GOOG 10-Q Q1 2015
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
FORM 10-Q
________________________________________________________________
(Mark One)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2015
OR
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¨ | 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: 001-36380
________________________________________________________________
Google Inc.
(Exact name of registrant as specified in its charter)
________________________________________________________________
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Delaware | 77-0493581 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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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) |
________________________________________________________________
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 ý 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 ý No ¨
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.
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Large accelerated filer | ý | | 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 Exchange Act). Yes ¨ No ý
As of April 23, 2015, there were 288,264,671 shares of Google’s Class A common stock outstanding, 52,452,377 shares of Google’s Class B common stock outstanding, and 341,692,317 Google's Class C capital stock outstanding.
Google Inc.
Form 10-Q
For the Quarterly Period Ended March 31, 2015
TABLE OF CONTENTS
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Item 1 | | |
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Item 2 | | |
Item 3 | | |
Item 4 | | |
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Item 1 | | |
Item 1A | | |
Item 6 | | |
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NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding:
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• | the growth of our business and revenues and our expectations about the factors that influence our success and trends in our business; |
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• | our plans to continue to invest in new businesses, products and technologies, systems, facilities, and infrastructure, to continue to hire aggressively and provide competitive compensation programs, as well as to continue to invest in acquisitions; |
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• | seasonal fluctuations in internet usage and advertiser expenditures, traditional retail seasonality and macroeconomic conditions, which are likely to cause fluctuations in our quarterly results; |
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• | the potential for declines in our revenue growth rate; |
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• | our expectation that growth in advertising revenues from our websites will continue to exceed that from our Google Network Members’ websites, which will have a positive impact on our operating margins; |
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• | our expectation that we will continue to take steps to improve the relevance of the ads we deliver and to reduce the number of accidental clicks; |
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• | fluctuations in aggregate paid clicks and average cost-per-click; |
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• | our belief that our foreign exchange risk management program will not fully offset our net exposure to fluctuations in foreign currency exchange rates; |
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• | the expected increase of costs related to hedging activities under our foreign exchange risk management program; |
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• | our expectation that our cost of revenues, research and development expenses, sales and marketing expenses, and general and administrative expenses will increase in dollars and may increase as a percentage of revenues; |
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• | our potential exposure in connection with pending investigations, proceedings, and other contingencies; |
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• | our expectation that our traffic acquisition costs will fluctuate in the future; |
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• | our continued investments in international markets; |
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• | estimates of our future compensation expenses; |
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• | fluctuations in our effective tax rate; |
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• | the sufficiency of our sources of funding; |
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• | our payment terms to certain advertisers, which may increase our working capital requirements; |
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• | fluctuations in our capital expenditures; |
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, Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, as may be updated in our subsequent Quarterly Reports on Form 10-Q. Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “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 Quarterly Report on Form 10-Q, and in particular, the risks discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, 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, “Google,” “we,” “our,” and similar terms include Google Inc. and its subsidiaries, unless the context indicates otherwise.
“Google” and other trademarks of ours appearing in this report are our property. This report contains additional trade names and trademarks of other companies. 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 I - FINANCIAL INFORMATION
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ITEM 1. | FINANCIAL STATEMENTS |
Google Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except share and par value amounts which are reflected in thousands
and par value per share amounts)
|
| | | | | | | |
| As of December 31, 2014 | | As of March 31, 2015 |
| | | (unaudited) |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 18,347 |
| | $ | 16,976 |
|
Marketable securities | 46,048 |
| | 48,460 |
|
Total cash, cash equivalents, and marketable securities (including securities loaned of $4,058 and $2,574) | 64,395 |
| | 65,436 |
|
Accounts receivable, net of allowance of $225 and $200 | 9,383 |
| | 8,584 |
|
Receivable under reverse repurchase agreements | 875 |
| | 825 |
|
Deferred income taxes, net | 1,322 |
| | 847 |
|
Income taxes receivable, net | 1,298 |
| | 901 |
|
Prepaid revenue share, expenses and other assets | 3,412 |
| | 3,720 |
|
Total current assets | 80,685 |
| | 80,313 |
|
Prepaid revenue share, expenses and other assets, non-current | 3,280 |
| | 3,596 |
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Non-marketable investments | 3,079 |
| | 4,090 |
|
Property and equipment, net | 23,883 |
| | 25,448 |
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Intangible assets, net | 4,607 |
| | 4,380 |
|
Goodwill | 15,599 |
| | 15,573 |
|
Total assets | $ | 131,133 |
| | $ | 133,400 |
|
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 1,715 |
| | $ | 1,688 |
|
Short-term debt | 2,009 |
| | 2,009 |
|
Accrued compensation and benefits | 3,069 |
| | 1,911 |
|
Accrued expenses and other current liabilities | 4,434 |
| | 4,494 |
|
Accrued revenue share | 1,952 |
| | 1,755 |
|
Securities lending payable | 2,778 |
| | 1,657 |
|
Deferred revenue | 752 |
| | 699 |
|
Income taxes payable, net | 96 |
| | 123 |
|
Total current liabilities | 16,805 |
| | 14,336 |
|
Long-term debt | 3,228 |
| | 3,226 |
|
Deferred revenue, non-current | 104 |
| | 93 |
|
Income taxes payable, non-current | 3,407 |
| | 3,717 |
|
Deferred income taxes, net, non-current | 1,971 |
| | 1,845 |
|
Other long-term liabilities | 1,118 |
| | 1,735 |
|
Commitments and contingencies |
| |
|
Stockholders’ equity: | | | |
Convertible preferred stock, $0.001 par value per share, 100,000 shares authorized; no shares issued and outstanding | 0 |
| | 0 |
|
Class A and Class B common stock, and Class C capital stock and additional paid-in capital, $0.001 par value per share: 15,000,000 shares authorized (Class A 9,000,000, Class B 3,000,000, Class C 3,000,000); 680,172 (Class A 286,560, Class B 53,213, Class C 340,399) and par value of $680 (Class A $287, Class B $53, Class C $340) and 682,330 (Class A 288,198, Class B 52,480, Class C 341,652) and par value of $682 (Class A $288, Class B $52, Class C $342) shares issued and outstanding | 28,767 |
| | 29,527 |
|
Accumulated other comprehensive income (loss) | 27 |
| | (371 | ) |
Retained earnings | 75,706 |
| | 79,292 |
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Total stockholders’ equity | 104,500 |
| | 108,448 |
|
Total liabilities and stockholders’ equity | $ | 131,133 |
| | $ | 133,400 |
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See accompanying notes.
