What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-10-29 compared with 2021-07-30 · 83 added, 91 removed, 230 unchanged (43% of the section changed)

5 unchanged sentences

Forward-looking statements reflect management’s current expectations and are inherently uncertain.

Actual results could differ materially for a variety of reasons, including, among others, fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, world events, the rate of growth of the Internet, online commerce, and cloud services, the amount that Amazon.com invests in new business opportunities and the timing of those investments, the mix of products and services sold to customers, the mix of net sales derived from products as compared with services, the extent to which we owe income or other taxes, competition, management of growth, potential fluctuations in operating results, international growth and expansion, the outcomes of claims, litigation, government investigations, and other proceedings, fulfillment, sortation, delivery, and data center optimization, risks of inventory management, variability in demand, the degree to which we enter into, maintain, and develop commercial agreements, proposed and completed acquisitions and strategic transactions, payments risks, and risks of fulfillment throughput and productivity.

Actual results could differ materially for a variety of reasons, including, among others, fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, labor market and global supply chain constraints, world events, the rate of growth of the Internet, online commerce, and cloud services, the amount that Amazon.com invests in new business opportunities and the timing of those investments, the mix of products and services sold to customers, the mix of net sales derived from products as compared with services, the extent to which we owe income or other taxes, competition, management of growth, potential fluctuations in operating results, international growth and expansion, the outcomes of claims, litigation, government investigations, and other proceedings, fulfillment, sortation, delivery, and data center optimization, risks of inventory management, variability in demand, the degree to which we enter into, maintain, and develop commercial agreements, proposed and completed acquisitions and strategic transactions, payments risks, and risks of fulfillment throughput and productivity.

In addition, the global economic climate and additional or unforeseen effects from the COVID-19 pandemic amplify many of these risks.

12 unchanged sentences

These assumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.

As a measure of sensitivity, for every 1% of additional inventory valuation allowance as of June 30, 2021, we would have recorded an additional cost of sales of approximately $275 million.

As a measure of sensitivity, for every 1% of additional inventory valuation allowance as of September 30, 2021, we would have recorded an additional cost of sales of approximately $350 million.

In addition, we enter into supplier commitments for certain electronic device components and certain products.

16 unchanged sentences

Three Months Ended

June 30, Six Months Ended

June 30, Twelve Months Ended

September 30, Nine Months Ended

September 30, Twelve Months Ended

September 30,

2020 2021 2020 2021 2020 2021

3 unchanged sentences

Financing activities (4,105) (2,776) 712 9,391 (2,859) 7,575

Our principal sources of liquidity are cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, which, at fair value, were $84.4 billion and $89.9 billion as of December 31, 2020 and June 30, 2021.

Amounts held in foreign currencies were $23.5 billion and $18.5 billion as of December 31, 2020 and June 30, 2021, and were primarily British Pounds, Japanese Yen, Canadian Dollars, and Euros.

Cash provided by (used in) operating activities was $20.6 billion and $12.7 billion for Q2 2020 and Q2 2021, and $23.7 billion and $16.9 billion for the six months ended June 30, 2020 and 2021.

Our principal sources of liquidity are cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, which, at fair value, were $84.4 billion and $79.0 billion as of December 31, 2020 and September 30, 2021.

Amounts held in foreign currencies were $23.5 billion and $14.3 billion as of December 31, 2020 and September 30, 2021, and were primarily British Pounds, Japanese Yen, Canadian Dollars, and Euros.

Cash provided by (used in) operating activities was $12.0 billion and $7.3 billion for Q3 2020 and Q3 2021, and $35.6 billion and $24.2 billion for the nine months ended September 30, 2020 and 2021.

Our operating cash flows result primarily from cash received from our consumer, seller, developer, enterprise, and content creator customers, and advertisers, offset by cash payments we make for products and services, employee compensation, payment processing and related transaction costs, operating leases, and interest payments on our long-term obligations.

1 unchanged sentence

Because consumers primarily use credit cards to buy from us, our receivables from consumers settle quickly.

The increase in operating cash flow for the trailing twelve months ended June 30, 2021, compared to the comparable prior year period, was primarily due to the increase in net income, excluding non-cash expenses, and changes in working capital.

The decrease in operating cash flow for the trailing twelve months ended September 30, 2021, compared to the comparable prior year period, was primarily due to changes in working capital, partially offset by the increase in net income, excluding non-cash expenses.

