NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.
Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Google 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 primarily by delivering relevant, cost-effective online advertising.
Basis of Consolidation
The consolidated financial statements of Alphabet include the accounts of Alphabet and entities consolidated under the variable interest and voting models. Noncontrolling interests are not presented separately as the amounts are not material. All intercompany balances and transactions have been eliminated.
Unaudited Interim Financial Information
The Consolidated Balance Sheet as of
June 30, 2019
, the Consolidated Statements of Income for the
three and six months ended June 30, 2018
and
2019
, the Consolidated Statements of Comprehensive Income for the
three and six months ended June 30, 2018
and
2019
, the Consolidated Statements of Stockholders' Equity for the
three and six months ended June 30, 2018
and
2019
and the Consolidated Statements of Cash Flows for the
six months ended June 30, 2018
and
2019
are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of
June 30, 2019
, our results of operations for the
three and six months ended June 30, 2018
and
2019
, and our cash flows for the
six months ended June 30, 2018
and
2019
. The results of operations for the
three and six months ended June 30, 2019
are not necessarily indicative of the results to be expected for the year ending
December 31, 2019
.
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2018
, as amended, filed with the SEC.
Use of Estimates
Preparation 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. On an ongoing basis, we evaluate our estimates, including those related to bad debt allowance, sales allowances, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, and contingent liabilities, among others. We base our estimates on assumptions, both historical and forward looking, that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-13 (ASU 2016-13) "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. We will adopt ASU 2016-13 effective January 1, 2020 with the cumulative effect of adoption recorded as an adjustment to retained earnings. We are currently implementing new credit loss models and updating our processes and controls in preparation for the adoption of ASU 2016-13. The effect on our consolidated financial statements will largely depend on the composition and credit quality of our investment portfolio and the economic conditions at the time of adoption.
Recently adopted accounting pronouncements
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (Topic 842) "Leases." Topic 842 supersedes the lease requirements in Accounting Standards Codification Topic 840, "Leases." Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating.
We adopted Topic 842 effective January 1, 2019. The most significant effects of Topic 842 were the recognition of
$8.0 billion
of operating lease assets and
$8.4 billion
of operating lease liabilities and the de-recognition of
$1.5 billion
of build-to-suit assets and liabilities upon adoption. We applied Topic 842 to all leases as of January 1, 2019 with comparative periods continuing to be reported under Topic 840. In the adoption of Topic 842, we carried forward the assessment from Topic 840 of whether our contracts contain or are leases, the classification of our leases, and remaining lease terms. Our accounting for finance leases remains substantially unchanged. The standard does not have a significant effect on our consolidated results of operations or cash flows. See
Note 4
for further details.
Prior Period Reclassifications
Certain amounts in prior periods have been reclassified to conform with current period presentation. Performance fees have been reclassified for all periods from general and administrative expenses to other income (expense), net to align with the presentation of the investment gains and losses on which the performance fees are based. See
Note 7
for further details.
Note 2.
Revenues
Disaggregated Revenues
The following table presents our revenues disaggregated by revenue source (in millions, unaudited). Sales and usage-based taxes are excluded from revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
Google properties
|
$
|
23,262
|
|
|
$
|
27,335
|
|
|
$
|
45,260
|
|
|
$
|
53,017
|
|
Google Network Members' properties
|
4,825
|
|
|
5,266
|
|
|
9,469
|
|
|
10,304
|
|
Google advertising revenues
|
28,087
|
|
|
32,601
|
|
|
54,729
|
|
|
63,321
|
|
Google other revenues
|
4,425
|
|
|
6,181
|
|
|
8,779
|
|
|
11,630
|
|
Other Bets revenues
|
145
|
|
|
162
|
|
|
295
|
|
|
332
|
|
Total revenues
(1)
|
$
|
32,657
|
|
|
$
|
38,944
|
|
|
$
|
63,803
|
|
|
$
|
75,283
|
|
|
|
(1)
|
Revenues include hedging gains (losses) of
$(103) million
and
$108 million
for the
three months ended June 30, 2018
and
2019
, respectively, and
$(342) million
and
$245 million
for the
six months ended June 30, 2018
and
2019
, respectively, which do not represent revenues recognized from contracts with customers.
|
The following table presents our revenues disaggregated by geography, based on the addresses of our customers (in millions, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
United States
|
$
|
14,933
|
|
|
46
|
%
|
|
$
|
17,863
|
|
|
46
|
%
|
|
$
|
29,077
|
|
|
46
|
%
|
|
$
|
34,395
|
|
|
46
|
%
|
EMEA
(1)
|
10,785
|
|
|
33
|
|
|
12,401
|
|
|
32
|
|
|
21,259
|
|
|
33
|
|
|
24,192
|
|
|
32
|
%
|
APAC
(1)
|
5,090
|
|
|
15
|
|
|
6,551
|
|
|
17
|
|
|
9,894
|
|
|
15
|
|
|
12,663
|
|
|
17
|
%
|
Other Americas
(1)
|
1,849
|
|
|
6
|
|
|
2,129
|
|
|
5
|
|
|
3,573
|
|
|
6
|
|
|
4,033
|
|
|
5
|
%
|
Total revenues
(2)
|
$
|
32,657
|
|
|
100
|
%
|
|
$
|
38,944
|
|
|
100
|
%
|
|
$
|
63,803
|
|
|
100
|
%
|
|
$
|
75,283
|
|
|
100
|
%
|
|
|
(1)
|
Regions represent Europe, the Middle East, and Africa (EMEA); Asia-Pacific (APAC); and Canada and Latin America (Other Americas).
|
|
|
(2)
|
Revenues include hedging gains (losses) for the
three and six months ended June 30, 2018
and
2019
.
|
Deferred Revenues
We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The
decrease
in the deferred revenue balance for the
six months ended
June 30, 2019
was primarily driven by the recognition of
$1.3 billion
of revenues that were included in the deferred revenue balance as of
December 31, 2018
, offset by cash payments received or due in advance of satisfying our performance obligations.
Note 3.
Financial Instruments
Debt Securities
We classify our marketable debt securities 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.
The following tables summarize our debt securities by significant investment categories as of
December 31, 2018
and
June 30, 2019
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Adjusted
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Cash and Cash
Equivalents
|
|
Marketable
Securities
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
(1)
|
$
|
2,202
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,202
|
|
|
$
|
2,202
|
|
|
$
|
0
|
|
Government bonds
|
53,634
|
|
|
71
|
|
|
(414
|
)
|
|
53,291
|
|
|
3,717
|
|
|
49,574
|
|
Corporate debt securities
|
25,383
|
|
|
15
|
|
|
(316
|
)
|
|
25,082
|
|
|
44
|
|
|
25,038
|
|
Mortgage-backed and asset-backed securities
|
16,918
|
|
|
11
|
|
|
(324
|
)
|
|
16,605
|
|
|
0
|
|
|
16,605
|
|
Total
|
$
|
98,137
|
|
|
$
|
97
|
|
|
$
|
(1,054
|
)
|
|
$
|
97,180
|
|
|
$
|
5,963
|
|
|
$
|
91,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
Adjusted
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Cash and Cash
Equivalents
|
|
Marketable
Securities
|
|
(unaudited)
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
(1)
|
$
|
3,469
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,469
|
|
|
$
|
3,469
|
|
|
$
|
0
|
|
Government bonds
|
54,182
|
|
|
456
|
|
|
(67
|
)
|
|
54,571
|
|
|
684
|
|
|
53,887
|
|
Corporate debt securities
|
26,020
|
|
|
266
|
|
|
(23
|
)
|
|
26,263
|
|
|
7
|
|
|
26,256
|
|
Mortgage-backed and asset-backed securities
|
17,171
|
|
|
95
|
|
|
(67
|
)
|
|
17,199
|
|
|
0
|
|
|
17,199
|
|
Total
|
$
|
100,842
|
|
|
$
|
817
|
|
|
$
|
(157
|
)
|
|
$
|
101,502
|
|
|
$
|
4,160
|
|
|
$
|
97,342
|
|
|
|
(1)
|
The majority of our time deposits are domestic deposits.
|
We determine realized gains or losses on the sale or extinguishment of debt securities on a specific identification method. We recognized gross realized gains of
$37 million
and
$119 million
for the
three months ended June 30, 2018
and
2019
, respectively, and
$39 million
and
$165 million
, for the
six months ended June 30, 2018
and
2019
, respectively
. We recognized gross realized losses of
$31 million
and
$21 million
for the
three months ended June 30, 2018
and
2019
, respectively and
$72 million
and
$69 million
for the
six months ended June 30, 2018
and
2019
, respectively
. We reflect these gains and losses as a component of other income (expense), net, in the Consolidated Statements of Income.
