amount (in millions)
2015:
Fourth quarter
121,802
$
115.15
$
14,026
Third quarter
31,231
$
128.08
4,000
Second quarter
56,400
$
124.11
7,000
First quarter
45,704
$
109.40
5,000
Total open market common stock repurchases
255,137
$
30,026
2014:
Fourth quarter
81,255
$
98.46
$
8,000
Third quarter
58,661
$
85.23
5,000
Second quarter
79,749
$
75.24
6,000
First quarter
66,847
$
74.79
5,000
Total open market common stock repurchases
286,512
$
24,000
Apple Inc. | 2015 Form 10-K | 60
Table of Contents
Note 8 Comprehensive Income
Comprehensive income consists of two components, net income and OCI. OCI refers to revenue, expenses, and gains and losses that under
GAAP are recorded as an element of shareholders equity but are excluded from net income. The Companys OCI consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional
currency, net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges and unrealized gains and losses on marketable securities classified as available-for-sale.
The following table shows the pre-tax amounts reclassified from AOCI into the Consolidated Statements of Operations, and the associated financial
statement line item, for 2015 and 2014 (in millions):
Comprehensive Income Components
Financial Statement Line Item
2015
2014
Unrealized (gains)/losses on derivative instruments:
Foreign exchange contracts
Revenue
$
(2,432
)
$
449
Cost of sales
(2,168
)
(295
)
Other income/(expense), net
456
15
Interest rate contracts
Other income/(expense), net
17
16
(4,127
)
185
Unrealized (gains)/losses on marketable securities
Other income/(expense), net
91
(205
)
Total amounts reclassified from AOCI
$
(4,036
)
$
(20
)
The following table shows the changes in AOCI by component for 2015 (in millions):
CumulativeForeignCurrency Translation
UnrealizedGains/Losseson DerivativeInstruments
UnrealizedGains/Losseson MarketableSecurities
Total
Balance at September 28, 2013
$
(105
)
$
(175
)
$
(191
)
$
(471
)
Other comprehensive income/(loss) before reclassifications
(187
)
1,687
438
1,938
Amounts reclassified from AOCI
0
185
(205
)
(20
)
Tax effect
50
(333
)
(82
)
(365
)
Other comprehensive income/(loss)
(137
)
1,539
151
1,553
Balance at September 27, 2014
(242
)
1,364
(40
)
1,082
Other comprehensive income/(loss) before reclassifications
(612
)
3,346
(747
)
1,987
Amounts reclassified from AOCI
0
(4,127
)
91
(4,036
)
Tax effect
201
189
232
622
Other comprehensive income/(loss)
(411
)
(592
)
(424
)
(1,427
)
Balance at September 26, 2015
$
(653
)
$
772
$
(464
)
$
(345
)
Apple Inc. | 2015 Form 10-K | 61
Table of Contents
Note 9 Benefit Plans
2014 Employee Stock Plan In the second
quarter of 2014, shareholders approved the 2014 Employee Stock Plan (the 2014 Plan) and terminated the Companys authority to grant new awards under the 2003 Employee Stock Plan (the 2003 Plan). The 2014 Plan provides
for broad-based equity grants to employees, including executive officers, and permits the granting of RSUs, stock grants, performance-based awards, stock options and stock appreciation rights, as well as cash bonus awards. RSUs granted under the
2014 Plan generally vest over four years, based on continued employment, and are settled upon vesting in shares of the Companys common stock on a one-for-one basis. Each share issued with respect to RSUs granted under the 2014 Plan reduces the
number of shares available for grant under the plan by two shares. RSUs cancelled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under the 2014 Plan utilizing a factor of two times the
number of RSUs cancelled or shares withheld. Currently, all RSUs granted under the 2014 Plan have dividend equivalent rights (DERs), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are
subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. Upon approval of the 2014 Plan, the Company reserved 385 million shares plus the
number of shares remaining that were reserved but not issued under the 2003 Plan. Shares subject to outstanding awards under the 2003 Plan that expire, are cancelled or otherwise terminate, or are withheld to satisfy tax withholding obligations with
respect to RSUs, will also be available for awards under the 2014 Plan. As of September 26, 2015, approximately 442.9 million shares were reserved for future issuance under the 2014 Plan.
2003 Employee Stock Plan The 2003 Plan is a shareholder
approved plan that provided for broad-based equity grants to employees, including executive officers. The 2003 Plan permitted the granting of incentive stock options, nonstatutory stock options, RSUs, stock appreciation rights, stock purchase rights
and performance-based awards. Options granted under the 2003 Plan generally expire seven to ten years after the grant date and generally become exercisable over a period of four years, based on continued employment, with either annual, semi-annual
or quarterly vesting. RSUs granted under the 2003 Plan generally vest over two to four years, based on continued employment and are settled upon vesting in shares of the Companys common stock on a one-for-one basis. All RSUs, other than RSUs
held by the Chief Executive Officer, granted under the 2003 Plan have DERs. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. In the
second quarter of 2014, the Company terminated the authority to grant new awards under the 2003 Plan. 1997 Director Stock Plan
The 1997 Director Stock Plan (the Director Plan) is a shareholder approved plan that (i) permits the Company to grant awards of RSUs or
stock options to the Companys non-employee directors, (ii) provides for automatic initial grants of RSUs upon a non-employee director joining the Board of Directors and automatic annual grants of RSUs at each annual meeting of
shareholders, and (iii) permits the Board of Directors to prospectively change the relative mixture of stock options and RSUs for the initial and annual award grants and the methodology for determining the number of shares of the Companys
common stock subject to these grants without shareholder approval. Each share issued with respect to RSUs granted under the Director Plan reduces the number of shares available for grant under the plan by two shares. The Director Plan expires
November 9, 2019. All RSUs granted under the Director Plan are entitled to DERs. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares
vest. As of September 26, 2015, approximately 1.2 million shares were reserved for future issuance under the Director Plan. Rule 10b5-1 Trading Plans
During the fourth quarter of 2015, Section 16 officers Timothy D. Cook, Angela Ahrendts, Luca Maestri, Daniel Riccio, Philip Schiller and
Jeffrey Williams had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act. An equity trading plan is a written document that pre-establishes the amounts, prices and dates (or formula for determining the amounts,
prices and dates) of future purchases or sales of the Companys stock, including shares acquired pursuant to the Companys employee and director equity plans.
Employee Stock Purchase Plan The Employee Stock Purchase Plan
(the Purchase Plan) is a shareholder approved plan under which substantially all employees may purchase the Companys common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the
stock as of the beginning or the end of six-month offering periods. An employees payroll deductions under the Purchase Plan are limited to 10% of the employees compensation and employees may not purchase more than $25,000 of stock during
any calendar year. As of September 26, 2015, approximately 53.0 million shares were reserved for future issuance under the Purchase Plan.
Apple Inc. | 2015 Form 10-K | 62
Table of Contents
401(k) Plan The
Companys 401(k) Plan is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating U.S. employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution
limit ($18,000 for calendar year 2015). The Company matches 50% to 100% of each employees contributions, depending on length of service, up to a maximum 6% of the employees eligible earnings. The Companys matching contributions to
the 401(k) Plan were $200 million, $163 million and $135 million in 2015, 2014 and 2013, respectively. Restricted Stock Units
A summary of the Companys RSU activity and related information for 2015, 2014 and 2013, is as follows:
Number
ofRSUs (in thousands)
Weighted-AverageGrant
Date FairValue Per Share
Aggregate Intrinsic Value (in millions)
Balance at September 29, 2012
105,037
$
49.27
RSUs granted
39,415
$
78.23
RSUs vested
(42,291
)
$
45.96
RSUs cancelled
(8,877
)
$
57.31
Balance at September 28, 2013
93,284
$
62.24
RSUs granted
59,269
$
74.54
RSUs vested
(43,111
)
$
57.29
RSUs cancelled
(5,620
)
$
68.47
Balance at September 27, 2014
103,822
$
70.98
RSUs granted
45,587
$
105.51
RSUs vested
(41,684
)
$
71.32
RSUs cancelled
(6,258
)
$
80.34
Balance at September 26, 2015
101,467
$
85.77
$
11,639
The fair value as of the respective vesting dates of RSUs was $4.8 billion, $3.4 billion and $3.1 billion for 2015, 2014
and 2013, respectively. The majority of RSUs that vested in 2015, 2014 and 2013 were net-share settled such that the Company withheld shares with value equivalent to the employees minimum statutory obligation for the applicable income and
other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately 14.1 million, 15.6 million and 15.5 million for 2015, 2014 and 2013, respectively, and were based on the
value of the RSUs on their respective vesting dates as determined by the Companys closing stock price. Total payments for the employees tax obligations to taxing authorities were $1.6 billion, $1.2 billion and $1.1 billion in 2015, 2014
and 2013, respectively, and are reflected as a financing activity within the Consolidated Statements of Cash Flows. These net-share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would
have otherwise been issued as a result of the vesting and did not represent an expense to the Company. Stock Options
The Company had 1.2 million stock options outstanding as of September 26, 2015, with a weighted-average exercise price per share of $15.08 and
weighted-average remaining contractual term of 4.1 years, substantially all of which are exercisable. The aggregate intrinsic value of the stock options outstanding as of September 26, 2015 was $120 million, which represents the value of the
Companys closing stock price on the last trading day of the period in excess of the weighted-average exercise price multiplied by the number of options outstanding. Total intrinsic value of options at time of exercise was $479 million, $1.5
billion and $1.0 billion for 2015, 2014 and 2013, respectively.
Apple Inc. | 2015 Form 10-K | 63
Table of Contents
Share-based Compensation
The following table shows a summary of the share-based compensation expense included in the Consolidated Statements of Operations for 2015, 2014 and 2013
(in millions):
2015
2014
2013
Cost of sales
$
575
$
450
$
350
Research and development
1,536
1,216
917
Selling, general and administrative
1,475
1,197
986
Total share-based compensation expense
$
3,586
$
2,863
$
2,253
The income tax benefit related to share-based compensation expense was $1.2 billion, $1.0 billion and $816 million for
2015, 2014 and 2013, respectively. As of September 26, 2015, the total unrecognized compensation cost related to outstanding stock options, RSUs and restricted stock was $6.8 billion, which the Company expects to recognize over a
weighted-average period of 2.7 years.
Note 10 Commitments and Contingencies
Accrued Warranty and Indemnification The
following table shows changes in the Companys accrued warranties and related costs for 2015, 2014 and 2013 (in millions):
2015
2014
2013
Beginning accrued warranty and related costs
$
4,159
$
2,967
$
1,638
Cost of warranty claims
(4,401
)
(3,760
)
(3,703
)
Accruals for product warranty
5,022
4,952
5,032
Ending accrued warranty and related costs
$
4,780
$
4,159
$
2,967
The Company generally does not indemnify end-users of its operating system and application software against legal claims
that the software infringes third-party intellectual property rights. Other agreements entered into by the Company sometimes include indemnification provisions under which the Company could be subject to costs and/or damages in the event of an
infringement claim against the Company or an indemnified third-party. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss with respect to indemnification of end-users of its
operating system or application software for infringement of third-party intellectual property rights. The Company did not record a liability for infringement costs related to indemnification as of September 26, 2015 or September 27, 2014.
In September 2015, the Company introduced the iPhone Upgrade Program, which is available to customers who purchase an iPhone 6s and 6s Plus in one
of its U.S. physical retail stores and activate the purchased iPhone with one of the four national carriers. The iPhone Upgrade Program provides customers the right to trade in that iPhone for a new iPhone, provided certain conditions are met. One
of the conditions of this program requires the customer to finance the initial purchase price of the iPhone with a third-party lender. Upon exercise of the trade-in right and purchase of a new iPhone, the Company satisfies the customers
outstanding balance due to the third-party lender on the original device. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such right with subsequent changes to the
guarantee liability recognized within revenue. The Company has entered into indemnification agreements with its directors and executive officers.
Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers and to advance expenses incurred by such
individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of prior indemnification
claims and the unique facts and circumstances involved in each claim. However, the Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations.
Concentrations in the Available Sources of Supply of Materials and Product
Although most components essential to the Companys business are generally available from multiple sources, a number of components are currently
obtained from single or limited sources. In addition, the Company competes for various components with other participants in the markets for mobile communication and media devices and personal computers. Therefore, many components used by the
Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant pricing fluctuations that could materially adversely affect the Companys financial condition and operating
results.
Apple Inc. | 2015 Form 10-K | 64
Table of Contents
The Company uses some custom components that are not commonly used by its competitors, and new products
introduced by the Company often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers yields have matured or manufacturing
capacity has increased. If the Companys supply of components for a new or existing product were delayed or constrained, or if an outsourcing partner delayed shipments of completed products to the Company, the Companys financial condition
and operating results could be materially adversely affected. The Companys business and financial performance could also be materially adversely affected depending on the time required to obtain sufficient quantities from the original source,
or to identify and obtain sufficient quantities from an alternative source. Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers concentrated on the production of common components instead of
components customized to meet the Companys requirements. The Company has entered into agreements for the supply of many components; however,
there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all. Therefore, the Company remains subject to significant risks of supply shortages and price increases that could materially
adversely affect its financial condition and operating results. Substantially all of the Companys hardware products are manufactured by
outsourcing partners that are located primarily in Asia. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. Certain of these outsourcing partners are the
sole-sourced suppliers of components and manufacturers for many of the Companys products. Although the Company works closely with its outsourcing partners on manufacturing schedules, the Companys operating results could be adversely
affected if its outsourcing partners were unable to meet their production commitments. The Companys purchase commitments typically cover its requirements for periods up to 150 days.
Other Off-Balance Sheet Commitments Operating Leases
The Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements. The Company does not
currently utilize any other off-balance sheet financing arrangements. The major facility leases are typically for terms not exceeding 10 years and generally contain multi-year renewal options. As of September 26, 2015, the Company had a total
of 463 retail stores. Leases for retail space are for terms ranging from five to 20 years, the majority of which are for 10 years, and often contain multi-year renewal options. As of September 26, 2015, the Companys total future minimum
lease payments under noncancelable operating leases were $6.3 billion, of which $3.6 billion related to leases for retail space. Rent expense under
all operating leases, including both cancelable and noncancelable leases, was $794 million, $717 million and $645 million in 2015, 2014 and 2013, respectively. Future minimum lease payments under noncancelable operating leases having remaining terms
in excess of one year as of September 26, 2015, are as follows (in millions):
2016
$
772
2017
774
2018
744
2019
715
2020
674
Thereafter
2,592
Total
$
6,271
Other Commitments The Company
utilizes several outsourcing partners to manufacture sub-assemblies for the Companys products and to perform final assembly and testing of finished products. These outsourcing partners acquire components and build product based on demand
information supplied by the Company, which typically covers periods up to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers. Consistent with industry practice, the Company acquires
components through a combination of purchase orders, supplier contracts and open orders based on projected demand information. Where appropriate, the purchases are applied to inventory component prepayments that
are outstanding with the respective supplier. As of September 26, 2015, the Company had outstanding off-balance sheet third-party manufacturing commitments and component purchase commitments of $29.5 billion.
Apple Inc. | 2015 Form 10-K | 65
Table of Contents
In addition to the commitments mentioned above, the Company had other off-balance sheet obligations of $7.3
billion as of September 26, 2015 that consisted of commitments to acquire capital assets, including product tooling and manufacturing process equipment, and commitments related to inventory prepayments, advertising, licensing, R&D, internet
and telecommunications services, energy and other obligations. Contingencies
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully
adjudicated, certain of which are discussed in Part I, Item 1A of this Form 10-K under the heading Risk Factors and in Part I, Item 3 of this Form 10-K under the heading Legal Proceedings. In the opinion of
management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. However, the
outcome of litigation is inherently uncertain. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in
excess of managements expectations, the Companys consolidated financial statements for that reporting period could be materially adversely affected.
Apple Inc. v. Samsung Electronics Co., Ltd, et al. On
August 24, 2012, a jury returned a verdict awarding the Company $1.05 billion in its lawsuit against Samsung Electronics Co., Ltd and affiliated parties in the United States District Court, Northern District of California, San Jose Division. On
March 6, 2014, the District Court entered final judgment in favor of the Company in the amount of approximately $930 million. On May 18, 2015, the U.S. Court of Appeals for the Federal Circuit affirmed in part, and reversed in part,
the decision of the District Court. As a result, the Court of Appeals ordered entry of final judgment on damages in the amount of approximately $548 million, with the District Court to determine supplemental damages and interest, as well as damages
owed for products subject to the reversal in part. Because the ruling remains subject to further proceedings, the Company has not recognized the award in its results of operations.
Note 11 Segment Information and Geographic Data
The Company reports segment information based on the management approach. The management approach designates the internal
reporting used by management for making decisions and assessing performance as the source of the Companys reportable operating segments. The
Company manages its business primarily on a geographic basis. The Companys reportable operating segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. The Americas segment includes both North and South
America. The Europe segment includes European countries, as well as India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and those Asian countries not
included in the Companys other reportable operating segments. Although each reportable operating segment provides similar hardware and software products and similar services, they are managed separately to better align with the location of the
Companys customers and distribution partners and the unique market dynamics of each geographic region. The accounting policies of the various segments are the same as those described in Note 1, Summary of Significant Accounting
Policies. The Company evaluates the performance of its reportable operating segments based on net sales and operating income. Net sales for
geographic segments are generally based on the location of customers and sales through the Companys retail stores located in those geographic locations. Operating income for each segment includes net sales to third parties, related cost of
sales and operating expenses directly attributable to the segment. Advertising expenses are generally included in the geographic segment in which the expenditures are incurred. Operating income for each segment excludes other income and expense and
certain expenses managed outside the reportable operating segments. Costs excluded from segment operating income include various corporate expenses such as R&D, corporate marketing expenses, certain share-based compensation expenses, income
taxes, various nonrecurring charges and other separately managed general and administrative costs. The Company does not include intercompany transfers between segments for management reporting purposes.
Apple Inc. | 2015 Form 10-K | 66
Table of Contents
The following table shows information by reportable operating segment for 2015, 2014 and 2013 (in millions):
2015
2014
2013
Americas:
Net sales
$
93,864
$
80,095
$
77,093
Operating income
$
31,186
$
26,158
$
24,829
Europe:
Net sales
$
50,337
$
44,285
$
40,980
Operating income
$
16,527
$
14,434
$
12,767
Greater China:
Net sales
$
58,715
$
31,853
$
27,016
Operating income
$
23,002
$
11,039
$
8,499
Japan:
Net sales
$
15,706
$
15,314
$
13,782
Operating income
$
7,617
$
6,904
$
6,668
Rest of Asia Pacific:
Net sales
$
15,093
$
11,248
$
12,039
Operating income
$
5,518
$
3,674
$
3,762
A reconciliation of the Companys segment operating income to the Consolidated Statements of Operations for 2015,
2014 and 2013 is as follows (in millions):
2015
2014
2013
Segment operating income
$
83,850
$
62,209
$
56,525
Research and development expense
(8,067
)
(6,041
)
(4,475
)
Other corporate expenses, net
(4,553
)
(3,665
)
(3,051
)
Total operating income
$
71,230
$
52,503
$
48,999
The U.S. and China were the only countries that accounted for more than 10% of the Companys net sales in 2015, 2014
and 2013. There was no single customer that accounted for more than 10% of net sales in 2015, 2014 or 2013. Net sales for 2015, 2014 and 2013 and long-lived assets as of September 26, 2015 and September 27, 2014 are as follows (in
millions):
2015
2014
2013
Net sales:
U.S.
$
81,732
$
68,909
$
66,197
China (1)
56,547
30,638
25,946
Other countries
95,436
83,248
78,767
Total net sales
$
233,715
$
182,795
$
170,910
2015
2014
Long-lived assets:
U.S.
$
12,022
$
9,108
China (1)
8,722
9,477
Other countries
3,040
2,917
Total long-lived assets
$
23,784
$
21,502
(1)
China includes Hong Kong. Long-lived assets located in China consist primarily of product tooling and
manufacturing process equipment and assets related to retail stores and related infrastructure.
Apple Inc. | 2015 Form 10-K | 67
Table of Contents
Net sales by product for 2015, 2014 and 2013 are as follows (in millions):
2015
2014
2013
Net Sales by Product:
iPhone (1)
$
155,041
$
101,991
$
91,279
iPad (1)
23,227
30,283
31,980
Mac (1)
25,471
24,079
21,483
Services (2)
19,909
18,063
16,051
Other Products (1)(3)
10,067
8,379
10,117
Total net sales
$
233,715
$
182,795
$
170,910
(1)
Includes deferrals and amortization of related software upgrade rights and non-software services.
(2)
Includes revenue from the iTunes Store, App Store, Mac App Store, iBooks Store, Apple Music, AppleCare, Apple Pay, licensing and other services.
(3)
Includes sales of Apple TV, Apple Watch, Beats products, iPod and Apple-branded and third-party accessories.
Note 12 Selected Quarterly Financial Information (Unaudited)
The following tables show a summary of the Companys quarterly financial information for each of the four quarters of 2015 and
2014 (in millions, except per share amounts):
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2015:
Net sales
$
51,501
$
49,605
$
58,010
$
74,599
Gross margin
$
20,548
$
19,681
$
23,656
$
29,741
Net income
$
11,124
$
10,677
$
13,569
$
18,024
Earnings per share (1):
Basic
$
1.97
$
1.86
$
2.34
$
3.08
Diluted
$
1.96
$
1.85
$
2.33
$
3.06
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2014:
Net sales
$
42,123
$
37,432
$
45,646
$
57,594
Gross margin
$
16,009
$
14,735
$
17,947
$
21,846
Net income
$
8,467
$
7,748
$
10,223
$
13,072
Earnings per share (1):
Basic
$
1.43
$
1.29
$
1.67
$
2.08
Diluted
$
1.42
$
1.28
$
1.66
$
2.07
(1)
Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per
share information may not equal annual basic and diluted earnings per share.
Apple Inc. | 2015 Form 10-K | 68
Table of Contents
Report of Ernst & Young LLP, Independent Registered Public Accounting
Firm The Board of Directors and Shareholders of Apple Inc.
We have audited the accompanying consolidated balance sheets of Apple Inc. as of September 26, 2015 and September 27, 2014, and the related
consolidated statements of operations, comprehensive income, shareholders equity and cash flows for each of the three years in the period ended September 26, 2015. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the
financial statements referred to above present fairly, in all material respects, the consolidated financial position of Apple Inc. at September 26, 2015 and September 27, 2014, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended September 26, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Apple Inc.s internal
control over financial reporting as of September 26, 2015, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated October 28, 2015 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP
San Jose, California October 28, 2015
Apple Inc. | 2015 Form 10-K | 69
Table of Contents
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Apple Inc.
We have audited Apple Inc.s internal control over financial reporting as of September 26, 2015, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Apple Inc.s management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Annual Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on the Companys internal control over financial reporting based on our audit. We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Apple Inc. maintained, in all material respects, effective internal control over financial reporting as of September 26, 2015, based
on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
2015 consolidated financial statements of Apple Inc. and our report dated October 28, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP San Jose,
California October 28, 2015
Apple Inc. | 2015 Form 10-K | 70
Table of Contents
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.
Item 9A.
Controls and Procedures Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of the Companys management, the Companys principal executive officer
and principal financial officer have concluded that the Companys disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act) were effective
as of September 26, 2015 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Companys management, including its principal executive officer and principal financial officer, as appropriate
to allow timely decisions regarding required disclosure. Inherent Limitations Over Internal Controls
The Companys internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP). The Companys internal control over financial reporting includes those policies and
procedures that:
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Companys
assets;
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the
Companys receipts and expenditures are being made only in accordance with authorizations of the Companys management and directors; and
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Companys assets that could
have a material effect on the financial statements. Management, including the Companys Chief Executive Officer and Chief
Financial Officer, does not expect that the Companys internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations
in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject
to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Managements Annual Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of the Companys internal control over financial reporting based on the criteria set forth in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the Companys assessment, management has concluded that its internal control over financial reporting was effective as of September 26, 2015 to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. The Companys independent registered public accounting firm, Ernst & Young LLP, has
issued an audit report on the Companys internal control over financial reporting, which appears in Part II, Item 8 of this Form 10-K. Changes in
Internal Control Over Financial Reporting There were no changes in the Companys internal control over financial reporting during the fourth
quarter of 2015, which were identified in connection with managements evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.
Item 9B.
Other Information Not applicable.
Apple Inc. | 2015 Form 10-K | 71
Table of Contents
PART III
Item 10.
Directors, Executive Officers and Corporate Governance The information required by this Item is
set forth under the headings Directors, Corporate Governance and Executive Officers in the Companys 2016 Proxy Statement to be filed with the U.S. Securities and Exchange Commission (the SEC) within 120 days after
September 26, 2015 in connection with the solicitation of proxies for the Companys 2016 annual meeting of shareholders and is incorporated herein by reference.
The Company has a code of ethics, Business Conduct: The way we do business worldwide, that applies to all employees, including the
Companys principal executive officer, principal financial officer, and principal accounting officer, as well as to the members of the Board of Directors of the Company. The code is available at investor.apple.com/corporate-governance.cfm. The
Company intends to disclose any changes in, or waivers from, this code by posting such information on the same website or by filing a Form 8-K, in each case to the extent such disclosure is required by rules of the SEC or the NASDAQ Stock Market
LLC.
Item 11.
Executive Compensation The information required by this Item is set forth under the heading
Executive Compensation and under the subheadings Board Oversight of Risk Management, Compensation Committee Interlocks and Insider Participation, Compensation of Directors and Director
Compensation-2015 under the heading Directors, Corporate Governance and Executive Officers in the Companys 2016 Proxy Statement to be filed with the SEC within 120 days after September 26, 2015 and is incorporated herein
by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The
information required by this Item is set forth under the headings Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information in the Companys 2016 Proxy Statement to be filed
with the SEC within 120 days after September 26, 2015 and is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence The information required
by this Item is set forth under the subheadings Board Committees, Review, Approval or Ratification of Transactions with Related Persons and Transactions with Related Persons under the heading Directors,
Corporate Governance and Executive Officers in the Companys 2016 Proxy Statement to be filed with the SEC within 120 days after September 26, 2015 and is incorporated herein by reference.
Item 14.
Principal Accounting Fees and Services The information required by this Item is set forth under
the subheadings Fees Paid to Auditors and Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services Performed by the Independent Registered Public Accounting Firm under the proposal Ratification of
Appointment of Independent Registered Public Accounting Firm in the Companys 2016 Proxy Statement to be filed with the SEC within 120 days after September 26, 2015 and is incorporated herein by reference.
Apple Inc. | 2015 Form 10-K | 72
Table of Contents
PART IV
Item 15.
Exhibits, Financial Statement Schedules
(a)
Documents filed as part of this report
(1)
All financial statements
Index to Consolidated Financial Statements
Page
Consolidated Statements of Operations for the years ended September 26, 2015, September
27, 2014 and September 28, 2013
39
Consolidated Statements of Comprehensive Income for the years ended September 26, 2015, September
27, 2014 and September 28, 2013
40
Consolidated Balance Sheets as of September 26, 2015 and September 27, 2014
41
Consolidated Statements of Shareholders Equity for the years ended September 26, 2015, September
27, 2014 and September 28, 2013
42
Consolidated Statements of Cash Flows for the years ended September 26, 2015, September
27, 2014 and September 28, 2013
43
Notes to Consolidated Financial Statements
44
Selected Quarterly Financial Information (Unaudited)
68
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm
69
(2)
Financial Statement Schedules All
financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated
financial statements and notes thereto included in this Form 10-K.
(3)
Exhibits required by Item 601 of Regulation S-K
The information required by this Section (a)(3) of Item 15 is set forth on the exhibit index that follows the Signatures page of this Form 10-K.
Apple Inc. | 2015 Form 10-K | 73
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized. Date: October 28, 2015
Apple Inc.
By:
/s/ Luca Maestri
Luca Maestri
Senior Vice President, Chief Financial Officer
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Timothy D. Cook and Luca Maestri, jointly and
severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on
Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Name
Title
Date
/s/ Timothy D.
Cook TIMOTHY D. COOK
Chief Executive Officer and Director (Principal Executive
Officer)
October 28, 2015
/s/ Luca
Maestri LUCA MAESTRI
Senior Vice President, Chief Financial Officer (Principal Financial
Officer)
October 28, 2015
/s/ Chris
Kondo CHRIS KONDO
Senior Director of Corporate Accounting (Principal Accounting
Officer)
October 28, 2015
/s/ Al
Gore AL GORE
Director
October 28, 2015
/s/ Robert A.
Iger ROBERT A. IGER
Director
October 28, 2015
/s/ Andrea
Jung ANDREA JUNG
Director
October 28, 2015
/s/ Arthur D.
Levinson ARTHUR D. LEVINSON
Director
October 28, 2015
/s/ Ronald D.
Sugar RONALD D. SUGAR
Director
October 28, 2015
/s/ Susan L.
