AMAZON COM INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects, or future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results could differ materially for a variety of reasons, including, among others, fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, labor market and global supply chain constraints, world events, the rate of growth of the Internet, online commerce, and cloud services, the amount that Amazon.com invests in new business opportunities and the timing of those investments, the mix of products and services sold to customers, the mix of net sales derived from products as compared with services, the extent to which we owe income or other taxes, competition, management of growth, potential fluctuations in operating results, international growth and expansion, the outcomes of claims, litigation, government investigations, and other proceedings, fulfillment, sortation, delivery, and data center optimization, risks of inventory management, variability in demand, the degree to which we enter into, maintain, and develop commercial agreements, proposed and completed acquisitions and strategic transactions, payments risks, and risks of fulfillment throughput and productivity. In addition, the global economic climate and additional or unforeseen effects from the COVID-19 pandemic amplify many of these risks. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management’s expectations, are described in greater detail in Item 1A of Part II, “Risk Factors.” For additional information, see Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” of our 2020 Annual Report on Form 10-K. Critical Accounting Judgments The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business, Accounting Policies, and Supplemental Disclosures” of our 2020 Annual Report on Form 10-K and Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies and Supplemental Disclosures,” of this Form 10-Q. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions. Inventories Inventories, consisting of products available for sale, are primarily accounted for using the first-in first-out method, and are valued at the lower of cost and net realizable value. This valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category. These assumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future. As a measure of sensitivity, for every 1% of additional inventory valuation allowance as of September 30, 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. These commitments are based on forecasted customer demand. If we reduce these commitments, we may incur additional costs. Income Taxes We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, administrative practices, principles, and interpretations in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. In addition, our actual and forecasted earnings are subject to 19 Table of Contents change due to economic, political, and other conditions, such as the COVID-19 pandemic, and significant judgment is required in determining our ability to use our deferred tax assets. Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize related tax benefits, the applicability of special tax regimes, changes in foreign currency exchange rates, changes in our stock price, changes to our forecasts of income and loss and the mix of jurisdictions to which they relate, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions. In addition, a number of countries have enacted or are actively pursuing changes to their tax laws applicable to corporate multinationals. We are also currently subject to tax controversies in various jurisdictions, and these jurisdictions may assess additional income tax liabilities against us. Developments in an audit, investigation, or other tax controversy could have a material effect on our operating results or cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods. We regularly assess the likelihood of an adverse outcome resulting from these proceedings to determine the adequacy of our tax accruals. Although we believe our tax estimates are reasonable, the final outcome of audits, investigations, and any other tax controversies could be materially different from our historical income tax provisions and accruals. 20 Table of Contents Liquidity and Capital Resources Cash flow information is as follows (in millions): Three Months Ended September 30, Nine Months Ended September 30, Twelve Months Ended September 30, 2020 2021 2020 2021 2020 2021 Cash provided by (used in): Operating activities $ 11,964 $ 7,313 $ 35,633 $ 24,241 $ 55,292 $ 54,671 Investing activities (15,876) (14,828) (42,574) (45,574) (46,110) (62,611) 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 $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. Cash received from our customers and other activities generally corresponds to our net sales. Because consumers primarily use credit cards to buy from us, our receivables from consumers settle quickly. The decrease in operating cash flow 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 $(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. Certain foreign subsidiary earnings and losses are subject to current U.S. taxation and the subsequent repatriation of those earnings is not subject to tax in the U.S. We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts. 21 Table of Contents Tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions are reducing our U.S. taxable income. U.S. tax rules provide for enhanced accelerated depreciation deductions by allowing the election of full expensing of qualified property, primarily equipment, through 2022. 