The following table summarizes the estimated fair value of our investments in marketable debt securities with stated contractual maturity dates, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities (in millions, unaudited):
|
|
|
|
|
|
As of
June 30, 2019
|
Due in 1 year
|
$
|
22,862
|
|
Due in 1 year through 5 years
|
59,518
|
|
Due in 5 years through 10 years
|
4,773
|
|
Due after 10 years
|
10,189
|
|
Total
|
$
|
97,342
|
|
The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of
December 31, 2018
and
June 30, 2019
, 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, 2018
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
Government bonds
|
$
|
12,019
|
|
|
$
|
(85
|
)
|
|
$
|
23,877
|
|
|
$
|
(329
|
)
|
|
$
|
35,896
|
|
|
$
|
(414
|
)
|
Corporate debt securities
|
10,171
|
|
|
(107
|
)
|
|
11,545
|
|
|
(209
|
)
|
|
21,716
|
|
|
(316
|
)
|
Mortgage-backed and asset-backed securities
|
5,534
|
|
|
(75
|
)
|
|
8,519
|
|
|
(249
|
)
|
|
14,053
|
|
|
(324
|
)
|
Total
|
$
|
27,724
|
|
|
$
|
(267
|
)
|
|
$
|
43,941
|
|
|
$
|
(787
|
)
|
|
$
|
71,665
|
|
|
$
|
(1,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
|
(unaudited)
|
Government bonds
|
$
|
2,744
|
|
|
$
|
(2
|
)
|
|
$
|
16,475
|
|
|
$
|
(65
|
)
|
|
$
|
19,219
|
|
|
$
|
(67
|
)
|
Corporate debt securities
|
618
|
|
|
(1
|
)
|
|
8,867
|
|
|
(22
|
)
|
|
9,485
|
|
|
(23
|
)
|
Mortgage-backed and asset-backed securities
|
509
|
|
|
(1
|
)
|
|
6,776
|
|
|
(66
|
)
|
|
7,285
|
|
|
(67
|
)
|
Total
|
$
|
3,871
|
|
|
$
|
(4
|
)
|
|
$
|
32,118
|
|
|
$
|
(153
|
)
|
|
$
|
35,989
|
|
|
$
|
(157
|
)
|
During the
three and six months ended June 30, 2018
and
2019
, we did
no
t recognize any significant other-than-temporary impairment losses. Losses on impairment are included as a component of other income (expense), net, in the Consolidated Statements of Income. See
Note 7
for further details on other income (expense), net.
Equity Investments
The following discusses our marketable equity securities, non-marketable equity securities, gains and losses on marketable and non-marketable equity securities, as well as our equity securities accounted for under the equity method.
Marketable equity securities
Our marketable equity securities are publicly traded stocks or funds measured at fair value and classified within Level 1 and 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.
The following table summarizes marketable equity securities measured at fair value by significant investment categories as of
December 31, 2018
and
June 30, 2019
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
As of June 30, 2019
|
|
Cash and Cash Equivalents
|
|
Marketable
Securities
|
|
Cash and Cash Equivalents
|
|
Marketable
Securities
|
|
|
|
|
|
(unaudited)
|
Level 1:
|
|
|
|
|
|
Money market funds
|
$
|
3,493
|
|
|
$
|
0
|
|
|
$
|
6,096
|
|
|
$
|
0
|
|
Marketable equity securities
(1)
|
0
|
|
|
994
|
|
|
0
|
|
|
6,880
|
|
|
3,493
|
|
|
994
|
|
|
6,096
|
|
|
6,880
|
|
Level 2:
|
|
|
|
|
|
|
|
Mutual funds
|
0
|
|
|
228
|
|
|
0
|
|
|
247
|
|
Total
|
$
|
3,493
|
|
|
$
|
1,222
|
|
|
$
|
6,096
|
|
|
$
|
7,127
|
|
|
|
(1)
|
The balance a
s of
June 30, 2019
includes investments that were reclassified from non-marketable equity securities following the initial public offering of the issuers
(certain of which are subject to short-term lock-up restrictions)
.
|
Non-marketable equity securities
Our 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 for observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). All gains and losses on non-marketable equity securities, realized and unrealized, are recognized in other income (expense), net. Non-marketable equity securities that have been remeasured are classified within Level 3 in the fair value hierarchy because we estimate the value based on valuation methods using the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the securities we hold.
The following is a summary of unrealized gains and losses recorded in other income (expense), net, and included as adjustments to the carrying value of non-marketable equity securities (in millions, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
Unrealized gains
|
$
|
572
|
|
|
$
|
962
|
|
|
$
|
3,080
|
|
|
$
|
1,418
|
|
Unrealized losses (including impairment)
|
(81
|
)
|
|
(72
|
)
|
|
(104
|
)
|
|
(138
|
)
|
Total unrealized gain (loss) for non-marketable equity securities
|
$
|
491
|
|
|
$
|
890
|
|
|
$
|
2,976
|
|
|
$
|
1,280
|
|
The following table summarizes the total carrying value of our non-marketable equity securities held as of
June 30, 2019
including cumulative unrealized gains and losses (in millions, unaudited):
|
|
|
|
|
|
Initial cost basis
|
|
$
|
8,015
|
|
Unrealized gains
|
|
2,952
|
|
Unrealized losses (including impairment)
|
|
(303
|
)
|
Total carrying value at the end of the period
|
|
$
|
10,664
|
|
During the
three months ended June 30, 2019
, included in the
$10.7 billion
of non-marketable equity securities,
$4.3 billion
were measured at fair value based on observable market transactions, resulting in a net unrealized gain of
$890 million
.
Gains and losses on marketable and non-marketable equity securities
Gains and losses for our marketable and non-marketable equity securities are summarized below (in millions, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
Net gain (loss) on equity securities sold during the period
|
$
|
515
|
|
|
$
|
80
|
|
|
$
|
900
|
|
|
$
|
130
|
|
Unrealized gain (loss) on equity securities held as of the end of the period
(1)
|
547
|
|
|
2,619
|
|
|
3,193
|
|
|
3,652
|
|
Total gain (loss) recognized in other income (expense), net
|
$
|
1,062
|
|
|
$
|
2,699
|
|
|
$
|
4,093
|
|
|
$
|
3,782
|
|
|
|
(1)
|
Includes
$491 million
and
$890 million
for the
three months ended June 30, 2018
and
2019
, respectively, and
$2,976 million
and
$1,280 million
for the
six months ended
June 30,
2018
and
2019
, respectively, related to non-marketable equity securities.
|
In the table above, 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. The cumulative net gain measured as the sale price less the initial purchase price for equity securities sold during the
three and six months ended June 30, 2019
was
$182 million
and
$300 million
, respectively.
Equity securities accounted for under the Equity Method
Equity securities accounted for under the equity method had a carrying value of approximately $
1.3 billion
and
$1.2 billion
as of
December 31, 2018
and
June 30, 2019
, respectively. Our share of gains and losses including
impairment are included as a component of other income (expense), net. See
Note 7
for further details on other income (expense), net.
Derivative Financial Instruments
We classify our foreign currency and interest rate derivative contracts primarily within Level 2 in the fair value hierarchy as the valuation inputs are based on quoted prices and market observable data of similar instruments.
We recognize derivative instruments as either assets or liabilities in the Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives in the Consolidated Statements of Income as either other income (expense), net, or revenues, or in the Consolidated Balance Sheets in accumulated other comprehensive income (AOCI), as discussed below. Any components excluded from the assessment of hedge effectiveness are recognized in the same income statement line as the hedged item.