Google Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except share amounts which are reflected in thousands and per share amounts)
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2014 | | 2015 |
| (unaudited) |
Revenues | $ | 15,420 |
| | $ | 17,258 |
|
Costs and expenses: | | | |
Cost of revenues (1) | 5,961 |
| | 6,356 |
|
Research and development (1) | 2,126 |
| | 2,753 |
|
Sales and marketing (1) | 1,729 |
| | 2,065 |
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General and administrative (1) | 1,489 |
| | 1,637 |
|
Total costs and expenses | 11,305 |
| | 12,811 |
|
Income from operations | 4,115 |
| | 4,447 |
|
Interest and other income, net | 357 |
| | 157 |
|
Income from continuing operations before income taxes | 4,472 |
| | 4,604 |
|
Provision for income taxes | 822 |
| | 1,018 |
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Net income from continuing operations | 3,650 |
| | 3,586 |
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Net loss from discontinued operations (1) | (198 | ) | | 0 |
|
Net income | $ | 3,452 |
| | $ | 3,586 |
|
Basic net income (loss) per share of Class A and B common stock and Class C capital stock: | | | |
Continuing operations | $ | 5.42 |
| | $ | 5.27 |
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Discontinued operations | (0.29 | ) | | 0.00 |
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Basic net income per share | $ | 5.13 |
| | $ | 5.27 |
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Diluted net income (loss) per share of Class A and B common stock and Class C capital stock: | | | |
Continuing operations | $ | 5.33 |
| | $ | 5.20 |
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Discontinued operations | (0.29 | ) | | 0.00 |
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Diluted net income per share | $ | 5.04 |
| | $ | 5.20 |
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| | | |
Shares used in basic per share calculation | 672,587 |
| | 680,915 |
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Shares used in diluted per share calculation | 685,212 |
| | 689,498 |
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| | | |
(1) Includes stock-based compensation expense as follows: | | | |
Cost of revenues | $ | 95 |
| | $ | 160 |
|
Research and development | 456 |
| | 615 |
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Sales and marketing | 147 |
| | 205 |
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General and administrative | 141 |
| | 223 |
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Discontinued operations | 48 |
| | 0 |
|
Total stock-based compensation expense
| $ | 887 |
| | $ | 1,203 |
|
See accompanying notes.
Google Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
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| | | | | | | |
| Three Months Ended |
| March 31, |
| 2014 | | 2015 |
| (unaudited) |
Net income | $ | 3,452 |
| | $ | 3,586 |
|
Other comprehensive income (loss): | | | |
Change in foreign currency translation adjustment | 65 |
| | (923 | ) |
Available-for-sale investments: | | | |
Change in net unrealized gains | 217 |
| | 221 |
|
Less: reclassification adjustment for net gains included in net income | (67 | ) | | (27 | ) |
Net change (net of tax effect of $42 and $61) | 150 |
| | 194 |
|
Cash flow hedges: | | | |
Change in net unrealized gains | 10 |
| | 562 |
|
Less: reclassification adjustment for net gains included in net income | (5 | ) | | (231 | ) |
Net change (net of tax effect of $30 and $192) | 5 |
| | 331 |
|
Other comprehensive income (loss) | 220 |
| | (398 | ) |
Comprehensive income | $ | 3,672 |
| | $ | 3,188 |
|
See accompanying notes.
Google Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2014 | | 2015 |
| (unaudited) |
Operating activities | | | |
Net income | $ | 3,452 |
| | $ | 3,586 |
|
Adjustments: | | | |
Depreciation expense and impairment of property and equipment | 816 |
| | 938 |
|
Amortization and impairment of intangible and other assets | 270 |
| | 239 |
|
Stock-based compensation expense | 887 |
| | 1,203 |
|
Excess tax benefits from stock-based award activities | (155 | ) | | (105 | ) |
Deferred income taxes | 144 |
| | 71 |
|
Gain on equity interest | (103 | ) | | 0 |
|
Gain on sale of non-marketable investments | (117 | ) | | 0 |
|
Other | (14 | ) | | 77 |
|
Changes in assets and liabilities, net of effects of acquisitions: | | | |
Accounts receivable | 267 |
| | 698 |
|
Income taxes, net | 201 |
| | 756 |
|
Prepaid revenue share, expenses and other assets | (308 | ) | | 43 |
|
Accounts payable | 177 |
| | (24 | ) |
Accrued expenses and other liabilities | (1,079 | ) | | (601 | ) |
Accrued revenue share | (70 | ) | | (205 | ) |
Deferred revenue | 23 |
| | (59 | ) |
Net cash provided by operating activities | 4,391 |
| | 6,617 |
|
Investing activities | | | |
Purchases of property and equipment | (2,345 | ) | | (2,927 | ) |
Purchases of marketable securities | (12,082 | ) | | (12,558 | ) |
Maturities and sales of marketable securities | 9,406 |
| | 10,389 |
|
Purchases of non-marketable investments | (168 | ) | | (1,074 | ) |
Cash collateral related to securities lending | 779 |
| | (1,120 | ) |
Investments in reverse repurchase agreements | 50 |
| | 50 |
|
Acquisitions, net of cash acquired, and purchases of intangibles and other assets | (2,947 | ) | | (64 | ) |
Net cash used in investing activities | (7,307 | ) | | (7,304 | ) |
Financing activities | | | |
Net payments related to stock-based award activities | (326 | ) | | (493 | ) |
Excess tax benefits from stock-based award activities | 155 |
| | 105 |
|
Proceeds from issuance of debt, net of costs | 3,416 |
| | 3,305 |
|
Repayments of debt | (2,423 | ) | | (3,308 | ) |
Net cash provided by (used in) financing activities | 822 |
| | (391 | ) |
Effect of exchange rate changes on cash and cash equivalents | (5 | ) | | (293 | ) |
Net decrease in cash and cash equivalents | (2,099 | ) | | (1,371 | ) |
Cash and cash equivalents at beginning of period | 18,898 |
| | 18,347 |
|
Reclassification of assets previously held for sale | (160 | ) | | 0 |
|
Cash and cash equivalents at end of period | $ | 16,639 |
| | $ | 16,976 |
|
| | | |
Supplemental disclosures of cash flow information | | | |
Cash paid for taxes | $ | 353 |
| | $ | 98 |
|
Cash paid for interest | $ | 0 |
| | $ | 18 |
|
See accompanying notes.
Google Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Google Inc. and Summary of Significant Accounting Policies
We were incorporated in California in September 1998 and re-incorporated in the State of Delaware in August 2003. We generate revenues primarily by delivering relevant, cost-effective online advertising.
On October 29, 2014, we sold the Motorola Mobile business (Motorola Mobile) to Lenovo Group Limited (Lenovo). The financial results of Motorola Mobile are presented as Net loss from discontinued operations on the Consolidated Statements of Income for the three months ended March 31, 2014. See Note 8 for further discussion of the sale.
Basis of Consolidation
The consolidated financial statements include the accounts of Google Inc. and our subsidiaries. All intercompany balances and transactions have been eliminated.
Unaudited Interim Financial Information
The accompanying Consolidated Balance Sheet as of March 31, 2015, the Consolidated Statements of Income for the three months ended March 31, 2014 and 2015, the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2015, and the Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2015 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 March 31, 2015, our results of operations for the three months ended March 31, 2014 and 2015, and our cash flows for the three months ended March 31, 2014 and 2015. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015.
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on February 6, 2015.