Wagner SUSAN L. WAGNER
Director
October 28, 2015
Apple Inc. | 2015 Form 10-K | 74
Table of Contents
EXHIBIT INDEX (1)
Incorporated byReference
ExhibitNumber
Exhibit Description
Form
Exhibit
Filing Date/Period
EndDate
3.1
Restated Articles of Incorporation of the Registrant effective as of
June 6, 2014.
8-K
3.1
6/6/14
3.2
Amended and Restated Bylaws of the Registrant effective as of
February 28, 2014.
8-K
3.2
3/5/14
4.1
Form of Common Stock Certificate of the Registrant.
10-Q
4.1
12/30/06
4.2
Indenture, dated as of April 29, 2013, between the Registrant and The Bank of New York Mellon Trust Company, N.A., as Trustee.
S-3
4.1
4/29/13
4.3
Officers Certificate of the Registrant, dated as of May 3, 2013, including forms of global notes representing the Floating Rate Notes due 2016, Floating Rate Notes due 2018, 0.45% Notes due
2016, 1.00% Notes due 2018, 2.40% Notes due 2023 and 3.85% Notes due 2043.
8-K
4.1
5/3/13
4.4
Officers Certificate of the Registrant, dated as of May 6, 2014, including forms of global notes representing the Floating Rate Notes due 2017, Floating Rate Notes due 2019, 1.05% Notes due
2017, 2.10% Notes due 2019, 2.85% Notes due 2021, 3.45% Notes due 2024 and 4.45% Notes due 2044.
8-K
4.1
5/6/14
4.5
Officers Certificate of the Registrant, dated as of November 10, 2014, including forms of global notes representing the 1.000% Notes due 2022 and 1.625% Notes due 2026.
8-K
4.1
11/10/14
4.6
Officers Certificate of the Registrant, dated as of February 9, 2015, including forms of global notes representing the Floating Rate Notes due 2020, 1.55% Notes due 2020, 2.15% Notes due 2022,
2.50% Notes due 2025 and 3.45% Notes due 2045.
8-K
4.1
2/9/15
4.7
Officers Certificate of the Registrant, dated as of May 13, 2015, including forms of global notes representing the Floating Rate Notes due 2017, Floating Rate Notes due 2020, 0.900% Notes due
2017, 2.000% Notes due 2020, 2.700% Notes due 2022, 3.200% Notes due 2025, and 4.375% Notes due 2045.
8-K
4.1
5/13/15
4.8
Officers Certificate of the Registrant, dated as of June 10, 2015, including forms of global notes representing the 0.35% Notes due 2020.
8-K
4.1
6/10/15
4.9
Officers Certificate of the Registrant, dated as of July 31, 2015, including forms of global notes representing the 3.05% Notes due 2029 and 3.60% Notes due 2042.
8-K
4.1
7/31/15
4.10
Officers Certificate of the Registrant, dated as of September 17, 2015, including forms of global notes representing the 1.375% Notes due 2024 and 2.000% Notes due 2027.
8-K
4.1
9/17/15
10.1*
Employee Stock Purchase Plan, as amended and restated as of March 10, 2015.
8-K
10.1
3/13/15
10.2*
Form of Indemnification Agreement between the Registrant and each director and executive officer of the Registrant.
10-Q
10.2
6/27/09
10.3*
1997 Director Stock Plan, as amended through August 23, 2012.
10-Q
10.3
12/28/13
10.4*
2003 Employee Stock Plan, as amended through February 25, 2010.
8-K
10.1
3/1/10
10.5*
Form of Restricted Stock Unit Award Agreement under 2003 Employee Stock Plan effective as of November 16, 2010.
10-Q
10.10
12/25/10
10.6*
Form of Restricted Stock Unit Award Agreement under 2003 Employee Stock Plan effective as of April 6, 2012.
10-Q
10.8
3/31/12
Apple Inc. | 2015 Form 10-K | 75
Table of Contents
Incorporated byReference
ExhibitNumber
Exhibit Description
Form
Exhibit
Filing Date/Period
EndDate
10.7*
Summary Description of Amendment, effective as of May 24, 2012, to certain Restricted Stock Unit Award Agreements outstanding as of April 5, 2012.
10-Q
10.8
6/30/12
10.8*
2014 Employee Stock Plan.
8-K
10.1
3/5/14
10.9*
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan as of February 28, 2014.
8-K
10.2
3/5/14
10.10*
Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of February 28, 2014.
8-K
10.3
3/5/14
10.11*
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of August 26, 2014.
10-K
10.11
9/27/14
10.12*
Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of August 26, 2014.
10-K
10.12
9/27/14
10.13*
Form of Amendment, effective as of August 26, 2014, to Restricted Stock Unit Award Agreements and Performance Award Agreements outstanding as of August 26, 2014.
10-K
10.13
9/27/14
10.14*
Offer Letter, dated August 1, 2013, from the Registrant to Angela Ahrendts.
10-Q
10.14
12/27/14
12.1**
Computation of Ratio of Earnings to Fixed Charges.
21.1**
Subsidiaries of the Registrant.
23.1**
Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm.
24.1**
Power of Attorney (included on the Signatures page of this Annual
Report on Form 10-K).
31.1**
Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.
31.2**
Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.
32.1***
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.
101.INS**
XBRL Instance Document.
101.SCH**
XBRL Taxonomy Extension Schema Document.
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document.
*
Indicates management contract or compensatory plan or arrangement.
**
Filed herewith.
***
Furnished herewith.
(1)
Certain instruments defining the rights of holders of long-term debt securities of the Registrant are omitted pursuant to Item 601(b)(4)(iii) of Regulation
S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.
Apple Inc. | 2015 Form 10-K | 76
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8-K_1067983_0001193125-16-505315.htm
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8-K
1
d156679d8k.htm
8-K
8-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) March 15, 2016
BERKSHIRE HATHAWAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
001-14905
47-0813844
(STATE OR OTHER JURISDICTION
OF INCORPORATION)
(COMMISSION
FILE NUMBER)
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
3555 Farnam Street
Omaha, Nebraska
68131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(402) 346-1400
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 8.01
Other Events. On March 15, 2016, Berkshire Hathaway Inc. (Berkshire)
issued (i) $1,000,000,000 aggregate principal amount of its 2.200% Senior Notes due 2021, (ii) $2,000,000,000 aggregate principal amount of its 2.750% Senior Notes due 2023, and (iii) $2,500,000,000 aggregate principal amount of its 3.125% Senior
Notes due 2026 ((i), (ii) and (iii) collectively, the Berkshire Notes) under a registration statement on Form S-3 under the Securities Act of 1933, as amended (the Securities Act), filed with the Securities and Exchange
Commission (the Commission) on January 26, 2016 (Registration No. 333-209122) (the Registration Statement). The Berkshire Notes were sold pursuant to an underwriting agreement entered into on March 8, 2016, by and
between (a) Berkshire and (b) Goldman, Sachs & Co., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC (collectively, the US Underwriters).
On March 15, 2016, Berkshire also issued (i) 1,000,000,000 aggregate principal amount of its 0.500% Senior Notes due 2020,
(ii) 1,000,000,000 aggregate principal amount of its 1.300% Senior Notes due 2024, and (iii) 750,000,000 aggregate principal amount of its 2.150% Senior Notes due 2028 ((i), (ii), and (iii) collectively, the
Berkshire Euro Notes) under the Registration Statement. The Berkshire Euro Notes were sold pursuant to an underwriting agreement entered into on March 9, 2016, by and between (a) Berkshire and (b) Goldman,
Sachs & Co., J.P. Morgan Securities plc, Merrill Lynch International and Wells Fargo Securities International Limited. On
March 15, 2016, Berkshire Hathaway Finance Corporation (BHFC) issued (i) $750,000,000 aggregate principal amount of its 1.450% Senior Notes due 2018, (ii) $1,000,000,000 aggregate principal amount of its Floating Rate Senior Notes
due March 2018, (iii) $1,250,000,000 aggregate principal amount of its 1.700% Senior Notes due 2019, and (iv) $500,000,000 aggregate principal amount of its Floating Rate Senior Notes due 2019 ((i), (ii), (iii), and (iv) collectively, the
BHFC Notes and together with the Berkshire Notes and the Berkshire Euro Notes, the Notes) under the Registration Statement. The BHFC Notes, which will be fully and unconditionally guaranteed by Berkshire, were sold
pursuant to an underwriting agreement entered into on March 8, 2016, by and between (a) BHFC and Berkshire and (b) the US Underwriters.
The Notes are issued under an Indenture, dated as of January 26, 2016, by and among Berkshire, as issuer and guarantor, BHFC, as issuer,
and The Bank of New York Mellon Trust Company, N.A., as trustee (the Indenture) and (a) an officers certificate dated as of March 15, 2016 by Berkshire with respect to its 2.200% Senior Notes due 2021, (b) an officers
certificate dated as of March 15, 2016 by Berkshire with respect to its 2.750% Senior Notes due 2023, (c) an officers certificate dated as of March 15, 2016 by Berkshire with respect to its 3.125% Senior Notes due 2026, (d) an officers
certificate dated as of March 15, 2016 by Berkshire with respect to its 0.500% Senior Notes due 2020, (e) an officers certificate dated as of March 15, 2016 by Berkshire with respect to its 1.300% Senior Notes due 2024, (f) an officers
certificate dated as of March 15, 2016 by Berkshire with respect to its 2.150% Senior Notes due 2028, (g) an officers certificate dated as of March 15, 2016 by BHFC with respect to its 1.450% Senior Notes due 2018, (h) an officers
certificate dated as of March 15, 2016 by BHFC with respect to its Floating Rate Senior Notes due March 2018, (i) an officers certificate dated as of March 15, 2016 by BHFC with respect to its 1.700% Senior Notes due 2019, and (j) an
officers certificate dated as of March 15, 2016 by BHFC with respect to its Floating Rate Senior Notes due 2019 ((a), (b), (c), (d), (e), (f), (g), (h), (i), and (j) collectively, the Officers Certificates).
The relevant terms of the Berkshire Notes and the Indenture are further described under the caption Description of the Notes in
the prospectus supplement, dated March 8, 2016, filed with the Commission by Berkshire on March 10, 2016, pursuant to Rule 424(b)(2) under the Securities Act and in the section entitled Description of the Debt Securities in the
base prospectus relating to debt securities of Berkshire, dated January 26, 2016, included in the Registration Statement, which descriptions are incorporated herein by reference. The relevant terms of the Berkshire Euro Notes and the Indenture
are further described under the caption Description of the Notes in the prospectus supplement, dated March 9, 2016, filed with the Commission by Berkshire on March 11, 2016, pursuant to Rule 424(b)(2) under the Securities Act
and in the section entitled Description of the Debt Securities in the base prospectus relating to debt securities of Berkshire, dated January 26, 2016, included in the Registration Statement, which descriptions are incorporated
herein by reference. The relevant terms of the BHFC Notes and the Indenture are further described under the caption Description of the Notes and Guarantees in the prospectus supplement, dated March 8, 2016, filed with the Commission by
Berkshire on March 10, 2016, pursuant to Rule 424(b)(2) under the Securities Act and in the section entitled Description of the Debt Securities in the base prospectus relating to debt securities of BHFC, dated January 26,
2016, included in the Registration Statement, which descriptions are incorporated herein by reference. A copy of the Indenture is set
forth in Exhibit 4.1 of the Registration Statement and is incorporated herein by reference. A copy of the officers certificate with respect to Berkshires 2.200% Senior Notes due 2021 (including the form of Berkshires 2.200% Senior
Notes due 2021) is attached hereto as Exhibit 4.2 and is incorporated herein by reference. A copy of the officers certificate with respect to Berkshires 2.750% Senior Notes due 2023 (including the form of Berkshires 2.750%
Senior Notes due 2023) is attached hereto as Exhibit 4.3 and is incorporated herein by reference. A copy of the officers certificate with respect to Berkshires 3.125% Senior Notes due 2026 (including the form of Berkshires
3.125% Senior Notes due 2026) is attached hereto as Exhibit 4.4 and is incorporated herein by reference. A copy of the officers certificate with respect to Berkshires 0.500% Senior Notes due 2020
(including the form of Berkshires 0.500% Senior Notes due 2020) is attached hereto as Exhibit 4.5 and is incorporated herein by reference. A copy of the officers certificate with
respect to Berkshires 1.300% Senior Notes due 2024 (including the form of Berkshires 1.300% Senior Notes due 2024) is attached hereto as Exhibit 4.6 and is incorporated herein by reference. A copy of the officers certificate
with respect to Berkshires 2.150% Senior Notes due 2028 (including the form of Berkshires 2.150% Senior Notes due 2028) is attached hereto as Exhibit 4.7 and is incorporated herein by reference. A copy of the officers certificate
with respect to BHFCs 1.450% Senior Notes due 2018 (including the form of BHFCs 1.450% Senior Notes due 2018) is attached hereto as Exhibit 4.8 and is incorporated herein by reference. A copy of the officers certificate with
respect to BHFCs Floating Rate Senior Notes due March 2018 (including the form of BHFCs Floating Rate Senior Notes due March 2018) is attached hereto as Exhibit 4.9 and is incorporated herein by reference. A copy of the
officers certificate with respect to BHFCs 1.700% Senior Notes due 2019 (including the form of BHFCs 1.700% Senior Notes due March 2019) is attached hereto as Exhibit 4.10 and is incorporated herein by reference. A copy of the
officers certificate with respect to BHFCs Floating Rate Senior Notes due 2019 (including the form of BHFCs Floating Rate Senior Notes due 2019) is attached hereto as Exhibit 4.11 and is incorporated herein by reference. The
descriptions of the Indenture, the Officers Certificates and the Notes in this report are summaries and are qualified in their entirety by the terms of the Indenture, the Officers Certificates and the Notes, respectively.
Item 9.01
Financial Statements and Exhibits. (d) Exhibits
1.1
Underwriting Agreement, dated March 8, 2016, by and between (a) Berkshire Hathaway Inc. and (b) Goldman, Sachs & Co., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities,
LLC.
1.2
Underwriting Agreement, dated March 9, 2016, by and between (a) Berkshire Hathaway Inc. and (b) Goldman, Sachs & Co., J.P. Morgan Securities plc, Merrill Lynch International and Wells Fargo Securities International
Limited.
1.3
Underwriting Agreement, dated March 8, 2016, by and between (a) Berkshire Hathaway Finance Corporation and Berkshire Hathaway Inc. and (b) Goldman, Sachs & Co., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Wells Fargo Securities, LLC.
4.1
Indenture, dated as of January 26, 2016, by and among Berkshire Hathaway Inc., Berkshire Hathaway Finance Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of
Berkshires Registration Statement on Form S-3 (Registration No. 333-209122) filed with the Commission on January 26, 2016).
4.2
Officers Certificate of Berkshire Hathaway Inc., dated as of March 15, 2016, including the form of Berkshire Hathaway Inc.s 2.200% Senior Notes due 2021.
4.3
Officers Certificate of Berkshire Hathaway Inc., dated as of March 15, 2016, including the form of Berkshire Hathaway Inc.s 2.750% Senior Notes due 2023.
4.4
Officers Certificate of Berkshire Hathaway Inc., dated as of March 15, 2016, including the form of Berkshire Hathaway Inc.s 3.125% Senior Notes due 2026.
4.5
Officers Certificate of Berkshire Hathaway Inc., dated as of March 15, 2016, including the form of Berkshire Hathaway Inc.s 0.500% Senior Notes due 2020.
4.6
Officers Certificate of Berkshire Hathaway Inc., dated as of March 15, 2016, including the form of Berkshire Hathaway Inc.s 1.300% Senior Notes due 2024.
4.7
Officers Certificate of Berkshire Hathaway Inc., dated as of March 15, 2016, including the form of Berkshire Hathaway Inc.s 2.150% Senior Notes due 2028.
4.8
Officers Certificate of Berkshire Hathaway Finance Corporation, dated as of March 15, 2016, including the form of Berkshire Hathaway Finance Corporations 1.450% Senior Notes due 2018.
4.9
Officers Certificate of Berkshire Hathaway Finance Corporation, dated as of March 15, 2016, including the form of Berkshire Hathaway Finance Corporations Floating Rate Senior Notes due March 2018.
4.10
Officers Certificate of Berkshire Hathaway Finance Corporation, dated as of March 15, 2016, including the form of Berkshire Hathaway Finance Corporations 1.700% Senior Notes due 2019.
4.11
Officers Certificate of Berkshire Hathaway Finance Corporation, dated as of March 15, 2016, including the form of Berkshire Hathaway Finance Corporations Floating Rate Senior Notes due 2019.
5.1
Opinion of Munger, Tolles & Olson LLP, dated March 15, 2016, with respect to the Berkshire Notes.
5.2
Opinion of Munger, Tolles & Olson LLP, dated March 15, 2016, with respect to the Berkshire Euro Notes.
5.3
Opinion of Munger, Tolles & Olson LLP, dated March 15, 2016, with respect to the BHFC Notes.
23.1
Consent of Munger, Tolles & Olson LLP (included in Exhibit 5.1).
23.2
Consent of Munger, Tolles & Olson LLP (included in Exhibit 5.2).
23.3
Consent of Munger, Tolles & Olson LLP (included in Exhibit 5.3).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
March 15, 2016
BERKSHIRE HATHAWAY INC.
/s/ Marc D. Hamburg
By:
Marc D. Hamburg
Senior Vice President and Chief Financial Officer
[8-K Signature Page]
Exhibit Index
1.1
Underwriting Agreement, dated March 8, 2016, by and between (a) Berkshire Hathaway Inc. and (b) Goldman, Sachs & Co., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities,
LLC.
1.2
Underwriting Agreement, dated March 9, 2016, by and between (a) Berkshire Hathaway Inc. and (b) Goldman, Sachs & Co., J.P. Morgan Securities plc, Merrill Lynch International and Wells Fargo Securities International
Limited.
1.3
Underwriting Agreement, dated March 8, 2016, by and between (a) Berkshire Hathaway Finance Corporation and Berkshire Hathaway Inc. and (b) Goldman, Sachs & Co., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Wells Fargo Securities, LLC.
4.1
Indenture, dated as of January 26, 2016, by and among Berkshire Hathaway Inc., Berkshire Hathaway Finance Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of
Berkshires Registration Statement on Form S-3 (Registration No. 333-209122) filed with the Commission on January 26, 2016).
4.2
Officers Certificate of Berkshire Hathaway Inc., dated as of March 15, 2016, including the form of Berkshire Hathaway Inc.s 2.200% Senior Notes due 2021.
4.3
Officers Certificate of Berkshire Hathaway Inc., dated as of March 15, 2016, including the form of Berkshire Hathaway Inc.s 2.750% Senior Notes due 2023.
4.4
Officers Certificate of Berkshire Hathaway Inc., dated as of March 15, 2016, including the form of Berkshire Hathaway Inc.s 3.125% Senior Notes due 2026.
4.5
Officers Certificate of Berkshire Hathaway Inc., dated as of March 15, 2016, including the form of Berkshire Hathaway Inc.s 0.500% Senior Notes due 2020.
4.6
Officers Certificate of Berkshire Hathaway Inc., dated as of March 15, 2016, including the form of Berkshire Hathaway Inc.s 1.300% Senior Notes due 2024.
4.7
Officers Certificate of Berkshire Hathaway Inc., dated as of March 15, 2016, including the form of Berkshire Hathaway Inc.s 2.150% Senior Notes due 2028.
4.8
Officers Certificate of Berkshire Hathaway Finance Corporation, dated as of March 15, 2016, including the form of Berkshire Hathaway Finance Corporations 1.450% Senior Notes due 2018.
4.9
Officers Certificate of Berkshire Hathaway Finance Corporation, dated as of March 15, 2016, including the form of Berkshire Hathaway Finance Corporations Floating Rate Senior Notes due March 2018.
4.10
Officers Certificate of Berkshire Hathaway Finance Corporation, dated as of March 15, 2016, including the form of Berkshire Hathaway Finance Corporations 1.700% Senior Notes due 2019.
4.11
Officers Certificate of Berkshire Hathaway Finance Corporation, dated as of March 15, 2016, including the form of Berkshire Hathaway Finance Corporations Floating Rate Senior Notes due 2019.
5.1
Opinion of Munger, Tolles & Olson LLP, dated March 15, 2016, with respect to the Berkshire Notes.
5.2
Opinion of Munger, Tolles & Olson LLP, dated March 15, 2016, with respect to the Berkshire Euro Notes.
5.3
Opinion of Munger, Tolles & Olson LLP, dated March 15, 2016, with respect to the BHFC Notes.
23.1
Consent of Munger, Tolles & Olson LLP (included in Exhibit 5.1).
23.2
Consent of Munger, Tolles & Olson LLP (included in Exhibit 5.2).
23.3
Consent of Munger, Tolles & Olson LLP (included in Exhibit 5.3).
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8-K_1045810_0001045810-22-000133.htm
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nvda-202208080001045810false00010458102022-08-082022-08-08UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549______________FORM 8-K CURRENT REPORTPURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934Date of Report (Date of earliest event reported): August 8, 2022 NVIDIA CORPORATION(Exact name of registrant as specified in its charter)Delaware0-2398594-3177549(State or other jurisdiction(Commission(IRS Employerof incorporation)File Number)Identification No.) 2788 San Tomas Expressway, Santa Clara, CA 95051 (Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (408) 486-2000 Not Applicable(Former name or former address, if changed since last report)Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock, $0.001 par value per shareNVDAThe Nasdaq Global Select MarketIndicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐Item 2.02 Results of Operations and Financial Condition.On August 8, 2022, NVIDIA Corporation, or the Company, issued a press release announcing selected preliminary financial results for the second quarter ended July 31, 2022. The press release is attached as Exhibit 99.1 and is incorporated herein by reference. The press release is furnished and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or subject to the liabilities of that Section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended. The information in this Current Report shall not be incorporated by reference in any filing with the U.S. Securities and Exchange Commission made by the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.Item 9.01. Financial Statements and Exhibits.(d) Exhibits Exhibit Description99.1 Press Release, dated August 8, 2022, entitled "NVIDIA Announces Preliminary Financial Results for Second Quarter Fiscal 2023"104The cover page of this Current Report on Form 8-K, formatted in inline XBRL (included as Exhibit 101)SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NVIDIA CorporationDate: August 8, 2022By: /s/ Colette M. Kress Colette M. Kress Executive Vice President and Chief Financial Officer
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8-K
1
d763537d8k.htm
8-K
8-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT
REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) June 19, 2019
BERKSHIRE HATHAWAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
001-14905
47-0813844
(STATE OR OTHER JURISDICTION
OF INCORPORATION)
(COMMISSION
FILE NUMBER)
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
3555 Farnam Street
Omaha, Nebraska
68131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(402) 346-1400
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE
Check the appropriate box below
if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbols
Name of each exchange
on which registered
Class A Common Stock
BRK.A
New York Stock Exchange
Class B Common Stock
BRK.B
New York Stock Exchange
0.75% Senior Notes due 2023
BRK23
New York Stock Exchange
1.125% Senior Notes due 2027
BRK27
New York Stock Exchange
1.625% Senior Notes due 2035
BRK35
New York Stock Exchange
0.500% Senior Notes due 2020
BRK20
New York Stock Exchange
1.300% Senior Notes due 2024
BRK24
New York Stock Exchange
2.150% Senior Notes due 2028
BRK28
New York Stock Exchange
0.250% Senior Notes due 2021
BRK21
New York Stock Exchange
0.625% Senior Notes due 2023
BRK23A
New York Stock Exchange
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of
1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ☐
Item 8.01 Other Events.
On June 19, 2019, Berkshire Hathaway Finance Corporation (BHFC) issued (i) £1,000,000,000 aggregate principal amount of its 2.375%
Senior Notes due 2039 and (ii) £750,000,000 aggregate principal amount of its 2.625% Senior Notes due 2059 ((i) and (ii) collectively, the Notes) under a registration statement on Form
S-3 under the Securities Act of 1933, as amended (the Securities Act), filed with the Securities and Exchange Commission (the Commission) on January 28, 2019 (Registration No. 333-229396) (the Registration Statement). The Notes, which are fully and unconditionally guaranteed by Berkshire Hathaway Inc. (Berkshire), were sold pursuant to an underwriting
agreement entered into on June 12, 2019, by and between (a) BHFC and Berkshire and (b) Goldman Sachs & Co. LLC, J.P. Morgan Securities plc, Merrill Lynch International and Wells Fargo Securities, LLC.
The Notes were issued under an Indenture, dated as of January 26, 2016, by and among Berkshire, BHFC and The Bank of New York Mellon Trust Company, N.A.
(the Indenture) and (i) an officers certificate dated as of June 19, 2019 by BHFC with respect to its 2.375% Senior Notes due 2039 (the 2039 Notes Officers Certificate) and (ii) an officers
certificate dated as of June 19, 2019 by BHFC with respect to its 2.625% Senior Notes due 2059 (the 2059 Notes Officers Certificate and, together with the 2039 Notes Officers Certificate, the Officers
Certificates). The relevant terms of the Notes and the Indenture are further described under the caption Description of the Notes and
Guarantees in the prospectus supplement relating to the Notes, dated June 12, 2019, filed with the Commission by Berkshire on June 13, 2019, pursuant to Rule 424(b)(2) under the Securities Act and in the section entitled
Description of the Debt Securities in the base prospectus relating to debt securities of BHFC, dated January 28, 2019, included in the Registration Statement, which descriptions are incorporated herein by reference.
A copy of the Indenture is set forth in Exhibit 4.1 of the Registration Statement and is incorporated herein by reference. A copy of 2039 Notes Officers
Certificate is attached hereto as Exhibit 4.2 and is incorporated herein by reference. A copy of the 2059 Notes Officers Certificate is attached hereto as Exhibit 4.3 and is incorporated herein by reference. The descriptions of the Indenture,
the Officers Certificates and the Notes in this report are summaries and are qualified in their entirety by the terms of the Indenture, the Officers Certificates and the Notes, respectively.
Item 9.01 Financial Statements and Exhibits. (d)
Exhibits
1.1
Underwriting Agreement, dated June 12, 2019, by and between (a) Berkshire Hathaway Finance Corporation and Berkshire Hathaway Inc. and (b) Goldman Sachs
& Co. LLC, J.P. Morgan Securities plc, Merrill Lynch International and Wells Fargo Securities, LLC.
4.1
Indenture, dated as of January
26, 2016, by and among Berkshire Hathaway Inc., Berkshire Hathaway Finance Corporation and The Bank of New York Mellon Trust Company, N.A., (incorporated by reference to Exhibit 4.1 of Berkshire Hathaway Inc.s Registration Statement on Form S-3 (Registration No. 333-229396) filed with the Commission on January 28, 2019).
4.2
Officers Certificate of Berkshire Hathaway Finance Corporation, dated as of June 19, 2019, including the form of Berkshire Hathaway Finance Corporations 2.375% Senior Notes due 2039.
4.3
Officers Certificate of Berkshire Hathaway Finance Corporation, dated as of June 19, 2019, including the form of Berkshire Hathaway Finance Corporations 2.625% Senior Notes due 2059.
5.1
Opinion of Munger, Tolles & Olson LLP, dated June 19, 2019, with respect to the Notes.
23.1
Consent of Munger, Tolles & Olson LLP (included in Exhibit 5.1).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
June 19, 2019
BERKSHIRE HATHAWAY INC.