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, 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 $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. We believe that cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, as well as our borrowing arrangements, will be sufficient to meet our anticipated operating cash needs for at least the next twelve months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. See Item 1A of Part II, “Risk Factors.” We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities, obtain finance and operating lease arrangements, enter into financing obligations, repurchase common stock, pay dividends, or repurchase, refinance, or otherwise restructure our debt for strategic reasons or to further strengthen our financial position. We expect to fund the acquisition of MGM Holdings Inc. with cash on hand. The sale of additional equity or convertible debt securities would be dilutive to our shareholders. In addition, we will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, capital infrastructure, and technologies, which might affect our liquidity requirements or cause us to secure additional financing, or issue additional equity or debt securities. There can be no assurance that additional credit lines or financing instruments will be available in amounts or on terms acceptable to us, if at all. 22 Table of Contents Results of Operations We have organized our operations into three segments: North America, International, and AWS. These segments reflect the way the Company evaluates its business performance and manages its operations. See Item 1 of Part I, “Financial Statements — Note 8 — Segment Information.” Overview 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 Net sales include product and service sales. Product sales represent revenue from the sale of products and related shipping fees and digital media content where we record revenue gross. Service sales primarily represent third-party seller fees, which includes commissions and any related fulfillment and shipping fees, AWS sales, advertising services, Amazon Prime membership fees, and certain digital content subscriptions. Net sales information is as follows (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2020 2021 2020 2021 Net Sales: North America $ 59,373 $ 65,557 $ 160,936 $ 197,473 International 25,171 29,145 66,945 90,515 AWS 11,601 16,110 32,628 44,422 Consolidated $ 96,145 $ 110,812 $ 260,509 $ 332,410 Year-over-year Percentage Growth: North America 39 % 10 % 37 % 23 % International 37 16 31 35 AWS 29 39 30 36 Consolidated 37 15 35 28 Year-over-year Percentage Growth, excluding the effect of foreign exchange rates: North America 39 % 10 % 38 % 22 % International 33 15 32 29 AWS 29 39 30 36 Consolidated 36 15 35 26 Net sales mix: North America 62 % 59 % 62 % 60 % International 26 26 26 27 AWS 12 15 12 13 Consolidated 100 % 100 % 100 % 100 % 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. 23 Table of Contents 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. Increased unit sales were driven largely by our continued efforts to reduce prices for our customers, including from our shipping offers, and increased demand, partially offset by fulfillment network inefficiencies and supply chain constraints. 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. Increased unit sales were driven largely by our continued efforts to reduce prices for our customers, including from our shipping offers, and increased demand, partially offset by fulfillment network inefficiencies and supply chain constraints. 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. Pricing changes were driven largely by our continued efforts to reduce prices for our customers. Operating Income (Loss) Operating income (loss) by segment is as follows (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2020 2021 2020 2021 Operating Income (Loss): North America $ 2,252 $ 880 $ 5,704 $ 7,477 International 407 (911) 355 703 AWS 3,535 4,883 9,967 13,239 Consolidated $ 6,194 $ 4,852 $ 16,026 $ 21,419 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 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 24 Table of Contents 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 Information about operating expenses is as follows (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2020 2021 2020 2021 Operating expenses: Cost of sales $ 57,106 $ 62,930 $ 154,023 $ 189,509 Fulfillment 14,705 18,498 40,043 52,666 Technology and content 10,976 14,380 30,691 40,739 Marketing 5,434 8,010 14,605 21,741 General and administrative 1,668 2,153 4,700 6,298 Other operating expense (income), net 62 (11) 421 38 Total operating expenses $ 89,951 $ 105,960 $ 244,483 $ 310,991 Year-over-year Percentage Growth: Cost of sales 38 % 10 % 38 % 23 % Fulfillment 45 26 43 32 Technology and content 19 31 17 33 Marketing 14 47 15 49 General and administrative 24 29 24 34 Other operating expense (income), net 12 (118) 209 (91) Percent of Net Sales: Cost of sales 59.4 % 