We enter into foreign currency contracts with financial institutions 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 use interest rate derivative contracts to hedge interest rate exposures on our fixed income securities and debt issuances. Our program is not used for trading or speculative purposes.
We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. To further reduce credit risk, we enter into collateral security arrangements under which the counterparty is required to provide collateral when the net fair value of certain financial instruments fluctuates from contractually established thresholds. We can take possession of the collateral in the event of counterparty default. As of
December 31, 2018
and
June 30, 2019
, we received cash collateral related to the derivative instruments under our collateral security arrangements of
$327 million
and
$262 million
, respectively, which was included in other current assets.
Cash Flow Hedges
We use foreign currency forwards and option contracts, including collars (an option strategy comprised of a combination of purchased and written options), designated as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the U.S. dollar. The notional principal of these contracts was approximately
$11.8 billion
and
$12.1 billion
as of
December 31, 2018
and
June 30, 2019
, respectively. These contracts have maturities of
24 months
or less.
For forwards and option contracts, we exclude the change in the forward points and time value from our assessment of hedge effectiveness. The initial value of the excluded component is amortized on a straight-line basis over the life of the hedging instrument and recognized in revenues. The difference between fair value changes of the excluded component and the amount amortized to revenues is recorded in AOCI. We reflect the gains or losses of a cash flow hedge included in our assessment of hedge effectiveness as a component of AOCI and subsequently reclassify these gains and losses to revenues when the hedged transactions are recorded. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI are immediately reclassified to other income (expense), net.
As of
June 30, 2019
, the net accumulated loss on our foreign currency cash flow hedges before tax effect was
$14 million
, which is expected to be reclassified from AOCI into earnings within the next 12 months.
Fair Value Hedges
We use forward contracts designated as fair value hedges to hedge foreign currency risks for our investments denominated in currencies other than the U.S. dollar. We exclude changes in forward points for the forward contracts from the assessment of hedge effectiveness. We recognize changes in the excluded component in other income (expense), net. The notional principal of these contracts was
$2.0 billion
as of both
December 31, 2018
and
June 30, 2019
.
Gains and losses on these forward contracts are recognized in other income (expense), net, along with the offsetting gains and losses of the related hedged items.
Net Investment Hedges
We use forward contracts designated as net investment hedges to hedge the foreign currency risks related to our investment in foreign subsidiaries. We exclude changes in forward points for the forward contracts from the assessment of hedge effectiveness. We recognize changes in the excluded component in other income (expense), net. The notional principal of these contracts was
$6.7 billion
and $
7.7 billion
as of
December 31, 2018
and
June 30, 2019
, respectively.
Gains and losses on these forward contracts are recognized in AOCI as part of the foreign currency translation adjustment.
Other Derivatives
Other derivatives not designated as hedging instruments consist of foreign currency forward contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the local currency of a subsidiary. We recognize gains and losses on these contracts, as well as the related costs in other income (expense), net, along with the foreign currency gains and losses on monetary assets and liabilities. The notional principal of the outstanding foreign exchange contracts was
$20.1 billion
and
$22.8 billion
as of
December 31, 2018
and
June 30, 2019
, respectively.
The fair values of our outstanding derivative instruments were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Balance Sheet Location
|
|
Fair Value of Derivatives Designated as Hedging Instruments
|
|
Fair Value of
Derivatives Not
Designated as
Hedging Instruments
|
|
Total Fair Value
|
Derivative Assets:
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current and non-current assets
|
|
$
|
459
|
|
|
$
|
54
|
|
|
$
|
513
|
|
Total
|
|
|
$
|
459
|
|
|
$
|
54
|
|
|
$
|
513
|
|
Derivative Liabilities:
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accrued expenses and other liabilities, current and non-current
|
|
$
|
5
|
|
|
$
|
228
|
|
|
$
|
233
|
|
Total
|
|
|
$
|
5
|
|
|
$
|
228
|
|
|
$
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
Balance Sheet Location
|
|
Fair Value of
Derivatives
Designated as
Hedging Instruments
|
|
Fair Value of
Derivatives Not
Designated as
Hedging Instruments
|
|
Total Fair Value
|
|
|
|
(unaudited)
|
Derivative Assets:
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current and non-current assets
|
|
$
|
352
|
|
|
$
|
19
|
|
|
$
|
371
|
|
Total
|
|
|
$
|
352
|
|
|
$
|
19
|
|
|
$
|
371
|
|
Derivative Liabilities:
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accrued expenses and other liabilities, current and non-current
|
|
$
|
84
|
|
|
$
|
272
|
|
|
$
|
356
|
|
Total
|
|
|
$
|
84
|
|
|
$
|
272
|
|
|
$
|
356
|
|
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, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
Derivatives in Cash Flow Hedging Relationship:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
Amount included in the assessment of effectiveness
|
$
|
443
|
|
|
$
|
(42
|
)
|
|
$
|
124
|
|
|
$
|
(48
|
)
|
Amount excluded from the assessment of effectiveness
|
8
|
|
|
11
|
|
|
1
|
|
|
(19
|
)
|
Derivatives in Net Investment Hedging Relationship:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
Amount included in the assessment of effectiveness
|
0
|
|
|
(83
|
)
|
|
0
|
|
|
(19
|
)
|
Total
|
$
|
451
|
|
|
$
|
(114
|
)
|
|
$
|
125
|
|
|
$
|
(86
|
)
|
The effect of derivative instruments on income is summarized below (in millions, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Recognized in Income
|
|
Three Months Ended
|
|
June 30,
|
|
2018
|
|
2019
|
|
Revenues
|
|
Other income (expense), net
|
|
Revenues
|
|
Other income (expense), net
|
Total amounts presented in the Consolidated Statements of Income in which the effects of cash flow and fair value hedges are recorded
|
$
|
32,657
|
|
|
$
|
1,170
|
|
|
$
|
38,944
|
|
|
$
|
2,967
|
|
|
|
|
|
|
|
|
|
Gains (Losses) on Derivatives in Cash Flow Hedging Relationship:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
Amount of gains (losses) reclassified from AOCI to income
|
$
|
(101
|
)
|
|
$
|
0
|
|
|
$
|
85
|
|
|
$
|
0
|
|
Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach
|
(2
|
)
|
|
0
|
|
|
23
|
|
|
0
|
|
Gains (Losses) on Derivatives in Fair Value Hedging Relationship:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
Hedged items
|
0
|
|
|
(158
|
)
|
|
0
|
|
|
(13
|
)
|
Derivatives designated as hedging instruments
|
0
|
|
|
158
|
|
|
0
|
|
|
13
|
|
Amount excluded from the assessment of effectiveness
|
0
|
|
|
10
|
|
|
0
|
|
|
10
|
|
Gains (Losses) on Derivatives in Net Investment Hedging Relationship:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
Amount excluded from the assessment of effectiveness
|
0
|
|
|
0
|
|
|
0
|
|
|
57
|
|
Gains (Losses) on Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
0
|
|
|
200
|
|
|
0
|
|
|
95
|
|
Total gains (losses)
|
$
|
(103
|
)
|
|
$
|
210
|
|
|
$
|
108
|
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Recognized in Income
|
|
Six Months Ended
|
|
June 30,
|
|
2018
|
|
2019
|
|
Revenues
|
|
Other income (expense), net
|
|
Revenues
|
|
Other income (expense), net
|
Total amounts presented in the Consolidated Statements of Income in which the effects of cash flow and fair value hedges are recorded
|
$
|
63,803
|
|
|
$
|
4,080
|
|
|
$
|
75,283
|
|
|
$
|
4,505
|
|
|
|
|
|
|
|
|
|
Gains (Losses) on Derivatives in Cash Flow Hedging Relationship:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
Amount of gains (losses) reclassified from AOCI to income
|
$
|
(348
|
)
|
|
$
|
0
|
|
|
$
|
213
|
|
|
$
|
0
|
|
Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach
|
6
|
|
|
0
|
|
|
32
|
|
|
0
|
|
Gains (Losses) on Derivatives in Fair Value Hedging Relationship:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
Hedged items
|
0
|
|
|
(45
|
)
|
|
0
|
|
|
9
|
|
Derivatives designated as hedging instruments
|
0
|
|
|
45
|
|
|
0
|
|
|
(9
|
)
|
Amount excluded from the assessment of effectiveness
|
0
|
|
|
21
|
|
|
0
|
|
|
20
|
|
Gains (Losses) on Derivatives in Net Investment Hedging Relationship:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
Amount excluded from the assessment of effectiveness
|
0
|
|
|
0
|
|
|
0
|
|
|
111
|
|
Gains (Losses) on Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
0
|
|
|
100
|
|
|
0
|
|
|
(154
|
)
|
Total gains (losses)
|
$
|
(342
|
)
|
|
$
|
121
|
|
|
$
|
245
|
|
|
$
|
(23
|
)
|
Offsetting of Derivatives
We present our forwards and purchased options at gross fair values in the Consolidated Balance Sheets. For foreign currency collars, we present at net fair values where both purchased and written options are with the same counterparty. Our master netting and other similar arrangements allow net settlements under certain conditions. As of
December 31, 2018
and
June 30, 2019
, information related to these offsetting arrangements were as follows (in millions):
Offsetting of Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
|
|
|
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Presented in the Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Received
|
|
Non-Cash Collateral Received
|
|
Net Assets Exposed
|
Derivatives
|
$
|
569
|
|
|
$
|
(56
|
)
|
|
$
|
513
|
|
|
$
|
(90
|
)
|
(1)
|
$
|
(307
|
)
|
|
$
|
(14
|
)
|
|
$
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
|
|
|
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Presented in the Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Received
|
|
Non-Cash Collateral Received
|
|
Net Assets Exposed
|
|
(unaudited)
|
Derivatives
|
$
|
389
|
|
|
$
|
(18
|
)
|
|
$
|
371
|
|
|
$
|
(88
|
)
|
(1)
|
$
|
(227
|
)
|
|
$
|
(47
|
)
|
|
$
|
9
|
|
|
|
(1)
|
The balances as of
December 31, 2018
and
June 30, 2019
were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with our master netting agreements.