Working capital at any specific point in time is subject to many variables, including variability in demand, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates.

Cash provided by (used in) investing activities corresponds with cash capital expenditures, including leasehold improvements, incentives received from property and equipment vendors, proceeds from asset sales, cash outlays for acquisitions, investments in other companies and intellectual property rights, and purchases, sales, and maturities of marketable securities.

Cash provided by (used in) investing activities was $(17.8) billion and $(22.1) billion for Q2 2020 and Q2 2021, and $(26.7) billion and $(30.7) billion for the six months ended June 30, 2020 and 2021, with the variability caused primarily by our decision to purchase or lease property and equipment and purchases, sales, and maturities of marketable securities.

Cash capital expenditures were $6.6 billion and $13.0 billion during Q2 2020 and Q2 2021, and $12.0 billion and $24.2 billion for the six months ended June 30, 2020 and 2021, which primarily reflect investments in additional capacity to support our fulfillment operations and in support of continued business growth in technology infrastructure (the majority of which is to support AWS), which investments we expect to continue over time.

We made cash payments, net of acquired cash, related to acquisition and other investment activity of $118 million and $320 million during Q2 2020 and Q2 2021, and $210 million and $950 million for the six months ended June 30, 2020 and 2021.

Cash provided by (used in) financing activities was $7.4 billion and $15.6 billion for Q2 2020 and Q2 2021, and $4.8 billion and $12.2 billion for the six months ended June 30, 2020 and 2021.

Cash inflows from financing activities resulted from proceeds from short-term debt, and other and long-term debt of $12.4 billion and $19.7 billion for Q2 2020 and Q2 2021, and $13.0 billion and $21.7 billion for the six months ended June 30, 2020 and 2021.

Cash outflows from financing activities resulted from payments of short-term debt, and other, long-term debt, finance leases, and financing obligations of $4.9 billion and $4.0 billion in Q2 2020 and Q2 2021, and $8.2 billion and $9.6 billion for the six months ended June 30, 2020 and 2021.

Property and equipment acquired under finance leases was $3.2 billion and $1.6 billion during Q2 2020 and Q2 2021, and $5.3 billion and $3.7 billion for the six months ended June 30, 2020 and 2021, reflecting investments in support of continued business growth primarily due to investments in technology infrastructure for AWS.

We had no borrowings outstanding under the Credit Agreement, $725 million of borrowings outstanding under the Commercial Paper Program, and $503 million of borrowings outstanding under our Credit Facility as of June 30, 2021.

Cash provided by (used in) investing activities was $(15.9) billion and $(14.8) billion for Q3 2020 and Q3 2021, and $(42.6) billion and $(45.6) billion for the nine months ended September 30, 2020 and 2021, with the variability caused primarily by our decision to purchase or lease property and equipment and purchases, sales, and maturities of marketable securities.

Cash capital expenditures were $9.8 billion and $14.8 billion during Q3 2020 and Q3 2021, and $21.9 billion and $38.9 billion for the nine months ended September 30, 2020 and 2021, which primarily reflect investments in additional capacity to support our fulfillment operations and in support of continued business growth in technology infrastructure (the majority of which is to support AWS), which investments we expect to continue over time.

We made cash payments, net of acquired cash, related to acquisition and other investment activity of $1.7 billion and $654 million during Q3 2020 and Q3 2021, and $1.9 billion and $1.6 billion for the nine months ended September 30, 2020 and 2021.

Cash provided by (used in) financing activities was $(4.1) billion and $(2.8) billion for Q3 2020 and Q3 2021, and $712 million and $9.4 billion for the nine months ended September 30, 2020 and 2021.

Cash inflows from financing activities resulted from proceeds from short-term debt, and other and long-term debt of $1.3 billion and $2.4 billion for Q3 2020 and Q3 2021, and $14.4 billion and $24.1 billion for the nine months ended September 30, 2020 and 2021.

Cash outflows from financing activities resulted from payments of short-term debt, and other, long-term debt, finance leases, and financing obligations of $5.4 billion and $5.1 billion in Q3 2020 and Q3 2021, and $13.6 billion and $14.7 billion for the nine months ended September 30, 2020 and 2021.

Property and equipment acquired under finance leases was $3.6 billion and $1.7 billion during Q3 2020 and Q3 2021, and $8.9 billion and $5.5 billion for the nine months ended September 30, 2020 and 2021, reflecting investments in support of continued business growth primarily due to investments in technology infrastructure for AWS.