Use of Estimates
The 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 the accounts receivable and 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 historical experience and on various other assumptions 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
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09) "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. As currently issued, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early adoption is not permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
In June 2014, the FASB issued Accounting Standards Update No. 2014-10 (ASU 2014-10) "Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation". ASU 2014-10 removes the definition of a development stage entity from the Master Glossary of the ASC thereby removing the financial reporting distinction between development stage entities and other reporting entities. The amendment eliminating the exception to the sufficiency-of-equity-at-risk criterion for development stage entities will be applied retrospectively for annual reporting periods beginning after December 15, 2015, and interim periods therein. Early application of these amendments is permitted. We are
currently in the process of evaluating the impact of the adoption of ASU 2014-10 on our consolidated financial statements.
In June 2014, the FASB issued Accounting Standards Update No. 2014-11 (ASU 2014-11) "Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." ASU 2014-11 requires entities to account for repurchase-to-maturity transactions and repurchase financing arrangements as secured borrowings. ASU 2014-11 also expands disclosure requirements for these transactions to include the nature of the collateral being pledged and the time to maturity. The accounting changes are effective for the first interim or annual period beginning after December 15, 2014 and certain disclosure requirements are effective for interim periods beginning after March 15, 2015. In the first quarter of 2015, we adopted the amended accounting requirements and it did not have a material impact on the consolidated financial statements. We will adopt the additional disclosure requirements in the second quarter of 2015.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02 (ASU 2015-02) "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We are currently in the process of evaluating the impact of the adoption of ASU 2015-02 on our consolidated financial statements.
Note 2. Financial Instruments
Fair Value Measurements
We measure our cash equivalents, marketable securities, foreign currency and interest rate derivative contracts, and non-marketable debt securities at fair value on a recurring basis. 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.
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.
We classify our cash equivalents and marketable 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. We classify our foreign currency and interest rate derivative contracts primarily within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments. We classify our non-marketable debt securities within Level 3 as the valuation inputs are not observable in an active market.
Cash, Cash Equivalents and Marketable Securities
The following tables summarize our cash, cash equivalents and marketable securities by significant investment categories as of December 31, 2014 and March 31, 2015 (in millions):
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| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2014 |
| Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Marketable Securities |
Cash | $ | 9,863 |
| | $ | 0 |
| | $ | 0 |
| | $ | 9,863 |
| | $ | 9,863 |
| | $ | 0 |
|
Level 1: | | | | | | | | | | | |
Money market and other funds | 2,532 |
| | 0 |
| | 0 |
| | 2,532 |
| | 2,532 |
| | 0 |
|
U.S. government notes | 15,320 |
| | 37 |
| | (4 | ) | | 15,353 |
| | 1,128 |
| | 14,225 |
|
Marketable equity securities | 988 |
| | 428 |
| | (64 | ) | | 1,352 |
| | 0 |
| | 1,352 |
|
| 18,840 |
| | 465 |
| | (68 | ) | | 19,237 |
| | 3,660 |
| | 15,577 |
|
Level 2: | | | | | | | | | | | |
Time deposits(1) | 2,409 |
| | 0 |
| | 0 |
| | 2,409 |
| | 2,309 |
| | 100 |
|
Money market and other funds(2) | 1,762 |
| | 0 |
| | 0 |
| | 1,762 |
| | 1,762 |
| | 0 |
|
Fixed-income bond funds(3) | 385 |
| | 0 |
| | (38 | ) | | 347 |
| | 0 |
| | 347 |
|
U.S. government agencies | 2,327 |
| | 8 |
| | (1 | ) | | 2,334 |
| | 750 |
| | 1,584 |
|
Foreign government bonds | 1,828 |
| | 22 |
| | (10 | ) | | 1,840 |
| | 0 |
| | 1,840 |
|
Municipal securities | 3,370 |
| | 33 |
| | (6 | ) | | 3,397 |
| | 3 |
| | 3,394 |
|
Corporate debt securities | 11,499 |
| | 114 |
| | (122 | ) | | 11,491 |
| | 0 |
| | 11,491 |
|
Agency residential mortgage-backed securities | 8,196 |
| | 109 |
| | (42 | ) | | 8,263 |
| | 0 |
| | 8,263 |
|
Asset-backed securities | 3,456 |
| | 1 |
| | (5 | ) | | 3,452 |
| | 0 |
| | 3,452 |
|
| 35,232 |
| | 287 |
| | (224 | ) | | 35,295 |
| | 4,824 |
| | 30,471 |
|
Total | $ | 63,935 |
| | $ | 752 |
| | $ | (292 | ) | | $ | 64,395 |
| | $ | 18,347 |
| | $ | 46,048 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2015 |
| Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Marketable Securities |
| (unaudited) |
Cash | $ | 10,929 |
| | $ | 0 |
| | $ | 0 |
| | $ | 10,929 |
| | $ | 10,929 |
| | $ | 0 |
|
Level 1: | | | | | | | | | | | |
Money market and other funds | 2,451 |
| | 0 |
| | 0 |
| | 2,451 |
| | 2,451 |
| | 0 |
|
U.S. government notes | 14,385 |
| | 93 |
| | 0 |
| | 14,478 |
| | 8 |
| | 14,470 |
|
Marketable equity securities | 984 |
| | 379 |
| | 0 |
| | 1,363 |
| | 0 |
| | 1,363 |
|
| 17,820 |
| | 472 |
| | 0 |
| | 18,292 |
| | 2,459 |
| | 15,833 |
|
Level 2: | | | | | | | | | | | |
Time deposits | 2,798 |
| | 0 |
| | 0 |
| | 2,798 |
| | 2,771 |
| | 27 |
|
Money market and other funds(2) | 810 |
| | 0 |
| | 0 |
| | 810 |
| | 810 |
| | 0 |
|
Fixed-income bond funds(3) | 370 |
| | 0 |
| | (51 | ) | | 319 |
| | 0 |
| | 319 |
|
U.S. government agencies | 1,973 |
| | 14 |
| | 0 |
| | 1,987 |
| | 0 |
| | 1,987 |
|
Foreign government bonds | 1,914 |
| | 27 |
| | (5 | ) | | 1,936 |
| | 0 |
| | 1,936 |
|
Municipal securities | 3,679 |
| | 38 |
| | (4 | ) | | 3,713 |
| | 7 |
| | 3,706 |
|
Corporate debt securities | 12,645 |
| | 178 |
| | (64 | ) | | 12,759 |
| | 0 |
| | 12,759 |
|
Agency residential mortgage-backed securities | 8,161 |
| | 133 |
| | (22 | ) | | 8,272 |
| | 0 |
| | 8,272 |
|
Asset-backed securities | 3,620 |
| | 3 |
| | (2 | ) | | 3,621 |
| | 0 |
| | 3,621 |
|
| 35,970 |
| | 393 |
| | (148 | ) | | 36,215 |
| | 3,588 |
| | 32,627 |
|
Total | $ | 64,719 |
| | $ | 865 |
| | $ | (148 | ) | | $ | 65,436 |
| | $ | 16,976 |
| | $ | 48,460 |
|
| |
(1) | The majority of our time deposits are foreign deposits. |
| |
(2) | The balances as of December 31, 2014 and March 31, 2015 were related to cash collateral received in connection with our securities lending program, which was invested in reverse repurchase agreements maturing within three months. See section titled "Securities Lending Program" below for further discussion of this program. |
| |
(3) | Fixed-income bond funds consist of mutual funds that primarily invest in corporate and government bonds. |
We determine realized gains or losses on the sale of marketable securities on a specific identification method. We recognized gross realized gains of $98 million and $77 million for the three months ended March 31, 2014 and 2015. We recognized gross realized losses of $24 million and $45 million for the three months ended March 31, 2014 and 2015. We reflect these gains and losses as a component of Interest and other income, net in the accompanying Consolidated Statements of Income.