|
Offsetting of Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
|
|
|
|
Gross Amounts of Recognized Liabilities
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Presented in the Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Pledged
|
|
Non-Cash Collateral Pledged
|
|
Net Liabilities
|
Derivatives
|
$
|
289
|
|
|
$
|
(56
|
)
|
|
$
|
233
|
|
|
$
|
(90
|
)
|
(2)
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
|
|
|
Gross Amounts of Recognized Liabilities
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Presented in the Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Pledged
|
|
Non-Cash Collateral Pledged
|
|
Net Liabilities
|
|
(unaudited)
|
Derivatives
|
$
|
374
|
|
|
$
|
(18
|
)
|
|
$
|
356
|
|
|
$
|
(88
|
)
|
(2)
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
268
|
|
|
|
(2)
|
The balances as of
December 31, 2018
and
June 30, 2019
were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.
|
Note 4.
Leases
We have entered into operating and finance lease agreements primarily for data centers, land and offices throughout the world with lease periods expiring between
2019
and
2063
.
We determine if an arrangement is a lease at inception. Operating lease assets and liabilities are included on our Consolidated Balance Sheet beginning January 1, 2019. 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 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 most of 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. Operating lease assets also include any prepaid lease payments and lease incentives. 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. Operating lease expense is recognized on a straight-line basis over the lease term.
Our lease agreements generally contain lease and non-lease components. Non-lease components primarily include payments for maintenance and utilities. We combine fixed payments for non-lease components with our lease payments and account for them together as a single lease component which increases the amount of our lease assets and liabilities.
Payments under our lease arrangements are primarily fixed, however, certain lease agreements contain variable payments, which are expensed as incurred and not included in the operating lease assets and liabilities. These amounts include payments affected by the Consumer Price Index, payments contingent on wind or solar production for power purchase arrangements, and payments for maintenance and utilities.
Components of operating lease expense were as follows (in millions, unaudited):
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2019
|
Operating lease cost
|
$
|
427
|
|
|
$
|
825
|
|
Variable lease cost
|
130
|
|
|
258
|
|
Total operating lease cost
|
$
|
557
|
|
|
$
|
1,083
|
|
Supplemental cash flow information related to operating leases was as follows (in millions, unaudited):
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2019
|
Cash payments for operating leases
|
$
|
396
|
|
|
$
|
770
|
|
New operating lease assets obtained in exchange for operating lease liabilities
|
$
|
1,322
|
|
|
$
|
2,453
|
|
As of
June 30, 2019
, our operating leases had a weighted average remaining lease term of
10
years and a weighted average discount rate of
2.9%
. Future lease payments under operating leases as of
June 30, 2019
were as follows (in millions, unaudited):
|
|
|
|
|
|
Operating Leases
|
Remainder of 2019
|
$
|
717
|
|
2020
|
1,635
|
|
2021
|
1,561
|
|
2022
|
1,387
|
|
2023
|
1,221
|
|
Thereafter
|
5,898
|
|
Total future lease payments
|
12,419
|
|
Less imputed interest
|
(2,267
|
)
|
Total lease liability balance
|
$
|
10,152
|
|
As of
June 30, 2019
, we have entered into leases that have not yet commenced with future lease payments of
$5.7 billion
that are not reflected in the table above. These leases will commence between
2019
and
2022
with non-cancelable lease terms of
1
to
25
years.
Note 5.
Variable Interest Entities (VIEs)
Consolidated VIEs
We consolidate VIEs in which we hold a variable interest and are the primary beneficiary. We are the primary beneficiary because we have the power to direct activities that most significantly affect their economic performance and have the obligation to absorb the majority of their losses or benefits. 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, 2018
and
June 30, 2019
, assets that can only be used to settle obligations of these VIEs were
$2.4 billion
and
$2.3 billion
, respectively, and the liabilities for which creditors only have recourse to the VIEs were
$909 million
and
$727 million
, respectively.
Calico
Calico is a life science company with a mission to harness advanced technologies to increase our understanding of the biology that controls lifespan.
In September 2014, AbbVie Inc. (AbbVie) and Calico entered into a research and development collaboration agreement intended to help both companies discover, develop, and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer. In the second quarter of 2018, AbbVie and Calico amended the collaboration agreement resulting in an increase in total commitments. As of
June 30, 2019
, AbbVie has contributed
$750 million
to fund the collaboration pursuant to the agreement and is committed to an additional
$500 million
which will be paid by the fourth quarter of 2019. As of
June 30, 2019
, Calico has contributed
$500 million
and has committed up to an additional
$750 million
.
Calico has used its scientific expertise to establish a world-class research and development facility, with a focus on drug discovery and early drug development; and AbbVie provides scientific and clinical development support and its commercial expertise to bring new discoveries to market. Both companies share costs and profits for projects covered under this agreement equally. AbbVie's contribution has been recorded as a liability on Calico's financial statements, which is reduced and reflected as a reduction to research and development expense as eligible research and development costs are incurred by Calico.
As of
June 30, 2019
, we have contributed
$480 million
to Calico in exchange for Calico convertible preferred units and are committed to fund up to an additional
$750 million
on an as-needed basis and subject to certain conditions.
Verily
Verily is a life science company with a mission to make the world's health data useful so that people enjoy healthier lives. In December 2018, Verily received
$900 million
in cash from a
$1.0 billion
investment round. The remaining
$100 million
was received in the first quarter of 2019. As of
June 30, 2019
, Verily has received an aggregate amount of
$1.8 billion
from sales of equity securities to external investors. These transactions were accounted for as equity transactions and no gain or loss was recognized.
Unconsolidated VIEs
Certain renewable energy investments included in our non-marketable equity investments accounted for under the equity method are VIEs. These entities' 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 such as setting operating budgets. Therefore, we do not consolidate these VIEs in our consolidated financial statements. The carrying value and maximum exposure of these VIEs were
$705 million
and
$622 million
as of
December 31, 2018
and
June 30, 2019
, respectively. The maximum exposure is based on current investments to date. We have determined the single source of our exposure to these VIEs is our capital investment in them.
Other unconsolidated VIEs were not material as of
December 31, 2018
and
June 30, 2019
.