We had no borrowings outstanding under the Credit Agreement, $725 million of borrowings outstanding under the Commercial Paper Programs, and $626 million of borrowings outstanding under our Credit Facility as of September 30, 2021.

See Item 1 of Part I, “Financial Statements — Note 5 — Debt” for additional information.

5 unchanged sentences

taxable income.

tax rules provide for enhanced accelerated depreciation deductions by allowing the

election of full expensing of qualified property, primarily equipment, through 2022.

Cash taxes paid (net of refunds) were $486 million and $1.8 billion for Q2 2020 and Q2 2021, and $791 million and $2.6 billion for the six months ended June 30, 2020 and 2021.

tax rules provide for enhanced accelerated depreciation deductions by allowing the election of full expensing of qualified property, primarily equipment, through 2022.

Cash taxes paid (net of refunds) were $502 million and $750 million for Q3 2020 and Q3 2021, and $1.3 billion and $3.4 billion for the nine months ended September 30, 2020 and 2021.

We endeavor to manage our global taxes on a cash basis, rather than on a financial reporting basis.

In connection with the European Commission’s October 2017 decision against us on state aid, Luxembourg tax authorities computed an initial recovery amount, consistent with the European Commission’s decision, of approximately €250 million, that we deposited into escrow in March 2018, subject to adjustment pending conclusion of all appeals.

As of December 31, 2020 and June 30, 2021, restricted cash, cash equivalents, and marketable securities were $257 million and $290 million.

In connection with the European Commission’s October 2017 decision against us on state aid, Luxembourg tax authorities computed an initial recovery amount, consistent with the European Commission’s decision, of approximately €250 million, which we deposited into escrow in March 2018, subject to adjustment pending conclusion of all appeals.

As of December 31, 2020 and September 30, 2021, restricted cash, cash equivalents, and marketable securities were $257 million and $236 million.

See Item 1 of Part I, “Financial Statements — Note 4 — Commitments and Contingencies” and “Financial Statements — Note 5 — Debt” for additional discussion of our principal contractual commitments, as well as our pledged assets.

Additionally, purchase obligations and open purchase orders, consisting of inventory and significant non-inventory commitments, were $39.8 billion as of June 30, 2021.

Additionally, purchase obligations and open purchase orders, consisting of inventory and significant non-inventory commitments, were $43.3 billion as of September 30, 2021.

These purchase obligations and open purchase orders are generally cancellable in full or in part through the contractual provisions.

4 unchanged sentences

with cash on hand.

The COVID-19 pandemic and resulting global disruptions have caused significant market volatility.

We have utilized a range of financing methods to fund our global operations and capital expenditures and expect to continue to maintain financing flexibility in the current market conditions.

However, due to the rapidly evolving global situation, it is not possible to predict whether unanticipated consequences of the pandemic are reasonably likely to materially affect our liquidity and capital resources in the future.

The sale of additional equity or convertible debt securities would be dilutive to our shareholders.

6 unchanged sentences

See Item 1 of Part I, “Financial Statements — Note 8 — Segment Information.”

Effects of COVID-19

As reflected in the discussion below, the impact of the COVID-19 pandemic and actions taken in response to it had varying effects on our Q2 2021 results of operations, although some effects, including customer demand, are mitigating or becoming more difficult to isolate or quantify.

Moreover, it is not possible to determine the duration and scope of the pandemic, the scale and rate of economic recovery from the pandemic, any ongoing effects on consumer demand and spending patterns, or other impacts of the pandemic, and whether these or other currently unanticipated consequences of the pandemic are reasonably likely to materially affect our results of operations;

however, we expect our net sales growth rate to decelerate in Q3 2021 compared to the increases we experienced in 2020 and the first quarter of 2021.

In addition, we incurred approximately $1.5 billion in COVID-19 related costs in Q2 2021, primarily due to the impact of lower productivity and costs to maintain safe workplaces.

We expect COVID-19 related costs, as well as the effects of the pandemic on fulfillment network capacity and supply chain constraints, to continue into all or portions of Q3 2021.

We will continue to prioritize employee and customer safety and comply with evolving federal, state, and local standards as well as to implement standards or processes that we determine to be in the best interests of our employees, customers, and communities.