The following table summarizes the estimated fair value of our investments in marketable debt securities, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities (in millions):
|
| | | |
| As of March 31, 2015 |
| (unaudited) |
Due in 1 year | $ | 6,279 |
|
Due in 1 year through 5 years | 24,805 |
|
Due in 5 years through 10 years | 6,943 |
|
Due after 10 years | 8,751 |
|
Total | $ | 46,778 |
|
Non-marketable Investments
We included $90 million and $998 million of available-for-sale debt securities in our non-marketable investments as of December 31, 2014 and March 31, 2015. These debt securities are primarily preferred stock with certain features and convertible notes issued by private companies that do not have readily determinable market values and are categorized accordingly as Level 3 in the fair value hierarchy. To estimate the fair value of these securities, we used a combination of valuation methodologies, including market and income approaches based on prior transaction prices, estimated timing, probability and amount of cash flows, and illiquidity considerations. Financial information of the private companies may not be available to us due to the nature of those companies, and consequently we will estimate the value based on the best available information available to us at the measurement date. As of December 31, 2014 and March 31, 2015, the estimated fair value of these securities approximated their carrying value. In addition, since these securities do not have contractual maturity dates and we do not intend to liquidate them in the next 12 months, we have classified them as non-current assets on the accompanying Consolidated Balance Sheet as of December 31, 2014 and March 31, 2015.
The following table presents reconciliations for our assets measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3) (in millions, unaudited):
|
| | | |
| Level 3 |
Balance at January 1, 2015 | $ | 90 |
|
Purchases of securities (1) | 908 |
|
Balance at March 31, 2015 | $ | 998 |
|
| |
(1) | Purchases of securities included our $900 million investment in SpaceX, a space exploration and space transport company, made during January 2015. |
Impairment Considerations for Available-for-sale Investments
The following tables present gross unrealized losses and fair values for those marketable investments that were in an unrealized loss position as of December 31, 2014 and March 31, 2015, 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, 2014 |
| | Less than 12 Months | | 12 Months or Greater | | Total |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
U.S. government notes | | $ | 4,490 |
| | $ | (4 | ) | | $ | 0 |
| | $ | 0 |
| | $ | 4,490 |
| | $ | (4 | ) |
U.S. government agencies | | 830 |
| | (1 | ) | | 0 |
| | 0 |
| | 830 |
| | (1 | ) |
Foreign government bonds | | 255 |
| | (7 | ) | | 43 |
| | (3 | ) | | 298 |
| | (10 | ) |
Municipal securities | | 877 |
| | (3 | ) | | 174 |
| | (3 | ) | | 1,051 |
| | (6 | ) |
Corporate debt securities | | 5,851 |
| | (112 | ) | | 225 |
| | (10 | ) | | 6,076 |
| | (122 | ) |
Agency residential mortgage-backed securities | | 609 |
| | (1 | ) | | 2,168 |
| | (41 | ) | | 2,777 |
| | (42 | ) |
Asset-backed securities | | 2,388 |
| | (4 | ) | | 174 |
| | (1 | ) | | 2,562 |
| | (5 | ) |
Fixed-income bond funds | | 347 |
| | (38 | ) | | 0 |
| | 0 |
| | 347 |
| | (38 | ) |
Marketable equity securities | | 690 |
| | (64 | ) | | 0 |
| | 0 |
| | 690 |
| | (64 | ) |
Total | | $ | 16,337 |
| | $ | (234 | ) | | $ | 2,784 |
| | $ | (58 | ) | | $ | 19,121 |
| | $ | (292 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2015 |
| | Less than 12 Months | | 12 Months or Greater | | Total |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| | | | | | (unaudited) | | | | |
Foreign government bonds | | $ | 366 |
| | $ | (4 | ) | | $ | 23 |
| | $ | (1 | ) | | $ | 389 |
| | $ | (5 | ) |
Municipal securities | | 930 |
| | (3 | ) | | 19 |
| | (1 | ) | | 949 |
| | (4 | ) |
Corporate debt securities | | 3,266 |
| | (59 | ) | | 126 |
| | (5 | ) | | 3,392 |
| | (64 | ) |
Agency residential mortgage-backed securities | | 798 |
| | (3 | ) | | 1,246 |
| | (19 | ) | | 2,044 |
| | (22 | ) |
Asset-backed securities | | 1,941 |
| | (2 | ) | | 0 |
| | 0 |
| | 1,941 |
| | (2 | ) |
Fixed-income bond funds | | 319 |
| | (51 | ) | | 0 |
| | 0 |
| | 319 |
| | (51 | ) |
Total | | $ | 7,620 |
| | $ | (122 | ) | | $ | 1,414 |
| | $ | (26 | ) | | $ | 9,034 |
| | $ | (148 | ) |
We periodically review our available-for-sale debt and equity securities for other-than-temporary impairment. We consider factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. For debt securities, we also consider whether (i) it is more likely than not that we will be required to sell the debt securities before recovery of their amortized cost basis, and (ii) the amortized cost basis cannot be recovered as a result of credit losses. During the three months ended March 31, 2014 and 2015, we did not recognize any other-than-temporary impairment loss.
Securities Lending Program
From time to time, we enter into securities lending agreements with financial institutions to enhance investment income. We loan selected securities which are collateralized in the form of cash or securities. Cash collateral is invested in reverse repurchase agreements which are collateralized in the form of securities.
We classify loaned securities as cash equivalents or marketable securities and record the cash collateral as an asset with a corresponding liability in the accompanying Consolidated Balance Sheets. We classify reverse repurchase agreements maturing within three months as cash equivalents and those longer than three months as receivable under reverse repurchase agreements in the accompanying Consolidated Balance Sheets. For security collateral received, we do not record an asset or liability except in the event of counterparty default.
Derivative Financial Instruments
We recognize derivative instruments as either assets or liabilities in the accompanying Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e. gains or losses) of the derivatives in the accompanying Consolidated Statements of Income as Interest and other income, net, as part of revenues, or as a component of accumulated other comprehensive income (AOCI) in the accompanying Consolidated Balance Sheets, as discussed below.