By:
/s/ Marc D. Hamburg
Marc D. Hamburg
Senior Vice President and Chief Financial Officer
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8-K
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Apple Inc. (Exact name of Registrant as specified in its charter)
California
001-36743
94-2404110
(State or other jurisdiction of incorporation)
(Commission File Number)
(I.R.S. Employer Identification No.) One Apple Park Way Cupertino, California 95014 (Address of principal executive offices) (Zip Code) (408) 996-1010 (Registrant’s telephone number, including area code) Not applicable (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $0.00001 par value per share
AAPL
The Nasdaq Stock Market LLC
1.000% Notes due 2022
—
The Nasdaq Stock Market LLC
1.375% Notes due 2024
—
The Nasdaq Stock Market LLC
0.000% Notes due 2025
—
The Nasdaq Stock Market LLC
0.875% Notes due 2025
—
The Nasdaq Stock Market LLC
1.625% Notes due 2026
—
The Nasdaq Stock Market LLC
2.000% Notes due 2027
—
The Nasdaq Stock Market LLC
1.375% Notes due 2029
—
The Nasdaq Stock Market LLC
3.050% Notes due 2029
—
The Nasdaq Stock Market LLC
0.500% Notes due 2031
—
The Nasdaq Stock Market LLC
3.600% Notes due 2042
—
The Nasdaq Stock Market LLC Indicate by check mark whether the Registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
Item 8.01
Other Events. On May 11, 2020, Apple Inc. (“Apple”) consummated the issuance and sale of $2,000,000,000 aggregate principal amount of its 0.750% Notes due 2023 (the “2023 Notes”), $2,250,000,000 aggregate principal amount of its 1.125% Notes due 2025 (the “2025 Notes”), $1,750,000,000 aggregate principal amount of its 1.650% Notes due 2030 (the “2030 Notes”) and $2,500,000,000 aggregate principal amount of its 2.650% Notes due 2050 (the “2050 Notes” and, together with the 2023 Notes, the 2025 Notes and the 2030 Notes, the “Notes”), pursuant to an underwriting agreement (the “Underwriting Agreement”) dated May 4, 2020 among Apple and Goldman Sachs & Co. LLC, BofA Securities, Inc., J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC, as representatives of the several underwriters named therein. The Notes are being issued pursuant to an indenture, dated as of November 5, 2018 (the “Indenture”), between Apple and The Bank of New York Mellon Trust Company, N.A., as trustee, together with the officer’s certificate, dated May 11, 2020 (the “Officer’s Certificate”), issued pursuant to the Indenture establishing the terms of each series of Notes. The Notes are being issued pursuant to Apple’s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on November 5, 2018 (Reg. No. 333-228159) (the “Registration Statement”). Interest on the Notes will be paid semi-annually in arrears on May 11 and November 11 of each year, beginning on November 11, 2020. The 2023 Notes will mature on May 11, 2023. The 2025 Notes will mature on May 11, 2025. The 2030 Notes will mature on May 11, 2030. The 2050 Notes will mature on May 11, 2050. The Notes will be Apple’s senior unsecured obligations and will rank equally with Apple’s other unsecured and unsubordinated debt from time to time outstanding. The foregoing description of the Notes and related agreements is qualified in its entirety by the terms of the Underwriting Agreement, the Indenture and the Officer’s Certificate (including the forms of the Notes). Apple is furnishing the Underwriting Agreement and the Officer’s Certificate (including the forms of the Notes) attached hereto as Exhibits 1.1 and 4.1 through 4.5, respectively, and they are incorporated herein by reference. The Indenture is filed as Exhibit 4.1 to the Registration Statement. An opinion regarding the legality of the Notes is filed as Exhibit 5.1, and is incorporated by reference into the Registration Statement; and a consent relating to the incorporation of such opinion is incorporated by reference into the Registration Statement and is filed as Exhibit 23.1 by reference to its inclusion within Exhibit 5.1.
Item 9.01
Financial Statements and Exhibits.
(d)
Exhibits.
Exhibit Number
Exhibit Description
1.1
Underwriting Agreement, dated May 4, 2020, among Apple Inc. and Goldman Sachs & Co. LLC, BofA Securities, Inc., J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC, as representatives of the several underwriters named therein
4.1
Officer’s Certificate of Apple Inc., dated May 11, 2020
4.2
Form of Global Note representing the 2023 Notes (included in Exhibit 4.1)
4.3
Form of Global Note representing the 2025 Notes (included in Exhibit 4.1)
4.4
Form of Global Note representing the 2030 Notes (included in Exhibit 4.1)
4.5
Form of Global Note representing the 2050 Notes (included in Exhibit 4.1)
5.1
Opinion of Latham & Watkins LLP
23.1
Consent of Latham & Watkins LLP (included in the opinion filed as Exhibit 5.1)
104
Inline XBRL for the cover page of this Current Report on Form 8-K.
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: May 11, 2020
Apple Inc.
By:
/s/ Luca Maestri
Luca Maestri
Senior Vice President, Chief Financial Officer
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10-K_320193_0000320193-20-000096.htm
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STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended September 26, 2020or☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .Commission File Number: 001-36743Apple Inc.(Exact name of Registrant as specified in its charter)California94-2404110(State or other jurisdictionof incorporation or organization)(I.R.S. Employer Identification No.)One Apple Park WayCupertino, California95014(Address of principal executive offices)(Zip Code)(408) 996-1010(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading symbol(s)Name of each exchange on which registeredCommon Stock, $0.00001 par value per shareAAPLThe Nasdaq Stock Market LLC1.000% Notes due 2022—The Nasdaq Stock Market LLC1.375% Notes due 2024—The Nasdaq Stock Market LLC0.000% Notes due 2025—The Nasdaq Stock Market LLC0.875% Notes due 2025—The Nasdaq Stock Market LLC1.625% Notes due 2026—The Nasdaq Stock Market LLC2.000% Notes due 2027—The Nasdaq Stock Market LLC1.375% Notes due 2029—The Nasdaq Stock Market LLC3.050% Notes due 2029—The Nasdaq Stock Market LLC0.500% Notes due 2031—The Nasdaq Stock Market LLC3.600% Notes due 2042—The Nasdaq Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes ☒ No ☐Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes ☐ No ☒Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes ☒ No ☐Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).Yes ☒ No ☐Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Large accelerated filer☒Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes ☐ No ☒The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, as of March 27, 2020, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $1,070,633,000,000. Solely for purposes of this disclosure, shares of common stock held by executive officers and directors of the Registrant as of such date have been excluded because such persons may be deemed to be affiliates. This determination of executive officers and directors as affiliates is not necessarily a conclusive determination for any other purposes.17,001,802,000 shares of common stock were issued and outstanding as of October 16, 2020.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s definitive proxy statement relating to its 2021 annual meeting of shareholders (the “2021 Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 2021 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.Apple Inc.Form 10-KFor the Fiscal Year Ended September 26, 2020TABLE OF CONTENTSPagePart IItem 1.Business1Item 1A.Risk Factors5Item 1B.Unresolved Staff Comments15Item 2.Properties15Item 3.Legal Proceedings16Item 4.Mine Safety Disclosures16Part IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities17Item 6.Selected Financial Data19Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations20Item 7A.Quantitative and Qualitative Disclosures About Market Risk28Item 8.Financial Statements and Supplementary Data30Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure62Item 9A.Controls and Procedures62Item 9B.Other Information62Part IIIItem 10.Directors, Executive Officers and Corporate Governance63Item 11.Executive Compensation63Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters63Item 13.Certain Relationships and Related Transactions, and Director Independence63Item 14.Principal Accountant Fees and Services63Part IVItem 15.Exhibit and Financial Statement Schedules64Item 16.Form 10-K Summary66This Annual Report on Form 10-K (“Form 10-K”) contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Many of the forward-looking statements are located in Part II, Item 7 of this Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. For example, statements in this Form 10-K regarding the potential future impact of the COVID-19 pandemic on the Company’s business and results of operations are forward-looking statements. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K under the heading “Risk Factors.” The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.Unless otherwise stated, all information presented herein is based on the Company’s fiscal calendar, and references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company” and “Apple” as used herein refers collectively to Apple Inc. and its wholly owned subsidiaries, unless otherwise stated.PART IItem 1. BusinessCompany BackgroundThe Company designs, manufactures and markets smartphones, personal computers, tablets, wearables and accessories, and sells a variety of related services. The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. The Company is a California corporation established in 1977.ProductsiPhoneiPhone® is the Company’s line of smartphones based on its iOS operating system. During 2020, the Company released a new iPhone SE. In October 2020, the Company announced four new iPhone models with 5G technology: iPhone 12 and iPhone 12 Pro were available starting in October 2020, and iPhone 12 Pro Max and iPhone 12 mini are both expected to be available in November 2020.MacMac® is the Company’s line of personal computers based on its macOS® operating system. During 2020, the Company released a new 16-inch MacBook Pro®, a fully redesigned Mac Pro®, and updated versions of its MacBook Air®, 13-inch MacBook Pro and 27-inch iMac®.iPadiPad® is the Company’s line of multi-purpose tablets based on its iPadOS® operating system. During 2020, the Company released an updated iPad Pro®. In September 2020, the Company released an eighth-generation iPad and introduced an all-new iPad Air®, which was available starting in October 2020.Wearables, Home and AccessoriesWearables, Home and Accessories includes AirPods®, Apple TV®, Apple Watch®, Beats® products, HomePod®, iPod touch® and other Apple-branded and third-party accessories. AirPods are the Company’s wireless headphones that interact with Siri®. During 2020, the Company released AirPods Pro®. Apple Watch is the Company’s line of smart watches based on its watchOS® operating system. In September 2020, the Company released Apple Watch Series 6 and a new Apple Watch SE. In October 2020, the Company announced HomePod mini™, which is expected to be available in November 2020.ServicesAdvertisingThe Company’s advertising services include various third-party licensing arrangements and the Company’s own advertising platforms.Apple Inc. | 2020 Form 10-K | 1AppleCareThe Company offers a portfolio of fee-based service and support products under the AppleCare® brand. The offerings provide priority access to Apple technical support, access to the global Apple authorized service network for repair and replacement services, and in many cases additional coverage for instances of accidental damage and/or theft and loss, depending on the country and type of product.Cloud ServicesThe Company’s cloud services store and keep customers’ content up-to-date and available across multiple Apple devices and Windows personal computers.Digital ContentThe Company operates various platforms, including the App Store®, that allow customers to discover and download applications and digital content, such as books, music, video, games and podcasts.The Company also offers digital content through subscription-based services, including Apple ArcadeSM, a game subscription service; Apple Music®, which offers users a curated listening experience with on-demand radio stations; Apple News+SM, a subscription news and magazine service; and Apple TV+SM, which offers exclusive original content. In September 2020, the Company announced Apple Fitness+SM, a personalized fitness service built for Apple Watch, which is expected to be available before the end of calendar 2020.Payment ServicesThe Company offers payment services, including Apple Card™, a co-branded credit card, and Apple Pay®, a cashless payment service.Markets and DistributionThe Company’s customers are primarily in the consumer, small and mid-sized business, education, enterprise and government markets. The Company sells its products and resells third-party products in most of its major markets directly to consumers, small and mid-sized businesses, and education, enterprise and government customers through its retail and online stores and its direct sales force. The Company also employs a variety of indirect distribution channels, such as third-party cellular network carriers, wholesalers, retailers and resellers. During 2020, the Company’s net sales through its direct and indirect distribution channels accounted for 34% and 66%, respectively, of total net sales.No single customer accounted for more than 10% of net sales in 2020, 2019 and 2018.CompetitionThe markets for the Company’s products and services are highly competitive, and are characterized by aggressive price competition and resulting downward pressure on gross margins, frequent introduction of new products and services, short product life cycles, evolving industry standards, continual improvement in product price and performance characteristics, rapid adoption of technological advancements by competitors, and price sensitivity on the part of consumers and businesses. Many of the Company’s competitors seek to compete primarily through aggressive pricing and very low cost structures, and by emulating the Company’s products and infringing on its intellectual property.The Company’s ability to compete successfully depends heavily on ensuring the continuing and timely introduction of innovative new products, services and technologies to the marketplace. The Company believes it is unique in that it designs and develops nearly the entire solution for its products, including the hardware, operating system, numerous software applications and related services. Principal competitive factors important to the Company include price, product and service features (including security features), relative price and performance, product and service quality and reliability, design innovation, a strong third-party software and accessories ecosystem, marketing and distribution capability, service and support, and corporate reputation.Apple Inc. | 2020 Form 10-K | 2The Company is focused on expanding its market opportunities related to smartphones, personal computers, tablets and other electronic devices and services. The Company faces substantial competition in these markets from companies that have significant technical, marketing, distribution and other resources, as well as established hardware, software, and service offerings with large customer bases. In addition, some of the Company’s competitors have broader product lines, lower-priced products and a larger installed base of active devices. Competition has been particularly intense as competitors have aggressively cut prices and lowered product margins. Certain competitors may have the resources, experience or cost structures to provide products at little or no profit or even at a loss. The Company’s services compete with business models that provide content to users for free and use illegitimate means to obtain third-party digital content and applications. The Company expects competition in these markets to intensify significantly as competitors imitate the Company’s product features and applications within their products, or collaborate to offer integrated solutions that are more competitive than those they currently offer.Supply of ComponentsAlthough most components essential to the Company’s business are generally available from multiple sources, certain components are currently obtained from single or limited sources. The Company also competes for various components with other participants in the markets for smartphones, personal computers, tablets and other electronic devices. Therefore, many components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant commodity pricing fluctuations.The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or their manufacturing capacities have increased. The continued availability of these components at acceptable prices, or at all, may be affected if suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements.The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all.Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers manufactured in the U.S. and Ireland.Research and DevelopmentBecause the industries in which the Company competes are characterized by rapid technological advances, the Company’s ability to compete successfully depends heavily upon its ability to ensure a continual and timely flow of competitive products, services and technologies to the marketplace. The Company continues to develop new technologies to enhance existing products and services, and to expand the range of its offerings through research and development (“R&D”), licensing of intellectual property and acquisition of third-party businesses and technology.Intellectual PropertyThe Company currently holds a broad collection of intellectual property rights relating to certain aspects of its hardware devices, accessories, software and services. This includes patents, copyrights, trademarks, service marks, trade dress and other forms of intellectual property rights in the U.S. and various foreign countries. Although the Company believes the ownership of such intellectual property rights is an important factor in its business and that its success does depend in part on such ownership, the Company relies primarily on the innovative skills, technical competence and marketing abilities of its personnel.The Company regularly files patent applications to protect innovations arising from its research, development and design, and is currently pursuing thousands of patent applications around the world. Over time, the Company has accumulated a large portfolio of issued patents, including utility patents, design patents and others. The Company also holds copyrights relating to certain aspects of its products and services. No single intellectual property right is solely responsible for protecting the Company’s products. The Company believes the duration of its intellectual property rights is adequate relative to the expected lives of its products.In addition to Company-owned intellectual property, many of the Company’s products and services are designed to include intellectual property owned by third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of the Company’s products, processes and services. While the Company has generally been able to obtain such licenses on commercially reasonable terms in the past, there is no guarantee that such licenses could be obtained in the future on reasonable terms or at all.Apple Inc. | 2020 Form 10-K | 3Business Seasonality and Product IntroductionsThe Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part to seasonal holiday demand. Additionally, new product and service introductions can significantly impact net sales, cost of sales and operating expenses. The timing of product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are filled with new inventory following a product launch, and channel inventory of an older product often declines as the launch of a newer product approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction.EmployeesAs of September 26, 2020, the Company had approximately 147,000 full-time equivalent employees.Available InformationThe Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the Securities and Exchange Commission (the “SEC”). Such reports and other information filed by the Company with the SEC are available free of charge at investor.apple.com/investor-relations/sec-filings/default.aspx when such reports are available on the SEC’s website. The Company periodically provides other information for investors on its corporate website, www.apple.com, and its investor relations website, investor.apple.com. This includes press releases and other information about financial performance, information on corporate governance and details related to the Company’s annual meeting of shareholders. The information contained on the websites referenced in this Form 10-K is not incorporated by reference into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references only.Apple Inc. | 2020 Form 10-K | 4Item 1A. Risk FactorsThe following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Form 10-K. The following information should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.The Company’s business, results of operations, financial condition and stock price have been adversely affected and could in the future be materially adversely affected by the COVID-19 pandemic.COVID-19 has spread rapidly throughout the world, prompting governments and businesses to take unprecedented measures in response. Such measures have included restrictions on travel and business operations, temporary closures of businesses, and quarantines and shelter-in-place orders. The COVID-19 pandemic has significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets.The COVID-19 pandemic and the measures taken by many countries in response have adversely affected and could in the future materially adversely impact the Company’s business, results of operations, financial condition and stock price. Following the initial outbreak of the virus, the Company experienced disruptions to its manufacturing, supply chain and logistical services provided by outsourcing partners, resulting in temporary iPhone supply shortages that affected sales worldwide. During the course of the pandemic, the Company’s retail stores, as well as channel partner points of sale, have been temporarily closed at various times. In many cases, where stores and points of sale have reopened they are subject to operating restrictions to protect public health and the health and safety of employees and customers. The Company has at times required substantially all of its employees to work remotely.The Company is continuing to monitor the situation and take appropriate actions in accordance with the recommendations and requirements of relevant authorities. The full extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance is currently uncertain and will depend on many factors outside the Company’s control, including, without limitation, the timing, extent, trajectory and duration of the pandemic, the development and availability of effective treatments and vaccines, the imposition of and compliance with protective public safety measures, and the impact of the pandemic on the global economy and demand for consumer products. Additional future impacts on the Company may include, but are not limited to, material adverse effects on: demand for the Company’s products and services; the Company’s supply chain and sales and distribution channels; the Company’s ability to execute its strategic plans; and the Company’s profitability and cost structure.To the extent the COVID-19 pandemic adversely affects the Company’s business, results of operations, financial condition and stock price, it may also have the effect of heightening many of the other risks described in this Part I, Item 1A of this Form 10-K.Global and regional economic conditions could materially adversely affect the Company’s business, results of operations, financial condition and growth.The Company has international operations with sales outside the U.S. representing a majority of the Company’s total net sales. In addition, a majority of the Company’s supply chain, and its manufacturing and assembly activities, are located outside the U.S. As a result, the Company’s operations and performance depend significantly on global and regional economic conditions.Adverse macroeconomic conditions, including inflation, slower growth or recession, new or increased tariffs and other barriers to trade, changes to fiscal and monetary policy, tighter credit, higher interest rates, high unemployment and currency fluctuations could materially adversely affect demand for the Company’s products and services. In addition, consumer confidence and spending could be adversely affected in response to financial market volatility, negative financial news, conditions in the real estate and mortgage markets, declines in income or asset values, changes to fuel and other energy costs, labor and healthcare costs and other economic factors. Apple Inc. | 2020 Form 10-K | 5In addition to an adverse impact on demand for the Company’s products, uncertainty about, or a decline in, global or regional economic conditions could have a significant impact on the Company’s suppliers, contract manufacturers, logistics providers, distributors, cellular network carriers and other channel partners. Potential effects include financial instability; inability to obtain credit to finance operations and purchases of the Company’s products; and insolvency.A downturn in the economic environment could also lead to increased credit and collectibility risk on the Company’s trade receivables; the failure of derivative counterparties and other financial institutions; limitations on the Company’s ability to issue new debt; reduced liquidity; and declines in the fair value of the Company’s financial instruments. These and other economic factors could materially adversely affect the Company’s business, results of operations, financial condition and growth.Global markets for the Company’s products and services are highly competitive and subject to rapid technological change, and the Company may be unable to compete effectively in these markets.The Company’s products and services are offered in highly competitive global markets characterized by aggressive price competition and resulting downward pressure on gross margins, frequent introduction of new products and services, short product life cycles, evolving industry standards, continual improvement in product price and performance characteristics, rapid adoption of technological advancements by competitors, and price sensitivity on the part of consumers and businesses.The Company’s ability to compete successfully depends heavily on ensuring the continuing and timely introduction of innovative new products, services and technologies to the marketplace. The Company believes it is unique in that it designs and develops nearly the entire solution for its products, including the hardware, operating system, numerous software applications and related services. As a result, the Company must make significant investments in R&D. There can be no assurance that these investments will achieve expected returns, and the Company may not be able to develop and market new products and services successfully.The Company currently holds a significant number of patents, trademarks and copyrights and has registered, and applied to register, numerous patents, trademarks and copyrights. In contrast, many of the Company’s competitors seek to compete primarily through aggressive pricing and very low cost structures, and by emulating the Company’s products and infringing on its intellectual property. Effective intellectual property protection may not be consistently available in every country in which the Company operates. If the Company is unable to continue to develop and sell innovative new products with attractive margins or if competitors infringe on the Company’s intellectual property, the Company’s ability to maintain a competitive advantage could be adversely affected.The Company has a minority market share in the global smartphone, personal computer and tablet markets. The Company faces substantial competition in these markets from companies that have significant technical, marketing, distribution and other resources, as well as established hardware, software and digital content supplier relationships. In addition, some of the Company’s competitors have broader product lines, lower-priced products and a larger installed base of active devices. Competition has been particularly intense as competitors have aggressively cut prices and lowered product margins. Certain competitors may have the resources, experience or cost structures to provide products at little or no profit or even at a loss. Some of the markets in which the Company competes have from time to time experienced little to no growth or contracted overall.Additionally, the Company faces significant competition as competitors imitate the Company’s product features and applications within their products or collaborate to offer solutions that are more competitive than those they currently offer. The Company also expects competition to intensify as competitors imitate the Company’s approach to providing components seamlessly within their offerings or work collaboratively to offer integrated solutions.The Company’s services also face substantial competition, including from companies that have significant resources and experience and have established service offerings with large customer bases. The Company competes with business models that provide content to users for free. The Company also competes with illegitimate means to obtain third-party digital content and applications.The Company’s financial condition and operating results depend substantially on the Company’s ability to continually improve its products and services to maintain their functional and design advantages. There can be no assurance the Company will be able to continue to provide products and services that compete effectively.Apple Inc. | 2020 Form 10-K | 6To remain competitive and stimulate customer demand, the Company must successfully manage frequent introductions and transitions of products and services.Due to the highly volatile and competitive nature of the industries in which the Company competes, the Company must continually introduce new products, services and technologies, enhance existing products and services, effectively stimulate customer demand for new and upgraded products and services, and successfully manage the transition to these new and upgraded products and services. The success of new product and service introductions depends on a number of factors including, but not limited to, timely and successful development, market acceptance, the Company’s ability to manage the risks associated with new product production ramp-up issues, the availability of application software for new products, the effective management of purchase commitments and inventory levels in line with anticipated product demand, the availability of products in appropriate quantities and at expected costs to meet anticipated demand, and the risk that new products and services may have quality or other defects or deficiencies. Accordingly, the Company cannot determine in advance the ultimate effect of new product and service introductions and transitions.The Company depends on the performance of carriers, wholesalers, retailers and other resellers.The Company distributes its products through cellular network carriers, wholesalers, retailers and resellers, many of whom distribute products from competing manufacturers. The Company also sells its products and resells third-party products in most of its major markets directly to consumers, small and mid-sized businesses, and education, enterprise and government customers through its retail and online stores and its direct sales force.Some carriers providing cellular network service for iPhone offer financing, installment payment plans or subsidies for users’ purchases of the device. There is no assurance that such offers will be continued at all or in the same amounts upon renewal of the Company’s agreements with these carriers or in agreements the Company enters into with new carriers.The Company has invested and will continue to invest in programs to enhance reseller sales, including staffing selected resellers’ stores with Company employees and contractors, and improving product placement displays. These programs can require a substantial investment while not assuring return or incremental sales. The financial condition of these resellers could weaken, these resellers could stop distributing the Company’s products, or uncertainty regarding demand for some or all of the Company’s products could cause resellers to reduce their ordering and marketing of the Company’s products.The Company is exposed to the risk of write-downs on the value of its inventory and other assets, in addition to purchase commitment cancellation risk.The Company records a write-down for product and component inventories that have become obsolete or exceed anticipated demand, or for which cost exceeds net realizable value. The Company also accrues necessary cancellation fee reserves for orders of excess products and components. The Company reviews long-lived assets, including capital assets held at its suppliers’ facilities and inventory prepayments, for impairment whenever events or circumstances indicate the assets may not be recoverable. If the Company determines that an impairment has occurred, it records a write-down equal to the amount by which the carrying value of the asset exceeds its fair value. Although the Company believes its inventory, capital assets, inventory prepayments and other assets and purchase commitments are currently recoverable, no assurance can be given that the Company will not incur write-downs, fees, impairments and other charges given the rapid and unpredictable pace of product obsolescence in the industries in which the Company competes.The Company orders components for its products and builds inventory in advance of product announcements and shipments. Manufacturing purchase obligations cover the Company’s forecasted component and manufacturing requirements, typically for periods up to 150 days. Because the Company’s markets are volatile, competitive and subject to rapid technology and price changes, there is a risk the Company will forecast incorrectly and order or produce excess or insufficient amounts of components or products, or not fully utilize firm purchase commitments.Apple Inc. | 2020 Form 10-K | 7Future operating results depend upon the Company’s ability to obtain components in sufficient quantities on commercially reasonable terms.Because the Company currently obtains certain components from single or limited sources, the Company is subject to significant supply and pricing risks. Many components, including those that are available from multiple sources, are at times subject to industry-wide shortages and significant commodity pricing fluctuations that could materially adversely affect the Company’s financial condition and operating results. While the Company has entered into agreements for the supply of many components, there can be no assurance that the Company will be able to extend or renew these agreements on similar terms, or at all. Component suppliers may suffer from poor financial conditions, which can lead to business failure for the supplier or consolidation within a particular industry, further limiting the Company’s ability to obtain sufficient quantities of components on commercially reasonable terms. The effects of global or regional economic conditions on the Company’s suppliers, described in “Global and regional economic conditions could materially adversely affect the Company’s business, results of operations, financial condition and growth,” above, also could affect the Company’s ability to obtain components. Therefore, the Company remains subject to significant risks of supply shortages and price increases that could materially adversely affect its financial condition and operating results.The Company’s new products often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or their manufacturing capacities have increased. The continued availability of these components at acceptable prices, or at all, can be affected for any number of reasons, including if suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements. If the Company’s supply of components for a new or existing product were delayed or constrained, or if an outsourcing partner delayed shipments of completed products to the Company, the Company’s financial condition and operating results could be materially adversely affected. The Company’s business and financial performance could also be materially adversely affected depending on the time required to obtain sufficient quantities from the source, or to identify and obtain sufficient quantities from an alternative source.The Company depends on component and product manufacturing and logistical services provided by outsourcing partners, many of which are located outside of the U.S.Substantially all of the Company’s manufacturing is performed in whole or in part by outsourcing partners located primarily in Asia. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. The Company has also outsourced much of its transportation and logistics management. While these arrangements can lower operating costs, they also reduce the Company’s direct control over production and distribution. Such diminished control may have an adverse effect on the quality or quantity of products or services, or the Company’s flexibility to respond to changing conditions. Although arrangements with these partners may contain provisions for product defect expense reimbursement, the Company generally remains responsible to the consumer for warranty and out-of-warranty service in the event of product defects and could experience an unanticipated product defect liability. While the Company relies on its partners to adhere to its supplier code of conduct, material violations of the supplier code of conduct could occur.The Company relies on single-source outsourcing partners in the U.S., Asia and Europe to supply and manufacture many components, and on outsourcing partners primarily located in Asia, for final assembly of substantially all of the Company’s hardware products. Any failure of these partners to perform can have a negative impact on the Company’s cost or supply of components or finished goods. In addition, manufacturing or logistics in these locations or transit to final destinations can be disrupted for a variety of reasons including, but not limited to, natural and man-made disasters, information technology system failures, commercial disputes, military actions, economic, business, labor, environmental, public health or political issues, or international trade disputes.The Company has invested in manufacturing process equipment, much of which is held at certain of its outsourcing partners, and has made prepayments to certain of its suppliers associated with long-term supply agreements. While these arrangements help ensure the supply of components and finished goods, if these outsourcing partners or suppliers experience severe financial problems or other disruptions in their business, such continued supply can be reduced or terminated, and the recoverability of manufacturing process equipment or prepayments can be negatively impacted.Apple Inc. | 2020 Form 10-K | 8The Company’s products and services may be affected from time to time by design and manufacturing defects that could materially adversely affect the Company’s business and result in harm to the Company’s reputation.The Company offers complex hardware and software products and services that can be affected by design and manufacturing defects. Sophisticated operating system software and applications, such as those offered by the Company, often have issues that can unexpectedly interfere with the intended operation of hardware or software products. Defects can also exist in components and products the Company purchases from third parties. Component defects could make the Company’s products unsafe and create a risk of environmental or property damage and personal injury. These risks may increase as the Company’s products are introduced into specialized applications, including healthcare. In addition, the Company’s service offerings may have quality issues and from time to time experience outages, service slowdowns or errors. As a result, the Company’s services may not perform as anticipated and may not meet customer expectations. There can be no assurance the Company will be able to detect and fix all issues and defects in the hardware, software and services it offers. Failure to do so could result in widespread technical and performance issues affecting the Company’s products and services. In addition, the Company can be exposed to product liability claims, recalls, product replacements or modifications, write-offs of inventory, property, plant and equipment, and/or intangible assets, and significant warranty and other expenses, including litigation costs and regulatory fines. Quality problems can also adversely affect the experience for users of the Company’s products and services, and result in harm to the Company’s reputation, loss of competitive advantage, poor market acceptance, reduced demand for products and services, delay in new product and service introductions and lost sales.The Company relies on access to third-party digital content, which may not be available to the Company on commercially reasonable terms or at all.The Company contracts with numerous third parties to offer their digital content to customers. This includes the right to sell currently available content. The licensing or other distribution arrangements with these third parties are for relatively short terms and do not guarantee the continuation or renewal of these arrangements on commercially reasonable terms, if at all. Some third-party content providers and distributors currently or in the future may offer competing products and services, and can take actions to make it more difficult or impossible for the Company to license or otherwise distribute their content in the future. Other content owners, providers or distributors may seek to limit the Company’s access to, or increase the cost of, such content. The Company may be unable to continue to offer a wide variety of content at commercially reasonable prices with acceptable usage rules, or continue to expand its geographic reach. Failure to obtain the right to make third-party digital content available, or to make such content available on commercially reasonable terms, could have a material adverse impact on the Company’s financial condition and operating results.Some third-party digital content providers require the Company to provide digital rights management and other security solutions. If requirements change, the Company may have to develop or license new technology to provide these solutions. There is no assurance the Company will be able to develop or license such solutions at a reasonable cost and in a timely manner. In addition, certain countries have passed or may propose and adopt legislation that would force the Company to license its digital rights management, which could lessen the protection of content and subject it to piracy and also could negatively affect arrangements with the Company’s content providers.The Company’s future performance depends in part on support from third-party software developers.The Company believes decisions by customers to purchase its hardware products depend in part on the availability of third-party software applications and services. There is no assurance that third-party developers will continue to develop and maintain software applications and services for the Company’s products. If third-party software applications and services cease to be developed and maintained for the Company’s products, customers may choose not to buy the Company’s products.The Company believes the availability of third-party software applications and services for its products depends in part on the developers’ perception and analysis of the relative benefits of developing, maintaining and upgrading such software and services for the Company’s products compared to competitors’ platforms, such as Android for smartphones and tablets and Windows for personal computers. This analysis may be based on factors such as the market position of the Company and its products, the anticipated revenue that may be generated, expected future growth of product sales, and the costs of developing such applications and services.The Company’s minority market share in the global smartphone, personal computer and tablet markets could make developers less inclined to develop or upgrade software for the Company’s products and more inclined to devote their resources to developing and upgrading software for competitors’ products with larger market share. If developers focus their efforts on these competing platforms, the availability and quality of applications for the Company’s devices may suffer.Apple Inc. | 2020 Form 10-K | 9The Company relies on the continued availability and development of compelling and innovative software applications for its products. The Company’s products and operating systems are subject to rapid technological change, and if third-party developers are unable to or choose not to keep up with this pace of change, third-party applications might not take advantage of these changes to deliver improved customer experiences or might not operate correctly and may result in dissatisfied customers.The Company sells and delivers third-party applications for its products through the App Store. For the vast majority of applications, developers keep all of the revenue they generate on the App Store. The Company only retains a commission from sales of applications through its platforms and in situations where a developer offers purchases for digital features, services, or goods within an application. If developers reduce their use of the Company’s platforms, including in-app purchases, then the volume of sales, and the commission that the Company earns on those sales, would decrease. If the rate of the commission that the Company retains on such sales is reduced, or if it is otherwise narrowed in scope or eliminated, the Company’s financial condition and operating results could be materially adversely affected.The Company relies on access to third-party intellectual property, which may not be available to the Company on commercially reasonable terms or at all.Many of the Company’s products and services are designed to include intellectual property owned by third parties, which requires licenses from those third parties. In addition, because of technological changes in the industries in which the Company currently competes or in the future may compete, current extensive patent coverage and the rapid rate of issuance of new patents, the Company’s products and services may unknowingly infringe existing patents or intellectual property rights of others. From time to time, the Company has been notified that it may be infringing certain patents or other intellectual property rights of third parties. Based on experience and industry practice, the Company believes licenses to such third-party intellectual property can generally be obtained on commercially reasonable terms. There is, however, no assurance that the necessary licenses can be obtained on commercially reasonable terms or at all. Failure to obtain the right to use third-party intellectual property, or to use such intellectual property on commercially reasonable terms, could preclude the Company from selling certain products or services, or otherwise have a material adverse impact on the Company’s financial condition and operating results.The Company’s financial condition and operating results could be adversely impacted by unfavorable results of legal proceedings or government investigations.The Company is subject to various claims, legal proceedings and government investigations that have arisen in the ordinary course of business and have not yet been fully resolved, and new matters may arise in the future. In addition, agreements entered into by the Company sometimes include indemnification provisions which can subject the Company to costs and damages in the event of a claim against an indemnified third party. The number of claims, legal proceedings and government investigations involving the Company, and the alleged magnitude of such claims, proceedings and government investigations, has generally increased over time and may continue to increase.The Company has faced and continues to face a significant number of patent claims relating to its cellular-enabled products, and new claims may arise in the future. For example, technology and other patent-holding companies frequently assert their patents and seek royalties and often enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. The Company is vigorously defending infringement actions in courts in several U.S. jurisdictions, as well as internationally in various countries. The plaintiffs in these actions frequently seek injunctions and substantial damages.Regardless of the merit of particular claims, defending against litigation or responding to government investigations can be expensive, time-consuming, disruptive to the Company’s operations and distracting to management. In recognition of these considerations, the Company may enter into agreements or other arrangements to settle litigation and resolve such challenges. No assurance can be given that such agreements can be obtained on acceptable terms or that litigation will not occur. These agreements may also significantly increase the Company’s cost of sales and operating expenses.Except as described in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 10, “Commitments and Contingencies” under the heading “Contingencies,” in the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss greater than a recorded accrual, concerning loss contingencies for asserted legal and other claims, including matters related to infringement of intellectual property rights.The outcome of litigation or government investigations is inherently uncertain. If one or more legal matters were resolved against the Company or an indemnified third party in a reporting period for amounts above management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected. Further, such an outcome could result in significant compensatory, punitive or trebled monetary damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief against the Company, and could require the Company to change its business practices or limit the Company’s ability to offer certain products and services, all of which could materially adversely affect its financial condition and operating results.While the Company maintains insurance coverage for certain types of claims, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise.Apple Inc. | 2020 Form 10-K | 10The Company is subject to complex and changing laws and regulations worldwide, which exposes the Company to potential liabilities, increased costs and other adverse effects on the Company’s business.The Company’s global operations are subject to complex and changing laws and regulations on subjects including, but not limited to: antitrust; privacy, data security and data localization; consumer protection; advertising, sales, billing and e-commerce; product liability; intellectual property ownership and infringement; digital platforms; Internet, telecommunications, and mobile communications; media, television, film and digital content; availability of third-party software applications and services; labor and employment; anti-corruption; import, export and trade; foreign exchange controls and cash repatriation restrictions; anti–money laundering; foreign ownership and investment; tax; and environmental, health and safety.Compliance with these laws and regulations may be onerous and expensive, increasing the cost of conducting the Company’s global operations. Changes to laws and regulations can adversely affect the Company’s business by increasing the Company’s costs, limiting the Company’s ability to offer a product or service to customers, requiring changes to the Company’s supply chain and business practices or otherwise making the Company’s products and services less attractive to customers. The Company has implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that the Company’s employees, contractors or agents will not violate such laws and regulations or the Company’s policies and procedures. If the Company is found to have violated laws and regulations, it could materially adversely affect the Company’s reputation, financial condition and operating results.The technology industry, including, in some instances, the Company, is subject to intense media, political and regulatory scrutiny, which exposes the Company to government investigations, legal actions and penalties. For example, the Company is subject to antitrust investigations in various jurisdictions around the world, which can result in legal proceedings and claims against the Company that could, individually or in the aggregate, have a materially adverse impact on the Company’s financial condition and operating results. In addition, if enacted, legislative and other proposals to further regulate technology companies could result in changes to the Company’s business, including requiring the Company to modify its product and service offerings, limiting the Company’s ability to invest in strategic acquisitions, or affecting the Company’s business relationships with other technology companies, and could have a materially adverse impact on the Company’s financial condition and operating results. Further, the Company’s business partners are or may become subject to litigation that, if resolved against them, could affect the Company’s relationships with these business partners and have a materially adverse impact on the Company’s financial condition and operating results. There can be no assurance that the Company’s business will not be materially adversely affected, individually or in the aggregate, by the outcomes of such investigations, litigation or changes to laws and regulations in the future.The Company’s retail stores have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties.The Company’s retail stores have required substantial investment in equipment and leasehold improvements, information systems, inventory and personnel. The Company also has entered into substantial lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness. Because of their unique design elements, locations and size, these stores require substantially more investment than the Company’s more typical retail stores. Due to the high cost structure associated with the Company’s retail stores, a decline in sales or the closure or poor performance of an individual store or multiple stores, including as a result of protective public safety measures in response to the COVID-19 pandemic, could result in significant lease termination costs, write-offs of equipment and leasehold improvements and severance costs.The Company’s retail operations are subject to many factors that pose risks and uncertainties and could adversely impact the Company’s financial condition and operating results, including macro-economic factors that could have an adverse effect on general retail activity. Other factors include, but are not limited to, the Company’s ability to: manage costs associated with retail store construction and operation; manage relationships with existing retail partners; manage costs associated with fluctuations in the value of retail inventory; and obtain and renew leases in quality retail locations at a reasonable cost.Investment in new business strategies and acquisitions could disrupt the Company’s ongoing business, present risks not originally contemplated and adversely affect the Company’s reputation, financial condition and operating results.The Company has invested, and in the future may invest, in new business strategies or acquisitions. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, greater-than-expected liabilities and expenses, economic, political, legal and regulatory challenges associated with operating in new businesses, regions or countries, inadequate return on capital, potential impairment of tangible and intangible assets, and significant write-offs. These new ventures are inherently risky and may not be successful. The failure of any significant investment could adversely affect the Company’s reputation, financial condition and operating results.Apple Inc. | 2020 Form 10-K | 11The Company’s business and reputation may be impacted by information technology system failures or network disruptions.The Company is exposed to information technology system failures or network disruptions caused by natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, or other events or disruptions. System redundancy and other continuity measures may be ineffective or inadequate, and the Company’s business continuity and disaster recovery planning may not be sufficient for all eventualities. Such failures or disruptions can adversely impact the Company’s business by, among other things, preventing access to the Company’s online services, interfering with customer transactions or impeding the manufacturing and shipping of the Company’s products. These events could materially adversely affect the Company’s reputation, financial condition and operating results.There may be losses or unauthorized access to or releases of confidential information, including personally identifiable information, that could subject the Company to significant reputational, financial, legal and operational consequences.The Company’s business requires it to use and store confidential information including, among other things, personally identifiable information (“PII”) with respect to the Company’s customers and employees. The Company devotes significant resources to network and data security, including through the use of encryption and other security measures intended to protect its systems and data. But these measures cannot provide absolute security, and losses or unauthorized access to or releases of confidential information occur and could materially adversely affect the Company’s reputation, financial condition and operating results.The Company’s business also requires it to share confidential information with suppliers and other third parties. Although the Company takes steps to secure confidential information that is provided to third parties, such measures are not always effective and losses or unauthorized access to or releases of confidential information occur and could materially adversely affect the Company’s reputation, financial condition and operating results.For example, the Company may experience a security breach impacting the Company’s information technology systems that compromises the confidentiality, integrity or availability of confidential information. Such an incident could, among other things, impair the Company’s ability to attract and retain customers for its products and services, impact the Company’s stock price, materially damage supplier relationships, and expose the Company to litigation or government investigations, which could result in penalties, fines or judgments against the Company.Although malicious attacks perpetrated to gain access to confidential information, including PII, affect many companies across various industries, the Company is at a relatively greater risk of being targeted because of its high profile and the value of the confidential information it creates, owns, manages, stores and processes.The Company has implemented systems and processes intended to secure its information technology systems and prevent unauthorized access to or loss of sensitive data, including through the use of encryption and authentication technologies. As with all companies, these security measures may not be sufficient for all eventualities and may be vulnerable to hacking, employee error, malfeasance, system error, faulty password management or other irregularities. For example, third parties fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may, in turn, be used to access the Company’s information technology systems. To help protect customers and the Company, the Company monitors its services and systems for unusual activity and may freeze accounts under suspicious circumstances, which, among other things, may result in the delay or loss of customer orders or impede customer access to the Company’s products and services.In addition to the risks relating to general confidential information described above, the Company is also subject to specific obligations relating to health data and payment card data. Health data is subject to additional privacy, security and breach notification requirements, and the Company can be subject to audit by governmental authorities regarding the Company’s compliance with these obligations. If the Company fails to adequately comply with these rules and requirements, or if health data is handled in a manner not permitted by law or under the Company’s agreements with healthcare institutions, the Company could be subject to litigation or government investigations, may be liable for associated investigatory expenses, and could also incur significant fees or fines.Under payment card rules and obligations, if cardholder information is potentially compromised, the Company could be liable for associated investigatory expenses and could also incur significant fees or fines if the Company fails to follow payment card industry data security standards. The Company could also experience a significant increase in payment card transaction costs or lose the ability to process payment cards if it fails to follow payment card industry data security standards, which would materially adversely affect the Company’s reputation, financial condition and operating results.While the Company maintains insurance coverage that is intended to address certain aspects of data security risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise.Apple Inc. | 2020 Form 10-K | 12The Company’s business is subject to a variety of U.S. and international laws, rules, policies and other obligations regarding data protection.The Company is subject to federal, state and international laws relating to the collection, use, retention, security and transfer of PII. In many cases, these laws apply not only to third-party transactions, but also may restrict transfers of PII among the Company and its international subsidiaries. Several jurisdictions have passed laws in this area, and other jurisdictions are considering imposing additional restrictions. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing international requirements may cause the Company to incur substantial costs or require the Company to change its business practices. Noncompliance could result in significant penalties or legal liability.The Company makes statements about its use and disclosure of PII through its privacy policy, information provided on its website and press statements. Any failure by the Company to comply with these public statements or with other federal, state or international privacy-related or data protection laws and regulations could result in proceedings against the Company by governmental entities or others. In addition to reputational impacts, penalties could include ongoing audit requirements and significant legal liability.The Company’s success depends largely on the continued service and availability of key personnel.Much of the Company’s future success depends on the continued availability and service of key personnel, including its Chief Executive Officer, executive team and other highly skilled employees. Experienced personnel in the technology industry are in high demand and competition for their talents is intense, especially in Silicon Valley, where most of the Company’s key personnel are located.The Company’s business can be impacted by political events, international trade disputes, war, terrorism, natural disasters, public health issues, industrial accidents and other business interruptions.Political events, international trade disputes, war, terrorism, natural disasters, public health issues, industrial accidents and other business interruptions could harm or disrupt international commerce and the global economy, and could have a material adverse effect on the Company and its customers, suppliers, contract manufacturers, logistics providers, distributors, cellular network carriers and other channel partners.The Company has a large, global business, and the Company believes that it generally benefits from growth in international trade. International trade disputes can result in tariffs, sanctions, and other measures that restrict international trade and can adversely affect the Company’s business. For example, tensions between the U.S. and China have led to a series of tariffs being imposed by the U.S. on imports from China mainland, as well as other business restrictions. Tariffs may increase the cost of the Company’s products and the components and raw materials that go into making them. These increased costs adversely impact the gross margin that the Company earns on its products. Tariffs can also make the Company’s products more expensive for customers, which could make the Company’s products less competitive and reduce consumer demand. Countries may also adopt other measures, such as controls on imports or exports of goods, technology or data, that could adversely impact the Company’s operations and supply chain and limit the Company’s ability to offer its products and services as designed. These measures can require the Company to take various actions, including change suppliers, restructure business relationships, and stop offering third-party applications on its platforms. Changing the Company’s operations in accordance with new or changed trade restrictions may be expensive, time-consuming, disruptive to the Company’s operations and distracting to management. Trade restrictions may be announced with little or no advance notice and the Company may not be able to effectively mitigate all adverse impacts from such measures. Political uncertainty surrounding international trade disputes could also have a negative effect on consumer confidence and spending, which could adversely affect the Company’s business.Many of the Company’s operations and facilities, as well as critical business operations of the Company’s suppliers and contract manufacturers, are in locations that are prone to earthquakes and other natural disasters. In addition, such operations and facilities are subject to the risk of interruption by fire, power shortages, nuclear power plant accidents and other industrial accidents, terrorist attacks and other hostile acts, labor disputes, public health issues, including pandemics such as the COVID-19 pandemic, and other events beyond the Company’s control. Global climate change could result in certain types of natural disasters occurring more frequently or with more intense effects. Such events could make it difficult or impossible for the Company to manufacture and deliver products to its customers, create delays and inefficiencies in the Company’s supply and manufacturing chain, and result in slowdowns and outages to the Company’s service offerings. Following an interruption to its business, the Company could require substantial recovery time, experience significant expenditures to resume operations, and lose significant sales. Because the Company relies on single or limited sources for the supply and manufacture of many critical components, a business interruption affecting such sources would exacerbate any negative consequences to the Company.Apple Inc. | 2020 Form 10-K | 13The Company’s operations are also subject to the risks of industrial accidents at its suppliers and contract manufacturers. While the Company’s suppliers are required to maintain safe working environments and operations, an industrial accident could occur and could result in disruption to the Company’s business and harm to the Company’s reputation. Major public health issues, including pandemics such as the COVID-19 pandemic, have adversely affected, and could in the future adversely affect, the Company due to their impact on the global economy and demand for consumer products; the imposition of protective public safety measures, such as stringent employee travel restrictions and limitations on freight services and the movement of products between regions; and disruptions in the Company’s supply chain and sales and distribution channels, resulting in interruptions of the supply of current products and delays in production ramps of new products.While the Company maintains insurance coverage for certain types of losses, such insurance coverage may be insufficient to cover all losses that may arise.The Company expects its quarterly net sales and operating results to fluctuate.The Company’s profit margins vary across its products, services, geographic segments and distribution channels. For example, the gross margins on the Company’s products and services vary significantly and can change over time. The Company’s gross margins are subject to volatility and downward pressure due to a variety of factors, including: continued industry-wide global product pricing pressures and product pricing actions that the Company may take in response to such pressures; increased competition; the Company’s ability to effectively stimulate demand for certain of its products and services; compressed product life cycles; potential increases in the cost of components, outside manufacturing services, and developing, acquiring and delivering content for the Company’s services; the Company’s ability to manage product quality and warranty costs effectively; shifts in the mix of products and services, or in the geographic, currency or channel mix; fluctuations in foreign exchange rates; and the introduction of new products or services, including new products or services with higher cost structures. These and other factors could have a materially adverse impact on the Company’s financial condition and operating results.The Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part to seasonal holiday demand. Additionally, new product and service introductions can significantly impact net sales, cost of sales and operating expenses. Further, the Company generates a significant portion of its net sales from a single product and a decline in demand for that product could significantly impact quarterly net sales. The Company could also be subject to unexpected developments, such as lower-than-anticipated demand for the Company’s products or services, issues with new product or service introductions, information technology system failures or network disruptions, or failure of one of the Company’s logistics, components supply, or manufacturing partners.The Company’s stock price is subject to volatility.The Company’s stock price has experienced substantial price volatility in the past and may continue to do so in the future. Additionally, the Company, the technology industry and the stock market as a whole have experienced extreme stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to these companies’ operating performance. Price volatility over a given period may cause the average price at which the Company repurchases its stock to exceed the stock’s price at a given point in time. The Company believes its stock price should reflect expectations of future growth and profitability. The Company also believes its stock price should reflect expectations that its cash dividend will continue at current levels or grow, and that its current share repurchase program will be fully consummated. Future dividends are subject to declaration by the Company’s Board of Directors, and the Company’s share repurchase program does not obligate it to acquire any specific number of shares. If the Company fails to meet expectations related to future growth, profitability, dividends, share repurchases or other market expectations, its stock price may decline significantly, which could have a material adverse impact on investor confidence and employee retention.The Company’s financial performance is subject to risks associated with changes in the value of the U.S. dollar relative to local currencies.The Company’s primary exposure to movements in foreign currency exchange rates relates to non–U.S. dollar–denominated sales, cost of sales and operating expenses worldwide. Gross margins on the Company’s products in foreign countries and on products that include components obtained from foreign suppliers could be materially adversely affected by foreign currency exchange rate fluctuations.The weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of the Company’s foreign currency–denominated sales and earnings, and generally leads the Company to raise international pricing, potentially reducing demand for the Company’s products. In some circumstances, for competitive or other reasons, the Company may decide not to raise international pricing to offset the U.S. dollar’s strengthening, which would adversely affect the U.S. dollar value of the gross margins the Company earns on foreign currency–denominated sales.Apple Inc. | 2020 Form 10-K | 14Conversely, a strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to the Company’s foreign currency–denominated sales and earnings, could cause the Company to reduce international pricing and incur losses on its foreign currency derivative instruments, thereby limiting the benefit. Additionally, strengthening of foreign currencies may increase the Company’s cost of product components denominated in those currencies, thus adversely affecting gross margins.The Company uses derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not be effective to offset any, or more than a portion, of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place.The Company is exposed to credit risk and fluctuations in the values of its investment portfolio.The Company’s investments can be negatively affected by liquidity, credit deterioration, financial results, market and economic conditions, political risk, sovereign risk, interest rate fluctuations or other factors. As a result, the value and liquidity of the Company’s cash, cash equivalents, and marketable and non-marketable securities may fluctuate substantially. Therefore, although the Company has not realized any significant losses on its cash, cash equivalents, and marketable and non-marketable securities, future fluctuations in their value could result in significant losses and could have a material adverse impact on the Company’s financial condition and operating results.The Company is exposed to credit risk on its trade accounts receivable, vendor non-trade receivables and prepayments related to long-term supply agreements, and this risk is heightened during periods when economic conditions worsen.The Company distributes its products through third-party cellular network carriers, wholesalers, retailers and resellers. The Company also sells its products directly to small and mid-sized businesses and education, enterprise and government customers. A substantial majority of the Company’s outstanding trade receivables are not covered by collateral, third-party bank support or financing arrangements, or credit insurance, and a significant portion of the Company’s trade receivables can be concentrated within cellular network carriers or other resellers. The Company’s exposure to credit and collectibility risk on its trade receivables is higher in certain international markets and its ability to mitigate such risks may be limited. The Company also has unsecured vendor non-trade receivables resulting from purchases of components by outsourcing partners and other vendors that manufacture sub-assemblies or assemble final products for the Company. In addition, the Company has made prepayments associated with long-term supply agreements to secure supply of inventory components. As of September 26, 2020, the Company’s vendor non-trade receivables and prepayments related to long-term supply agreements were concentrated among a few individual vendors located primarily in Asia. While the Company has procedures to monitor and limit exposure to credit risk on its trade and vendor non-trade receivables, as well as long-term prepayments, there can be no assurance such procedures will effectively limit its credit risk and avoid losses.The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities.The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, the introduction of new taxes, or changes in tax laws or their interpretation, including in the U.S. and Ireland.The Company is also subject to the examination of its tax returns and other tax matters by the U.S. Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s financial condition and operating results could be materially adversely affected.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesThe Company’s headquarters are located in Cupertino, California. As of September 26, 2020, the Company owned or leased facilities and land for corporate functions, R&D, data centers, retail and other purposes at locations throughout the U.S. and in various places outside the U.S. The Company believes its existing facilities and equipment, which are used by all reportable segments, are in good operating condition and are suitable for the conduct of its business.Apple Inc. | 2020 Form 10-K | 15Item 3. Legal ProceedingsThe Company is subject to legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. The Company’s material legal proceedings are described in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 10, “Commitments and Contingencies” under the heading “Contingencies.”The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts above management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected. The Company settled certain matters during the fourth quarter of 2020 that did not individually or in the aggregate have a material impact on the Company’s financial condition or operating results.Item 4. Mine Safety DisclosuresNot applicable.Apple Inc. | 2020 Form 10-K | 16PART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesThe Company’s common stock is traded on The Nasdaq Stock Market LLC under the symbol AAPL.Common Stock SplitOn August 28, 2020, the Company effected a four-for-one stock split to shareholders of record as of August 24, 2020. All share, restricted stock unit (“RSU”) and per share or per RSU information has been retroactively adjusted to reflect the stock split.HoldersAs of October 16, 2020, there were 22,797 shareholders of record.Purchases of Equity Securities by the Issuer and Affiliated PurchasersShare repurchase activity during the three months ended September 26, 2020 was as follows (in millions, except number of shares, which are reflected in thousands, and per share amounts):PeriodsTotal Numberof Shares PurchasedAverage PricePaid Per ShareTotal Number of SharesPurchased as Part of PubliclyAnnounced Plans or ProgramsApproximate Dollar Value ofShares That May Yet Be PurchasedUnder the Plans or Programs (1)June 28, 2020 to August 1, 2020:Open market and privately negotiated purchases67,990 $94.68 67,990 August 2, 2020 to August 29, 2020:May 2020 ASR3,115 (2)3,115 Open market and privately negotiated purchases40,004 $115.99 40,004 August 30, 2020 to September 26, 2020:Open market and privately negotiated purchases60,725 $114.00 60,725 Total171,834 $56,353 (1)As of September 26, 2020, the Company was authorized to purchase up to $225 billion of the Company’s common stock under a share repurchase program announced on April 30, 2020, of which $168.6 billion had been utilized. The remaining $56.4 billion in the table represents the amount available to repurchase shares under the authorized repurchase program as of September 26, 2020. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.(2)In May 2020, the Company entered into an accelerated share repurchase arrangement (“ASR”) to purchase up to $6.0 billion of the Company’s common stock. In August 2020, the purchase period for this ASR ended and an additional 3 million shares were delivered and retired. In total, 64 million shares were delivered under this ASR at an average repurchase price of $94.14.Apple Inc. | 2020 Form 10-K | 17Company Stock PerformanceThe following graph shows a comparison of cumulative total shareholder return, calculated on a dividend-reinvested basis, for the Company, the S&P 500 Index, the S&P Information Technology Index and the Dow Jones U.S. Technology Supersector Index for the five years ended September 26, 2020. The graph assumes $100 was invested in each of the Company’s common stock, the S&P 500 Index, the S&P Information Technology Index and the Dow Jones U.S. Technology Supersector Index as of the market close on September 25, 2015. Note that past stock price performance is not necessarily indicative of future stock price performance.*$100 invested on September 25, 2015 in stock or index, including reinvestment of dividends. Data points are the last day of each fiscal year for the Company’s common stock and September 30th for indexes.Copyright© 2020 Standard & Poor’s, a division of S&P Global. All rights reserved.Copyright© 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.September 2015September 2016September 2017September 2018September 2019September 2020Apple Inc.$100 $100 $140 $208 $204 $424 S&P 500 Index$100 $115 $137 $161 $168 $194 S&P Information Technology Index$100 $123 $158 $208 $226 $333 Dow Jones U.S. Technology Supersector Index$100 $122 $156 $205 $218 $325 Apple Inc. | 2020 Form 10-K | 18Item 6. Selected Financial DataThe information set forth below for the five years ended September 26, 2020, is not necessarily indicative of results of future operations, and should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below (in millions, except number of shares, which are reflected in thousands, and per share amounts).20202019201820172016Total net sales$274,515 $260,174 $265,595 $229,234 $215,639 Net income$57,411 $55,256 $59,531 $48,351 $45,687 Earnings per share:Basic$3.31 $2.99 $3.00 $2.32 $2.09 Diluted$3.28 $2.97 $2.98 $2.30 $2.08 Cash dividends declared per share$0.795 $0.75 $0.68 $0.60 $0.545 Shares used in computing earnings per share:Basic17,352,119 18,471,336 19,821,510 20,868,968 21,883,281 Diluted17,528,214 18,595,651 20,000,435 21,006,767 22,001,126 Total cash, cash equivalents and marketable securities$191,830 $205,898 $237,100 $268,895 $237,585 Total assets$323,888 $338,516 $365,725 $375,319 $321,686 Non-current portion of term debt$98,667 $91,807 $93,735 $97,207 $75,427 Other non-current liabilities$54,490 $50,503 $48,914 $44,212 $39,986 Apple Inc. | 2020 Form 10-K | 19Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Form 10-K. This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended September 28, 2019.Fiscal Year HighlightsCOVID-19 UpdateCOVID-19 has spread rapidly throughout the world, prompting governments and businesses to take unprecedented measures in response. Such measures have included restrictions on travel and business operations, temporary closures of businesses, and quarantines and shelter-in-place orders. The COVID-19 pandemic has significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets. The COVID-19 pandemic and the measures taken by many countries in response have adversely affected and could in the future materially adversely impact the Company’s business, results of operations, financial condition and stock price. During 2020, aspects of the Company’s business were adversely affected by the COVID-19 pandemic, with many of the Company’s retail stores, as well as channel partner points of sale, temporarily closed at various times, and the vast majority of the Company’s employees working remotely. The Company has reopened some of its offices and the majority of its retail stores, subject to operating restrictions to protect public health and the health and safety of employees and customers, and it continues to work on safely re-opening the remainder of its offices and retail stores, subject to local rules and regulations. The full extent of the future impact of the COVID-19 pandemic on the Company’s operational and financial performance is currently uncertain and will depend on many factors outside the Company’s control, including, without limitation, the timing, extent, trajectory and duration of the pandemic, the development and availability of effective treatments and vaccines, the imposition of protective public safety measures, and the impact of the pandemic on the global economy and demand for consumer products. Refer to Part I, Item 1A of this Form 10-K under the heading “Risk Factors,” for more information.The Company believes its existing balances of cash, cash equivalents and marketable securities, along with commercial paper and other short-term liquidity arrangements, will be sufficient to satisfy its working capital needs, capital asset purchases, dividends, share repurchases, debt repayments and other liquidity requirements associated with its existing operations.Fiscal 2020 HighlightsTotal net sales increased 6% or $14.3 billion during 2020 compared to 2019, primarily driven by higher net sales of Services and Wearables, Home and Accessories. The weakness in foreign currencies had an unfavorable impact on net sales during 2020.In April 2020, the Company announced an increase to its current share repurchase program authorization from $175 billion to $225 billion and raised its quarterly dividend from $0.1925 to $0.205 per share beginning in May 2020. During 2020, the Company repurchased $72.5 billion of its common stock and paid dividends and dividend equivalents of $14.1 billion.On August 28, 2020, the Company effected a four-for-one stock split to shareholders of record as of August 24, 2020. All share, RSU and per share or per RSU information has been retroactively adjusted to reflect the stock split.Apple Inc. | 2020 Form 10-K | 20Products and Services PerformanceThe following table shows net sales by category for 2020, 2019 and 2018 (dollars in millions):2020Change2019Change2018Net sales by category:iPhone (1)$137,781 (3)%$142,381 (14)%$164,888 Mac (1)28,622 11 %25,740 2 %25,198 iPad (1)23,724 11 %21,280 16 %18,380 Wearables, Home and Accessories (1)(2)30,620 25 %24,482 41 %17,381 Services (3)53,768 16 %46,291 16 %39,748 Total net sales$274,515 6 %$260,174 (2)%$265,595 (1)Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in the sales price of the respective product.(2)Wearables, Home and Accessories net sales include sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and Apple-branded and third-party accessories.(3)Services net sales include sales from the Company’s advertising, AppleCare, digital content and other services. Services net sales also include amortization of the deferred value of Maps, Siri, and free iCloud® storage and Apple TV+ services, which are bundled in the sales price of certain products.iPhoneiPhone net sales decreased during 2020 compared to 2019 due primarily to the absence of new iPhone models in the fourth quarter of 2020 and the weakness in foreign currencies relative to the U.S. dollar, partially offset by the introduction of iPhone SE in the third quarter of 2020.MacMac net sales increased during 2020 compared to 2019 due primarily to higher net sales of MacBook Pro.iPadiPad net sales increased during 2020 compared to 2019 due primarily to higher net sales of 10-inch versions of iPad, iPad Air and iPad Pro.Wearables, Home and AccessoriesWearables, Home and Accessories net sales increased during 2020 compared to 2019 due primarily to higher net sales of AirPods and Apple Watch.ServicesServices net sales increased during 2020 compared to 2019 due primarily to higher net sales from the App Store, advertising and cloud services.Apple Inc. | 2020 Form 10-K | 21Segment Operating PerformanceThe Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and Africa. Greater China includes China mainland, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the reportable segments provide similar hardware and software products and similar services, each one is managed separately to better align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic region. Further information regarding the Company’s reportable segments can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 11, “Segment Information and Geographic Data.”The following table shows net sales by reportable segment for 2020, 2019 and 2018 (dollars in millions):2020Change2019Change2018Net sales by reportable segment:Americas$124,556 7 %$116,914 4 %$112,093 Europe68,640 14 %60,288 (3)%62,420 Greater China40,308 (8)%43,678 (16)%51,942 Japan21,418 — %21,506 (1)%21,733 Rest of Asia Pacific19,593 10 %17,788 2 %17,407 Total net sales$274,515 6 %$260,174 (2)%$265,595 AmericasAmericas net sales increased during 2020 compared to 2019 due primarily to higher net sales of Services and Wearables, Home and Accessories. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Americas net sales during 2020.EuropeEurope net sales increased during 2020 compared to 2019 due primarily to higher net sales of iPhone, Wearables, Home and Accessories and Services. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Europe net sales during 2020.Greater ChinaGreater China net sales decreased during 2020 compared to 2019 due primarily to lower net sales of iPhone, partially offset by higher net sales of Services and iPad. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Greater China net sales during 2020.JapanJapan net sales were flat during 2020 compared to 2019 due primarily to lower net sales of iPhone, offset by higher net sales of Services and Wearables, Home and Accessories. The strength of the Japanese yen relative to the U.S. dollar had a favorable impact on Japan net sales during 2020.Rest of Asia PacificRest of Asia Pacific net sales increased during 2020 compared to 2019 due primarily to higher net sales of Wearables, Home and Accessories, Services and iPhone. The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Rest of Asia Pacific net sales during 2020.Apple Inc. | 2020 Form 10-K | 22Gross MarginProducts and Services gross margin and gross margin percentage for 2020, 2019 and 2018 were as follows (dollars in millions):202020192018Gross margin:Products$69,461 $68,887 $77,683 Services35,495 29,505 24,156 Total gross margin$104,956 $98,392 $101,839 Gross margin percentage:Products31.5 %32.2 %34.4 %Services66.0 %63.7 %60.8 %Total gross margin percentage38.2 %37.8 %38.3 %Products Gross MarginProducts gross margin increased during 2020 compared to 2019 due primarily to higher Products volume and material cost savings, partially offset by the weakness in foreign currencies relative to the U.S. dollar and a different Products mix. Products gross margin percentage decreased during 2020 compared to 2019 due primarily to the weakness in foreign currencies relative to the U.S. dollar and a different Products mix, partially offset by material cost savings and higher leverage.Services Gross MarginServices gross margin increased during 2020 compared to 2019 due primarily to higher Services net sales and a different Services mix. Services gross margin percentage increased during 2020 compared to 2019 due primarily to a different Services mix and higher leverage, partially offset by higher Services costs.The Company’s future gross margins can be impacted by a variety of factors, as set forth in Part I, Item 1A of this Form 10-K under the heading “Risk Factors.” As a result, the Company believes, in general, gross margins will be subject to volatility and remain under downward pressure.Operating ExpensesOperating expenses for 2020, 2019 and 2018 were as follows (dollars in millions):2020Change2019Change2018Research and development$18,752 16 %$16,217 14 %$14,236 Percentage of total net sales7 %6 %5 %Selling, general and administrative$19,916 9 %$18,245 9 %$16,705 Percentage of total net sales7 %7 %6 %Total operating expenses$38,668 12 %$34,462 11 %$30,941 Percentage of total net sales14 %13 %12 %Research and DevelopmentThe year-over-year growth in R&D expense in 2020 was driven primarily by increases in headcount-related expenses. The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace, and to the development of new and updated products and services that are central to the Company’s core business strategy.Selling, General and AdministrativeThe year-over-year growth in selling, general and administrative expense in 2020 was driven primarily by increases in headcount-related expenses, higher spending on marketing and advertising, and higher variable selling expenses.Apple Inc. | 2020 Form 10-K | 23Other Income/(Expense), NetOther income/(expense), net (“OI&E”) for 2020, 2019 and 2018 was as follows (dollars in millions):2020Change2019Change2018Interest and dividend income$3,763 $4,961 $5,686 Interest expense(2,873)(3,576)(3,240)Other income/(expense), net(87)422 (441)Total other income/(expense), net$803 (56)%$1,807 (10)%$2,005 The year-over-year decrease in OI&E during 2020 was due primarily to lower interest income and net impairment/gain activity on non-marketable securities, partially offset by lower interest expense. The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 1.85% and 2.19% in 2020 and 2019, respectively.Provision for Income TaxesProvision for income taxes, effective tax rate and statutory federal income tax rate for 2020, 2019 and 2018 were as follows (dollars in millions):202020192018Provision for income taxes$9,680 $10,481 $13,372 Effective tax rate14.4 %15.9 %18.3 %Statutory federal income tax rate21 %21 %24.5 %The Company’s effective tax rate for both 2020 and 2019 was lower than the statutory federal income tax rate due primarily to the lower tax rate on foreign earnings, including the impact of tax settlements, and tax benefits from share-based compensation.The Company’s effective tax rate for 2020 was lower compared to 2019 due primarily to a one-time adjustment of U.S. foreign tax credits in response to regulations issued by the U.S. Department of the Treasury in December 2019 in connection with the U.S. Tax Cuts and Jobs Act of 2017 (the “Act”) and higher tax benefits from share-based compensation.As of September 26, 2020, the Company had net deferred tax assets arising from deductible temporary differences and tax credits of $11.0 billion and deferred tax liabilities of $2.8 billion. Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to recover the net deferred tax assets. The Company will continue to evaluate the amount of the valuation allowance, if any, by assessing the realizability of deferred tax assets.Recent Accounting PronouncementsFinancial InstrumentsIn June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses on certain financial instruments. The Company will adopt ASU 2016-13 in its first quarter of 2021 utilizing the modified retrospective transition method. Based on the composition of the Company’s investment portfolio, current market conditions, and historical credit loss activity, the adoption of ASU 2016-13 will not have a material impact on its consolidated financial statements.Apple Inc. | 2020 Form 10-K | 24Liquidity and Capital ResourcesThe following table presents selected financial information and statistics as of and for the years ended September 26, 2020, September 28, 2019 and September 29, 2018 (in millions):202020192018Cash, cash equivalents and marketable securities (1)$191,830 $205,898 $237,100 Property, plant and equipment, net$36,766 $37,378 $41,304 Commercial paper$4,996 $5,980 $11,964 Total term debt$107,440 $102,067 $102,519 Working capital$38,321 $57,101 $15,410 Cash generated by operating activities$80,674 $69,391 $77,434 Cash generated by/(used in) investing activities$(4,289)$45,896 $16,066 Cash used in financing activities$(86,820)$(90,976)$(87,876)(1)As of September 26, 2020 and September 28, 2019, total marketable securities included $18.6 billion and $18.9 billion, respectively, that was restricted from general use, related to the State Aid Decision (refer to Note 5, “Income Taxes” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K) and other agreements.The Company believes its existing balances of cash, cash equivalents and marketable securities, along with commercial paper and other short-term liquidity arrangements, will be sufficient to satisfy its working capital needs, capital asset purchases, dividends, share repurchases, debt repayments and other liquidity requirements associated with its existing operations over the next 12 months.In connection with the State Aid Decision, as of September 26, 2020, the adjusted recovery amount of €12.9 billion plus interest of €1.2 billion was funded into escrow, where it will remain restricted from general use pending the conclusion of all legal proceedings. Further information regarding the State Aid Decision can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 5, “Income Taxes.”The Company’s marketable securities investment portfolio is primarily invested in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer.During 2020, cash generated by operating activities of $80.7 billion was a result of $57.4 billion of net income, non-cash adjustments to net income of $17.6 billion and an increase in the net change in operating assets and liabilities of $5.7 billion. Cash used in investing activities of $4.3 billion during 2020 consisted primarily of cash used to acquire property, plant and equipment of $7.3 billion and cash paid for business acquisitions, net of cash acquired, of $1.5 billion, partially offset by proceeds from maturities and sales of marketable securities, net of purchases, of $5.5 billion. Cash used in financing activities of $86.8 billion during 2020 consisted primarily of cash used to repurchase common stock of $72.4 billion, cash used to pay dividends and dividend equivalents of $14.1 billion, cash used to repay or redeem term debt of $12.6 billion and net repayments of commercial paper of $1.0 billion, partially offset by net proceeds from the issuance of term debt of $16.1 billion.During 2019, cash generated by operating activities of $69.4 billion was a result of $55.3 billion of net income and non-cash adjustments to net income of $17.6 billion, partially offset by a decrease in the net change in operating assets and liabilities of $3.5 billion. Cash generated by investing activities of $45.9 billion during 2019 consisted primarily of proceeds from sales and maturities of marketable securities, net of purchases, of $57.5 billion, partially offset by cash used to acquire property, plant and equipment of $10.5 billion. Cash used in financing activities of $91.0 billion during 2019 consisted primarily of cash used to repurchase common stock of $66.9 billion, cash used to pay dividends and dividend equivalents of $14.1 billion, cash used to repay term debt of $8.8 billion and net repayments of commercial paper of $6.0 billion, partially offset by net proceeds from the issuance of term debt of $7.0 billion.DebtThe Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses the net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of September 26, 2020, the Company had $5.0 billion of Commercial Paper outstanding, with a weighted-average interest rate of 0.62% and maturities generally less than nine months.The Company may enter into agreements to sell certain of its marketable securities with a promise to repurchase the securities at a specified time and amount as an additional short-term liquidity arrangement.Apple Inc. | 2020 Form 10-K | 25As of September 26, 2020, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $106.1 billion (collectively the “Notes”). During 2020, the Company issued $16.1 billion and repaid or redeemed $12.6 billion of Notes. The Company has entered, and in the future may enter, into interest rate swaps to manage interest rate risk on the Notes. In addition, the Company has entered, and in the future may enter, into foreign currency swaps to manage foreign currency risk on the Notes.Further information regarding the Company’s debt issuances and related hedging activity can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 3, “Financial Instruments” and Note 6, “Debt.”Capital Return ProgramAs of September 26, 2020, the Company was authorized to purchase up to $225 billion of the Company’s common stock under a share repurchase program, of which $168.6 billion had been utilized. During 2020, the Company repurchased 917 million shares of its common stock for $72.5 billion, including 141 million shares delivered under a $10.0 billion November 2019 ASR and 64 million shares delivered under a $6.0 billion May 2020 ASR. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.As of September 26, 2020, the Company’s quarterly cash dividend was $0.205 per share. The Company intends to increase its dividend on an annual basis, subject to declaration by the Board of Directors.Contractual ObligationsThe following table presents certain payments due by the Company as of September 26, 2020, and includes amounts already recorded on the Consolidated Balance Sheet, except for manufacturing purchase obligations, other purchase obligations and certain lease obligations (in millions):Payments due in 2021Payments due in 2022–2023Payments due in 2024–2025Payments due after 2025TotalTerm debt$8,750 $20,958 $21,029 $55,341 $106,078 Leases1,622 3,097 2,352 5,888 12,959 Manufacturing purchase obligations (1)47,961 1,849 61 40 49,911 Other purchase obligations6,178 2,736 400 90 9,404 Deemed repatriation tax payable1,533 5,923 12,955 9,254 29,665 Total$66,044 $34,563 $36,797 $70,613 $208,017 (1)Represents amount expected to be paid under manufacturing-related supplier arrangements, which are primarily noncancelable.LeasesThe Company has lease arrangements for certain equipment and facilities, including retail, corporate, manufacturing and data center space. The Company’s retail store and other facility leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options. The above contractual obligations table includes future payments under leases that had commenced as of September 26, 2020, and were therefore recorded on the Company’s Consolidated Balance Sheet, as well as leases that had been signed but not yet commenced as of September 26, 2020. Further information regarding the Company’s leases can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 12, “Leases.”Manufacturing Purchase ObligationsThe Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company’s products and to perform final assembly and testing of finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers.Other Purchase ObligationsThe Company’s other purchase obligations consist of noncancelable obligations to acquire capital assets, including product tooling and manufacturing process equipment, and noncancelable obligations related to advertising, licensing, R&D, Internet and telecommunications services, content creation and other activities.Apple Inc. | 2020 Form 10-K | 26Deemed Repatriation Tax PayableAs of September 26, 2020, a significant portion of the other non-current liabilities in the Company’s Consolidated Balance Sheet consisted of the deemed repatriation tax payable imposed by the Act. The Company plans to pay the deemed repatriation tax payable in installments in accordance with the Act.Other Non-Current LiabilitiesThe Company’s remaining other non-current liabilities primarily consist of items for which the Company is unable to make a reasonably reliable estimate of the timing or amount of payments; therefore, such amounts are not included in the above contractual obligations table.Critical Accounting Policies and EstimatesThe preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 1, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.Management believes the Company’s critical accounting policies and estimates are those related to revenue recognition, valuation of manufacturing-related assets and estimation of inventory purchase commitment cancellation fees, warranty costs, income taxes, and legal and other contingencies. Management considers these policies critical because they are both important to the portrayal of the Company’s financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. The Company’s senior management has reviewed these critical accounting policies and related disclosures with the Audit and Finance Committee of the Company’s Board of Directors.Revenue RecognitionThe Company has identified up to three performance obligations regularly included in arrangements involving the sale of iPhone, Mac, iPad and certain other products. The first performance obligation, which represents the substantial portion of the allocated sales price, is the hardware and bundled software delivered at the time of sale. The second performance obligation is the right to receive certain product-related bundled services, which include iCloud, Siri and Maps. The third performance obligation is the right to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the software bundled with each device. The Company allocates revenue and any related discounts to these performance obligations based on their relative stand-alone selling prices (“SSPs”). Because the Company lacks observable prices for the undelivered performance obligations, the allocation of revenue is based on the Company’s estimated SSPs. Revenue allocated to the product-related bundled services and unspecified software upgrade rights is deferred and recognized on a straight-line basis over the estimated period they are expected to be provided.The Company’s process for determining estimated SSPs involves management’s judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable. Should future facts and circumstances change, the Company’s SSPs and the future rate of related amortization for product-related bundled services and unspecified software upgrade rights related to future sales of these devices could change. Factors subject to change include the nature of the product-related bundled services and unspecified software upgrade rights offered, their estimated value and the estimated period they are expected to be provided.Valuation of Manufacturing-Related Assets and Estimation of Inventory Purchase Commitment Cancellation FeesThe Company invests in manufacturing-related assets, including capital assets held at its suppliers’ facilities and prepayments provided to certain of its suppliers associated with long-term agreements to secure the supply of inventory. The Company also accrues estimated purchase commitment cancellation fees related to inventory orders that have been canceled or are expected to be canceled. The Company’s estimates of future product development plans and demand for its products are key inputs in determining the recoverability of manufacturing-related assets and assessing the adequacy of any purchase commitment cancellation fee accruals. If there is an abrupt and substantial decline in estimated demand for one or more of the Company’s products, a change in the Company’s product development plans, or an unanticipated change in technological requirements for any of the Company’s products, the Company may be required to record write-downs or impairments of manufacturing-related assets or accrue purchase commitment cancellation fees.Apple Inc. | 2020 Form 10-K | 27Warranty CostsThe Company offers limited warranties on its new and certified refurbished hardware products and on parts used to repair its hardware products, and customers may purchase extended service coverage, where available, on many of the Company’s hardware products. The Company accrues the estimated cost of warranties in the period the related revenue is recognized based on historical and projected warranty claim rates, historical and projected cost per claim and knowledge of specific product failures outside the Company’s typical experience. If actual product failure rates or repair costs differ from estimates, revisions to the estimated warranty liabilities would be required.Income TaxesThe Company recognizes tax benefits from uncertain tax positions if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefit that has a greater-than-50% likelihood of being realized upon ultimate settlement. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results.Legal and Other ContingenciesAs discussed in Part I, Item 3 of this Form 10-K under the heading “Legal Proceedings” and in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 10, “Commitments and Contingencies,” the Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable, the determination of which requires significant judgment. Except as described in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 10, “Commitments and Contingencies” under the heading “Contingencies,” in the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss greater than a recorded accrual, concerning loss contingencies for asserted legal and other claims.The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts above management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected.Item 7A. Quantitative and Qualitative Disclosures About Market RiskInterest Rate and Foreign Currency Risk ManagementThe Company regularly reviews its foreign exchange forward and option positions and interest rate swaps, both on a stand-alone basis and in conjunction with its underlying foreign currency and interest rate exposures. Given the effective horizons of the Company’s risk management activities and the anticipatory nature of the exposures, there can be no assurance these positions will offset more than a portion of the financial impact resulting from movements in either foreign exchange or interest rates. Further, the recognition of the gains and losses related to these instruments may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Company’s financial condition and operating results.Interest Rate RiskThe Company’s exposure to changes in interest rates relates primarily to the Company’s investment portfolio and outstanding debt. While the Company is exposed to global interest rate fluctuations, the Company’s interest income and expense are most sensitive to fluctuations in U.S. interest rates. Changes in U.S. interest rates affect the interest earned on the Company’s cash, cash equivalents and marketable securities and the fair value of those securities, as well as costs associated with hedging and interest paid on the Company’s debt.The Company’s investment policy and strategy are focused on the preservation of capital and supporting the Company’s liquidity requirements. The Company uses a combination of internal and external management to execute its investment strategy and achieve its investment objectives. The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. To provide a meaningful assessment of the interest rate risk associated with the Company’s investment portfolio, the Company performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment portfolio assuming a 100 basis point parallel shift in the yield curve. Based on investment positions as of September 26, 2020 and September 28, 2019, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $3.1 billion and $2.8 billion incremental decline in the fair market value of the portfolio, respectively. Such losses would only be realized if the Company sold the investments prior to maturity.Apple Inc. | 2020 Form 10-K | 28As of September 26, 2020 and September 28, 2019, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate carrying amount of $107.4 billion and $102.1 billion, respectively. The Company has entered, and in the future may enter, into interest rate swaps to manage interest rate risk on its outstanding term debt. Interest rate swaps allow the Company to effectively convert fixed-rate payments into floating-rate payments or floating-rate payments into fixed-rate payments. Gains and losses on term debt are generally offset by the corresponding losses and gains on the related hedging instrument. A 100 basis point increase in market interest rates would cause interest expense on the Company’s debt as of September 26, 2020 and September 28, 2019 to increase by $218 million and $325 million on an annualized basis, respectively.Foreign Currency RiskIn general, the Company is a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, will negatively affect the Company’s net sales and gross margins as expressed in U.S. dollars. There is a risk that the Company will have to adjust local currency pricing due to competitive pressures when there has been significant volatility in foreign currency exchange rates.The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. In addition, the Company has entered, and in the future may enter, into foreign currency contracts to partially offset the foreign currency exchange gains and losses on its foreign currency–denominated debt issuances. The Company generally hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months. However, the Company may choose not to hedge certain foreign exchange exposures for a variety of reasons including, but not limited to, accounting considerations or the prohibitive economic cost of hedging particular exposures.To provide an assessment of the foreign currency risk associated with certain of the Company’s foreign currency derivative positions, the Company performed a sensitivity analysis using a value-at-risk (“VAR”) model to assess the potential impact of fluctuations in exchange rates. The VAR model consisted of using a Monte Carlo simulation to generate thousands of random market price paths assuming normal market conditions. The VAR is the maximum expected loss in fair value, for a given confidence interval, to the Company’s foreign currency derivative positions due to adverse movements in rates. The VAR model is not intended to represent actual losses but is used as a risk estimation and management tool. Forecasted transactions, firm commitments and assets and liabilities denominated in foreign currencies were excluded from the model. Based on the results of the model, the Company estimates with 95% confidence, a maximum one-day loss in fair value of $551 million as of September 26, 2020, compared to a maximum one-day loss in fair value of $452 million as of September 28, 2019. Because the Company uses foreign currency instruments for hedging purposes, the losses in fair value incurred on those instruments are generally offset by increases in the fair value of the underlying exposures.Actual future gains and losses associated with the Company’s investment portfolio, debt and derivative positions may differ materially from the sensitivity analyses performed as of September 26, 2020 due to the inherent limitations associated with predicting the timing and amount of changes in interest rates, foreign currency exchange rates and the Company’s actual exposures and positions.Apple Inc. | 2020 Form 10-K | 29Item 8. Financial Statements and Supplementary DataIndex to Consolidated Financial StatementsPageConsolidated Statements of Operations for the years ended September 26, 2020, September 28, 2019 and September 29, 201831Consolidated Statements of Comprehensive Income for the years ended September 26, 2020, September 28, 2019 and September 29, 201832Consolidated Balance Sheets as of September 26, 2020 and September 28, 201933Consolidated Statements of Shareholders’ Equity for the years ended September 26, 2020, September 28, 2019 and September 29, 201834Consolidated Statements of Cash Flows for the years ended September 26, 2020, September 28, 2019 and September 29, 201835Notes to Consolidated Financial Statements36Selected Quarterly Financial Information (Unaudited)57Reports of Independent Registered Public Accounting Firm59All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and accompanying notes.Apple Inc. | 2020 Form 10-K | 30Apple Inc.CONSOLIDATED STATEMENTS OF OPERATIONS(In millions, except number of shares which are reflected in thousands and per share amounts)Years endedSeptember 26,2020September 28,2019September 29,2018Net sales: Products$220,747 $213,883 $225,847 Services53,768 46,291 39,748 Total net sales274,515 260,174 265,595 Cost of sales: Products151,286 144,996 148,164 Services18,273 16,786 15,592 Total cost of sales169,559 161,782 163,756 Gross margin104,956 98,392 101,839 Operating expenses:Research and development18,752 16,217 14,236 Selling, general and administrative19,916 18,245 16,705 Total operating expenses38,668 34,462 30,941 Operating income66,288 63,930 70,898 Other income/(expense), net803 1,807 2,005 Income before provision for income taxes67,091 65,737 72,903 Provision for income taxes9,680 10,481 13,372 Net income$57,411 $55,256 $59,531 Earnings per share:Basic$3.31 $2.99 $3.00 Diluted$3.28 $2.97 $2.98 Shares used in computing earnings per share:Basic17,352,119 18,471,336 19,821,510 Diluted17,528,214 18,595,651 20,000,435 See accompanying Notes to Consolidated Financial Statements.Apple Inc. | 2020 Form 10-K | 31Apple Inc.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In millions)Years endedSeptember 26,2020September 28,2019September 29,2018Net income$57,411 $55,256 $59,531 Other comprehensive income/(loss):Change in foreign currency translation, net of tax88 (408)(525)Change in unrealized gains/losses on derivative instruments, net of tax:Change in fair value of derivatives79 (661)523 Adjustment for net (gains)/losses realized and included in net income(1,264)23 382 Total change in unrealized gains/losses on derivative instruments(1,185)(638)905 Change in unrealized gains/losses on marketable debt securities, net of tax:Change in fair value of marketable debt securities1,202 3,802 (3,407)Adjustment for net (gains)/losses realized and included in net income(63)25 1 Total change in unrealized gains/losses on marketable debt securities1,139 3,827 (3,406)Total other comprehensive income/(loss)42 2,781 (3,026)Total comprehensive income$57,453 $58,037 $56,505 See accompanying Notes to Consolidated Financial Statements.Apple Inc. | 2020 Form 10-K | 32Apple Inc.CONSOLIDATED BALANCE SHEETS(In millions, except number of shares which are reflected in thousands and par value)September 26,2020September 28,2019ASSETS:Current assets:Cash and cash equivalents$38,016 $48,844 Marketable securities52,927 51,713 Accounts receivable, net16,120 22,926 Inventories4,061 4,106 Vendor non-trade receivables21,325 22,878 Other current assets11,264 12,352 Total current assets143,713 162,819 Non-current assets:Marketable securities100,887 105,341 Property, plant and equipment, net36,766 37,378 Other non-current assets42,522 32,978 Total non-current assets180,175 175,697 Total assets$323,888 $338,516 LIABILITIES AND SHAREHOLDERS’ EQUITY:Current liabilities:Accounts payable$42,296 $46,236 Other current liabilities42,684 37,720 Deferred revenue6,643 5,522 Commercial paper4,996 5,980 Term debt8,773 10,260 Total current liabilities105,392 105,718 Non-current liabilities:Term debt98,667 91,807 Other non-current liabilities54,490 50,503 Total non-current liabilities153,157 142,310 Total liabilities258,549 248,028 Commitments and contingenciesShareholders’ equity:Common stock and additional paid-in capital, $0.00001 par value: 50,400,000 shares authorized; 16,976,763 and 17,772,945 shares issued and outstanding, respectively50,779 45,174 Retained earnings14,966 45,898 Accumulated other comprehensive income/(loss)(406)(584)Total shareholders’ equity65,339 90,488 Total liabilities and shareholders’ equity$323,888 $338,516 See accompanying Notes to Consolidated Financial Statements.Apple Inc. | 2020 Form 10-K | 33Apple Inc.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(In millions, except per share amounts)Years endedSeptember 26,2020September 28,2019September 29,2018Total shareholders’ equity, beginning balances$90,488 $107,147 $134,047 Common stock and additional paid-in capital:Beginning balances45,174 40,201 35,867 Common stock issued880 781 669 Common stock withheld related to net share settlement of equity awards(2,250)(2,002)(1,778)Share-based compensation6,975 6,194 5,443 Ending balances50,779 45,174 40,201 Retained earnings:Beginning balances45,898 70,400 98,330 Net income57,411 55,256 59,531 Dividends and dividend equivalents declared(14,087)(14,129)(13,735)Common stock withheld related to net share settlement of equity awards(1,604)(1,029)(948)Common stock repurchased(72,516)(67,101)(73,056)Cumulative effects of changes in accounting principles(136)2,501 278 Ending balances14,966 45,898 70,400 Accumulated other comprehensive income/(loss):Beginning balances(584)(3,454)(150)Other comprehensive income/(loss)42 2,781 (3,026)Cumulative effects of changes in accounting principles136 89 (278)Ending balances(406)(584)(3,454)Total shareholders’ equity, ending balances$65,339 $90,488 $107,147 Dividends and dividend equivalents declared per share or RSU$0.795 $0.75 $0.68 See accompanying Notes to Consolidated Financial Statements.Apple Inc. | 2020 Form 10-K | 34Apple Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS(In millions)Years endedSeptember 26,2020September 28,2019September 29,2018Cash, cash equivalents and restricted cash, beginning balances$50,224 $25,913 $20,289 Operating activities:Net income57,411 55,256 59,531 Adjustments to reconcile net income to cash generated by operating activities:Depreciation and amortization11,056 12,547 10,903 Share-based compensation expense6,829 6,068 5,340 Deferred income tax benefit(215)(340)(32,590)Other(97)(652)(444)Changes in operating assets and liabilities:Accounts receivable, net6,917 245 (5,322)Inventories(127)(289)828 Vendor non-trade receivables1,553 2,931 (8,010)Other current and non-current assets(9,588)873 (423)Accounts payable(4,062)(1,923)9,175 Deferred revenue2,081 (625)(3)Other current and non-current liabilities8,916 (4,700)38,449 Cash generated by operating activities80,674 69,391 77,434 Investing activities:Purchases of marketable securities(114,938)(39,630)(71,356)Proceeds from maturities of marketable securities69,918 40,102 55,881 Proceeds from sales of marketable securities50,473 56,988 47,838 Payments for acquisition of property, plant and equipment(7,309)(10,495)(13,313)Payments made in connection with business acquisitions, net(1,524)(624)(721)Purchases of non-marketable securities(210)(1,001)(1,871)Proceeds from non-marketable securities92 1,634 353 Other(791)(1,078)(745)Cash generated by/(used in) investing activities(4,289)45,896 16,066 Financing activities:Proceeds from issuance of common stock880 781 669 Payments for taxes related to net share settlement of equity awards(3,634)(2,817)(2,527)Payments for dividends and dividend equivalents(14,081)(14,119)(13,712)Repurchases of common stock(72,358)(66,897)(72,738)Proceeds from issuance of term debt, net16,091 6,963 6,969 Repayments of term debt(12,629)(8,805)(6,500)Repayments of commercial paper, net(963)(5,977)(37)Other(126)(105)— Cash used in financing activities(86,820)(90,976)(87,876)Increase/(Decrease) in cash, cash equivalents and restricted cash(10,435)24,311 5,624 Cash, cash equivalents and restricted cash, ending balances$39,789 $50,224 $25,913 Supplemental cash flow disclosure:Cash paid for income taxes, net$9,501 $15,263 $10,417 Cash paid for interest$3,002 $3,423 $3,022 See accompanying Notes to Consolidated Financial Statements.Apple Inc. | 2020 Form 10-K | 35Apple Inc.Notes to Consolidated Financial StatementsNote 1 – Summary of Significant Accounting PoliciesBasis of Presentation and PreparationThe consolidated financial statements include the accounts of Apple Inc. and its wholly owned subsidiaries (collectively “Apple” or the “Company”). Intercompany accounts and transactions have been eliminated. In the opinion of the Company’s management, the consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. Certain prior period amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation.The Company’s fiscal year is the 52- or 53-week period that ends on the last Saturday of September. The Company’s fiscal years 2020, 2019 and 2018 spanned 52 weeks each. An additional week is included in the first fiscal quarter every five or six years to realign the Company’s fiscal quarters with calendar quarters. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years.Common Stock SplitOn August 28, 2020, the Company effected a four-for-one stock split to shareholders of record as of August 24, 2020. All share, restricted stock unit (“RSU”) and per share or per RSU information has been retroactively adjusted to reflect the stock split.Recently Adopted Accounting PronouncementsLeasesAt the beginning of the first quarter of 2020, the Company adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), and additional ASUs issued to clarify and update the guidance in ASU 2016-02 (collectively, the “new leases standard”), which modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The Company adopted the new leases standard utilizing the modified retrospective transition method, under which amounts in prior periods presented were not restated. For contracts existing at the time of adoption, the Company elected to not reassess (i) whether any are or contain leases, (ii) lease classification, and (iii) initial direct costs. Upon adoption, the Company recorded $7.5 billion of right-of-use (“ROU”) assets and $8.1 billion of lease liabilities on its Condensed Consolidated Balance Sheet.HedgingAt the beginning of the first quarter of 2020, the Company adopted FASB ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 expands component and fair value hedging, specifies the presentation of the effects of hedging instruments, eliminates the separate measurement and presentation of hedge ineffectiveness, and updates disclosure requirements related to hedging. The Company adopted ASU 2017-12 utilizing the modified retrospective transition method. Upon adoption, the Company recorded a $136 million increase in accumulated other comprehensive income/(loss) (“AOCI”) and a corresponding decrease in retained earnings in the Condensed Consolidated Statement of Shareholders’ Equity.Advertising CostsAdvertising costs are expensed as incurred and included in selling, general and administrative expenses.Share-Based CompensationThe Company generally measures share-based compensation based on the closing price of the Company’s common stock on the date of grant, and recognizes expense on a straight-line basis for its estimate of equity awards that will ultimately vest. Further information regarding share-based compensation can be found in Note 9, “Benefit Plans.”Apple Inc. | 2020 Form 10-K | 36Earnings Per ShareThe following table shows the computation of basic and diluted earnings per share for 2020, 2019 and 2018 (net income in millions and shares in thousands):202020192018Numerator:Net income$57,411 $55,256 $59,531 Denominator:Weighted-average basic shares outstanding17,352,119 18,471,336 19,821,510 Effect of dilutive securities176,095 124,315 178,925 Weighted-average diluted shares17,528,214 18,595,651 20,000,435 Basic earnings per share$3.31 $2.99 $3.00 Diluted earnings per share$3.28 $2.97 $2.98 The Company applies the treasury stock method to determine the dilutive effect of potentially dilutive securities. Potentially dilutive securities representing 62 million shares of common stock were excluded from the computation of diluted earnings per share for 2019 because their effect would have been antidilutive.Cash Equivalents and Marketable SecuritiesAll highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.The Company’s investments in marketable debt securities have been classified and accounted for as available-for-sale. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Unrealized gains and losses on marketable debt securities classified as available-for-sale are recognized in other comprehensive income/(loss) (“OCI”). The Company’s investments in marketable equity securities are classified based on the nature of the securities and their availability for use in current operations. The Company’s marketable equity securities are measured at fair value with gains and losses recognized in other income/(expense), net (“OI&E”).The cost of securities sold is determined using the specific identification method.InventoriesInventories are measured using the first-in, first-out method.Property, Plant and EquipmentDepreciation on property, plant and equipment is recognized on a straight-line basis over the estimated useful lives of the assets, which for buildings is the lesser of 40 years or the remaining life of the building; between one and five years for machinery and equipment, including product tooling and manufacturing process equipment; and the shorter of lease term or useful life for leasehold improvements. Capitalized costs related to internal-use software are amortized on a straight-line basis over the estimated useful lives of the assets, which range from three to seven years. Depreciation and amortization expense on property and equipment was $9.7 billion, $11.3 billion and $9.3 billion during 2020, 2019 and 2018, respectively.Non-cash investing activities involving property, plant and equipment resulted in a net increase/(decrease) to accounts payable and other current liabilities of $(2.9) billion and $3.4 billion during 2019 and 2018, respectively.Apple Inc. | 2020 Form 10-K | 37Non-Marketable SecuritiesThe Company has elected to apply the measurement alternative to equity securities without readily determinable fair values. As such, the Company’s non-marketable equity securities are measured at cost, less any impairment, and are adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the same issuer. Gains and losses on non-marketable equity securities are recognized in OI&E.Restricted Cash and Restricted Marketable SecuritiesThe Company considers cash and marketable securities to be restricted when withdrawal or general use is legally restricted. The Company reports restricted cash as other assets in the Consolidated Balance Sheets, and determines current or non-current classification based on the expected duration of the restriction. The Company reports restricted marketable securities as current or non-current marketable securities in the Consolidated Balance Sheets based on the classification of the underlying securities.Fair Value MeasurementsThe fair values of the Company’s money market funds and certain marketable equity securities are based on quoted prices in active markets for identical assets. The valuation techniques used to measure the fair value of the Company’s debt instruments and all other financial instruments, which generally have counterparties with high credit ratings, are based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data.Note 2 – Revenue RecognitionNet sales consist of revenue from the sale of iPhone, Mac, iPad, Services and other products. The Company recognizes revenue at the amount to which it expects to be entitled when control of the products or services is transferred to its customers. Control is generally transferred when the Company has a present right to payment and title and the significant risks and rewards of ownership of products or services are transferred to its customers. For most of the Company’s Products net sales, control transfers when products are shipped. For the Company’s Services net sales, control transfers over time as services are delivered. Payment for Products and Services net sales is collected within a short period following transfer of control or commencement of delivery of services, as applicable.The Company records reductions to Products net sales related to future product returns, price protection and other customer incentive programs based on the Company’s expectations and historical experience.For arrangements with multiple performance obligations, which represent promises within an arrangement that are distinct, the Company allocates revenue to all distinct performance obligations based on their relative stand-alone selling prices (“SSPs”). When available, the Company uses observable prices to determine SSPs. When observable prices are not available, SSPs are established that reflect the Company’s best estimates of what the selling prices of the performance obligations would be if they were sold regularly on a stand-alone basis. The Company’s process for estimating SSPs without observable prices considers multiple factors that may vary depending upon the unique facts and circumstances related to each performance obligation including, where applicable, prices charged by the Company for similar offerings, market trends in the pricing for similar offerings, product-specific business objectives and the estimated cost to provide the performance obligation.The Company has identified up to three performance obligations regularly included in arrangements involving the sale of iPhone, Mac, iPad and certain other products. The first performance obligation, which represents the substantial portion of the allocated sales price, is the hardware and bundled software delivered at the time of sale. The second performance obligation is the right to receive certain product-related bundled services, which include iCloud, Siri and Maps. The third performance obligation is the right to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the software bundled with each device. The Company allocates revenue and any related discounts to these performance obligations based on their relative SSPs. Because the Company lacks observable prices for the undelivered performance obligations, the allocation of revenue is based on the Company’s estimated SSPs. Revenue allocated to the delivered hardware and bundled software is recognized when control has transferred to the customer, which generally occurs when the product is shipped. Revenue allocated to the product-related bundled services and unspecified software upgrade rights is deferred and recognized on a straight-line basis over the estimated period they are expected to be provided. Cost of sales related to delivered hardware and bundled software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide product-related bundled services and unspecified software upgrade rights are recognized as cost of sales as incurred.For certain long-term service arrangements, the Company has performance obligations for services it has not yet delivered. For these arrangements, the Company does not have a right to bill for the undelivered services. The Company has determined that any unbilled consideration relates entirely to the value of the undelivered services. Accordingly, the Company has not recognized revenue, and has elected not to disclose amounts, related to these undelivered services.Apple Inc. | 2020 Form 10-K | 38For the sale of third-party products where the Company obtains control of the product before transferring it to the customer, the Company recognizes revenue based on the gross amount billed to customers. The Company considers multiple factors when determining whether it obtains control of third-party products including, but not limited to, evaluating if it can establish the price of the product, retains inventory risk for tangible products or has the responsibility for ensuring acceptability of the product. For third-party applications sold through the App Store and certain digital content sold through the Company’s other digital content stores, the Company does not obtain control of the product before transferring it to the customer. Therefore, the Company accounts for such sales on a net basis by recognizing in Services net sales only the commission it retains.The Company has elected to record revenue net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded within other current liabilities until remitted to the relevant government authority.Deferred RevenueAs of September 26, 2020 and September 28, 2019, the Company had total deferred revenue of $10.2 billion and $8.1 billion, respectively. As of September 26, 2020, the Company expects 65% of total deferred revenue to be realized in less than a year, 25% within one-to-two years, 8% within two-to-three years and 2% in greater than three years.Disaggregated RevenueNet sales disaggregated by significant products and services for 2020, 2019 and 2018 were as follows (in millions):202020192018iPhone (1)$137,781 $142,381 $164,888 Mac (1)28,622 25,740 25,198 iPad (1)23,724 21,280 18,380 Wearables, Home and Accessories (1)(2)30,620 24,482 17,381 Services (3)53,768 46,291 39,748 Total net sales (4)$274,515 $260,174 $265,595 (1)Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in the sales price of the respective product.(2)Wearables, Home and Accessories net sales include sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and Apple-branded and third-party accessories.(3)Services net sales include sales from the Company’s advertising, AppleCare, digital content and other services. Services net sales also include amortization of the deferred value of Maps, Siri, and free iCloud storage and Apple TV+ services, which are bundled in the sales price of certain products.(4)Includes $5.0 billion of revenue recognized in 2020 that was included in deferred revenue as of September 28, 2019, $5.9 billion of revenue recognized in 2019 that was included in deferred revenue as of September 29, 2018, and $5.8 billion of revenue recognized in 2018 that was included in deferred revenue as of September 30, 2017.The Company’s proportion of net sales by disaggregated revenue source was generally consistent for each reportable segment in Note 11, “Segment Information and Geographic Data” for 2020, 2019 and 2018.Apple Inc. | 2020 Form 10-K | 39Note 3 – Financial InstrumentsCash, Cash Equivalents and Marketable SecuritiesThe following tables show the Company’s cash and marketable securities by significant investment category as of September 26, 2020 and September 28, 2019 (in millions):2020AdjustedCostUnrealizedGainsUnrealizedLossesFairValueCash andCashEquivalentsCurrentMarketableSecuritiesNon-CurrentMarketableSecuritiesCash$17,773 $— $— $17,773 $17,773 $— $— Level 1 (1):Money market funds2,171 — — 2,171 2,171 — — Subtotal2,171 — — 2,171 2,171 — — Level 2 (2):U.S. Treasury securities28,439 331 — 28,770 8,580 11,972 8,218 U.S. agency securities8,604 8 — 8,612 2,009 3,078 3,525 Non-U.S. government securities19,361 275 (186)19,450 255 3,329 15,866 Certificates of deposit and time deposits10,399 — — 10,399 4,043 6,246 110 Commercial paper11,226 — — 11,226 3,185 8,041 — Corporate debt securities76,937 1,834 (175)78,596 — 19,687 58,909 Municipal securities1,001 22 — 1,023 — 139 884 Mortgage- and asset-backed securities13,520 314 (24)13,810 — 435 13,375 Subtotal169,487 2,784 (385)171,886 18,072 52,927 100,887 Total (3)$189,431 $2,784 $(385)$191,830 $38,016 $52,927 $100,887 2019AdjustedCostUnrealizedGainsUnrealizedLossesFairValueCash andCashEquivalentsCurrentMarketableSecuritiesNon-CurrentMarketableSecuritiesCash$12,204 $— $— $12,204 $12,204 $— $— Level 1 (1):Money market funds15,897 — — 15,897 15,897 — — Subtotal15,897 — — 15,897 15,897 — — Level 2 (2):U.S. Treasury securities30,293 33 (62)30,264 6,165 9,817 14,282 U.S. agency securities9,767 1 (3)9,765 6,489 2,249 1,027 Non-U.S. government securities19,821 337 (50)20,108 749 3,168 16,191 Certificates of deposit and time deposits4,041 — — 4,041 2,024 1,922 95 Commercial paper12,433 — — 12,433 5,193 7,240 — Corporate debt securities85,383 756 (92)86,047 123 26,127 59,797 Municipal securities958 8 (1)965 — 68 897 Mortgage- and asset-backed securities14,180 67 (73)14,174 — 1,122 13,052 Subtotal176,876 1,202 (281)177,797 20,743 51,713 105,341 Total (3)$204,977 $1,202 $(281)$205,898 $48,844 $51,713 $105,341 (1)Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.(2)Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.(3)As of September 26, 2020 and September 28, 2019, total marketable securities included $18.6 billion and $18.9 billion, respectively, that was restricted from general use, related to the State Aid Decision (refer to Note 5, “Income Taxes”) and other agreements.Apple Inc. | 2020 Form 10-K | 40The Company may sell certain of its marketable debt securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation. The maturities of the Company’s non-current marketable debt securities generally range from one to five years.The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio. When evaluating a marketable debt security for other-than-temporary impairment, the Company reviews factors such as the duration and extent to which the fair value of the security is less than its cost, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it will more likely than not be required to sell, the security before recovery of its amortized cost basis. As of September 26, 2020, the Company does not consider any of its marketable debt securities to be other-than-temporarily impaired.Non-Marketable SecuritiesThe Company holds non-marketable equity securities of certain privately held companies without readily determinable fair values. As of September 26, 2020 and September 28, 2019, the Company’s non-marketable equity securities had a carrying value of $2.8 billion and $2.9 billion, respectively.Restricted CashA reconciliation of the Company’s cash and cash equivalents in the Consolidated Balance Sheets to cash, cash equivalents and restricted cash in the Consolidated Statements of Cash Flows as of September 26, 2020 and September 28, 2019 is as follows (in millions):20202019Cash and cash equivalents$38,016 $48,844 Restricted cash included in other current assets36 23 Restricted cash included in other non-current assets1,737 1,357 Cash, cash equivalents and restricted cash$39,789 $50,224 The Company’s restricted cash primarily consisted of cash to support the Company’s iPhone Upgrade Program.Derivative Financial InstrumentsThe Company may use derivatives to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, net investments in certain foreign subsidiaries, and certain existing assets and liabilities. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations or the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates.To protect gross margins from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries whose functional currency is the U.S. dollar may hedge a portion of forecasted foreign currency revenue, and subsidiaries whose functional currency is not the U.S. dollar may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries’ functional currencies. The Company may enter into forward contracts, option contracts or other instruments to manage this risk and may designate these instruments as cash flow hedges. The Company generally hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.To protect the net investment in a foreign operation from fluctuations in foreign currency exchange rates, the Company may enter into foreign currency forward and option contracts to offset a portion of the changes in the carrying amounts of these investments due to fluctuations in foreign currency exchange rates. In addition, the Company may use non-derivative financial instruments, such as its foreign currency–denominated debt, as hedges of its net investments in certain foreign subsidiaries. In both of these cases, the Company designates these instruments as net investment hedges.To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in foreign currency exchange rates, the Company may enter into forward contracts, cross-currency swaps or other instruments. These instruments may offset a portion of the foreign currency remeasurement gains or losses, or changes in fair value. The Company may designate these instruments as either cash flow or fair value hedges. As of September 26, 2020, the Company’s hedged term debt– and marketable securities–related foreign currency transactions are expected to be recognized within 22 years.The Company may also enter into non-designated foreign currency contracts to offset a portion of the foreign currency exchange gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies.Apple Inc. | 2020 Form 10-K | 41To protect the Company’s foreign currency–denominated term debt or marketable securities from fluctuations in interest rates, the Company may enter into interest rate swaps, options or other instruments. These instruments may offset a portion of the changes in interest income or expense, or changes in fair value. The Company designates these instruments as either cash flow or fair value hedges. As of September 26, 2020, the Company’s hedged interest rate transactions are expected to be recognized within seven years.Cash Flow HedgesCash flow hedge amounts that are included in the assessment of hedge effectiveness are deferred in AOCI until the hedged item is recognized in earnings. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of net sales in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of inventory purchases are recognized as a component of cost of sales in the same period as the related costs are recognized. Deferred gains and losses associated with cash flow hedges of interest income or expense are recognized in OI&E in the same period as the related income or expense is recognized. For options designated as cash flow hedges, the time value is excluded from the assessment of hedge effectiveness and recognized in the financial statement line item to which the hedge relates on a straight-line basis over the life of the hedge. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in OCI.Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified into OI&E in the period of de-designation. Any subsequent changes in fair value of such derivative instruments are reflected in OI&E unless they are re-designated as hedges of other transactions.Net Investment HedgesNet investment hedge amounts that are included in the assessment of hedge effectiveness are recorded in OCI as a part of the cumulative translation adjustment. For foreign exchange forward contracts designated as net investment hedges, the forward carry component is excluded from the assessment of hedge effectiveness and recognized in OCI on a straight-line basis over the life of the hedge. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in OCI.Fair Value HedgesFair value hedge gains and losses related to amounts that are included in the assessment of hedge effectiveness are recognized in earnings along with a corresponding loss or gain related to the change in value of the hedged item in the same line in the Consolidated Statements of Operations. For foreign exchange forward contracts designated as fair value hedges, the forward carry component is excluded from the assessment of hedge effectiveness and recognized in OI&E on a straight-line basis over the life of the hedge. Amounts excluded from the effectiveness assessment of fair value hedges and recognized in OI&E were gains of $465 million and $777 million for 2020 and 2019, respectively. Changes in the fair value of amounts excluded from the assessment of hedge effectiveness are recognized in OCI.Non-Designated DerivativesDerivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.The Company records all derivatives in the Consolidated Balance Sheets at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables show the Company’s derivative instruments at gross fair value as of September 26, 2020 and September 28, 2019 (in millions):2020Fair Value ofDerivatives Designatedas Hedge InstrumentsFair Value ofDerivatives Not Designatedas Hedge InstrumentsTotalFair ValueDerivative assets (1):Foreign exchange contracts$749 $303 $1,052 Interest rate contracts$1,557 $— $1,557 Derivative liabilities (2):Foreign exchange contracts$1,561 $485 $2,046 Apple Inc. | 2020 Form 10-K | 422019Fair Value ofDerivatives Designatedas Hedge InstrumentsFair Value ofDerivatives Not Designatedas Hedge InstrumentsTotalFair ValueDerivative assets (1):Foreign exchange contracts$1,798 $323 $2,121 Interest rate contracts$685 $— $685 Derivative liabilities (2):Foreign exchange contracts$1,341 $160 $1,501 Interest rate contracts$105 $— $105 (1)The fair value of derivative assets is measured using Level 2 fair value inputs and is included in other current assets and other non-current assets in the Consolidated Balance Sheets.