As reflected in the discussion below, ongoing direct and indirect impacts of the COVID-19 pandemic and actions taken in response to them had varying effects on our Q3 2021 results of operations, although some effects, including customer demand, are mitigating or becoming more difficult to isolate or quantify.

Moreover, it is not possible to determine the duration and scope of the pandemic, the scale and rate of economic recovery from the pandemic, any ongoing effects on consumer demand and spending patterns, supply chain disruptions, and labor availability and costs, or the impact of other indirect factors that may be attributable to the pandemic, and the extent to which these or other currently unanticipated consequences of the pandemic are reasonably likely to materially affect our results of operations.

However, we expect our net sales growth rate to decelerate in Q4 2021 compared to the increases we experienced in 2020.

In addition, these direct and indirect factors have made it difficult to isolate and quantify the portion of our costs that are a direct result of the pandemic and costs arising from factors that may have been influenced by the pandemic, including increased wage rates and incentives and fulfillment network inefficiencies resulting from constrained labor markets and global supply chain constraints.

We expect these factors and their effects on our operations to continue into Q4 2021.

Net sales include product and service sales.

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2021 2020 2021

18 unchanged sentences

Consolidated 100 % 100 % 100 % 100 %

Sales increased 27% in Q2 2021 and 35% for the six months ended June 30, 2021 compared to the comparable prior year periods.

Changes in foreign currency exchange rates impacted net sales by $2.5 billion for Q2 2021 and by $4.5 billion for the six months ended June 30, 2021.

Sales increased 15% in Q3 2021 and 28% for the nine months ended September 30, 2021 compared to the comparable prior year periods.

Changes in foreign currency exchange rates impacted net sales by $513 million for Q3 2021 and by $5.1 billion for the nine months ended September 30, 2021.

For a discussion of the effect of foreign exchange rates on sales growth, see “Effect of Foreign Exchange Rates” below.

North America sales increased 22% in Q2 2021 and 30% for the six months ended June 30, 2021 compared to the comparable prior year periods.

The sales growth primarily reflects increased unit sales, including sales by third-party sellers.

Increased unit sales were driven largely by our continued efforts to reduce prices for our customers, including from our shipping offers, and increased demand, partially offset by fulfillment network capacity and supply chain constraints.

W e expect our North America sales growth rate to decelerate in Q3 2021 compared to the increases we experienced in 2020 and the first quarter of 2021.

International sales increased 36% in Q2 2021 and 47% for the six months ended June 30, 2021 compared to the comparable prior year periods.

The sales growth primarily reflects increased unit sales, including sales by third-party sellers.

W e expect our International sales growth rate to decelerate in Q3 2021 compared to the increases we experienced in 2020 and the first quarter of 2021.

Changes in foreign currency exchange rates impacted International net sales by $2.1 billion for Q2 2021, and by $4.0 billion for the six months ended June 30, 2021.

AWS sales increased 37% in Q2 2021 and 35% for the six months ended June 30, 2021 compared to the comparable prior year periods.

North America sales increased 10% in Q3 2021 and 23% for the nine months ended September 30, 2021 compared to the comparable prior year periods.

The sales growth primarily reflects increased unit sales, including sales by third-party sellers, and advertising sales.

W e expect our North America sales growth rate to decelerate in Q4 2021 compared to the increases we experienced in 2020.

International sales increased 16% in Q3 2021 and 35% for the nine months ended September 30, 2021 compared to the comparable prior year periods.

The sales growth primarily reflects increased unit sales, including sales by third-party sellers, and advertising sales.

W e expect our International sales growth rate to decelerate in Q4 2021 compared to the increases we experienced in 2020.

Changes in foreign currency exchange rates impacted International net sales by $323 million for Q3 2021, and by $4.3 billion for the nine months ended September 30, 2021.

AWS sales increased 39% in Q3 2021 and 36% for the nine months ended September 30, 2021 compared to the comparable prior year periods.

The sales growth primarily reflects increased customer usage, partially offset by pricing changes.

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2021 2020 2021

4 unchanged sentences

Consolidated $ 6,194 $ 4,852 $ 16,026 $ 21,419

Operating income increased from $5.8 billion in Q2 2020 to $7.7 billion in Q2 2021, and increased from $9.8 billion for the six months ended June 30, 2020, to $16.6 billion for the six months ended June 30, 2021.