We enter into foreign currency contracts with financial institutions to reduce the risk that our cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. We use certain interest rate derivative
contracts to hedge interest rate exposures on our fixed income securities and our anticipated debt issuance. 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, 2014 and March 31, 2015, we received cash collateral related to the derivative instruments under our collateral security arrangements of $268 million and $311 million.
Cash Flow Hedges
We use 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 $13.6 billion and $13.5 billion as of December 31, 2014 and March 31, 2015. These foreign exchange contracts have maturities of 36 months or less.
In 2012, we entered into forward-starting interest rate swaps, with a total notional amount of $1.0 billion and terms calling for us to receive interest at a variable rate and to pay interest at a fixed rate, that effectively locked in an interest rate on our anticipated debt issuance of $1.0 billion in 2014. We issued $1.0 billion of unsecured senior notes in February 2014 (See details in Note 3). As a result, we terminated the forward-starting interest rate swaps upon the debt issuance. The gain associated with the termination is reported within operating activities in the Consolidated Statement of Cash Flows for the three months ended March 31, 2014, consistent with the impact of the hedged item.
We reflect gains or losses on the effective portion of a cash flow hedge as a component of AOCI and subsequently reclassify cumulative gains and losses to revenues or interest expense when the hedged transactions are recorded. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI would be immediately reclassified to Interest and other income, net. Further, we exclude the change in the time value of the options from our assessment of hedge effectiveness. We record the premium paid or time value of an option on the date of purchase as an asset. Thereafter, we recognize changes to this time value in Interest and other income, net.
As of March 31, 2015, the effective portion of our cash flow hedges before tax effect was $1.3 billion, of which $1.1 billion 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 the time value for these forward contracts from the assessment of hedge effectiveness. The notional principal of these contracts was $1.5 billion as of December 31, 2014 and March 31, 2015.
We use interest rate swaps designated as fair value hedges to hedge interest rate risk for certain fixed rate securities. The notional principal of these contracts was $175 million and $200 million as of December 31, 2014 and March 31, 2015.
Gains and losses on these forward contracts and interest rate swaps are recognized in Interest and other income, net along with the offsetting losses and gains of the related hedged items. Realized gains and losses on these forward contracts and interest rate swaps are reported within investment activities in the Consolidated Statement of Cash Flows, consistent with the impact of the hedged items.
Other Derivatives
Other derivatives not designated as hedging instruments consist of 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 Interest and other income, net along with the foreign currency gains and losses on monetary assets and liabilities. The notional principal of foreign exchange contracts outstanding was $6.2 billion as of December 31, 2014 and March 31, 2015.
We also use exchange-traded interest rate futures contracts and “To Be Announced” (TBA) forward purchase commitments of mortgage-backed assets to hedge interest rate risks on certain fixed income securities. The TBA contracts meet the definition of derivative instruments in cases where physical delivery of the assets is not taken at the earliest available delivery date. Our interest rate futures and TBA contracts (together interest rate contracts) are not designated as hedging instruments. We recognize gains and losses on these contracts, as well as the related costs, in Interest and other income, net. The gains and losses are generally economically offset by unrealized gains and losses in the underlying available-for-sale securities, which are recorded as a component of AOCI until the securities
are sold or other-than-temporarily impaired, at which time the amounts are moved from AOCI into Interest and other income, net. The total notional amounts of interest rate contracts outstanding were $150 million as of December 31, 2014 and $250 million as of March 31, 2015.
The fair values of our outstanding derivative instruments were as follows (in millions):
|
| | | | | | | | | | | | | |
| | | As of December 31, 2014 |
| 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 | Prepaid revenue share, expenses and other assets, current and non-current | | $ | 851 |
| | $ | 0 |
| | $ | 851 |
|
Interest rate contracts | Prepaid revenue share, expenses and other assets, current and non-current | | 1 |
| | 0 |
| | 1 |
|
Total | | | $ | 852 |
| | $ | 0 |
| | $ | 852 |
|
Derivative Liabilities: | | | | | | | |
Level 2: | | | | | | | |
Foreign exchange contracts | Accrued expenses and other current liabilities | | $ | 0 |
| | $ | 3 |
| | $ | 3 |
|
Interest rate contracts | Accrued expenses and other liabilities, current and non-current | | 1 |
| | 0 |
| | 1 |
|
Total | | | $ | 1 |
| | $ | 3 |
| | $ | 4 |
|
|
| | | | | | | | | | | | | |
| | | As of March 31, 2015 |
| 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 | Prepaid revenue share, expenses and other assets, current and non-current | | $ | 1,265 |
| | $ | 4 |
| | $ | 1,269 |
|
Total | | | $ | 1,265 |
| | $ | 4 |
| | $ | 1,269 |
|
Derivative Liabilities: | | | | | | | |
Level 2: | | | | | | | |
Foreign exchange contracts | Accrued expenses and other current liabilities | | $ | 17 |
| | $ | 2 |
| | $ | 19 |
|
Interest rate contracts | Accrued expenses and other liabilities, current and non-current | | 2 |
| | 1 |
| | 3 |
|
Total | | | $ | 19 |
| | $ | 3 |
| | $ | 22 |
|
The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income (OCI) is summarized below (in millions):
|
| | | | | | | |
| Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect (Effective Portion) |
| Three Months Ended |
| March 31, |
Derivatives in Cash Flow Hedging Relationship | 2014 | | 2015 |
| (unaudited) |
Foreign exchange contracts | $ | 13 |
| | $ | 836 |
|
Interest rate contracts | (31 | ) | | 0 |
|
Total | $ | (18 | ) | | $ | 836 |
|
|
| | | | | | | | | |
| Gains Reclassified from AOCI into Income (Effective Portion) |
| | | Three Months Ended |
| | | March 31, |
Derivatives in Cash Flow Hedging Relationship | Income Statement Location | | 2014 | | 2015 |
| | | (unaudited) |
Foreign exchange contracts | Revenues | | $ | 8 |
| | $ | 311 |
|
Interest rate contracts | Interest and other income, net | | 0 |
| | 1 |
|
Total | | | $ | 8 |
| | $ | 312 |
|
|
| | | | | | | | | |
| Gains (Losses) Recognized in Income on Derivatives (1) (Amount Excluded from Effectiveness Testing and Ineffective Portion) |
| | | Three Months Ended |
| | | March 31, |
Derivatives in Cash Flow Hedging Relationship | Income Statement Location | | 2014 | | 2015 |
| | | (unaudited) |
Foreign exchange contracts | Interest and other income, net | | $ | (67 | ) | | $ | (101 | ) |
Interest rate contracts | Interest and other income, net | | 4 |
| | 0 |
|
Total | | | $ | (63 | ) | | $ | (101 | ) |
| |
(1) | Gains (losses) related to the ineffective portion of the hedges were not material in all periods presented. |