Note 6.
Debt
Short-Term Debt
We have a debt financing program of up to
$5.0 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, 2018
and
June 30, 2019
.
Long-Term Debt
Google issued
$3.0 billion
of senior unsecured notes in
three
tranches (collectively, 2011 Notes) in May 2011, due in 2014, 2016, and 2021, as well as
$1.0 billion
of senior unsecured notes (2014 Notes) in February 2014 due in 2024.
In April 2016, we completed an exchange offer with eligible holders of Google’s 2011 Notes due 2021 and 2014 Notes due 2024 (collectively, the Google Notes). An aggregate principal amount of approximately
$1.7 billion
of the Google Notes was exchanged for approximately
$1.7 billion
of Alphabet notes with identical interest rate and maturity.
Because the exchange was between a parent and the subsidiary company and for substantially identical notes, the change was treated as a debt modification for accounting purposes with
no
gain or loss recognized.
In August 2016, Alphabet issued
$2.0 billion
of senior unsecured notes (2016 Notes) due 2026. The net proceeds from the issuance of the 2016 Notes were used for general corporate purposes, including the repayment of outstanding commercial paper. The Alphabet notes due in 2021, 2024, and 2026 rank equally with each other and are structurally subordinate to the outstanding Google Notes.
The total outstanding long-term debt is summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2018
|
|
As of
June 30, 2019
|
|
|
|
(unaudited)
|
3.625% Notes due on May 19, 2021
|
$
|
1,000
|
|
|
$
|
1,000
|
|
3.375% Notes due on February 25, 2024
|
1,000
|
|
|
1,000
|
|
1.998% Notes due on August 15, 2026
|
2,000
|
|
|
2,000
|
|
Unamortized discount for the Notes above
|
(50
|
)
|
|
(46
|
)
|
Subtotal
(1)
|
3,950
|
|
|
3,954
|
|
Finance lease obligation
|
62
|
|
|
120
|
|
Total long-term debt
|
$
|
4,012
|
|
|
$
|
4,074
|
|
|
|
(1)
|
Includes the outstanding (and unexchanged) Google Notes issued in 2011 and 2014 and the Alphabet notes exchanged in 2016.
|
The effective interest yields based on proceeds received from the outstanding notes due in 2021, 2024, and 2026 were
3.734%
,
3.377%
, and
2.231%
, respectively, with interest payable semi-annually. We may redeem these notes at any time in whole or in part at specified redemption prices. The total estimated fair value of all outstanding notes was approximately
$3.9 billion
and
$4.0 billion
as of
December 31, 2018
and
June 30, 2019
, 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.
Credit Facility
As of
June 30, 2019
, we have
$4.0 billion
of revolving credit facilities which expire in July 2023. The interest rate for the credit facilities is determined based on a formula using certain market rates.
No
amounts were outstanding under the credit facilities as of
December 31, 2018
and
June 30, 2019
.
Note 7.
Supplemental Financial Statement Information
Property and Equipment, Net
Property and equipment, net, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2018
|
|
As of
June 30, 2019
|
|
|
|
(unaudited)
|
Land and buildings
|
$
|
30,179
|
|
|
$
|
32,829
|
|
Information technology assets
|
30,119
|
|
|
33,022
|
|
Construction in progress
|
16,838
|
|
|
19,787
|
|
Leasehold improvements
|
5,310
|
|
|
5,682
|
|
Furniture and fixtures
|
61
|
|
|
110
|
|
Property and equipment, gross
|
82,507
|
|
|
91,430
|
|
Less: accumulated depreciation
|
(22,788
|
)
|
|
(26,539
|
)
|
Property and equipment, net
|
$
|
59,719
|
|
|
$
|
64,891
|
|
As of
December 31, 2018
and
June 30, 2019
, information technology assets under finance lease with a cost basis of
$648 million
and
$925 million
, respectively, were included in property and equipment.
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2018
|
|
As of
June 30, 2019
|
|
|
|
(unaudited)
|
European Commission fines
(1)
|
$
|
7,754
|
|
|
$
|
9,521
|
|
Accrued customer liabilities
|
1,810
|
|
|
1,765
|
|
Other accrued expenses and current liabilities
|
7,394
|
|
|
8,537
|
|
Accrued expenses and other current liabilities
|
$
|
16,958
|
|
|
$
|
19,823
|
|
|
|
(1)
|
Includes the effects of foreign exchange and interest. See
Note 10
for further details.
|
Accumulated Other Comprehensive Income (Loss)
The components of AOCI, net of tax, were as follows (in millions, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Unrealized Gains (Losses) on Available-for-Sale Investments
|
|
Unrealized Gains (Losses) on Cash Flow Hedges
|
|
Total
|
Balance as of December 31, 2017
|
$
|
(1,103
|
)
|
|
$
|
233
|
|
|
$
|
(122
|
)
|
|
$
|
(992
|
)
|
Cumulative effect of accounting change
|
0
|
|
|
(98
|
)
|
|
0
|
|
|
(98
|
)
|
Other comprehensive income (loss) before reclassifications
|
(485
|
)
|
|
(356
|
)
|
|
100
|
|
|
(741
|
)
|
Amounts excluded from the assessment of hedge effectiveness recorded in AOCI
|
0
|
|
|
0
|
|
|
1
|
|
|
1
|
|
Amounts reclassified from AOCI
|
0
|
|
|
33
|
|
|
272
|
|
|
305
|
|
Other comprehensive income (loss)
|
(485
|
)
|
|
(323
|
)
|
|
373
|
|
|
(435
|
)
|
Balance as of June 30, 2018
|
$
|
(1,588
|
)
|
|
$
|
(188
|
)
|
|
$
|
251
|
|
|
$
|
(1,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Unrealized Gains (Losses) on Available-for-Sale Investments
|
|
Unrealized Gains (Losses) on Cash Flow Hedges
|
|
Total
|
Balance as of December 31, 2018
|
$
|
(1,884
|
)
|
|
$
|
(688
|
)
|
|
$
|
266
|
|
|
$
|
(2,306
|
)
|
Cumulative effect of accounting change
|
0
|
|
|
0
|
|
|
(30
|
)
|
|
(30
|
)
|
Other comprehensive income (loss) before reclassifications
|
82
|
|
|
1,460
|
|
|
(36
|
)
|
|
1,506
|
|
Amounts excluded from the assessment of hedge effectiveness recorded in AOCI
|
0
|
|
|
0
|
|
|
(19
|
)
|
|
(19
|
)
|
Amounts reclassified from AOCI
|
0
|
|
|
(68
|
)
|
|
(174
|
)
|
|
(242
|
)
|
Other comprehensive income (loss)
|
82
|
|
|
1,392
|
|
|
(229
|
)
|
|
1,245
|
|
Balance as of June 30, 2019
|
$
|
(1,802
|
)
|
|
$
|
704
|
|
|
$
|
7
|
|
|
$
|
(1,091
|
)
|
The effects on net income of amounts reclassified from AOCI were as follows (in millions, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Reclassified from AOCI to the Consolidated Statements of Income
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
June 30,
|
AOCI Components
|
|
Location
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
Unrealized gains (losses) on available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
6
|
|
|
$
|
98
|
|
|
$
|
(33
|
)
|
|
$
|
96
|
|
|
|
Benefit (provision) for income taxes
|
|
0
|
|
|
(23
|
)
|
|
0
|
|
|
(28
|
)
|
|
|
Net of tax
|
|
6
|
|
|
75
|
|
|
$
|
(33
|
)
|
|
$
|
68
|
|
Unrealized gains (losses) on cash flow hedges
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Revenue
|
|
(101
|
)
|
|
85
|
|
|
$
|
(348
|
)
|
|
$
|
213
|
|
Interest rate contracts
|
|
Other income (expense), net
|
|
1
|
|
|
2
|
|
|
2
|
|
|
3
|
|
|
|
Benefit (provision) for income taxes
|
|
22
|
|
|
(17
|
)
|
|
74
|
|
|
(42
|
)
|
|
|
Net of tax
|
|
(78
|
)
|
|
70
|
|
|
$
|
(272
|
)
|
|
$
|
174
|
|
Total amount reclassified, net of tax
|
|
$
|
(72
|
)
|
|
$
|
145
|
|
|
$
|
(305
|
)
|
|
$
|
242
|
|
Other Income (Expense), Net
The components of other income (expense), net, were as follows (in millions, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
Interest income
|
$
|
456
|
|
|
$
|
653
|
|
|
$
|
855
|
|
|
$
|
1,175
|
|
Interest expense
(1)
|
(27
|
)
|
|
(25
|
)
|
|
(57
|
)
|
|
(60
|
)
|
Foreign currency exchange gain (loss), net
|
(33
|
)
|
|
(52
|
)
|
|
(57
|
)
|
|
22
|
|
Gain (loss) on debt securities, net
|
6
|
|
|
98
|
|
|
(33
|
)
|
|
96
|
|
Gain on equity securities, net
|
1,062
|
|
|
2,699
|
|
|
4,093
|
|
|
3,782
|
|
Performance fees
(2)
|
(238
|
)
|
|
(443
|
)
|
|
(870
|
)
|
|
(560
|
)
|
Loss and impairment from equity method investments, net
|
(105
|
)
|
|
(16
|
)
|
|
(112
|
)
|
|
(56
|
)
|
Other
|
49
|
|
|
53
|
|
|
261
|
|
|
106
|
|
Other income (expense), net
|
$
|
1,170
|
|
|
$
|
2,967
|
|
|
$
|
4,080
|
|
|
$
|
4,505
|
|
|
|
(1)
|
Interest expense is net of interest capitalized of
$23 million
and
$36 million
for the
three months ended June 30, 2018
and
2019
, respectively and
$39 million
and
$67 million
for the
six months ended June 30, 2018
and
2019
, respectively.