Operating income decreased from $6.2 billion in Q3 2020 to $4.9 billion in Q3 2021, and increased from $16.0 billion for the nine months ended September 30, 2020, to $21.4 billion for the nine months ended September 30, 2021.

We believe that operating income (loss) is a more meaningful measure than gross profit and gross margin due to the diversity of our product catego ries and services.

The increase in North America operating income in absolute dollars in Q2 2021 and for the six months ended June 30, 2021, compared to the comparable prior year periods, is primarily due to increased unit sales, including sales by third-party sellers, and advertising sales and lower COVID-19 related costs, partially offset by increased shipping and fulfillment costs, due in part to increased investments in our fulfillment network, and growth in certain operating expenses.

We expect the impact of COVID-19 related costs in our North America segment to continue to decrease, compared to the comparable prior year periods, through at least Q3 2021.

Changes in foreign exchange rates impacted operating income by $34 million for Q2 2021, and by $42 million for the six months ended June 30, 2021.

The increase in International operating income in absolute dollars in Q2 2021 and for the six months ended June 30, 2021 , compared to the comparable prior year periods, is primarily due to increased unit sales, including sales by third-party sellers, and advertising sales and lower COVID-19 related costs, partially offset by increased shipp ing and fulfillment costs, due in part to increased investments in our fulfillment network, and growth in certain operating expenses.

We expect the impact of COVID-19 related costs in our International segment to continue to decrease, compared to the comparable prior year periods, through at least Q3 2021.

Changes in foreign exchange rates impacted operating income by $199 million for Q2 2021, and by $469 million for the six months ended June 30, 2021.

The increase in AWS operating income in absolute dollars in Q2 2021 and for the six months ended June 30, 2021, compared to the comparable prior year periods, is primarily due to increased customer usage and cost structure productivity, partially offset by increased spending on technology infrastructure, payroll and related expenses, and software licensing expenses, all of which were primarily driven by additional investments to support the business growth, and reduced prices for our customers.

Changes in foreign exchange rates impacted operating income by $(226) million for Q2 2021, and by $(397) million for the six months ended June 30, 2021.

The decrease in North America operating income in absolute dollars in Q3 2021, compared to the comparable prior year period, is primarily due to increased shipping and fulfillment costs, due in part to increased investments in our fulfillment network, increased wage rates and incentives, and fulfillment network inefficiencies, and growth in certain operating expenses, including marketing, partially offset by increased unit sales, including sales by third-party sellers, and advertising sales.

The increase in North America operating income in absolute dollars for the nine months ended September 30, 2021, compared to the comparable prior year period, is primarily due to increased unit sales, including sales by third-party sellers, and advertising sales, partially offset by increased shipping and fulfillment costs, due in part to increased investments in our fulfillment network, increased wage rates and incentives, and fulfillment network inefficiencies, and growth in certain operating expenses, including marketing.

Changes in foreign exchange rates impacted operating income by $14 million for Q3 2021, and by $56 million for the nine months ended September 30, 2021.

The International operating loss in Q3 2021, as compared to the operating income in the comparable prior year period, is primarily due to increased shipp ing and fulfillment costs, due in part to increased investments in our fulfillment network, and growth in certain operating expenses, including marketing, partially offset by increased unit sales, including sales by third-party sellers, and advertising sales .

The increase in International operating income in absolute dollars for the nine months ended September 30, 2021 , compared to the comparable prior year period, is primarily due to increased unit sales, including sales by third-party sellers, and advertising sales , partially offset by increased shipp ing and fulfillment costs, due in part to increased investments in our fulfillment network, and growth in certain operating expenses, including marketing.

Changes in foreign exchange rates impacted operating income by $24 million for Q3 2021, and by $493 million for the nine months ended September 30, 2021.

The increase in AWS operating income in absolute dollars in Q3 2021 and for the nine months ended September 30, 2021, compared to the comparable prior year periods, is primarily due to increased customer usage and cost structure productivity, partially offset by increased spending on technology infrastructure and payroll and related expenses, all of which were primarily driven by additional investments to support the business growth, and reduced prices for our customers.

Changes in foreign

exchange rates impacted operating income by $(58) million for Q3 2021, and by $(455) million for the nine months ended September 30, 2021.