The effect of derivative instruments in fair value hedging relationships on income is summarized below (in millions):
|
| | | | | | | | | |
| Gains (Losses) Recognized in Income on Derivatives(2) |
| | | Three Months Ended |
| | | March 31, |
Derivatives in Fair Value Hedging Relationship | Income Statement Location | | 2014 | | 2015 |
| | | (unaudited) |
Foreign Exchange Hedges: | | | | | |
Foreign exchange contracts | Interest and other income, net | | $ | (2 | ) | | $ | 111 |
|
Hedged item | Interest and other income, net | | 0 |
| | (113 | ) |
Total | | | $ | (2 | ) | | $ | (2 | ) |
Interest Rate Hedges: | | | | | |
Interest rate contracts | Interest and other income, net | | $ | 0 |
| | $ | (2 | ) |
Hedged item | Interest and other income, net | | 0 |
| | 2 |
|
Total | | | $ | 0 |
| | $ | 0 |
|
| |
(2) | Losses related to the amount excluded from effectiveness testing of the hedges were $2 million and $2 million for the three months ended March 31, 2014 and 2015. |
The effect of derivative instruments not designated as hedging instruments on income is summarized below (in millions):
|
| | | | | | | | | |
| Gains (Losses) Recognized in Income on Derivatives |
| | | Three Months Ended |
| | | March 31, |
Derivatives Not Designated As Hedging Instruments | Income Statement Location | | 2014 | | 2015 |
| | | (unaudited) |
Foreign exchange contracts | Interest and other income, net and net loss from discontinued operations | | $ | (37 | ) | | $ | 157 |
|
Interest rate contracts | Interest and other income, net | | 1 |
| | (7 | ) |
Total | | | $ | (36 | ) | | $ | 150 |
|
Offsetting of Derivatives, Securities Lending and Reverse Repurchase Agreements
We present our derivatives, securities lending and reverse repurchase agreements at gross fair values in the Consolidated Balance Sheets. However, our master netting and other similar arrangements allow net settlements under certain conditions. As of December 31, 2014 and March 31, 2015, information related to these offsetting arrangements was as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Offsetting of Assets | | | | | | | | | | | | | |
| As of December 31, 2014 |
| | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | | |
Description | 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 | $ | 852 |
| | $ | 0 |
| | $ | 852 |
| | $ | (1 | ) | (1) | $ | (251 | ) | | $ | (412 | ) | | $ | 188 |
|
Reverse repurchase agreements | 2,637 |
| | 0 |
| | 2,637 |
| (2) | 0 |
| | 0 |
| | (2,637 | ) | | 0 |
|
Total | $ | 3,489 |
| | $ | 0 |
| | $ | 3,489 |
| | $ | (1 | ) | | $ | (251 | ) | | $ | (3,049 | ) | | $ | 188 |
|
| | | | | | | | | | | | | |
| As of March 31, 2015 |
| | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | | |
Description | 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 | $ | 1,269 |
| | $ | 0 |
| | $ | 1,269 |
| | $ | (1 | ) | (1) | $ | (302 | ) | | $ | (818 | ) | | $ | 148 |
|
Reverse repurchase agreements | 1,635 |
| | 0 |
| | 1,635 |
| (2) | 0 |
| | 0 |
| | (1,635 | ) | | 0 |
|
Total | $ | 2,904 |
| | $ | 0 |
| | $ | 2,904 |
| | $ | (1 | ) | | $ | (302 | ) | | $ | (2,453 | ) | | $ | 148 |
|
| |
(1) | The balances as of December 31, 2014 and March 31, 2015 were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with our master netting agreements. |
| |
(2) | The balances as of December 31, 2014 and March 31, 2015 included $1,762 million and $810 million recorded in cash and cash equivalents, respectively, and $875 million and $825 million recorded in receivable under reverse repurchase agreements, respectively. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Offsetting of Liabilities | | | | | | | | | | | | | |
| As of December 31, 2014 |
| | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | | |
Description | 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 | $ | 4 |
| | $ | 0 |
| | $ | 4 |
| | $ | (1 | ) | (3) | $ | 0 |
| | $ | 0 |
| | $ | 3 |
|
Securities lending agreements | 2,778 |
| | 0 |
| | 2,778 |
| | 0 |
| | 0 |
| | (2,740 | ) | | 38 |
|
Total | $ | 2,782 |
| | $ | 0 |
| | $ | 2,782 |
| | $ | (1 | ) | | $ | 0 |
| | $ | (2,740 | ) | | $ | 41 |
|
| | | | | | | | | | | | | |
| As of March 31, 2015 |
| | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | |
Description | 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 | $ | 22 |
| | $ | 0 |
| | $ | 22 |
| | $ | (1 | ) | (3) | $ | (1 | ) | | $ | 0 |
| | $ | 20 |
|
Securities lending agreements | 1,657 |
| | 0 |
| | 1,657 |
| | 0 |
| | 0 |
| | (1,643 | ) | | 14 |
|
Total | $ | 1,679 |
| | $ | 0 |
| | $ | 1,679 |
| | $ | (1 | ) | | $ | (1 | ) | | $ | (1,643 | ) | | $ | 34 |
|
| |
(3) | The balances as of December 31, 2014 and March 31, 2015 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements. |
Note 3. Debt
Short-Term Debt
We have a debt financing program of up to $3.0 billion through the issuance of commercial paper. Net proceeds from this program are used for general corporate purposes. As of December 31, 2014 and March 31, 2015, we had $2.0 billion of outstanding commercial paper recorded as short-term debt with weighted-average interest rates of 0.1%. In conjunction with this program, we have a $3.0 billion revolving credit facility which expires in July 2016. The interest rate for the credit facility is determined based on a formula using certain market rates. As of December 31, 2014 and March 31, 2015, we were in compliance with the financial covenants in the credit facility, and no amounts were outstanding under the credit facility at December 31, 2014 and March 31, 2015. The estimated fair value of the commercial paper approximated its carrying value as of December 31, 2014 and March 31, 2015.
Long-Term Debt
We issued $1.0 billion of unsecured senior notes (the "2014 Notes") in February 2014 and $3.0 billion of unsecured senior notes in three tranches (collectively, the "2011 Notes") in May 2011. We used the net proceeds from the issuance of the 2011 Notes to repay a portion of our outstanding commercial paper and for general corporate purposes. We used the net proceeds from the issuance of the 2014 Notes for the repayment of the portion of the principal amount of our 2011 Notes which matured on May 19, 2014 and for general corporate purposes. The total outstanding Notes are summarized below:
|
| | | | | | | |
| As of December 31, 2014 | | As of March 31, 2015 |
| | | (unaudited) |
Short-Term Portion of Long-Term Debt | | | |
Capital Lease Obligation | $ | 10 |
| | $ | 9 |
|
Total | $ | 10 |
| | $ | 9 |
|
| | | |
Long-Term Debt | | | |
2.125% Notes due on May 19, 2016 | $ | 1,000 |
| | $ | 1,000 |
|
3.625% Notes due on May 19, 2021 | 1,000 |
| | 1,000 |
|
3.375% Notes due on February 25, 2024 | 1,000 |
| | 1,000 |
|
Unamortized discount for the Notes above | (8 | ) | | (7 | ) |
Subtotal | 2,992 |
| | 2,993 |
|
Capital Lease Obligation | 236 |
| | 233 |
|
Total | $ | 3,228 |
| | $ | 3,226 |
|
The effective interest yields of the Notes due in 2016, 2021, and 2024 were 2.241%, 3.734% and 3.377%, respectively. Interest on the 2011 and 2014 Notes is payable semi-annually. The 2011 and 2014 Notes rank equally with each other and with all of our other senior unsecured and unsubordinated indebtedness from time to time outstanding. We may redeem the 2011 and 2014 Notes at any time in whole or in part at specified redemption prices. We are not subject to any financial covenants under the 2011 Notes or the 2014 Notes. The total estimated fair value of the outstanding 2011 and 2014 Notes was approximately $3.1 billion and $3.2 billion as of December 31, 2014 and March 31, 2015. The fair value of the outstanding 2011 and 2014 Notes 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.