|
|
|
(2)
|
Performance fees were reclassified for the prior period from general and administrative expenses to other income (expense), net to conform with current period presentation. For further information on the performance fees, see Note
13
.
|
Note 8.
Acquisitions
During the
six months ended June 30, 2019
, we completed acquisitions and purchases of intangible assets for total consideration of approximately
$220 million
, net of cash acquired. In aggregate,
$118 million
was attributed to goodwill,
$110 million
was attributed to intangible assets, and
$8 million
was attributed to
net liabilities assumed
. These acquisitions generally enhance the breadth and depth of our offerings and expand our expertise in engineering and other functional areas.
Pro forma results of operations for these acquisitions have not been presented because they are not material to the consolidated results of operations, either individually or in the aggregate.
For all intangible assets acquired and purchased during the
six months ended June 30, 2019
, patents and developed technology have a weighted-average useful life of
3.9
years and trade names and other have a weighted-average useful life of
4.8
years.
Pending Acquisition of Looker
In June 2019, we entered into an agreement to acquire Looker, a unified platform for business intelligence, data applications and embedded analytics, for
$2.6 billion
in cash, which includes post combination compensation arrangements. The acquisition of Looker is expected to be completed later this year, subject to customary closing conditions, including the receipt of regulatory approvals. Upon the close of the acquisition, Looker will join Google Cloud.
Note 9.
Goodwill and Other Intangible Assets
Goodwill
Changes in the carrying amount of goodwill for the
six months ended June 30, 2019
were as follows (in millions, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Google
|
|
Other Bets
|
|
Total Consolidated
|
Balance as of December 31, 2018
|
$
|
17,521
|
|
|
$
|
367
|
|
|
$
|
17,888
|
|
Acquisitions
|
118
|
|
|
0
|
|
|
118
|
|
Foreign currency translation and other adjustments
|
(6
|
)
|
|
0
|
|
|
(6
|
)
|
Balance as of June 30, 2019
|
$
|
17,633
|
|
|
$
|
367
|
|
|
$
|
18,000
|
|
Other Intangible Assets
Information regarding purchased intangible assets were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Patents and developed technology
|
$
|
5,125
|
|
|
$
|
3,394
|
|
|
$
|
1,731
|
|
Customer relationships
|
349
|
|
|
308
|
|
|
41
|
|
Trade names and other
|
703
|
|
|
255
|
|
|
448
|
|
Total
|
$
|
6,177
|
|
|
$
|
3,957
|
|
|
$
|
2,220
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
(unaudited)
|
Patents and developed technology
|
$
|
4,832
|
|
|
$
|
3,342
|
|
|
$
|
1,490
|
|
Customer relationships
|
94
|
|
|
70
|
|
|
24
|
|
Trade names and other
|
683
|
|
|
295
|
|
|
388
|
|
Total
|
$
|
5,609
|
|
|
$
|
3,707
|
|
|
$
|
1,902
|
|
Amortization expense relating to purchased intangible assets was
$250 million
and
$209 million
for the
three months ended June 30, 2018
and
2019
, respectively, and
$445 million
and
$406 million
for the
six months ended June 30, 2018
and
2019
, respectively.
As of June 30, 2019
, expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter are as follows (in millions, unaudited):
|
|
|
|
|
Remainder of 2019
|
$
|
356
|
|
2020
|
622
|
|
2021
|
568
|
|
2022
|
230
|
|
2023
|
20
|
|
Thereafter
|
106
|
|
Total
|
$
|
1,902
|
|
Note 10.
Contingencies
Legal Matters
Antitrust Investigations
On November 30, 2010, the EC's Directorate General for Competition opened an investigation into various antitrust-related complaints against us.
On April 15, 2015, the EC issued a Statement of Objections (SO) regarding the display and ranking of shopping search results and ads, to which we responded on August 27, 2015. On July 14, 2016, the EC issued a Supplementary SO regarding shopping search results and ads. 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 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. While under appeal, the fine is 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 fine.
On April 20, 2016, the EC issued an SO regarding certain Android distribution practices. We responded to the SO and the EC's informational requests. 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. On October 29, 2018, we implemented changes to certain of our Android distribution practices. We recognized a charge of
$5.1 billion
for the fine in the second quarter of 2018. While under appeal, the fine is 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 fine.
On July 14, 2016, the EC issued an SO regarding the syndication of AdSense for Search (AFS). We responded to the SO and to the EC's informational requests. On March 20, 2019, the EC announced its decision that certain contractual provisions in agreements that Google had with AFS 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 AFS 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. While under appeal, the fine is 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 fine.
The Comision Nacional de Defensa de la Competencia in Argentina, the Competition Commission of India (CCI), Brazil's Administrative Council for Economic Defense (CADE), and the Korean Fair Trade Commission have also opened investigations into certain of our business practices. In November 2016, we responded to the CCI Director General's report with interim findings of competition law infringements regarding search and ads. On February 8, 2018, the CCI issued its final decision, including a fine of approximately
$21 million
, finding no violation of competition law infringement on most of the issues it investigated, but finding violations, including in the display of the “flights unit” in search results, and a contractual provision in certain direct search intermediation agreements. We have appealed the CCI decision. The fine was accrued for in 2018.
Patent and Intellectual Property Claims
We have had patent, copyright, trade secret, and trademark infringement lawsuits filed against us claiming that certain of our products, services, and technologies infringe the intellectual property rights of others. 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, and may also cause us to change our business practices, and require development of 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 for a company or its suppliers in an ITC action could 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 for certain intellectual property infringement claims against them, 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. 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.
In 2010, Oracle America, Inc. (Oracle) brought a copyright lawsuit against Google in the Northern District of California, alleging that Google's Android operating system infringes Oracle's copyrights related to certain Java application programming interfaces. After trial, final judgment was entered by the district court in favor of Google on June 8, 2016, and the court decided post-trial motions in favor of Google. Oracle appealed and on March 27, 2018, the appeals court reversed and remanded the case for a trial on damages. On May 29, 2018, we filed a petition for an en banc rehearing at the Federal Circuit, and on August 28, 2018, the Federal Circuit denied the petition. On January 24, 2019, we filed a petition to the Supreme Court of the United States to review this case. On April 29, 2019, the Supreme Court requested the views of the Solicitor General regarding our petition. We believe this lawsuit is without merit and are defending ourselves vigorously. Given the nature of this case, we are unable to estimate the reasonably possible loss or range of loss, if any, arising from this matter.