(2)The fair value of derivative liabilities is measured using Level 2 fair value inputs and is included in other current liabilities and other non-current liabilities in the Consolidated Balance Sheets.The Company classifies cash flows related to derivative financial instruments as operating activities in its Consolidated Statements of Cash Flows.The following table shows the pre-tax gains and losses of the Company’s derivative and non-derivative instruments designated as cash flow and fair value hedges in OCI and the Consolidated Statements of Operations for 2020, 2019 and 2018 (in millions):202020192018Gains/(Losses) recognized in OCI – included in effectiveness assessment:Cash flow hedges:Foreign exchange contracts$365 $(959)$682 Interest rate contracts(57)— 1 Total$308 $(959)$683 Net investment hedges:Foreign currency debt$15 $(58)$4 Gains/(Losses) reclassified from AOCI into net income – included in effectiveness assessment:Cash flow hedges:Foreign exchange contracts$1,553 $(116)$(482)Interest rate contracts(8)(7)1 Total$1,545 $(123)$(481)The amount excluded from the effectiveness assessment of the Company’s hedges and recognized in OCI was a loss of $168 million for 2020.Apple Inc. | 2020 Form 10-K | 43The following tables show information about the Company’s derivative instruments designated as fair value hedges and the related hedged items for 2020, 2019 and 2018 and as of September 26, 2020 (in millions):202020192018Gains/(Losses) on derivative instruments (1):Foreign exchange contracts$(992)$1,020 $(168)Interest rate contracts1,114 2,068 (1,363)Total$122 $3,088 $(1,531)Gains/(Losses) related to hedged items (1):Marketable securities$991 $(1,018)$167 Fixed-rate debt(1,114)(2,068)1,363 Total$(123)$(3,086)$1,530 2020Carrying amounts of hedged assets/(liabilities):Marketable securities (2)$16,270 Fixed-rate debt (3)$(21,033)Cumulative hedging adjustments included in the carrying amounts of hedged items:Marketable securities carrying amount increases/(decreases)$493 Fixed-rate debt carrying amount (increases)/decreases$(1,541)(1)Gains and losses related to fair value hedges are included in OI&E in the Consolidated Statements of Operations.(2)The carrying amounts of marketable securities that are designated as hedged items in fair value hedges are included in current marketable securities and non-current marketable securities in the Consolidated Balance Sheet.(3)The carrying amounts of fixed-rate debt instruments that are designated as hedged items in fair value hedges are included in current term debt and non-current term debt in the Consolidated Balance Sheet.The following table shows the notional amounts of the Company’s outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of September 26, 2020 and September 28, 2019 (in millions):20202019NotionalAmountCredit RiskAmountNotionalAmountCredit RiskAmountInstruments designated as accounting hedges:Foreign exchange contracts$57,410 $749 $61,795 $1,798 Interest rate contracts$20,700 $1,557 $31,250 $685 Instruments not designated as accounting hedges:Foreign exchange contracts$88,636 $303 $76,868 $323 The notional amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts represent the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency or interest rates at each respective date. The Company’s exposure to credit loss and market risk will vary over time as currency and interest rates change. Although the table above reflects the notional and credit risk amounts of the Company’s derivative instruments, it does not reflect the gains or losses associated with the exposures and transactions that the instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.Apple Inc. | 2020 Form 10-K | 44The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The Company presents its derivative assets and derivative liabilities at their gross fair values in its Consolidated Balance Sheets. As of September 26, 2020 and September 28, 2019, the net cash collateral received by the Company related to derivative instruments under its collateral security arrangements was $875 million and $1.6 billion, respectively. The Company includes gross collateral posted and received in other current assets and other current liabilities in the Consolidated Balance Sheets, respectively.Under master netting arrangements with the respective counterparties to the Company’s derivative contracts, the Company is allowed to net settle transactions with a single net amount payable by one party to the other. As of September 26, 2020 and September 28, 2019, the potential effects of these rights of set-off associated with the Company’s derivative contracts, including the effects of collateral, would be a reduction to both derivative assets and derivative liabilities of $2.8 billion and $2.7 billion, respectively, resulting in net derivative liabilities of $312 million and $407 million, respectively.Accounts ReceivableTrade ReceivablesThe Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, resellers, small and mid-sized businesses and education, enterprise and government customers. The Company generally does not require collateral from its customers; however, the Company will require collateral or third-party credit support in certain instances to limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements.As of both September 26, 2020 and September 28, 2019, the Company had no customers that individually represented 10% or more of total trade receivables. The Company’s cellular network carriers accounted for 51% of total trade receivables as of September 28, 2019.Vendor Non-Trade ReceivablesThe Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacture sub-assemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. As of September 26, 2020, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 57% and 11%. As of September 28, 2019, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 59% and 14%.Note 4 – Consolidated Financial Statement DetailsThe following tables show the Company’s consolidated financial statement details as of September 26, 2020 and September 28, 2019 (in millions):Property, Plant and Equipment, Net20202019Land and buildings$17,952 $17,085 Machinery, equipment and internal-use software75,291 69,797 Leasehold improvements10,283 9,075 Gross property, plant and equipment103,526 95,957 Accumulated depreciation and amortization(66,760)(58,579)Total property, plant and equipment, net$36,766 $37,378 Other Non-Current Liabilities20202019Long-term taxes payable$28,170 $29,545 Other non-current liabilities26,320 20,958 Total other non-current liabilities$54,490 $50,503 Apple Inc. | 2020 Form 10-K | 45Other Income/(Expense), NetThe following table shows the detail of OI&E for 2020, 2019 and 2018 (in millions):202020192018Interest and dividend income$3,763 $4,961 $5,686 Interest expense(2,873)(3,576)(3,240)Other income/(expense), net(87)422 (441)Total other income/(expense), net$803 $1,807 $2,005 Note 5 – Income TaxesU.S. Tax Cuts and Jobs ActOn December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. The Act also created a new minimum tax on certain foreign earnings, for which the Company has elected to record certain deferred tax assets and liabilities.Provision for Income Taxes and Effective Tax RateThe provision for income taxes for 2020, 2019 and 2018, consisted of the following (in millions):202020192018Federal:Current$6,306 $6,384 $41,425 Deferred(3,619)(2,939)(33,819)Total2,687 3,445 7,606 State:Current455 475 551 Deferred21 (67)48 Total476 408 599 Foreign:Current3,134 3,962 3,986 Deferred3,383 2,666 1,181 Total6,517 6,628 5,167 Provision for income taxes$9,680 $10,481 $13,372 The foreign provision for income taxes is based on foreign pre-tax earnings of $38.1 billion, $44.3 billion and $48.0 billion in 2020, 2019 and 2018, respectively.A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (21% in 2020 and 2019; 24.5% in 2018) to income before provision for income taxes for 2020, 2019 and 2018, is as follows (dollars in millions):202020192018Computed expected tax$14,089 $13,805 $17,890 State taxes, net of federal effect423 423 271 Impacts of the Act(582)— 1,515 Earnings of foreign subsidiaries(2,534)(2,625)(5,606)Research and development credit, net(728)(548)(560)Excess tax benefits from equity awards(930)(639)(675)Other(58)65 537 Provision for income taxes$9,680 $10,481 $13,372 Effective tax rate14.4 %15.9 %18.3 %Apple Inc. | 2020 Form 10-K | 46Deferred Tax Assets and LiabilitiesAs of September 26, 2020 and September 28, 2019, the significant components of the Company’s deferred tax assets and liabilities were (in millions):20202019Deferred tax assets:Amortization and depreciation$8,317 $11,645 Accrued liabilities and other reserves4,934 5,196 Lease liabilities2,038 — Deferred revenue1,638 1,372 Other2,409 2,174 Total deferred tax assets19,336 20,387 Less: Valuation allowance(1,041)(747)Total deferred tax assets, net18,295 19,640 Deferred tax liabilities:Minimum tax on foreign earnings7,045 10,809 Right-of-use assets1,862 — Unrealized gains526 186 Other705 600 Total deferred tax liabilities10,138 11,595 Net deferred tax assets$8,157 $8,045 Deferred tax assets and liabilities reflect the effects of tax credits and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.Uncertain Tax PositionsAs of September 26, 2020, the total amount of gross unrecognized tax benefits was $16.5 billion, of which $8.8 billion, if recognized, would impact the Company’s effective tax rate. As of September 28, 2019, the total amount of gross unrecognized tax benefits was $15.6 billion, of which $8.6 billion, if recognized, would have impacted the Company’s effective tax rate.The aggregate change in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for 2020, 2019 and 2018, is as follows (in millions):202020192018Beginning balances$15,619 $9,694 $8,407 Increases related to tax positions taken during a prior year454 5,845 2,431 Decreases related to tax positions taken during a prior year(791)(686)(2,212)Increases related to tax positions taken during the current year1,347 1,697 1,824 Decreases related to settlements with taxing authorities(85)(852)(756)Decreases related to expiration of the statute of limitations(69)(79)— Ending balances$16,475 $15,619 $9,694 The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and many state and foreign jurisdictions. The U.S. Internal Revenue Service (the “IRS”) concluded its review of the years 2013 through 2015 in 2018, and all years before 2016 are closed. Tax years after 2014 remain open in certain major foreign jurisdictions and are subject to examination by the taxing authorities. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although the timing of resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease in the next 12 months by as much as $3.9 billion.Apple Inc. | 2020 Form 10-K | 47Interest and PenaltiesThe Company includes interest and penalties related to income tax matters within the provision for income taxes. As of September 26, 2020 and September 28, 2019, the total amount of gross interest and penalties accrued was $1.4 billion and $1.3 billion, respectively. The Company recognized interest and penalty expense in 2020, 2019 and 2018 of $85 million, $73 million and $489 million, respectively.European Commission State Aid DecisionOn August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the “State Aid Decision”). The State Aid Decision ordered Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. Irish legislative changes, effective as of January 2015, eliminated the application of the tax opinions from that date forward. The recovery amount was calculated to be €13.1 billion, plus interest of €1.2 billion. The Company and Ireland appealed the State Aid Decision to the General Court of the Court of Justice of the European Union (the “General Court”). On July 15, 2020, the General Court annulled the State Aid Decision. On September 25, 2020, the European Commission appealed the General Court’s decision to the European Court of Justice. The Company believes that any incremental Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes, subject to any foreign tax credit limitations in the Act.On an annual basis, the Company may request approval from the Irish Minister for Finance to reduce the recovery amount for certain taxes paid to other countries. As of September 26, 2020, the adjusted recovery amount was €12.9 billion, excluding interest. The adjusted recovery amount plus interest is funded into escrow, where it will remain restricted from general use pending the conclusion of all legal proceedings. Refer to the Cash, Cash Equivalents and Marketable Securities section of Note 3, “Financial Instruments” for more information.Note 6 – DebtCommercial Paper and Repurchase AgreementsThe Company issues unsecured short-term promissory notes (“Commercial Paper”) pursuant to a commercial paper program. The Company uses net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of September 26, 2020 and September 28, 2019, the Company had $5.0 billion and $6.0 billion of Commercial Paper outstanding, respectively, with maturities generally less than nine months. The weighted-average interest rate of the Company’s Commercial Paper was 0.62% and 2.24% as of September 26, 2020 and September 28, 2019, respectively. The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for 2020, 2019 and 2018 (in millions):202020192018Maturities 90 days or less:Proceeds from/(Repayments of) commercial paper, net$100 $(3,248)$1,044 Maturities greater than 90 days:Proceeds from commercial paper6,185 13,874 14,555 Repayments of commercial paper(7,248)(16,603)(15,636)Repayments of commercial paper, net(1,063)(2,729)(1,081)Total repayments of commercial paper, net$(963)$(5,977)$(37)In 2020, the Company entered into agreements to sell certain of its marketable securities with a promise to repurchase the securities at a specified time and amount (“Repos”). Due to the Company’s continuing involvement with the marketable securities, the Company accounted for its Repos as collateralized borrowings. The Company entered into $5.2 billion of Repos during 2020, all of which had been settled as of September 26, 2020.Apple Inc. | 2020 Form 10-K | 48Term DebtAs of September 26, 2020, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $106.1 billion (collectively the “Notes”). The Notes are senior unsecured obligations and interest is payable in arrears. The following table provides a summary of the Company’s term debt as of September 26, 2020 and September 28, 2019:Maturities(calendar year)20202019Amount(in millions)EffectiveInterest RateAmount(in millions)EffectiveInterest Rate2013 – 2019 debt issuances:Floating-rate notes2021 – 2022$2,250 0.60% – 1.39%$4,250 2.25% – 3.28%Fixed-rate 0.375% – 4.650% notes2020 – 204987,487 0.28% – 4.78%97,429 0.28% – 4.78%First quarter 2020 debt issuance of €2.0 billion:Fixed-rate 0.000% – 0.500% notes2025 – 20312,341 0.03% – 0.56%— — %Third quarter 2020 debt issuance of $8.5 billion:Fixed-rate 0.750% – 2.650% notes2023 – 20508,500 0.84% – 2.72%— — %Fourth quarter 2020 debt issuance of $5.5 billion:Fixed-rate 0.550% – 2.550% notes2025 – 20605,500 0.60% – 2.59%— — %Total term debt106,078 101,679 Unamortized premium/(discount) and issuance costs, net(314)(224)Hedge accounting fair value adjustments1,676 612 Less: Current portion of term debt(8,773)(10,260)Total non-current portion of term debt$98,667 $91,807 To manage interest rate risk on certain of its U.S. dollar–denominated fixed- or floating-rate notes, the Company has entered into interest rate swaps to effectively convert the fixed interest rates to floating interest rates or the floating interest rates to fixed interest rates on a portion of these notes. Additionally, to manage foreign currency risk on certain of its foreign currency–denominated notes, the Company has entered into foreign currency swaps to effectively convert these notes to U.S. dollar–denominated notes.As of September 28, 2019, a portion of the Company’s Japanese yen–denominated notes with a carrying value of $1.0 billion was designated as a hedge of the foreign currency exposure of the Company’s net investment in a foreign operation. The Company’s Japanese yen–denominated notes matured during 2020 and the associated net investment hedges were terminated. For further discussion regarding the Company’s use of derivative instruments, refer to the Derivative Financial Instruments section of Note 3, “Financial Instruments.”The effective interest rates for the Notes include the interest on the Notes, amortization of the discount or premium and, if applicable, adjustments related to hedging. The Company recognized $2.8 billion, $3.2 billion and $3.0 billion of interest cost on its term debt for 2020, 2019 and 2018, respectively.The future principal payments for the Company’s Notes as of September 26, 2020, are as follows (in millions):2021$8,750 20229,569 202311,389 202410,115 202510,914 Thereafter55,341 Total term debt$106,078 As of September 26, 2020 and September 28, 2019, the fair value of the Company’s Notes, based on Level 2 inputs, was $117.1 billion and $107.5 billion, respectively.Apple Inc. | 2020 Form 10-K | 49Note 7 – Shareholders’ EquityShare Repurchase ProgramAs of September 26, 2020, the Company was authorized to purchase up to $225 billion of the Company’s common stock under a share repurchase program, of which $168.6 billion had been utilized. During 2020, the Company repurchased 917 million shares of its common stock for $72.5 billion, including 141 million shares delivered under a $10.0 billion November 2019 accelerated share repurchase arrangement (“ASR”) and 64 million shares delivered under a $6.0 billion May 2020 ASR. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).Shares of Common StockThe following table shows the changes in shares of common stock for 2020, 2019 and 2018 (in thousands):202020192018Common stock outstanding, beginning balances17,772,945 19,019,943 20,504,805 Common stock repurchased(917,270)(1,380,819)(1,622,198)Common stock issued, net of shares withheld for employee taxes121,088 133,821 137,336 Common stock outstanding, ending balances16,976,763 17,772,945 19,019,943 Note 8 – Comprehensive IncomeThe Company’s OCI consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges and unrealized gains and losses on marketable debt securities classified as available-for-sale.The following table shows the pre-tax amounts reclassified from AOCI into the Consolidated Statements of Operations, and the associated financial statement line items, for 2020 and 2019 (in millions):Comprehensive Income ComponentsFinancial Statement Line Items20202019Unrealized (gains)/losses on derivative instruments:Foreign exchange contractsTotal net sales$(365)$(206)Total cost of sales(584)(482)Other income/(expense), net(604)784 Interest rate contractsOther income/(expense), net8 7 (1,545)103 Unrealized (gains)/losses on marketable debt securitiesOther income/(expense), net(82)31 Total amounts reclassified from AOCI$(1,627)$134 Apple Inc. | 2020 Form 10-K | 50The following table shows the changes in AOCI by component for 2020 and 2019 (in millions):Cumulative ForeignCurrency TranslationUnrealized Gains/Losseson Derivative InstrumentsUnrealized Gains/Losseson Marketable Debt SecuritiesTotalBalances as of September 29, 2018$(1,055)$810 $(3,209)$(3,454)Other comprehensive income/(loss) before reclassifications(421)(949)4,854 3,484 Amounts reclassified from AOCI— 103 31 134 Tax effect13 208 (1,058)(837)Other comprehensive income/(loss)(408)(638)3,827 2,781 Cumulative effect of change in accounting principle— — 89 89 Balances as of September 28, 2019(1,463)172 707 (584)Other comprehensive income/(loss) before reclassifications91 115 1,560 1,766 Amounts reclassified from AOCI— (1,545)(82)(1,627)Tax effect(3)245 (339)(97)Other comprehensive income/(loss)88 (1,185)1,139 42 Cumulative effect of change in accounting principle (1)— 136 — 136 Balances as of September 26, 2020$(1,375)$(877)$1,846 $(406)(1)Refer to Note 1, “Summary of Significant Accounting Policies” for more information on the Company’s adoption of ASU 2017-12 in 2020.Note 9 – Benefit Plans2014 Employee Stock PlanIn the second quarter of 2014, shareholders approved the 2014 Employee Stock Plan (the “2014 Plan”) and terminated the Company’s authority to grant new awards under the 2003 Employee Stock Plan (the “2003 Plan”). The 2014 Plan provides for broad-based equity grants to employees, including executive officers, and permits the granting of RSUs, stock grants, performance-based awards, stock options and stock appreciation rights, as well as cash bonus awards. RSUs granted under the 2014 Plan generally vest over four years, based on continued employment, and are settled upon vesting in shares of the Company’s common stock on a one-for-one basis. RSUs granted under the 2014 Plan reduce the number of shares available for grant under the plan by a factor of two times the number of RSUs granted. RSUs canceled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under the 2014 Plan utilizing a factor of two times the number of RSUs canceled or shares withheld. Currently, all RSUs granted under the 2014 Plan have dividend equivalent rights (“DERs”), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. Upon approval of the 2014 Plan, the Company reserved 1.54 billion shares plus the number of shares remaining that were reserved but not issued under the 2003 Plan. Shares subject to outstanding awards under the 2003 Plan that expire, are canceled or otherwise terminate, or are withheld to satisfy tax withholding obligations for RSUs, will also be available for awards under the 2014 Plan. As of September 26, 2020, approximately 808 million shares were reserved for future issuance under the 2014 Plan.Apple Inc. Non-Employee Director Stock PlanThe Apple Inc. Non-Employee Director Stock Plan (the “Director Plan”) is a shareholder-approved plan that (i) permits the Company to grant awards of RSUs or stock options to the Company’s non-employee directors, (ii) provides for automatic initial grants of RSUs upon a non-employee director joining the Board of Directors and automatic annual grants of RSUs at each annual meeting of shareholders, and (iii) permits the Board of Directors to prospectively change the value and relative mixture of stock options and RSUs for the initial and annual award grants and the methodology for determining the number of shares of the Company’s common stock subject to these grants, in each case within the limits set forth in the Director Plan and without further shareholder approval. RSUs granted under the Director Plan reduce the number of shares available for grant under the plan by a factor of two times the number of RSUs granted. The Director Plan expires on November 12, 2027. All RSUs granted under the Director Plan are entitled to DERs. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. As of September 26, 2020, approximately 4 million shares were reserved for future issuance under the Director Plan.Apple Inc. | 2020 Form 10-K | 51Rule 10b5-1 Trading PlansDuring the three months ended September 26, 2020, Section 16 officers Katherine L. Adams, Timothy D. Cook, Chris Kondo, Luca Maestri, Deirdre O’Brien and Jeffrey Williams had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act. An equity trading plan is a written document that pre-establishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including shares acquired under the Company’s employee and director equity plans.Employee Stock Purchase PlanThe Employee Stock Purchase Plan (the “Purchase Plan”) is a shareholder-approved plan under which substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee’s payroll deductions under the Purchase Plan are limited to 10% of the employee’s compensation and employees may not purchase more than $25,000 of stock during any calendar year. As of September 26, 2020, approximately 107 million shares were reserved for future issuance under the Purchase Plan.401(k) PlanThe Company’s 401(k) Plan is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating U.S. employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution limit ($19,500 for calendar year 2020). The Company matches 50% to 100% of each employee’s contributions, depending on length of service, up to a maximum of 6% of the employee’s eligible earnings.Restricted Stock UnitsA summary of the Company’s RSU activity and related information for 2020, 2019 and 2018, is as follows:Number ofRSUs(in thousands)Weighted-AverageGrant Date FairValue Per RSUAggregateFair Value(in millions)Balance as of September 30, 2017390,284 $27.58 RSUs granted181,402 $40.72 RSUs vested(178,873)$27.81 RSUs canceled(24,195)$31.95 Balance as of September 29, 2018368,618 $33.65 RSUs granted147,409 $53.99 RSUs vested(168,350)$33.80 RSUs canceled(21,609)$40.71 Balance as of September 28, 2019326,068 $42.30 RSUs granted156,800 $59.20 RSUs vested(157,743)$40.29 RSUs canceled(14,347)$48.07 Balance as of September 26, 2020310,778 $51.58 $34,894 The fair value as of the respective vesting dates of RSUs was $10.8 billion, $8.6 billion and $7.6 billion for 2020, 2019 and 2018, respectively. The majority of RSUs that vested in 2020, 2019 and 2018 were net share settled such that the Company withheld shares with a value equivalent to the employees’ obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately 56 million, 59 million and 64 million for 2020, 2019 and 2018, respectively, and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to taxing authorities were $3.9 billion, $3.0 billion and $2.7 billion in 2020, 2019 and 2018, respectively.Apple Inc. | 2020 Form 10-K | 52Share-Based CompensationThe following table shows share-based compensation expense and the related income tax benefit included in the Consolidated Statements of Operations for 2020, 2019 and 2018 (in millions):202020192018Share-based compensation expense$6,829 $6,068 $5,340 Income tax benefit related to share-based compensation expense$(2,476)$(1,967)$(1,893)As of September 26, 2020, the total unrecognized compensation cost related to outstanding RSUs and stock options was $12.2 billion, which the Company expects to recognize over a weighted-average period of 2.6 years.Note 10 – Commitments and ContingenciesAccrued Warranty and GuaranteesThe following table shows changes in the Company’s accrued warranties and related costs for 2020, 2019 and 2018 (in millions):202020192018Beginning accrued warranty and related costs$3,570 $3,692 $3,834 Cost of warranty claims(2,956)(3,857)(4,115)Accruals for product warranty2,740 3,735 3,973 Ending accrued warranty and related costs$3,354 $3,570 $3,692 The Company offers an iPhone Upgrade Program, which is available to customers who purchase a qualifying iPhone in the U.S., the U.K. and China mainland. The iPhone Upgrade Program provides customers the right to trade in that iPhone for a specified amount when purchasing a new iPhone, provided certain conditions are met. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such right, with subsequent changes to the guarantee liability recognized within net sales.Concentrations in the Available Sources of Supply of Materials and ProductAlthough most components essential to the Company’s business are generally available from multiple sources, certain components are currently obtained from single or limited sources. The Company also competes for various components with other participants in the markets for smartphones, personal computers, tablets and other electronic devices. Therefore, many components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant commodity pricing fluctuations.The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or their manufacturing capacities have increased. The continued availability of these components at acceptable prices, or at all, may be affected if suppliers decide to concentrate on the production of common components instead of components customized to meet the Company’s requirements.The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all.Substantially all of the Company’s hardware products are manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers manufactured in the U.S. and Ireland.Apple Inc. | 2020 Form 10-K | 53Unconditional Purchase ObligationsThe Company has entered into certain off–balance sheet commitments that require the future purchase of goods or services (“unconditional purchase obligations”). The Company’s unconditional purchase obligations primarily consist of payments for supplier arrangements, Internet and telecommunication services, intellectual property licenses and content creation. Future payments under noncancelable unconditional purchase obligations having a remaining term in excess of one year as of September 26, 2020, are as follows (in millions):2021$3,476 20222,885 20231,700 2024357 2025104 Thereafter130 Total$8,652 ContingenciesThe Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully resolved. The outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts above management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss greater than a recorded accrual, concerning loss contingencies for asserted legal and other claims, except for the following matters:VirnetXVirnetX, Inc. (“VirnetX”) filed a lawsuit against the Company alleging that certain of the Company’s products infringe on patents owned by VirnetX. On April 11, 2018, a jury returned a verdict against the Company and awarded damages of $503 million. The Company appealed the verdict to the U.S. Court of Appeals for the Federal Circuit, which remanded the case back to the U.S. District Court for the Eastern District of Texas, where it is scheduled for a re-trial in October 2020. The Company has challenged the validity of the patents at issue in the re-trial at the U.S. Patent and Trademark Office (the “PTO”), and the PTO has declared the patents invalid, subject to further appeal by VirnetX.iOS Performance Management CasesVarious civil litigation matters have been filed in state and federal courts in the U.S. and in various international jurisdictions alleging violation of consumer protection laws, fraud, computer intrusion and other causes of action related to the Company’s performance management feature used in its iPhone operating systems, introduced to certain iPhones in iOS updates 10.2.1 and 11.2. The claims seek monetary damages and other non-monetary relief. On April 5, 2018, several U.S. federal actions were consolidated through a Multidistrict Litigation process into a single action in the U.S. District Court for the Northern District of California (the “Northern California District Court”). On February 28, 2020, the parties in the Multidistrict Litigation reached a settlement to resolve the U.S. federal and California state class actions. Under the terms of the settlement, which the Northern California District Court preliminarily approved in May 2020, the Company has agreed to pay up to $500 million in the aggregate to certain U.S. owners of iPhones if certain conditions are met. The final amount of the settlement will be determined based on the number of consumers who file valid claims and the attorneys’ fee award. However, the Company has agreed to pay at least $310 million to settle the claims. In addition to civil litigation, the Company is also responding to governmental investigations and requests for information relating to the performance management feature. The Company continues to believe that its iPhones were not defective, that the performance management feature introduced with iOS updates 10.2.1 and 11.2 was intended to, and did, improve customers’ user experience, and that the Company did not make any misleading statements or fail to disclose any material information. The Company has accrued its best estimate for the ultimate resolution of these matters.French Competition AuthorityOn March 16, 2020, the French Competition Authority (“FCA”) announced its decision that aspects of the Company’s sales and distribution practices in France violate French competition law, and issued a fine of €1.1 billion. The Company strongly disagrees with the FCA’s decision, and has appealed.Apple Inc. | 2020 Form 10-K | 54OptisOptis Wireless Technology, LLC and related entities (“Optis”) filed a lawsuit in the U.S. District Court for the Eastern District of Texas against the Company alleging that certain of the Company’s products infringe on patents owned by Optis. On August 11, 2020, a jury returned a verdict against the Company and awarded damages of $506 million. The Company has asked the court to set aside the verdict, where the case remains pending.Note 11 – Segment Information and Geographic DataThe Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and Africa. Greater China includes China mainland, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company’s other reportable segments. Although the reportable segments provide similar hardware and software products and similar services, each one is managed separately to better align with the location of the Company’s customers and distribution partners and the unique market dynamics of each geographic region. The accounting policies of the various segments are the same as those described in Note 1, “Summary of Significant Accounting Policies.”The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are generally based on the location of customers and sales through the Company’s retail stores located in those geographic locations. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Advertising expenses are generally included in the geographic segment in which the expenditures are incurred. Operating income for each segment excludes other income and expense and certain expenses managed outside the reportable segments. Costs excluded from segment operating income include various corporate expenses such as research and development, corporate marketing expenses, certain share-based compensation expenses, income taxes, various nonrecurring charges and other separately managed general and administrative costs. The Company does not include intercompany transfers between segments for management reporting purposes.The following table shows information by reportable segment for 2020, 2019 and 2018 (in millions):202020192018Americas:Net sales$124,556 $116,914 $112,093 Operating income$37,722 $35,099 $34,864 Europe:Net sales$68,640 $60,288 $62,420 Operating income$22,170 $19,195 $19,955 Greater China:Net sales$40,308 $43,678 $51,942 Operating income$15,261 $16,232 $19,742 Japan:Net sales$21,418 $21,506 $21,733 Operating income$9,279 $9,369 $9,500 Rest of Asia Pacific:Net sales$19,593 $17,788 $17,407 Operating income$6,808 $6,055 $6,181 Apple Inc. | 2020 Form 10-K | 55A reconciliation of the Company’s segment operating income to the Consolidated Statements of Operations for 2020, 2019 and 2018 is as follows (in millions):202020192018Segment operating income$91,240 $85,950 $90,242 Research and development expense(18,752)(16,217)(14,236)Other corporate expenses, net(6,200)(5,803)(5,108)Total operating income$66,288 $63,930 $70,898 The U.S. and China were the only countries that accounted for more than 10% of the Company’s net sales in 2020, 2019 and 2018. There was no single customer that accounted for more than 10% of net sales in 2020, 2019 and 2018. Net sales for 2020, 2019 and 2018 and long-lived assets as of September 26, 2020 and September 28, 2019 were as follows (in millions):202020192018Net sales:U.S.$109,197 $102,266 $98,061 China (1)40,308 43,678 51,942 Other countries125,010 114,230 115,592 Total net sales$274,515 $260,174 $265,595 20202019Long-lived assets:U.S.