In August 2013, we entered into a capital lease obligation on certain property which expires in 2028 with an option to purchase the property in 2016. The effective rate of the capital lease obligation approximates the market rate. The estimated fair value of the capital lease obligation approximated its carrying value as of December 31, 2014 and March 31, 2015.
Note 4. Balance Sheet Components
Property and Equipment
Property and equipment consisted of the following (in millions):
|
| | | | | | | |
| As of December 31, 2014 | | As of March 31, 2015 |
| | | (unaudited) |
Information technology assets | $ | 10,918 |
| | $ | 11,855 |
|
Land and buildings | 13,326 |
| | 13,479 |
|
Construction in progress | 6,555 |
| | 7,415 |
|
Leasehold improvements | 1,868 |
| | 2,016 |
|
Furniture and fixtures | 79 |
| | 78 |
|
Property and equipment, gross | 32,746 |
| | 34,843 |
|
Less: accumulated depreciation and amortization | (8,863 | ) | | (9,395 | ) |
Property and equipment, net | $ | 23,883 |
| | $ | 25,448 |
|
Property under capital lease with a cost basis of $258 million was included in land and buildings and construction in progress as of March 31, 2015.
Prepaid Revenue Share, Expenses and Other Assets, Non-Current
Note Receivable
In connection with the sale of our Motorola Mobile business on October 29, 2014 (see Note 8 for additional information), we received an interest-free, three-year prepayable promissory note (the "Note Receivable") due October 2017 from Lenovo. The Note Receivable is included in prepaid revenue share, expenses and other assets, non-current on our Consolidated Balance Sheets. Based on the general market conditions and the credit quality of Lenovo, we discounted the Note Receivable at an effective interest rate of 4.5% as shown in the table below (in millions):
|
| | | | | | | |
| As of December 31, 2014 | | As of March 31, 2015 |
| | | (unaudited) |
Principal of the Note Receivable
| $ | 1,500 |
| | $ | 1,500 |
|
Less: unamortized discount for the Note Receivable | (175 | ) | | (160 | ) |
Total | $ | 1,325 |
| | $ | 1,340 |
|
As of December 31, 2014 and March 31, 2015, we did not recognize any valuation allowance on the Note Receivable.
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 on Cash Flow Hedges | | Total |
Balance as of December 31, 2013 | $ | 16 |
| | $ | 50 |
| | $ | 59 |
| | $ | 125 |
|
| | | | | | | |
Other comprehensive income before reclassifications | 65 |
| | 217 |
| | 10 |
| | 292 |
|
Amounts reclassified from AOCI | 0 |
| | (67 | ) | | (5 | ) | | (72 | ) |
Other comprehensive income | 65 |
| | 150 |
| | 5 |
| | 220 |
|
Balance as of March 31, 2014 | $ | 81 |
| | $ | 200 |
| | $ | 64 |
| | $ | 345 |
|
|
| | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Unrealized Gains (Losses) on Available-for-Sale Investments | | Unrealized Gains on Cash Flow Hedges | | Total |
Balance as of December 31, 2014 | $ | (980 | ) | | $ | 421 |
| | $ | 586 |
| | $ | 27 |
|
| | | | | | | |
Other comprehensive income (loss) before reclassifications | (923 | ) | | 221 |
| | 562 |
| | (140 | ) |
Amounts reclassified from AOCI | 0 |
| | (27 | ) | | (231 | ) | | (258 | ) |
Other comprehensive income (loss) | (923 | ) | | 194 |
| | 331 |
| | (398 | ) |
Balance as of March 31, 2015 | $ | (1,903 | ) | | $ | 615 |
| | $ | 917 |
| | $ | (371 | ) |
The effects on net income of amounts reclassified from AOCI were as follows (in millions, unaudited):
|
| | | | | | | | | | |
| | | | Gains (Losses) Reclassified from AOCI to the Consolidated Statement of Income |
| | | | Three Months Ended March 31, |
AOCI Components | | Location | | 2014 | | 2015 |
Unrealized gains on available-for-sale investments | | | | | | |
| | Interest and other income, net | | $ | 74 |
| | $ | 32 |
|
| | Provision for income taxes | | (7 | ) | | (5 | ) |
| | Net of tax | | $ | 67 |
| | $ | 27 |
|
| | | | | | |
Unrealized gains on cash flow hedges | | | | | | |
Foreign exchange contracts | | Revenue | | $ | 8 |
| | $ | 311 |
|
Interest rate contracts | | Interest and other income, net | | 0 |
| | 1 |
|
| | Provision for income taxes | | (3 | ) | | (81 | ) |
| | Net of tax | | $ | 5 |
| | $ | 231 |
|
| | | | | | |
Total amount reclassified, net of tax | | | | $ | 72 |
| | $ | 258 |
|
Note 5. Acquisitions
During the three months ended March 31, 2015, we completed various acquisitions and purchases of intangible assets for total consideration of approximately $64 million. In aggregate, $26 million was attributed to intangible assets, $17 million was attributed to goodwill, and $21 million was attributed to net assets acquired. These acquisitions generally enhance the breadth and depth of our offerings and expand our expertise in engineering and other functional areas. The amount of goodwill expected to be deductible for tax purposes is approximately $6 million.
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 aggregate.
For all acquisitions completed during the three months ended March 31, 2015, patents and developed technology have a weighted-average useful life of 4.1 years and trade names and other have a weighted-average useful life of 3.0 years.
Note 6. Collaboration Agreement
On September 18, 2013, we announced the formation of Calico, a life science company with a mission to harness advanced technologies to increase our understanding of the biology that controls lifespan. Calico's results of operations and statement of financial position are included in our consolidated financial statements. As of March 31, 2015, Google has contributed $240 million to Calico in exchange for Calico convertible preferred units. As of March 31, 2015, Google has also committed to fund an additional $490 million on an as-needed basis.
In September 2014, AbbVie Inc. (AbbVie) and Calico announced a research and development collaboration intended to help both companies discover, develop, and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer. As of March 31, 2015, AbbVie has contributed $750 million to fund
the collaboration pursuant to the agreement, which reflects its total commitment. As of March 31, 2015, Calico has contributed $250 million and committed up to an additional $500 million.