Operating Expenses

1 unchanged sentence

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2021 2020 2021

23 unchanged sentences

Cost of sales primarily consists of the purchase price of consumer products, inbound and outbound shipping costs, including costs related to sortation and delivery centers and where we are the transportation service provider, and digital media content costs where we record revenue gross, including video and music.

The increase in cost of sales in absolute dollars in Q2 2021 and for the six months ended June 30, 2021, compared to the comparable prior year periods, is primarily due to increased product and shipping costs resulting from increased sales, partially offset by lower COVID-19 related costs.

We expect the impact of COVID-19 related costs to continue to decrease, compared to the comparable prior year periods, through at least Q3 2021.

The increase in cost of sales in absolute dollars in Q3 2021 and for the nine months ended September 30, 2021, compared to the comparable prior year periods, is primarily due to increased product and shipping costs resulting from increased sales, costs from expanding our fulfillment network, and increased wage rates and incentives and fulfillment network inefficiencies resulting from a constrained labor market and global supply chain constraints.

Shipping costs to receive products from our suppliers are included in our inventory and recognized as cost of sales upon sale of products to our customers.

Shipping costs, which include sortation and delivery centers and transportation costs, were $13.7 billion and $17.7 billion in Q2 2020 and Q2 2021, and $24.6 billion and $34.9 billion for the six months ended June 30, 2020 and 2021.

Shipping costs, which include sortation and delivery centers and transportation costs, were $15.1 billion and $18.1 billion in Q3 2020 and Q3 2021, and $39.7 billion and $53.0 billion for the nine months ended September 30, 2020 and 2021.

We expect our cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate, we use more expensive shipping methods, including faster delivery, and we offer additional services.

5 unchanged sentences

Additionally, sales by our sellers have higher payment processing and related transaction costs as a percentage of net sales compared to our retail sales because payment processing costs are based on the gross purchase price of underlying transactions.

The increase in fulfillment costs in absolute dollars in Q2 2021 and for the six months ended June 30, 2021, compared to the comparable prior year periods, is primarily due to variable costs corresponding with increased product and service sales volume and inventory levels and costs from expanding our fulfillment network, partially offset by lower COVID-19 related costs in Q2 2021.

We expect the impact of COVID-19 related costs to continue to decrease, compared to the comparable prior year periods, through at least Q3 2021.

The increase in fulfillment costs in absolute dollars in Q3 2021 and for the nine months ended September 30, 2021, compared to the comparable prior year periods, is primarily due to variable costs corresponding with increased product and service sales volume and inventory levels, increased wage rates and incentives and fulfillment network inefficiencies resulting from a constrained labor market and global supply chain constraints, and costs from expanding our fulfillment network.

We seek to expand our fulfillment network to accommodate a greater selection and in-stock inventory levels and to meet anticipated shipment volumes from sales of our own products as well as sales by third parties for which we provide the fulfillment services.

8 unchanged sentences

These costs are allocated to segments based on usage.

The increase in technology and content costs in absolute dollars in Q2 2021 and for the six months ended June 30, 2021, compared to the comparable prior year periods, is primarily due to increased payroll and related costs associated with technical teams responsible for expanding our existing products and services and initiatives to introduce new products and service offerings, and an increase in spending on technology infrastructure.

The increase in technology and content costs in absolute dollars in Q3 2021 and for the nine months ended September 30, 2021, compared to the comparable prior year periods, is primarily due to an increase in spending on technology infrastructure and increased payroll and related costs associated with technical teams responsible for expanding our existing products and services and initiatives to introduce new products and service offerings.

See Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” of our 2020 Annual Report on Form 10-K for a discussion of how management views advances in technology and the importance of innovation.

3 unchanged sentences

To the extent there is increased or decreased competition for these traffic sources, or to the extent our mix of these channels shifts, we would expect to see a corresponding change in our marketing costs.

The increase in marketing costs in absolute dollars in Q2 2021 and for the six months ended June 30, 2021, compared to the comparable prior year periods, is primarily due to higher spending on marketing channels and increased payroll and related expenses for personnel engaged in marketing and selling activities.

The increase in marketing costs in absolute dollars in Q3 2021 and for the nine months ended September 30, 2021, compared to the comparable prior year periods, is primarily due to higher marketing spend, which was constrained in 2020 in response to COVID-19, and increased payroll and related expenses for personnel engaged in marketing and selling activities.

While costs associated with Amazon Prime membership benefits and other shipping offers are not included in marketing expense, we view these offers as effective worldwide marketing tools, and intend to continue offering them indefinitely.