Other
We are also regularly subject to claims, suits, regulatory and government investigations, and other proceedings involving competition, intellectual property, privacy, 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. Such claims, suits, regulatory and government investigations, and other proceedings could result in fines, civil or criminal penalties, or other adverse consequences.
Certain of these outstanding matters include speculative, substantial or indeterminate monetary amounts. 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 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. Significant judgment is required to determine both likelihood of there being and the estimated amount of a loss related to such matters.
With respect to our outstanding matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will not, either individually or in aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such matters is inherently unpredictable and subject to significant uncertainties.
We expense legal fees in the period in which they are incurred.
Non-Income Taxes
We 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. We believe these matters are without merit and we are defending ourselves vigorously. 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.
Note 11.
Stockholders' Equity
Share Repurchases
In January 2018, the board of directors of Alphabet authorized the company to repurchase up to
$8.6 billion
of its Class C capital stock, which was completed during the first quarter of 2019. In January 2019, the board of directors of Alphabet authorized the company to repurchase up to an additional
$12.5 billion
of its Class C capital stock. In July 2019, the board of directors of Alphabet authorized the company to repurchase up to an additional
$25.0 billion
of its Class C capital stock.The 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.
During the
six months ended June 30, 2019
, we repurchased and subsequently retired
5.8 million
shares of Alphabet Class C capital stock for an aggregate amount of
$6.6 billion
.
Note 12.
Net Income Per Share
The following table sets forth the computation of basic and diluted net income per share of Class A and Class B common stock and Class C capital stock (in millions, except share amounts which are reflected in thousands, and per share amounts, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2018
|
|
2019
|
|
Class A
|
|
Class B
|
|
Class C
|
|
Class A
|
|
Class B
|
|
Class C
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings
|
$
|
1,371
|
|
|
$
|
216
|
|
|
$
|
1,608
|
|
|
$
|
4,286
|
|
|
$
|
667
|
|
|
$
|
4,994
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in per share computation
|
298,264
|
|
|
46,915
|
|
|
349,756
|
|
|
299,035
|
|
|
46,525
|
|
|
348,409
|
|
Basic net income per share
|
$
|
4.60
|
|
|
$
|
4.60
|
|
|
$
|
4.60
|
|
|
$
|
14.33
|
|
|
$
|
14.33
|
|
|
$
|
14.33
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings for basic computation
|
$
|
1,371
|
|
|
$
|
216
|
|
|
$
|
1,608
|
|
|
$
|
4,286
|
|
|
$
|
667
|
|
|
$
|
4,994
|
|
Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares
|
216
|
|
|
0
|
|
|
0
|
|
|
667
|
|
|
0
|
|
|
0
|
|
Reallocation of undistributed earnings
|
(16
|
)
|
|
(3
|
)
|
|
16
|
|
|
(36
|
)
|
|
(6
|
)
|
|
36
|
|
Allocation of undistributed earnings
|
$
|
1,571
|
|
|
$
|
213
|
|
|
$
|
1,624
|
|
|
$
|
4,917
|
|
|
$
|
661
|
|
|
$
|
5,030
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in basic computation
|
298,264
|
|
|
46,915
|
|
|
349,756
|
|
|
299,035
|
|
|
46,525
|
|
|
348,409
|
|
Weighted-average effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Class B to Class A common shares outstanding
|
46,915
|
|
|
0
|
|
|
0
|
|
|
46,525
|
|
|
0
|
|
|
0
|
|
Restricted stock units and other contingently issuable shares
|
713
|
|
|
0
|
|
|
7,599
|
|
|
453
|
|
|
0
|
|
|
5,532
|
|
Number of shares used in per share computation
|
345,892
|
|
|
46,915
|
|
|
357,355
|
|
|
346,013
|
|
|
46,525
|
|
|
353,941
|
|
Diluted net income per share
|
$
|
4.54
|
|
|
$
|
4.54
|
|
|
$
|
4.54
|
|
|
$
|
14.21
|
|
|
$
|
14.21
|
|
|
$
|
14.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2019
|
|
Class A
|
|
Class B
|
|
Class C
|
|
Class A
|
|
Class B
|
|
Class C
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings
|
$
|
5,407
|
|
|
$
|
851
|
|
|
$
|
6,338
|
|
|
$
|
7,150
|
|
|
$
|
1,113
|
|
|
$
|
8,341
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in per share computation
|
298,292
|
|
|
46,934
|
|
|
349,618
|
|
|
299,025
|
|
|
46,562
|
|
|
348,832
|
|
Basic net income per share
|
$
|
18.13
|
|
|
$
|
18.13
|
|
|
$
|
18.13
|
|
|
$
|
23.91
|
|
|
$
|
23.91
|
|
|
$
|
23.91
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings for basic computation
|
$
|
5,407
|
|
|
$
|
851
|
|
|
$
|
6,338
|
|
|
$
|
7,150
|
|
|
$
|
1,113
|
|
|
$
|
8,341
|
|
Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares
|
851
|
|
|
0
|
|
|
0
|
|
|
1,113
|
|
|
0
|
|
|
0
|
|
Reallocation of undistributed earnings
|
(68
|
)
|
|
(11
|
)
|
|
68
|
|
|
(59
|
)
|
|
(9
|
)
|
|
59
|
|
Allocation of undistributed earnings
|
$
|
6,190
|
|
|
$
|
840
|
|
|
$
|
6,406
|
|
|
$
|
8,204
|
|
|
$
|
1,104
|
|
|
$
|
8,400
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in basic computation
|
298,292
|
|
|
46,934
|
|
|
349,618
|
|
|
299,025
|
|
|
46,562
|
|
|
348,832
|
|
Weighted-average effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Class B to Class A common shares outstanding
|
46,934
|
|
|
0
|
|
|
0
|
|
|
46,562
|
|
|
0
|
|
|
0
|
|
Restricted stock units and other contingently issuable shares
|
804
|
|
|
0
|
|
|
8,543
|
|
|
482
|
|
|
0
|
|
|
5,516
|
|
Number of shares used in per share computation
|
346,030
|
|
|
46,934
|
|
|
358,161
|
|
|
346,069
|
|
|
46,562
|
|
|
354,348
|
|
Diluted net income per share
|
$
|
17.89
|
|
|
$
|
17.89
|
|
|
$
|
17.89
|
|
|
$
|
23.71
|
|
|
$
|
23.71
|
|
|
$
|
23.71
|
|
For the periods presented above, the net income per share amounts are the same for Class A and Class B common stock and Class C capital 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.
Note 13.
Compensation Plans
Stock-Based Compensation
For the
three months ended June 30, 2018
and
2019
, total stock-based compensation (SBC) expense was
$2.5 billion
and
$2.9 billion
, respectively, including amounts associated with awards we expect to settle in Alphabet stock of
$2.4 billion
and
$2.8 billion
, respectively. For the
six months ended June 30, 2018
and
2019
, total SBC expense was
$5.0 billion
and
$5.8 billion
, respectively, including amounts associated with awards we expect to settle in Alphabet stock of
$4.9 billion
and
$5.5 billion
, respectively.
Stock-Based Award Activities
The following table summarizes the activities for our unvested restricted stock units (RSUs) for the
six months ended June 30, 2019
(unaudited):
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock Units
|
|
Number of
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
Unvested as of December 31, 2018
|
18,467,678
|
|
|
$
|
936.96
|
|
Granted
|
11,170,484
|
|
|
$
|
1,060.69
|
|
Vested
|
(6,138,306
|
)
|
|
$
|
879.62
|
|
Forfeited/canceled
|
(845,101
|
)
|
|
$
|
976.63
|
|
Unvested as of June 30, 2019
|
22,654,755
|
|
|
$
|
1,012.03
|
|
As of
June 30, 2019
, there was
$21.7 billion
of unrecognized compensation cost related to unvested employee RSUs. This amount is expected to be recognized over a weighted-average period of
2.7 years
.
Performance Fees
We have compensation arrangements with payouts based on realized investment returns. We recognize compensation expense based on the estimated payouts, which may result in expense recognized before investment returns are realized. Performance fees, which are primarily related to gains on equity securities (for further information on gains on equity securities, see
Note 3
), are accrued and recorded as a component of other income (expense), net. For further information on the performance fees, see
Note 7
.
Note 14.
Income Taxes
On July 27, 2015, the United States Tax Court, in an opinion in Altera Corp. v. Commissioner, invalidated the portion of the Treasury regulations issued under IRC Section 482 requiring related-party participants in a cost sharing agreement to share stock-based compensation costs. The U.S. Tax Court issued the final decision on December 28, 2015. As a result of that decision, we recorded a tax benefit related to the anticipated reimbursement of cost share payment for previously shared stock-based compensation costs.
On June 7, 2019, the United States Court of Appeals for the Ninth Circuit overturned the 2015 Tax Court decision in Altera Corp. v. Commissioner, and upheld the portion of the Treasury regulations issued under IRC Section 482 requiring related-party participants in a cost sharing arrangement to share stock-based compensation costs. As a result of the Ninth Circuit court decision, our cumulative net tax benefit of
$418 million
related to previously shared stock-based compensation costs was reversed in the three months ended
June 30, 2019
.
Our effective tax rate for the
three months ended June 30, 2018
and
2019
was
24.2%
and
18.1%
, respectively. The decrease in effective tax rate is primarily due to discrete items in the three months ended June 30, 2018 and 2019. A non-deductible EC fine and release of our deferred tax asset valuation allowance related to the gains on equity securities impacted the second quarter of 2018, and reversal of the Altera tax benefit impacted the second quarter of 2019.
Our effective tax rate for the
three months ended June 30, 2019
was lower than the U.S. federal statutory rate, primarily due to foreign earnings taxed at lower rates and the U.S. Research and Development Tax Credit, partially offset by the reversal of the cumulative net tax benefit as a result of the U.S. Court of Appeals decision in the Altera case.
Our effective tax rate for the
three months ended June 30, 2018
was higher than the U.S. federal statutory rate, primarily due to the impact from the 2018 EC fine that is not tax deductible, partially offset by foreign earnings taxed at lower rates and the U.S. Research and Development Tax Credit.
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. Our total gross unrecognized tax benefits were
$4.7 billion
and
$4.9 billion
as of
December 31, 2018
and
June 30, 2019
, respectively. Our total unrecognized tax benefits that, if recognized, would affect our effective tax rate were
$2.9 billion
and
$3.0 billion
as of
December 31, 2018
and
June 30, 2019
, respectively. It is reasonably possible that certain U.S. and non-U.S. tax matters may be resolved in the next
12 months
, which may decrease our unrecognized tax benefits (either by payment, release or a combination of both) up to
$2.8 billion
in the next
12 months
.
For information regarding non-income taxes, see
Note 10
.
Note 15.
Information about Segments and Geographic Areas
We operate our business in multiple operating segments. Google is our only reportable segment. None of our other segments meet the quantitative thresholds to qualify as reportable segments; therefore, the other operating segments are combined and disclosed as Other Bets.
Our reported segments are:
|
|
•
|
Google – Google includes our main products such as ads, Android, Chrome, hardware, Google Cloud, Google Maps, Google Play, Search, and YouTube. Our technical infrastructure is also included in Google. Google generates revenues primarily from advertising; sales of apps, in-app purchases, digital content products, and hardware; and licensing and service fees, including fees received for Google Cloud offerings.
|
|
|
•
|
Other Bets – Other Bets is a combination of multiple operating segments that are not individually material. Other Bets includes Access, Calico, CapitalG, GV, Verily, Waymo, and X, among others. Revenues from the Other Bets are derived primarily through the sales of internet and TV services through Access as well as licensing and R&D services through Verily.
|
Revenues, cost of revenues, and operating expenses are generally directly attributed to our segments. Inter-segment revenues are not presented separately, as these amounts are immaterial. Our Chief Operating Decision Maker does not evaluate operating segments using asset information.
Information about segments during the periods presented were as follows (in millions, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
Revenues:
|
|
|
|
|
|
|
|
Google
|
$
|
32,512
|
|
|
$
|
38,782
|
|
|
$
|
63,508
|
|
|
$
|
74,951
|
|
Other Bets
|
145
|
|
|
162
|
|
|
295
|
|
|
332
|
|
Total revenues
|
$
|
32,657
|
|
|
$
|
38,944
|
|
|
$
|
63,803
|
|
|
$
|
75,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
Operating income (loss):
|
|
|
|
|
|
|
|
Google
|
$
|
8,959
|
|
|
$
|
10,388
|
|
|
$
|
17,327
|
|
|
$
|
19,713
|
|
Other Bets
|
(732
|
)
|
|
(989
|
)
|
|
(1,303
|
)
|
|
(1,857
|
)
|
Reconciling items
(1)
|
(5,182
|
)
|
|
(219
|
)
|
|
(5,346
|
)
|
|
(2,068
|
)
|
Total income from operations
|
$
|
3,045
|
|
|
$
|
9,180
|
|
|
$
|
10,678
|
|
|
$
|
15,788
|
|
|
|
(1)
|
Reconciling items are primarily comprised of the EC fines for the
three months ended June 30, 2018
and the
six months ended
June 30, 2018
and
2019
as well as corporate administrative costs and other miscellaneous items that are not allocated to individual segments for all periods presented. Performance fees previously included in reconciling items were reclassified for the prior period from general and administrative expenses to other income (expense), net to conform with current period presentation. For further information on the reclassification, see
Note 1
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
Capital expenditures:
|
|
|
|
|
|
|
|
Google
|
$
|
5,299
|
|
|
$
|
6,896
|
|
|
$
|
12,968
|
|
|
$
|
11,430
|
|
Other Bets
|
10
|
|
|
65
|
|
|
65
|
|
|
124
|
|
Reconciling items
(2)
|
168
|
|
|
(835
|
)
|
|
(257
|
)
|
|
(790
|
)
|
Total capital expenditures as presented on the Consolidated Statements of Cash Flows
|
$
|
5,477
|
|
|
$
|
6,126
|
|
|
$
|
12,776
|
|
|
$
|
10,764
|
|
|
|
(2)
|
Reconciling items are related to timing differences of payments as segment capital expenditures are on accrual basis while total capital expenditures shown on the Consolidated Statements of Cash Flow are on cash basis and other miscellaneous differences.
|
Stock-based compensation and depreciation, amortization, and impairment are included in segment operating income (loss) as shown below (in millions, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
Stock-based compensation:
|
|
|
|
|
|
|
|
Google
|
$
|
2,288
|
|
|
$
|
2,600
|
|
|
$
|
4,592
|
|
|
$
|
5,212
|
|
Other Bets
|
127
|
|
|
125
|
|
|
239
|
|
|
248
|
|
Reconciling items
(3)
|
(2
|
)
|
|
35
|
|
|
39
|
|
|
69
|
|
Total stock-based compensation
(4)
|
$
|
2,413
|
|
|
$
|
2,760
|
|
|
$
|
4,870
|
|
|
$
|
5,529
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization, and impairment:
|
|
|
|
|
|
|
|
Google
|
$
|
2,031
|
|
|
$
|
2,756
|
|
|
$
|
3,932
|
|
|
$
|
5,285
|
|
Other Bets
|
83
|
|
|
79
|
|
|
168
|
|
|
163
|
|
Total depreciation, amortization, and impairment
|
$
|
2,114
|
|
|
$
|
2,835
|
|
|
$
|
4,100
|
|
|
$
|
5,448
|
|
|
|
(3)
|
Reconciling items represent corporate administrative costs that are not allocated to individual segments.
|
|
|
(4)
|
For purposes of segment reporting, SBC represents awards that we expect to settle in Alphabet stock.
|
The following table presents our long-lived assets by geographic area (in millions):
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2018
|
|
As of
June 30, 2019
|
|
|
|
(unaudited)
|
Long-lived assets:
|
|
|
|
United States
|
$
|
74,882
|
|
|
$
|
82,904
|
|
International
|
22,234
|
|
|
26,760
|
|
Total long-lived assets
|
$
|
97,116
|
|
|
$
|
109,664
|
|
For revenues by geography, see
Note 2
.