56.8 % 59.1 % 57.0 % Fulfillment 15.3 16.7 15.4 15.8 Technology and content 11.4 13.0 11.8 12.3 Marketing 5.7 7.2 5.6 6.5 General and administrative 1.7 1.9 1.8 1.9 Other operating expense (income), net 0.1 — 0.2 — Cost of Sales 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 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 $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. We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing our fulfillment network, negotiating better terms with our suppliers, and achieving better operating efficiencies. We believe that offering low prices to our customers is fundamental to our future success, and one way we offer lower prices is through shipping offers. Costs to operate our AWS segment are primarily classified as “Technology and content” as we leverage a shared infrastructure that supports both our internal technology requirements and external sales to AWS customers. 25 Table of Contents Fulfillment Fulfillment costs primarily consist of those costs incurred in operating and staffing our North America and International fulfillment centers, physical stores, and customer service centers and payment processing costs. While AWS payment processing and related transaction costs are included in “Fulfillment,” AWS costs are primarily classified as “Technology and content.” Fulfillment costs as a percentage of net sales may vary due to several factors, such as payment processing and related transaction costs, our level of productivity and accuracy, changes in volume, size, and weight of units received and fulfilled, the extent to which third party sellers utilize Fulfillment by Amazon services, timing of fulfillment network and physical store expansion, the extent we utilize fulfillment services provided by third parties, mix of products and services sold, and our ability to affect customer service contacts per unit by implementing improvements in our operations and enhancements to our customer self-service features. Additionally, sales by our sellers have higher payment processing and related transaction costs as a percentage of net sales compared to our retail sales because payment processing costs are based on the gross purchase price of underlying transactions. The increase in fulfillment costs in absolute dollars in 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. We regularly evaluate our facility requirements. Technology and Content Technology and content costs include payroll and related expenses for employees involved in the research and development of new and existing products and services, development, design, and maintenance of our stores, curation and display of products and services made available in our online stores, and infrastructure costs. Infrastructure costs include servers, networking equipment, and data center related depreciation and amortization, rent, utilities, and other expenses necessary to support AWS and other Amazon businesses. Collectively, these costs reflect the investments we make in order to offer a wide variety of products and services to our customers. We seek to invest efficiently in numerous areas of technology and content so we may continue to enhance the customer experience and improve our process efficiency through rapid technology developments, while operating at an ever increasing scale. Our technology and content investment and capital spending projects often support a variety of product and service offerings due to geographic expansion and the cross-functionality of our systems and operations. We expect spending in technology and content to increase over time as we continue to add employees and technology infrastructure. These costs are allocated to segments based on usage. The increase in technology and content costs in absolute dollars in 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. Marketing Marketing costs include advertising and payroll and related expenses for personnel engaged in marketing and selling activities, including sales commissions related to AWS. We direct customers to our stores primarily through a number of marketing channels, such as our sponsored search, social and online advertising, third party customer referrals, television advertising, and other initiatives. Our marketing costs are largely variable, based on growth in sales and changes in rates. To the extent there is increased or decreased competition for these traffic sources, or to the extent our mix of these channels shifts, we would expect to see a corresponding change in our marketing costs. The increase in 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. 26 Table of Contents General and Administrative 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 $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 $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 $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 $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. Income Taxes 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. Non-GAAP Financial Measures Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other SEC regulations define and prescribe the conditions for use of certain non-GAAP financial information. Our measures of free cash flows and the effect of foreign exchange rates on our consolidated statements of operations meet the definition of non-GAAP financial measures. We provide multiple measures of free cash flows because we believe these measures provide additional perspective on the impact of acquiring property and equipment with cash and through finance leases and financing obligations. Free Cash 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 September 30, 2020 and 2021 (in millions): Twelve Months Ended September 30, 2020 2021 Net cash provided by (used in) operating activities $ 55,292 $ 54,671 Purchases of property and equipment, net of proceeds from sales and incentives (25,791) (52,119) Free cash flow $ 29,501 $ 2,552 Net cash provided by (used in) investing activities $ (46,110) $ (62,611) Net cash provided by (used in) financing activities $ (2,859) $ 7,575 27 Table of Contents Free Cash Flow Less Principal Repayments of Finance Leases and Financing Obligations 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 September 30, 2020 and 2021 (in millions): Twelve Months Ended September 30, 2020 2021 Net cash provided by (used in) operating activities $ 55,292 $ 54,671 Purchases of property and equipment, net of proceeds from sales and incentives (25,791) (52,119) Free cash flow 29,501 2,552 Principal repayments of finance leases (11,054) (11,271) Principal repayments of financing obligations (68) (124) Free cash flow less principal repayments of finance leases and financing obligations $ 18,379 (8,843) Net cash provided by (used in) investing activities $ (46,110) $ (62,611) Net cash provided by (used in) financing activities $ (2,859) $ 7,575 Free Cash Flow Less Equipment Finance Leases and Principal Repayments of All Other Finance Leases and Financing Obligations Free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations is free cash flow reduced by equipment acquired under finance leases, which is included in “Property and equipment acquired under finance leases,” principal repayments of all other finance lease liabilities, which is included in “Principal repayments of finance leases,” and “Principal repayments of financing obligations.” All other finance lease liabilities and financing obligations consists of property. In this measure, equipment acquired under finance leases is reflected as if these assets had been purchased with cash, which is not the case as these assets have been leased. The following is a reconciliation of free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for the trailing twelve months ended September 30, 2020 and 2021 (in millions): Twelve Months Ended September 30, 2020 2021 Net cash provided by (used in) operating activities $ 55,292 $ 54,671 Purchases of property and equipment, net of proceeds from sales and incentives (25,791) (52,119) Free cash flow 29,501 2,552 Equipment acquired under finance leases (1) (11,116) (5,738) Principal repayments of all other finance leases (2) (413) (582) Principal repayments of financing obligations (68) (124) Free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations $ 17,904 $ (3,892) Net cash provided by (used in) investing activities $ (46,110) $ (62,611) Net cash provided by (used in) financing activities $ (2,859) $ 7,575 ___________________ (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. For example, these measures of free cash flows do 28 Table of Contents not incorporate the portion of payments representing principal reductions of debt or cash payments for business acquisitions. Additionally, our mix of property and equipment acquisitions with cash or other financing options may change over time. Therefore, we believe it is important to view free cash flows measures only as a complement to our entire consolidated statements of cash flows. Effect of Foreign Exchange Rates Information regarding the effect of foreign exchange rates, versus the U.S. Dollar, on our net sales, operating expenses, and operating income is provided to show reported period operating results had the foreign exchange rates remained the same as those in effect in the comparable prior year period. The effect on our net sales, operating expenses, and operating income from changes in our foreign exchange rates versus the U.S. Dollar is as follows (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2020 2021 2020 2021 As Reported Exchange Rate Effect (1) At Prior Year Rates (2) As Reported Exchange Rate Effect (1) At Prior Year Rates (2) As Reported Exchange Rate Effect (1) At Prior Year Rates (2) As Reported Exchange Rate Effect (1) At Prior Year Rates (2) Net sales $ 96,145 $ (691) $ 95,454 $ 110,812 $ (513) $ 110,299 $ 260,509 $ 278 $ 260,787 $ 332,410 $ (5,057) $ 327,353 Operating expenses 89,951 (558) 89,393 105,960 (533) 105,427 244,483 585 245,068 310,991 (4,963) 306,028 Operating income 6,194 (133) 6,061 4,852 20 4,872 16,026 (307) 15,719 21,419 (94) 21,325 ___________________ (1) Represents the change in reported amounts resulting from changes in foreign exchange rates from those in effect in the comparable prior year period for operating results. (2) Represents the outcome that would have resulted had foreign exchange rates in the reported period been the same as those in effect in the comparable prior year period for operating results. 29 Table of Contents Guidance 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. 30 Table of Contents