Calico will use its scientific expertise to establish a world-class research and development facility, with a focus on drug discovery and early drug development; and AbbVie will provide scientific and clinical development support and its commercial expertise to bring new discoveries to market. Both companies will share costs and profits 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 over the next few years.
Note 7. Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill for the three months ended March 31, 2015 were as follows (in millions, unaudited):
|
| | | |
Balance as of December 31, 2014 | $ | 15,599 |
|
Goodwill acquired | 17 |
|
Goodwill adjustment | (43 | ) |
Balance as of March 31, 2015 | $ | 15,573 |
|
Other Intangible Assets
Information regarding our purchased intangible assets was as follows (in millions):
|
| | | | | | | | | | | |
| As of December 31, 2014 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
Patents and developed technology | $ | 6,547 |
| | $ | 2,513 |
| | $ | 4,034 |
|
Customer relationships | 1,410 |
| | 1,168 |
| | 242 |
|
Trade names and other | 696 |
| | 365 |
| | 331 |
|
Total | $ | 8,653 |
| | $ | 4,046 |
| | $ | 4,607 |
|
| | | | | |
| As of March 31, 2015 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
| (unaudited) |
Patents and developed technology | $ | 6,510 |
| | $ | 2,697 |
| | $ | 3,813 |
|
Customer relationships | 1,396 |
| | 1,199 |
| | 197 |
|
Trade names and other | 729 |
| | 359 |
| | 370 |
|
Total | $ | 8,635 |
| | $ | 4,255 |
| | $ | 4,380 |
|
Amortization expense relating to our purchased intangible assets was $270 million and $239 million for the three months ended March 31, 2014 and 2015. For the three months ended March 31, 2014, amortization expense related to Motorola Mobile was included in net loss from discontinued operations.
As of March 31, 2015, expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter was as follows (in millions, unaudited):
|
| | | |
Remainder of 2015 | $ | 649 |
|
2016 | 791 |
|
2017 | 714 |
|
2018 | 631 |
|
2019 | 522 |
|
Thereafter | 1,073 |
|
| $ | 4,380 |
|
Note 8. Discontinued Operations
On October 29, 2014, we closed the sale of the Motorola Mobile business to Lenovo. We maintain ownership of the vast majority of the Motorola Mobile patent portfolio, including pre-closing patent applications and invention disclosures, which we licensed to Motorola Mobile for its continued operations. Additionally, in connection with the sale, we agreed to indemnify Lenovo for certain potential liabilities of the Motorola Mobile business, for which we recorded a liability of $130 million at the time of close.
The following table presents financial results of the Motorola Mobile business for the three months ended March 31, 2014, which were presented as Net loss from discontinued operations (in millions, unaudited):
|
| | | |
| Three Months Ended |
| March 31, |
| 2014 |
Revenues | $ | 1,377 |
|
| |
Loss from discontinued operations before income taxes | (274 | ) |
Benefits from income taxes | 76 |
|
Net loss from discontinued operations | $ | (198 | ) |
Note 9. Interest and Other Income, Net
The components of Interest and other income, net, were as follows (in millions, unaudited):
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2014 | | 2015 |
Interest income | $ | 168 |
| | $ | 226 |
|
Interest expense | (24 | ) | | (26 | ) |
Realized gains on available-for-sale investments, net | 74 |
| | 32 |
|
Foreign currency exchange losses, net | (109 | ) | | (62 | ) |
Realized gain on equity interest | 103 |
| | 0 |
|
Realized gain on non-marketable investments | 117 |
| | 0 |
|
Other income (expense), net | 28 |
| | (13 | ) |
Interest and other income, net | $ | 357 |
| | $ | 157 |
|
Note 10. Contingencies
Legal Matters
Antitrust Investigations
On November 30, 2010, the European Commission's (EC) 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. The EC also opened a formal investigation into Android. We will respond to the SO and will continue to cooperate with the EC.
The Comision Nacional de Defensa de la Competencia in Argentina, the Competition Commission of India, the Taiwan Fair Trade Commission, Brazil's Council for Economic Defense, the Canadian Competition Bureau and the Federal Antimonopoly Service of the Russian Federation have also opened investigations into certain of our business practices.
The state attorney general from Mississippi issued subpoenas in 2011 and 2012 in an antitrust investigation of our business practices. We have responded to those subpoenas, and we remain willing to cooperate with them if they have any further information requests.
Patent and Intellectual Property Claims
We have had patent, copyright, 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. Since 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 impact our business.
Other
We are also regularly subject to claims, suits, government investigations, and other proceedings involving competition (such as the pending EC investigations described above), intellectual property, privacy, tax, 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, government investigations, and other proceedings could result in fines, civil or criminal penalties, or other adverse consequences.
Certain of our outstanding legal 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 possible and a range of the loss can be reasonably estimated, we disclose the range of the possible loss. We evaluate, on a monthly basis, developments in our legal matters that could affect the amount of liability that has been previously accrued, and the matters and related ranges of 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 legal matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will not, either individually or in the aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties.
We expense legal fees in the period in which they are incurred.
Taxes
We are under audit by the Internal Revenue Service (IRS) and various other domestic and foreign tax authorities with regards to income tax and indirect tax matters. We have reserved for potential adjustments to our provision for income taxes and accrual of indirect taxes that may result from examinations by, or any negotiated agreements with, these tax authorities, and we believe that the final outcome of these examinations or agreements will not have a material effect on our results of operations. If events occur which indicate payment of these amounts is unnecessary, the reversal of the liabilities would result in the recognition of benefits in the period we determine the liabilities are no longer necessary. If our estimates of the federal, state, and foreign income tax liabilities and indirect tax liabilities are less than the ultimate assessment, it would result in a further charge to expense.
Please see Note 13 for additional information regarding contingencies related to our income taxes.
Note 11. 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):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2014 | 2015 |
| (unaudited) |
| Class A | | Class B | | Class C | | Class A | | Class B | | Class C |
Basic net income (loss) per share: | | | | | | | | | | | |
Numerator | | | | | | | | | | | |
Allocation of undistributed earnings - continuing operations | $ | 1,521 |
| | $ | 304 |
| | $ | 1,825 |
| | $ | 1,512 |
| | $ | 278 |
| | $ | 1,796 |
|
Allocation of undistributed earnings - discontinued operations | (83 | ) | | (16 | ) | | (99 | ) | | — |
| | — |
| | — |
|
Total | $ | 1,438 |
| | $ | 288 |
| | $ | 1,726 |
| | $ | 1,512 |
| | $ | 278 |
| | $ | 1,796 |
|
Denominator | | | | | | | | | | | |
Number of shares used in per share computation | 280,202 |
| | 56,091 |
| | 336,293 |
| | 287,043 |
| | 52,846 |
| | 341,026 |
|
Basic net income (loss) per share: | | | | | | | | | | | |
Continuing operations | $ | 5.42 |
| | $ | 5.42 |
| | $ | 5.42 |
| | $ | 5.27 |
| | $ | 5.27 |
| | $ | 5.27 |
|
Discontinued operations | (0.29 | ) | |