General and Administrative

The increase in general and administrative costs in absolute dollars in Q2 2021 and for the six months ended June 30, 2021, compared to the comparable prior year periods, is primarily due to increases in payroll and related expenses and professional service fees.

The increase in general and administrative costs in absolute dollars in Q3 2021 and for the nine months ended September 30, 2021, compared to the comparable prior year periods, is primarily due to increases in payroll and related expenses and professional service fees.

Other Operating Expense (Income), Net

Other operating expense (income), net was $290 million and $11 million for Q2 2020 and Q2 2021, and $360 million and $49 million for the six months ended June 30, 2020 and 2021, and was primarily related to a lease impairment in Q2 2020 and the amortization of intangible assets.

Other operating expense (income), net was $62 million and $(11) million for Q3 2020 and Q3 2021, and $421 million and $38 million for the nine months ended September 30, 2020 and 2021, and was primarily related to a lease impairment in Q2 2020 and the amortization of intangible assets.

Interest Income and Expense

Our interest income was $135 million and $106 million during Q2 2020 and Q2 2021, and $337 million and $211 million for the six months ended June 30, 2020 and 2021.

Our interest income was $118 million and $119 million during Q3 2020 and Q3 2021, and $455 million and $330 million for the nine months ended September 30, 2020 and 2021.

We generally invest our excess cash in AAA-rated money market funds and investment grade short- to intermediate-term fixed income securities.

Our interest income corresponds with the average balance of invested funds based on the prevailing rates, which vary depending on the geographies and currencies in which they are invested.

Interest expense was $403 million and $435 million during Q2 2020 and Q2 2021, and $805 million and $834 million for the six months ended June 30, 2020 and 2021, and was primarily related to debt and finance leases.

Interest expense was $428 million and $493 million during Q3 2020 and Q3 2021, and $1.2 billion and $1.3 billion for the nine months ended September 30, 2020 and 2021, and was primarily related to debt and finance leases.

Other Income (Expense), Net

Other income (expense), net was $646 million and $1.3 billion during Q2 2020 and Q2 2021 and $240 million and $3.0 billion for the six months ended June 30, 2020 and 2021.

Other income (expense), net was $925 million and $(163) million during Q3 2020 and Q3 2021 and $1.2 billion and $2.8 billion for the nine months ended September 30, 2020 and 2021.

The primary components of other income (expense), net are related to equity securities valuations and adjustments, equity warrant valuations, and foreign currency.

Our income tax provisions for the six months ended June 30, 2020 and 2021 were $1.7 billion and $3.0 billion, which included $831 million and $1.4 billion of net discrete tax benefits primarily attributable to excess tax benefits from stock-based compensation and, in 2021, audit-related developments.

Our income tax provisions for the nine months ended September 30, 2020 and 2021 were $2.3 billion and $4.2 billion, which included $1.5 billion and $1.7 billion of net discrete tax benefits primarily attributable to excess tax benefits from stock-based compensation and audit-related developments.

See Item 1 of Part I, “Financial Statements — Note 7 — Income Taxes” for additional information.

4 unchanged sentences

Free Cash Flow

Free cash flow is cash flow from operations reduced by “Purchases of property and equipment, net of proceeds from sales and incentives.” The following is a reconciliation of free cash flow to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for the trailing twelve months ended June 30, 2020 and 2021 (in millions):

Twelve Months Ended

September 30,

Net cash provided by (used in) operating activities $ 55,292 $ 54,671

5 unchanged sentences

Free cash flow less principal repayments of finance leases and financing obligations is free cash flow reduced by “Principal repayments of finance leases” and “Principal repayments of financing obligations.” Principal repayments of finance leases and financing obligations approximates the actual payments of cash for our finance leases and financing obligations.

The following is a reconciliation of free cash flow less principal repayments of finance leases and financing obligations to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for the trailing twelve months ended June 30, 2020 and 2021 (in millions):

Twelve Months Ended

September 30,

Net cash provided by (used in) operating activities $ 55,292 $ 54,671

9 unchanged sentences

In this measure, equipment acquired under finance leases is reflected as if these assets had been purchased with cash, which is not the case as these assets have been leased.