$25,890 $24,711 China (1)7,256 9,064 Other countries3,620 3,603 Total long-lived assets$36,766 $37,378 (1)China includes Hong Kong and Taiwan. Long-lived assets located in China consist primarily of product tooling and manufacturing process equipment and assets related to retail stores and related infrastructure.Note 12 – LeasesThe Company has lease arrangements for certain equipment and facilities, including retail, corporate, manufacturing and data center space. These leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options, some of which are reasonably certain of exercise. The Company’s lease arrangements may contain both lease and non-lease components. The Company has elected to combine and account for lease and non-lease components as a single lease component for leases of retail, corporate, and data center facilities.Payments under the Company’s lease arrangements may be fixed or variable, and variable lease payments are primarily based on purchases of output of the underlying leased assets. Lease costs associated with fixed payments on the Company’s operating leases were $1.5 billion for 2020. Lease costs associated with variable payments on the Company’s leases were $9.3 billion for 2020. Rent expense for operating leases, as previously reported under former lease accounting standards, was $1.3 billion and $1.2 billion in 2019 and 2018, respectively.For 2020, the Company made $1.5 billion of fixed cash payments related to operating leases. Non-cash activities involving ROU assets obtained in exchange for lease liabilities were $10.5 billion for 2020, including the impact of adopting the new leases standard in the first quarter of 2020.Apple Inc. | 2020 Form 10-K | 56The following table shows ROU assets and lease liabilities, and the associated financial statement line items, as of September 26, 2020 (in millions):Lease-Related Assets and LiabilitiesFinancial Statement Line Items2020Right-of-use assets:Operating leasesOther non-current assets$8,570 Finance leasesProperty, plant and equipment, net629 Total right-of-use assets$9,199 Lease liabilities:Operating leasesOther current liabilities$1,436 Other non-current liabilities7,745 Finance leasesOther current liabilities24 Other non-current liabilities637 Total lease liabilities$9,842 Lease liability maturities as of September 26, 2020, are as follows (in millions):OperatingLeasesFinanceLeasesTotal2021$1,493 $43 $1,536 20221,461 43 1,504 20231,317 54 1,371 20241,068 30 1,098 2025960 25 985 Thereafter3,845 895 4,740 Total undiscounted liabilities10,144 1,090 11,234 Less: Imputed interest(963)(429)(1,392)Total lease liabilities$9,181 $661 $9,842 The weighted-average remaining lease term and discount rate related to the Company’s lease liabilities as of September 26, 2020 were 10.3 years and 2.0%, respectively. The discount rates are generally based on estimates of the Company’s incremental borrowing rate, as the discount rates implicit in the Company’s leases cannot be readily determined.As of September 26, 2020, the Company had $1.7 billion of future payments under additional leases, primarily for corporate facilities and retail space, that had not yet commenced. These leases will commence between 2021 and 2022, with lease terms ranging from 1 year to 20 years.Note 13 – Selected Quarterly Financial Information (Unaudited)The following tables show a summary of the Company’s quarterly financial information for each of the four quarters of 2020 and 2019 (in millions, except per share amounts):Fourth QuarterThird QuarterSecond QuarterFirst Quarter2020:Total net sales$64,698 $59,685 $58,313 $91,819 Gross margin$24,689 $22,680 $22,370 $35,217 Net income$12,673 $11,253 $11,249 $22,236 Earnings per share (1):Basic$0.74 $0.65 $0.64 $1.26 Diluted$0.73 $0.65 $0.64 $1.25 Apple Inc. | 2020 Form 10-K | 57Fourth QuarterThird QuarterSecond QuarterFirst Quarter2019:Total net sales$64,040 $53,809 $58,015 $84,310 Gross margin$24,313 $20,227 $21,821 $32,031 Net income$13,686 $10,044 $11,561 $19,965 Earnings per share (1):Basic$0.76 $0.55 $0.62 $1.05 Diluted$0.76 $0.55 $0.61 $1.05 (1)Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.Apple Inc. | 2020 Form 10-K | 58Report of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of Apple Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Apple Inc. as of September 26, 2020 and September 28, 2019, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 26, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Apple Inc. at September 26, 2020 and September 28, 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 26, 2020, in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), Apple Inc.’s internal control over financial reporting as of September 26, 2020, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated October 29, 2020 expressed an unqualified opinion thereon.Basis for OpinionThese financial statements are the responsibility of Apple Inc.’s management. Our responsibility is to express an opinion on Apple Inc.’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.Critical Audit MatterThe critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.Uncertain Tax PositionsDescription of the MatterAs discussed in Note 5 to the financial statements, Apple Inc. is subject to taxation and files income tax returns in the U.S. federal jurisdiction and many state and foreign jurisdictions. As of September 26, 2020, the total amount of gross unrecognized tax benefits was $16.5 billion, of which $8.8 billion, if recognized, would impact Apple Inc.’s effective tax rate. Apple Inc. uses significant judgment in the calculation of tax liabilities in estimating the impact of uncertainties in the application of technical merits and complex tax laws.Auditing management’s evaluation of whether an uncertain tax position is more likely than not to be sustained and the measurement of the benefit of various tax positions can be complex, involves significant judgment, and is based on interpretations of tax laws and legal rulings.Apple Inc. | 2020 Form 10-K | 59How We Addressed theMatter in Our AuditWe tested controls relating to the evaluation of uncertain tax positions, including controls over management’s assessment as to whether tax positions are more likely than not to be sustained, management’s process to measure the benefit of its tax positions, and the development of the related disclosures.To evaluate Apple Inc.’s assessment of which tax positions are more likely than not to be sustained, our audit procedures included, among others, reading and evaluating management’s assumptions and analysis, and, as applicable, Apple Inc.’s communications with taxing authorities, that detailed the basis and technical merits of the uncertain tax positions. We involved our tax subject matter resources in assessing the technical merits of certain of Apple Inc.’s tax positions based on our knowledge of relevant tax laws and experience with related taxing authorities. For certain tax positions, we also received external legal counsel confirmation letters and discussed the matters with external advisors and Apple Inc. tax personnel. In addition, we evaluated Apple Inc.’s disclosure in relation to these matters included in Note 5 to the financial statements./s/ Ernst & Young LLPWe have served as Apple Inc.’s auditor since 2009.San Jose, CaliforniaOctober 29, 2020Apple Inc. | 2020 Form 10-K | 60Report of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of Apple Inc.Opinion on Internal Control Over Financial ReportingWe have audited Apple Inc.’s internal control over financial reporting as of September 26, 2020, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, Apple Inc. maintained, in all material respects, effective internal control over financial reporting as of September 26, 2020, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the consolidated balance sheets of Apple Inc. as of September 26, 2020 and September 28, 2019, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended September 26, 2020, and the related notes and our report dated October 29, 2020 expressed an unqualified opinion thereon.Basis for OpinionApple Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Apple Inc.’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ Ernst & Young LLPSan Jose, CaliforniaOctober 29, 2020Apple Inc. | 2020 Form 10-K | 61Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresBased on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of September 26, 2020 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.Inherent Limitations over Internal ControlsThe Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). The Company’s internal control over financial reporting includes those policies and procedures that: (i)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;(ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and(iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.Management’s Annual Report on Internal Control over Financial ReportingThe Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the Company’s assessment, management has concluded that its internal control over financial reporting was effective as of September 26, 2020 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the Company’s internal control over financial reporting, which appears in Part II, Item 8 of this Form 10-K.Changes in Internal Control over Financial ReportingThere were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2020, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.Item 9B. Other InformationNone.Apple Inc. | 2020 Form 10-K | 62PART IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe information required by this Item is set forth under the headings “Corporate Governance,” “Directors,” “Executive Officers” and, if applicable, “Other Information—Security Ownership of Certain Beneficial Owners and Management” in the Company’s 2021 Proxy Statement to be filed with the SEC within 120 days after September 26, 2020 in connection with the solicitation of proxies for the Company’s 2021 annual meeting of shareholders, and is incorporated herein by reference.Item 11. Executive CompensationThe information required by this Item is set forth under the heading “Executive Compensation,” under the subheadings “Board Oversight of Risk Management” and, if applicable, “Compensation Committee Interlocks and Insider Participation” under the heading “Corporate Governance” and under the subheadings “Compensation of Directors” and “Director Compensation—2020” under the heading “Directors” in the Company’s 2021 Proxy Statement to be filed with the SEC within 120 days after September 26, 2020, and is incorporated herein by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this Item is set forth under the headings “Other Information—Security Ownership of Certain Beneficial Owners and Management” and “Other Information—Equity Compensation Plan Information” in the Company’s 2021 Proxy Statement to be filed with the SEC within 120 days after September 26, 2020, and is incorporated herein by reference.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item is set forth under the subheadings “Role of the Board of Directors,” “Board Committees”, “Review, Approval, or Ratification of Transactions with Related Persons” and “Transactions with Related Persons” under the heading “Corporate Governance” in the Company’s 2021 Proxy Statement to be filed with the SEC within 120 days after September 26, 2020, and is incorporated herein by reference.Item 14. Principal Accountant Fees and ServicesThe information required by this Item is set forth under the subheadings “Fees Paid to Auditors” and “Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services Performed by the Independent Registered Public Accounting Firm” under the proposal “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Company’s 2021 Proxy Statement to be filed with the SEC within 120 days after September 26, 2020, and is incorporated herein by reference.Apple Inc. | 2020 Form 10-K | 63PART IVItem 15. Exhibit and Financial Statement Schedules(a)Documents filed as part of this report(1)All financial statementsIndex to Consolidated Financial StatementsPageConsolidated Statements of Operations for the years ended September 26, 2020, September 28, 2019 and September 29, 201831Consolidated Statements of Comprehensive Income for the years ended September 26, 2020, September 28, 2019 and September 29, 201832Consolidated Balance Sheets as of September 26, 2020 and September 28, 201933Consolidated Statements of Shareholders’ Equity for the years ended September 26, 2020, September 28, 2019 and September 29, 201834Consolidated Statements of Cash Flows for the years ended September 26, 2020, September 28, 2019 and September 29, 201835Notes to Consolidated Financial Statements36Selected Quarterly Financial Information (Unaudited)57Reports of Independent Registered Public Accounting Firm59(2)Financial Statement SchedulesAll financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and accompanying notes included in this Form 10-K.(3)Exhibits required by Item 601 of Regulation S-K (1)Incorporated by ReferenceExhibit NumberExhibit DescriptionFormExhibitFiling Date/Period End Date3.1Restated Articles of Incorporation of the Registrant filed on August 3, 2020.8-K3.18/7/203.2Amended and Restated Bylaws of the Registrant effective as of December 13, 2016.8-K3.212/15/164.1**Description of Securities of the Registrant.4.2Indenture, dated as of April 29, 2013, between the Registrant and The Bank of New York Mellon Trust Company, N.A., as Trustee.S-34.14/29/134.3Officer’s Certificate of the Registrant, dated as of May 3, 2013, including forms of global notes representing the Floating Rate Notes due 2016, Floating Rate Notes due 2018, 0.45% Notes due 2016, 1.00% Notes due 2018, 2.40% Notes due 2023 and 3.85% Notes due 2043.8-K4.15/3/134.4Officer’s Certificate of the Registrant, dated as of May 6, 2014, including forms of global notes representing the Floating Rate Notes due 2017, Floating Rate Notes due 2019, 1.05% Notes due 2017, 2.10% Notes due 2019, 2.85% Notes due 2021, 3.45% Notes due 2024 and 4.45% Notes due 2044.8-K4.15/6/144.5Officer’s Certificate of the Registrant, dated as of November 10, 2014, including forms of global notes representing the 1.000% Notes due 2022 and 1.625% Notes due 2026.8-K4.111/10/144.6Officer’s Certificate of the Registrant, dated as of February 9, 2015, including forms of global notes representing the Floating Rate Notes due 2020, 1.55% Notes due 2020, 2.15% Notes due 2022, 2.50% Notes due 2025 and 3.45% Notes due 2045.8-K4.12/9/154.7Officer’s Certificate of the Registrant, dated as of May 13, 2015, including forms of global notes representing the Floating Rate Notes due 2017, Floating Rate Notes due 2020, 0.900% Notes due 2017, 2.000% Notes due 2020, 2.700% Notes due 2022, 3.200% Notes due 2025, and 4.375% Notes due 2045.8-K4.15/13/154.8Officer’s Certificate of the Registrant, dated as of July 31, 2015, including forms of global notes representing the 3.05% Notes due 2029 and 3.60% Notes due 2042.8-K4.17/31/15Apple Inc. | 2020 Form 10-K | 64Incorporated by ReferenceExhibit NumberExhibit DescriptionFormExhibitFiling Date/Period End Date4.9Officer’s Certificate of the Registrant, dated as of September 17, 2015, including forms of global notes representing the 1.375% Notes due 2024 and 2.000% Notes due 2027.8-K4.19/17/154.10Officer’s Certificate of the Registrant, dated as of February 23, 2016, including forms of global notes representing the Floating Rate Notes due 2019, Floating Rate Notes due 2021, 1.300% Notes due 2018, 1.700% Notes due 2019, 2.250% Notes due 2021, 2.850% Notes due 2023, 3.250% Notes due 2026, 4.500% Notes due 2036 and 4.650% Notes due 2046.8-K4.12/23/164.11Supplement No. 1 to the Officer’s Certificate of the Registrant, dated as of March 24, 2016.8-K4.13/24/164.12Officer’s Certificate of the Registrant, dated as of August 4, 2016, including forms of global notes representing the Floating Rate Notes due 2019, 1.100% Notes due 2019, 1.550% Notes due 2021, 2.450% Notes due 2026 and 3.850% Notes due 2046.8-K4.18/4/164.13Officer’s Certificate of the Registrant, dated as of February 9, 2017, including forms of global notes representing the Floating Rate Notes due 2019, Floating Rate Notes due 2020, Floating Rate Notes due 2022, 1.550% Notes due 2019, 1.900% Notes due 2020, 2.500% Notes due 2022, 3.000% Notes due 2024, 3.350% Notes due 2027 and 4.250% Notes due 2047.8-K4.12/9/174.14Officer’s Certificate of the Registrant, dated as of May 11, 2017, including forms of global notes representing the Floating Rate Notes due 2020, Floating Rate Notes due 2022, 1.800% Notes due 2020, 2.300% Notes due 2022, 2.850% Notes due 2024 and 3.200% Notes due 2027.8-K4.15/11/174.15Officer’s Certificate of the Registrant, dated as of May 24, 2017, including forms of global notes representing the 0.875% Notes due 2025 and 1.375% Notes due 2029.8-K4.15/24/174.16Officer’s Certificate of the Registrant, dated as of June 20, 2017, including form of global note representing the 3.000% Notes due 2027.8-K4.16/20/174.17Officer’s Certificate of the Registrant, dated as of August 18, 2017, including form of global note representing the 2.513% Notes due 2024.8-K4.18/18/174.18Officer’s Certificate of the Registrant, dated as of September 12, 2017, including forms of global notes representing the 1.500% Notes due 2019, 2.100% Notes due 2022, 2.900% Notes due 2027 and 3.750% Notes due 2047.8-K4.19/12/174.19Officer’s Certificate of the Registrant, dated as of November 13, 2017, including forms of global notes representing the 1.800% Notes due 2019, 2.000% Notes due 2020, 2.400% Notes due 2023, 2.750% Notes due 2025, 3.000% Notes due 2027 and 3.750% Notes due 2047.8-K4.111/13/174.20Indenture, dated as of November 5, 2018, between the Registrant and The Bank of New York Mellon Trust Company, N.A., as Trustee.S-34.111/5/184.21Officer’s Certificate of the Registrant, dated as of September 11, 2019, including forms of global notes representing the 1.700% Notes due 2022, 1.800% Notes due 2024, 2.050% Notes due 2026, 2.200% Notes due 2029 and 2.950% Notes due 2049.8-K4.19/11/194.22Officer’s Certificate of the Registrant, dated as of November 15, 2019, including forms of global notes representing the 0.000% Notes due 2025 and 0.500% Notes due 2031.8-K4.111/15/194.23Officer’s Certificate of the Registrant, dated as of May 11, 2020, including forms of global notes representing the 0.750% Notes due 2023, 1.125% Notes due 2025, 1.650% Notes due 2030 and 2.650% Notes due 2050.8-K4.15/11/204.24Officer’s Certificate of the Registrant, dated as of August 20, 2020, including forms of global notes representing the 0.550% Notes due 2025, 1.25% Notes due 2030, 2.400% Notes due 2050 and 2.550% Notes due 2060.8-K4.18/20/204.25*Apple Inc. Deferred Compensation Plan.S-84.18/23/1810.1*Employee Stock Purchase Plan, as amended and restated as of March 10, 2015.8-K10.13/13/1510.2*Form of Indemnification Agreement between the Registrant and each director and executive officer of the Registrant.10-Q10.26/27/0910.3*Apple Inc. Non-Employee Director Stock Plan, as amended and restated as of February 13, 2018.8-K10.12/14/1810.4*2003 Employee Stock Plan, as amended through February 25, 2010.8-K10.13/1/10Apple Inc. | 2020 Form 10-K | 65Incorporated by ReferenceExhibit NumberExhibit DescriptionFormExhibitFiling Date/Period End Date10.5*Form of Restricted Stock Unit Award Agreement under 2003 Employee Stock Plan effective as of November 16, 2010.10-Q10.1012/25/1010.6*2014 Employee Stock Plan, as amended and restated as of October 1, 2017.10-K10.89/30/1710.7*Form of Amendment, effective as of August 26, 2014, to Restricted Stock Unit Award Agreements and Performance Award Agreements outstanding as of August 26, 2014.10-K10.139/27/1410.8*Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of October 14, 2016.10-K10.189/24/1610.9*Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of September 26, 2017.10-K10.209/30/1710.10*Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of September 26, 2017.10-K10.219/30/1710.11*Form of Restricted Stock Unit Award Agreement under Non-Employee Director Stock Plan effective as of February 13, 2018.10-Q10.23/31/1810.12*Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of August 21, 2018.10-K10.179/29/1810.13*Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of August 21, 2018.10-K10.189/29/1810.14*Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of September 29, 2019.10-K10.159/28/1910.15*Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of September 29, 2019.10-K10.169/28/1910.16*, **Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of August 18, 2020.10.17*, **Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of August 18, 2020.21.1**Subsidiaries of the Registrant.23.1**Consent of Independent Registered Public Accounting Firm.24.1**Power of Attorney (included on the Signatures page of this Annual Report on Form 10-K).31.1**Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.31.2**Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.32.1***Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.101**Inline XBRL Document Set for the consolidated financial statements and accompanying notes in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.104**Inline XBRL for the cover page of this Annual Report on Form 10-K, included in the Exhibit 101 Inline XBRL Document Set.*Indicates management contract or compensatory plan or arrangement.**Filed herewith.***Furnished herewith.(1)Certain instruments defining the rights of holders of long-term debt securities of the Registrant are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.Item 16. Form 10-K SummaryNone.Apple Inc. | 2020 Form 10-K | 66SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.Date: October 29, 2020Apple Inc.By:/s/ Luca MaestriLuca MaestriSenior Vice President,Chief Financial OfficerPower of AttorneyKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Timothy D. Cook and Luca Maestri, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:NameTitleDate/s/ Timothy D. CookChief Executive Officer and Director(Principal Executive Officer)October 29, 2020TIMOTHY D. COOK/s/ Luca MaestriSenior Vice President, Chief Financial Officer(Principal Financial Officer)October 29, 2020LUCA MAESTRI/s/ Chris KondoSenior Director of Corporate Accounting(Principal Accounting Officer)October 29, 2020CHRIS KONDO/s/ James A. BellDirectorOctober 29, 2020JAMES A. BELL/s/ Al GoreDirectorOctober 29, 2020AL GORE/s/ Andrea JungDirectorOctober 29, 2020ANDREA JUNG/s/ Arthur D. LevinsonDirectorOctober 29, 2020ARTHUR D. LEVINSON/s/ Ronald D. SugarDirectorOctober 29, 2020RONALD D. SUGAR/s/ Susan L. WagnerDirectorOctober 29, 2020SUSAN L. WAGNERApple Inc. | 2020 Form 10-K | 67
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8-K_59478_0001193125-21-270093.htm
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8-K
ELI LILLY & Co false 0000059478 0000059478 2021-09-08 2021-09-08 0000059478 us-gaap:CommonClassAMember 2021-09-08 2021-09-08 0000059478 lly:A1.000NotesDueJune22022Member 2021-09-08 2021-09-08 0000059478 lly:A718NotesDueJune12025Member 2021-09-08 2021-09-08 0000059478 lly:A1.625NotesDueJune22026Member 2021-09-08 2021-09-08 0000059478 lly:A2.125NotesDueJune32030Member 2021-09-08 2021-09-08 0000059478 lly:A625Notesdue2031Member 2021-09-08 2021-09-08 0000059478 lly:A6.77NotesDueJanuary12036Member 2021-09-08 2021-09-08 0000059478 lly:A1.700Notesdue2049Member 2021-09-08 2021-09-08 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): September 8, 2021 ELI LILLY AND COMPANY (Exact Name of Registrant as Specified in its Charter)
Indiana
001-06351
35-0470950
(State or Other Jurisdictionof Incorporation)
(CommissionFile Number)
(I.R.S. EmployerIdentification No.)
Lilly Corporate CenterIndianapolis, Indiana
46285
(Address of Principal Executive Offices)
(Zip Code) Registrant’s Telephone Number, Including Area Code: (317) 276-2000 Not Applicable (Former Name or Former Address, if Changed Since Last Report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2.):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
TradingSymbol(s)
Name of each exchangeon which registered
Common Stock (no par value)
LLY
New York Stock Exchange
1.000% Notes due 2022
LLY22
New York Stock Exchange
7 1/8% Notes due 2025
LLY25
New York Stock Exchange
1.625% Notes due 2026
LLY26
New York Stock Exchange
2.125% Notes due 2030
LLY30
New York Stock Exchange
0.625% Notes due 2031
LLY31
New York Stock Exchange
6.77% Notes due 2036
LLY36
New York Stock Exchange
1.700% Notes due 2049
LLY49A
New York Stock Exchange Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). 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. ☐
Item 8.01. Other Events. On September 8, 2021, Eli Lilly and Company (the “Company”) entered into an underwriting agreement (the “Underwriting Agreement”) with Merrill Lynch International, Barclays Bank PLC, BNP Paribas, Citigroup Global Markets Limited and Deutsche Bank AG, London Branch, as representatives of the several underwriters named therein, for the issuance and sale by the Company of €600,000,000 aggregate principal amount of its 0.500% Notes due 2033 (the “2033 Notes”), €500,000,000 aggregate principal amount of its 1.125% Notes due 2051 (the “2051 Notes”), €700,000,000 aggregate principal amount of its 1.375% Notes due 2061 (the “2061 Notes”) and £250,000,000 aggregate principal amount of its 1.625% Notes due 2043 (the “2043 Notes” and, collectively with the 2033 Notes, the 2051 Notes and the 2061 Notes, the “Notes”). The Notes are to be issued pursuant to an indenture (the “Indenture”), dated February 1, 1991, between the Company and Deutsche Bank Trust Company Americas (as successor to Citibank, N.A.), as trustee, and an officers’ certificate setting forth the terms of the Notes (including the forms of such Notes as exhibits). The offering of the Notes was registered on a Registration Statement on Form S-3 (File No. 333-229735). The 2033 Notes accrue interest at a rate of 0.500% per annum, payable annually, and, except as contemplated in the following paragraph, mature on September 14, 2033. The 2051 Notes accrue interest at a rate of 1.125% per annum, payable annually, and, except as contemplated in the following paragraph, mature on September 14, 2051. The 2061 Notes accrue interest at a rate of 1.375% per annum, payable annually, and, except as contemplated in the following paragraph, mature on September 14, 2061. The 2043 Notes accrue interest at a rate of 1.625% per annum, payable annually, and, except as contemplated in the following paragraph, mature on September 14, 2043. Upon the closing of the offering of the Notes, which is expected to occur on September 14, 2021, the Company will realize, after deduction of underwriting discounts and before deduction of estimated offering expenses payable by the Company, net proceeds of approximately €596.3 million from the sale of 2033 Notes, approximately €485.7 million from the sale of 2051 Notes, approximately €680.0 million from the sale of 2061 Notes and approximately £243.3 million from the sale of 2043 Notes. Upon the occurrence of an Event of Default (as defined in the Indenture) with respect to a series of Notes, the principal amount of the Notes of that series may be declared, and become, immediately due and payable. The Company may, at its election, redeem the Notes, in whole or in part, from time to time at the redemption prices and on the terms and conditions set forth in the Notes. The Company may also, at its election, redeem each series of the Notes in whole, but not in part, in the event of certain developments affecting U.S. taxation at a redemption price equal to 100% of the then outstanding principal amount, together with unpaid interest accrued thereon to the date fixed for redemption. The above description of the Underwriting Agreement and the Notes is qualified in its entirety by reference to the Underwriting Agreement, the form of officers’ certificate, the Indenture and the forms of the Notes filed as exhibits hereto, which exhibits are incorporated by reference herein. Item 9.01 Financial Statements and Exhibits. (d) Exhibits.
Exhibit No.
Description
1.1
Underwriting Agreement, dated September 8, 2021, among Eli Lilly and Company and Merrill Lynch International, Barclays Bank PLC, BNP Paribas, Citigroup Global Markets Limited and Deutsche Bank AG, London Branch, as representatives of the several underwriters.
4.1*
Indenture, dated February 1, 1991, between Eli Lilly and Company and Deutsche Bank Trust Company Americas, as successor to Citibank, N.A., as Trustee.
4.2±
Tripartite Agreement, dated September 13, 2007, appointing Deutsche Bank Trust Company Americas as Successor Trustee under the Indenture listed above.
4.3
Form of Officers’ Certificate setting forth the terms and form of the Notes.
4.4
Form of 0.500% Note due 2033 (included in Exhibit 4.3 above).
4.5
Form of 1.125% Note due 2051 (included in Exhibit 4.3 above).
4.6
Form of 1.375% Note due 2061 (included in Exhibit 4.3 above).
4.7
Form of 1.625% Note due 2043 (included in Exhibit 4.3 above).
5.1
Opinion of Kirkland & Ellis LLP.
5.2
Opinion of Jonathan Groff, Esq.
23.1
Consent of Kirkland & Ellis LLP (included as part of Exhibit 5.1).
23.2
Consent of Jonathan Groff, Esq. (included as part of Exhibit 5.2).
104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
*
Incorporated by reference to the same-numbered exhibit of the Company’s Registration Statement on Form S-3 (File No. 333-186979), filed with the Securities and Exchange Commission (“SEC”) on March 1, 2013.
±
Incorporated by reference to the same-numbered exhibit of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-06351), filed with the SEC on February 27, 2009.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ELI LILLY AND COMPANY
(Registrant)
By:
/s/ Philip Johnson
Name:
Philip Johnson
Title:
Senior Vice President, Finance, and Treasurer
Dated:
September 10, 2021
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8-K_1067983_0001193125-22-076089.htm
|
8-K
BERKSHIRE HATHAWAY INC DE false 0001067983 0001067983 2022-03-15 2022-03-15 0001067983 brka:ClassACommonStock2Member 2022-03-15 2022-03-15 0001067983 brka:ClassBCommonStock1Member 2022-03-15 2022-03-15 0001067983 brka:M0.750SeniorNotesDue2023Member12Member 2022-03-15 2022-03-15 0001067983 brka:M1.125SeniorNotesDue20273Member 2022-03-15 2022-03-15 0001067983 brka:M1.625SeniorNotesDue20354Member 2022-03-15 2022-03-15 0001067983 brka:M1.300SeniorNotesDue20245Member 2022-03-15 2022-03-15 0001067983 brka:M2.150SeniorNotesDue20286Member 2022-03-15 2022-03-15 0001067983 brka:M0.625SeniorNotesDue20237Member 2022-03-15 2022-03-15 0001067983 brka:M2.375SeniorNotesDue20398Member 2022-03-15 2022-03-15 0001067983 brka:M2.625SeniorNotesDue20599Member 2022-03-15 2022-03-15 0001067983 brka:M0.000SeniorNotesDue202510Member 2022-03-15 2022-03-15 0001067983 brka:M0.500SeniorNotesDue204111Member 2022-03-15 2022-03-15 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) March 15, 2022 BERKSHIRE HATHAWAY INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
001-14905
47-0813844
(STATE OR OTHER JURISDICTION OF INCORPORATION)
(COMMISSION FILE NUMBER)
(I.R.S. EMPLOYER IDENTIFICATION NO.)
3555 Farnam Street Omaha, Nebraska
68131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE) (402) 346-1400 REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act:
Title of each class
TradingSymbols
Name of each exchange on which registered
Class A Common Stock
BRK.A
New York Stock Exchange
Class B Common Stock
BRK.B
New York Stock Exchange
0.750% Senior Notes due 2023
BRK23
New York Stock Exchange
1.125% Senior Notes due 2027
BRK27
New York Stock Exchange
1.625% Senior Notes due 2035
BRK35
New York Stock Exchange
1.300% Senior Notes due 2024
BRK24
New York Stock Exchange
2.150% Senior Notes due 2028
BRK28
New York Stock Exchange
0.625% Senior Notes due 2023
BRK23A
New York Stock Exchange
2.375% Senior Notes due 2039
BRK39
New York Stock Exchange
2.625% Senior Notes due 2059
BRK59
New York Stock Exchange
0.000% Senior Notes due 2025
BRK25
New York Stock Exchange
0.500% Senior Notes due 2041
BRK41
New York Stock Exchange Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
Item 8.01
Other Events. On March 15, 2022, Berkshire Hathaway Finance Corporation (“BHFC”) issued (i) $750,000,000 aggregate principal amount of its 2.300% Senior Notes due 2027, (ii) $1,000,000,000 aggregate principal amount of its 2.875% Senior Notes due 2032 and (iii) $2,750,000,000 aggregate principal amount of its 3.850% Senior Notes due 2052 ((i) through (iii) collectively, the “Notes”) under a registration statement on Form S-3 under the Securities Act of 1933, as amended (the “Securities Act”), filed with the Securities and Exchange Commission (the “Commission”) on January 28, 2022 (Registration Nos. 333-262384 and 333-262384-01) (the “Registration Statement”). The Notes, which are fully and unconditionally guaranteed by Berkshire Hathaway Inc. (“Berkshire”), were sold pursuant to an underwriting agreement entered into on March 7, 2022, by and between (a) BHFC and Berkshire and (b) BofA Securities, Inc. and J.P. Morgan Securities LLC. The Notes were issued under an Indenture, dated as of January 28, 2022, by and among Berkshire, BHFC and The Bank of New York Mellon Trust Company, N.A. (the “Indenture”) and (i) an officers’ certificate dated as of March 15, 2022 by BHFC with respect to its 2.300% Senior Notes due 2027 (the “2027 Notes Officers’ Certificate”), (ii) an officers’ certificate dated as of March 15, 2022 by BHFC with respect to its 2.875% Senior Notes due 2032 (the “2032 Notes Officers’ Certificate”) and (iii) an officers’ certificate dated as of March 15, 2022 by BHFC with respect to its 3.850% Senior Notes due 2052 (the “2052 Notes Officers’ Certificate”) ((i) through (iii) collectively, the “Officers’ Certificates”). The relevant terms of the Notes and the Indenture are further described under the caption “Description of the Notes and Guarantees” in the prospectus supplement relating to the Notes, dated March 7, 2022, filed with the Commission by Berkshire and BHFC on March 9, 2022, pursuant to Rule 424(b)(5) under the Securities Act and in the section entitled “Description of the Debt Securities” in the base prospectus relating to debt securities of BHFC, dated January 28, 2022, included in the Registration Statement, which descriptions are incorporated herein by reference. A copy of the Indenture is set forth in Exhibit 4.1 of the Registration Statement and is incorporated herein by reference. A copy of the 2027 Notes Officers’ Certificate is attached hereto as Exhibit 4.2 and is incorporated herein by reference. A copy of the 2032 Notes Officers’ Certificate is attached hereto as Exhibit 4.3 and is incorporated herein by reference. A copy of the 2052 Notes Officers’ Certificate is attached hereto as Exhibit 4.4 and is incorporated herein by reference. The descriptions of the Indenture, the Officers’ Certificates and the Notes in this report are summaries and are qualified in their entirety by the terms of the Indenture, the Officers’ Certificates and the Notes, respectively.
Item 9.01
Financial Statements and Exhibits. (d) Exhibits
1.1
Underwriting Agreement, dated March 7, 2022, by and among (a) Berkshire Hathaway Finance Corporation and Berkshire Hathaway Inc. and (b) BofA Securities, Inc. and J.P. Morgan Securities LLC.
4.1
Indenture, dated as of January 28, 2022, by and among Berkshire Hathaway Inc., Berkshire Hathaway Finance Corporation and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.1 of Berkshire Hathaway Inc. and Berkshire Hathaway Finance Corporation’s Registration Statement on Form S-3 (Registration Nos. 333-262384 and 333-262384-01) filed with the Commission on January 28, 2022).
4.2
Officers’ Certificate of Berkshire Hathaway Finance Corporation, dated as of March 15, 2022, including the form of Berkshire Hathaway Finance Corporation’s 2.300% Senior Notes due 2027.
4.3
Officers’ Certificate of Berkshire Hathaway Finance Corporation, dated as of March 15, 2022, including the form of Berkshire Hathaway Finance Corporation’s 2.875% Senior Notes due 2032.
4.4
Officers’ Certificate of Berkshire Hathaway Finance Corporation, dated as of March 15, 2022, including the form of Berkshire Hathaway Finance Corporation’s 3.850% Senior Notes due 2052.
5.1
Opinion of Munger, Tolles & Olson LLP, dated March 15, 2022, with respect to the Notes.
23.1
Consent of Munger, Tolles & Olson LLP (included in Exhibit 5.1).
104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
March 15, 2022
BERKSHIRE HATHAWAY INC.
/s/ Marc D. Hamburg
By: Marc D. Hamburg
Senior Vice President and Chief Financial Officer
|
8-K_789019_0001193125-19-196501.htm
|
8-K
1
d777737d8k.htm
8-K
8-K
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) July 18, 2019
Microsoft Corporation
Washington
001-37845
91-1144442
(State or Other Jurisdiction
of Incorporation)
(Commission
File Number)
(IRS Employer
Identification No.)
One Microsoft Way, Redmond, Washington
98052-6399
(425) 882-8080
www.microsoft.com/investor Check the
appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐
Pre-commencement communications pursuant to Rule
14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐
Pre-commencement communications pursuant to Rule
13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
COMMON STOCK, $0.00000625 par value per share
MSFT
NASDAQ
2.125% Notes due 2021
MSFT
New York Stock Exchange
3.125% Notes due 2028
MSFT
New York Stock Exchange
2.625% Notes due 2033
MSFT
New York Stock Exchange
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act
of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). 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. ☐
Item 2.02. Results of Operations and Financial Condition
On July 18, 2019, Microsoft Corporation issued a press release announcing its financial results for the fiscal quarter and year ended June 30,
2019. A copy of the press release is furnished as Exhibit 99.1 to this report. In accordance with General Instruction B.2 of Form 8-K, the information in this Current Report on Form 8-K, including Exhibit 99.1, shall not be deemed to be filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of
1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. Item 9.01. Financial Statements and
Exhibits (d) Exhibits:
99.1
Press release, dated July 18, 2019, issued by Microsoft Corporation
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MICROSOFT CORPORATION
(Registrant)
Date: July 18, 2019
/S/ FRANK H. BROD
Frank H. Brod
Corporate Vice President, Finance and
Administration; Chief Accounting Officer
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