AMAZON.COM, INC. 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 and outcomes could differ materially for a variety of reasons, including, among others, fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, inflation, regional 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, global economic conditions and additional or unforeseen effects from the COVID-19 pandemic amplify many of these risks. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results or outcomes to differ significantly from management's expectations, are described in greater detail in Item 1A of Part 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 2021 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. TheSEC 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 2021 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 ofJune 30, 2022 , we would have recorded an additional cost of sales of approximately$425 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 theU.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 21
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change due to economic, political, and other conditions and significant judgment is required in determining our ability to use our deferred tax assets.
Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize related tax benefits, the applicability of special tax regimes, changes in foreign currency exchange rates, changes in our stock price, changes to our forecasts of income and loss and the mix of jurisdictions to which they relate, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions. In addition, a number of countries have enacted or are actively pursuing changes to their tax laws applicable to corporate multinationals. We are also currently subject to tax controversies in various jurisdictions, and these jurisdictions may assess additional income tax liabilities against us. Developments in an audit, investigation, or other tax controversy could have a material effect on our operating results or cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods. We regularly assess the likelihood of an adverse outcome resulting from these proceedings to determine the adequacy of our tax accruals. Although we believe our tax estimates are reasonable, the final outcome of audits, investigations, and any other tax controversies could be materially different from our historical income tax provisions and accruals.
Liquidity and Capital Resources
Cash flow information is as follows (in millions):
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
2021 2022 2021 2022 2021 2022
Cash provided by (used in):
Operating activities $ 12,715 $ 8,965 $ 16,928 $ 6,175 $ 59,322 $ 35,574
Investing activities (22,080) (12,078) (30,746) (11,172) (63,659) (38,580)
Financing activities 15,643 4,626 12,167 6,616 6,246 740
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 $96.0 billion and $60.7 billion as of December 31, 2021 and June 30,
2022 . Amounts held in foreign currencies were $22.7 billion and $12.4 billion as
of December 31, 2021 and June 30, 2022 . Our foreign currency balances include
British Pounds, Canadian Dollars, Euros, and Japanese Yen.
Cash provided by (used in) operating activities was $12.7 billion and $9.0
billion for Q2 2021 and Q2 2022, and $16.9 billion and $6.2 billion for the six
months ended June 30, 2021 and 2022. 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 June 30, 2022 , compared to the comparable
prior year period, was primarily due to changes in working capital, as well as
changes in net income (loss), 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 $(22.1) billion and $(12.1) billion for Q2
2021 and Q2 2022, and $(30.7) billion and $(11.2) billion for the six months
ended June 30, 2021 and 2022, with the variability caused primarily by
purchases, sales, and maturities of marketable securities. Cash capital
expenditures were $13.0 billion and $14.1 billion during Q2 2021 and Q2 2022,
and $24.2 billion and $27.8 billion for the six months ended June 30, 2021 and
2022, which primarily reflect investments in technology infrastructure (the
majority of which is to support AWS business growth) and in additional capacity
to support our fulfillment network. We expect to continue these investments over
time, with increased spending on technology infrastructure in 2022. We made cash
payments, net of acquired cash, related to acquisition and other investment
activity of $320 million and $259 million during Q2 2021 and Q2 2022, and $950
million and $6.6 billion for the six months
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endedJune 30, 2021 and 2022. We funded the acquisition of MGM Holdings Inc. with cash on hand. We expect to fund the acquisition of 1Life Healthcare, Inc. (One Medical) with cash on hand. Cash provided by (used in) financing activities was$15.6 billion and$4.6 billion for Q2 2021 and Q2 2022, and$12.2 billion and$6.6 billion for the six months endedJune 30, 2021 and 2022. Cash inflows from financing activities resulted from proceeds from short-term debt, and other and long-term debt of$19.7 billion and$17.7 billion for Q2 2021 and Q2 2022, and$21.7 billion and$31.4 billion for the six months endedJune 30, 2021 and 2022. Cash outflows from financing activities resulted from repurchases of common stock, payments of short-term debt, and other, long-term debt, finance leases, and financing obligations of$4.0 billion and$13.1 billion in Q2 2021 and Q2 2022, and$9.6 billion and$24.8 billion for the six months endedJune 30, 2021 and 2022. Property and equipment acquired under finance leases was$1.6 billion and$61 million during Q2 2021 and Q2 2022, and$3.7 billion and$227 million for the six months endedJune 30, 2021 and 2022. We had no borrowings outstanding under the Credit Agreement,$8.2 billion of borrowings outstanding under the Commercial Paper Programs, and$935 million of borrowings outstanding under our Credit Facility as ofJune 30, 2022 . See Item 1 of Part I, "Financial Statements - Note 5 - Debt" for additional information. Certain foreign subsidiary earnings and losses are subject to currentU.S. taxation and the subsequent repatriation of those earnings is not subject to tax in theU.S. We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of theU.S. in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts. OurU.S. taxable income is reduced by tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions and increased by the impact of capitalized research and development expenses.U.S. tax rules provide for enhanced accelerated depreciation deductions by allowing the election of full expensing of qualified property, primarily equipment, through 2022. EffectiveJanuary 1, 2022 , research and development expenses are required to be capitalized and amortized forU.S. tax purposes, which delays the deductibility of these expenses. Cash taxes paid (net of refunds) were$1.8 billion and$3.1 billion for Q2 2021 and Q2 2022, and$2.6 billion and$3.6 billion for the six months endedJune 30, 2021 and 2022. As ofDecember 31, 2021 andJune 30, 2022 , restricted cash, cash equivalents, and marketable securities were$260 million and$222 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, we have purchase obligations and open purchase orders, including for inventory and capital expenditures, that support normal operations and are primarily due in the next twelve months. These purchase obligations and open purchase orders are generally cancellable in full or in part through the contractual provisions. We believe that cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, as well as our borrowing arrangements, will be sufficient to meet our anticipated operating cash needs for at least the next twelve months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. See Item 1A of Part 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. The sale of additional equity or convertible debt securities would be dilutive to our shareholders. In addition, we will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, capital infrastructure, and technologies, which might affect our liquidity requirements or cause us to secure additional financing, or issue additional equity or debt securities. There can be no assurance that additional credit lines or financing instruments will be available in amounts or on terms acceptable to us, if at all. In addition, economic conditions and actions by policymaking bodies are contributing to rising interest rates, which, along with increases in our borrowing levels, could increase our future borrowing costs. 23
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Results of Operations
We have organized our operations into three segments:
Overview
Macroeconomic factors, including increased inflation rates, the prolonged COVID-19 pandemic, global supply chain constraints, and global economic and geopolitical developments, have direct and indirect impacts on our results of operations that are difficult to isolate and quantify. In addition, the COVID-19 pandemic and the related societal impacts, such as lockdowns, caused a significant increase in growth rates across ourNorth America and International segments throughout much of 2020 and 2021, and we are seeing a return to pre-pandemic demand patterns as consumers' mobility increases. The factors described above contributed to a deceleration in our net sales growth rate and increases in our operating costs during Q2 2022, particularly across ourNorth America and International segments, primarily due to a return to more normal, seasonal demand volumes in relation to our fulfillment network fixed costs as well as increased transportation costs, increased wage rates and incentives, and fulfillment network inefficiencies resulting from regional labor market and global supply chain constraints. We expect some or all of these factors to continue to impact our operations into Q3 2022.
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 Six Months Ended June 30, June 30, 2021 2022 2021 2022Net Sales : North America$ 67,550 $ 74,430 $ 131,916 $ 143,674 International 30,721 27,065 61,370 55,824 AWS 14,809 19,739 28,312 38,180 Consolidated$ 113,080 $ 121,234 $ 221,598 $ 237,678 Year-over-year Percentage Growth (Decline): North America 22 % 10 % 30 % 9 % International 36 (12) 47 (9) AWS 37 33 35 35 Consolidated 27 7 35 7 Year-over-year Percentage Growth (Decline), excluding the effect of foreign exchange rates: North America 21 % 10 % 29 % 9 % International 26 (1) 37 0 AWS 37 33 35 35 Consolidated 24 10 32 10 Net sales mix: North America 60 % 62 % 59 % 60 % International 27 22 28 24 AWS 13 16 13 16 Consolidated 100 % 100 % 100 % 100 % Sales increased 7% in Q2 2022, and 7% for the six months ended June 30, 2022 compared to the comparable prior year periods. Changes in foreign currency exchange rates impacted net sales by$(3.6) billion for Q2 2022 and by$(5.4) billion for the six months endedJune 30, 2022 . For a discussion of the effect of foreign exchange rates on sales growth, see "Effect of Foreign Exchange Rates" below. 24
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North America sales increased 10% in Q2 2022, and 9% for the six months endedJune 30, 2022 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 focus on price, selection, and convenience for our customers, including from our shipping offers. International sales decreased 12% in Q2 2022, and 9% for the six months endedJune 30, 2022 compared to the comparable prior year periods, primarily due to the impact of foreign currency exchange rates, and also due to decreased unit sales, partially offset by increased subscription services and advertising sales. Unit sales decreased compared to the higher levels we experienced in the comparable prior year periods due to widespread regional and national COVID-19 lockdowns in the 2021 periods. Changes in foreign currency exchange rates impacted International net sales by$(3.5) billion for Q2 2022, and by$(5.3) billion for the six months endedJune 30, 2022 . AWS sales increased 33% in Q2 2022, and 35% for the six months endedJune 30, 2022 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.
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