The following is a reconciliation of free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for the trailing twelve months ended June 30, 2020 and 2021 (in millions):

Twelve Months Ended

September 30,

Net cash provided by (used in) operating activities $ 55,292 $ 54,671

8 unchanged sentences

___________________

(1) For the twelve months ended June 30, 2020 and 2021, this amount relates to equipment included in “Property and equipment acquired under finance leases” of $13,110 million and $9,976 million.

(2) For the twelve months ended June 30, 2020 and 2021, this amount relates to property included in “Principal repayments of finance leases” of $10,504 million and $11,435 million.

(1) For the twelve months ended September 30, 2020 and 2021, this amount relates to equipment included in “Property and equipment acquired under finance leases” of $13,075 million and $8,149 million.

(2) For the twelve months ended September 30, 2020 and 2021, this amount relates to property included in “Principal repayments of finance leases” of $11,054 million and $11,271 million.

All of these free cash flows measures have limitations as they omit certain components of the overall cash flow statement and do not represent the residual cash flow available for discretionary expenditures.

8 unchanged sentences

Dollar is as follows (in millions):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2021 2020 2021

13 unchanged sentences

(2) Represents the outcome that would have resulted had foreign exchange rates in the reported period been the same as those in effect in the comparable prior year period for operating results.

We provided guidance on July 29, 2021, in our earnings release furnished on Form 8-K as set forth below.

These forward-looking statements reflect Amazon.com’s expectations as of July 29, 2021, and are subject to substantial uncertainty.

Our results are inherently unpredictable and may be materially affected by many factors, such as fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, world events, the rate of growth of the Internet, online commerce, and cloud services, as well as thos e outlined in Item 1A of Part II, “Risk Factors.” This guidance reflects our estimates as of July 29, 2021 regarding the impact of the COVID-19 pandemic on our operations, including those discussed above, and is highly dependent on numerous factors that we may not be able to predict or control, including:

the duration and scope of the pandemic, including any recurrence;

actions taken by governments, businesses, and individuals in response to the pandemic;

the impact of the pandemic on global and regional economies and economic activity, workforce staffing and productivity, and our significant and continuing spending on employee safety measures;

our ability to continue operations in affected areas;

and consumer demand and spending patterns, as well as the effects on suppliers, creditors, and third-party sellers, all of which are uncertain.

This guidance also assumes the impacts on consumer demand and spending patterns, including impacts due to concerns over the current economic outlook, will be in line with those experienced during the third quarter of 2021 to date, and the additional assumptions set forth below.

However, it is not possible to determine the ultimate impact on our operations for the third quarter of 2021, or whether other currently unanticipated direct or indirect consequences of the pandemic are reasonably likely to materially affect our operations.

Third Quarter 2021 Guidance

• Net sales are expected to be between $106.0 billion and $112.0 billion, or to grow between 10% and 16% compared with third quarter 2020.

This guidance anticipates a favorable impact of approximately 70 basis points from foreign exchange rates.

• Operating income is expected to be between $2.5 billion and $6.0 billion, compared with $6.2 billion in third quarter 2020.

This guidance assumes approximately $1.0 billion of costs related to COVID-19.

• This guidance assumes, among other things, that no additional business acquisitions, investments, restructurings, or legal settlements are concluded.

We provided guidance on October 28, 2021, in our earnings release furnished on Form 8-K as set forth below.

These forward-looking statements reflect Amazon.com’s expectations as of October 28, 2021, and are subject to substantial uncertainty.

Our results are inherently unpredictable and may be materially affected by many factors, such as uncertainty regarding the impacts of the COVID-19 pandemic, fluctuations in foreign exchange rates, changes in global economic conditions and customer demand and spending, labor market and global supply chain constraints, world events, the rate of growth of the Internet, online commerce, and cloud services, as well as thos e outlined in Item 1A of Part II, “Risk Factors.” This guidance reflects our estimates as of October 28, 2021 regarding the impacts of the COVID-19 pandemic on our operations as well as the effect of other factors discussed above.

Fourth Quarter 2021 Guidance

• Net sales are expected to be between $130.0 billion and $140.0 billion, or to grow between 4% and 12% compared with fourth quarter 2020.

This guidance anticipates an unfavorable impact of approximately 60 basis points from foreign exchange rates.

• Operating income is expected to be between $0 and $3.0 billion, compared with $6.9 billion in fourth quarter 2020.

• This guidance assumes, among other things, that no additional business acquisitions, restructurings, or legal settlements are concluded.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis