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 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, seasonality, 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 2019 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 and Accounting Policies," of our 2019 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 ofSeptember 30, 2020 , we would have recorded an additional cost of sales of approximately$265 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 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 are actively pursuing changes to their tax laws applicable to corporate multinationals, such as theU.S. tax reform legislation commonly known as theU.S. Tax Cuts and Jobs Act of 2017 (the "U.S. Tax Act"). Finally, foreign governments may enact tax laws in response to theU.S. Tax Act that could result in further changes to global taxation and materially affect our financial position and results of operations. 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 Nine Months Ended Twelve Months Ended September 30, September 30, September 30, 2019 2020 2019 2020 2019 2020 Cash provided by (used in): Operating activities$ 7,892 $ 11,964 $ 18,855 $ 35,633 $ 35,332 $ 55,292 Investing activities (5,074) (15,876) (20,745) (42,574) (24,317) (46,110) Financing activities (1,960) (4,105) (6,495) 712 (8,255) (2,859) 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$55.0 billion and$68.4 billion as ofDecember 31, 2019 andSeptember 30, 2020 . Amounts held in foreign currencies were$15.3 billion and$15.6 billion as ofDecember 31, 2019 andSeptember 30, 2020 , and were primarily Euros, British Pounds, and Japanese Yen. Cash provided by (used in) operating activities was$7.9 billion and$12.0 billion for Q3 2019 and Q3 2020, and$18.9 billion and$35.6 billion for the nine months endedSeptember 30, 2019 and 2020. Our operating cash flows result primarily from cash received from our consumer, seller, developer, enterprise, and content creator customers, and advertisers, offset by cash payments we make for products and services, employee compensation, payment processing and related transaction costs, operating leases, and interest payments on our long-term obligations. Cash received from our customers and other activities generally corresponds to our net sales. Because consumers primarily use credit cards to buy from us, our receivables from consumers settle quickly. The increase in operating cash flow for the trailing twelve months endedSeptember 30, 2020 , compared to the comparable prior year period, was primarily due to the increase in net income, excluding non-cash expenses, and changes in working capital. Working capital at any specific point in time is subject to many variables, including seasonality, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates. Cash provided by (used in) investing activities corresponds with cash capital expenditures including leasehold improvements, incentives received from property and equipment vendors, proceeds from asset sales, cash outlays for acquisitions, investments in other companies and intellectual property rights, and purchases, sales, and maturities of marketable securities. Cash provided by (used in) investing activities was$(5.1) billion and$(15.9) billion for Q3 2019 and Q3 2020, and$(20.7) billion and$(42.6) billion for the nine months endedSeptember 30, 2019 and 2020, with the variability caused primarily by our decision to purchase or lease property and equipment and purchases, maturities, and sales of marketable securities. Cash capital expenditures were$3.4 billion and$9.8 billion during Q3 2019 and Q3 2020, and$8.7 billion and$21.9 billion for the nine months endedSeptember 30, 2019 and 2020, 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$398 million and$1.7 billion during Q3 2019 and Q3 2020, and$1.7 billion and$1.9 billion for the nine months endedSeptember 30, 2019 and 2020. Cash provided by (used in) financing activities was$(2.0) billion and$(4.1) billion for Q3 2019 and Q3 2020, and$(6.5) billion and$712 million for the nine months endedSeptember 30, 2019 and 2020. Cash inflows from financing activities resulted from proceeds of short-term debt, and other and long-term debt of$702 million and$1.3 billion for Q3 2019 and Q3 2020, and$1.2 billion and$14.4 billion for the nine months endedSeptember 30, 2019 and 2020. Cash outflows from financing activities resulted from payments of short-term debt, and other, long-term debt, finance leases, and financing obligations of$2.7 billion and$5.4 billion in Q3 2019 and Q3 2020, and$7.7 billion and$13.6 billion for the nine months endedSeptember 30, 2019 and 2020. Property and equipment acquired under finance leases was$3.6 billion during Q3 2019 and Q3 2020, and$9.5 billion and$8.9 billion for the nine months endedSeptember 30, 2019 and 2020, 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$413 million of borrowings outstanding under our Credit Facility as ofSeptember 30, 2020 . See Item 1 of Part I, "Financial Statements - Note 5 - Debt" for additional information. We recorded net tax provisions of$494 million and$569 million in Q3 2019 and Q3 2020, and$1.6 billion and$2.3 billion for the nine months ended September 30, 2019 and 2020. Certain foreign subsidiary earnings are subject toU.S. taxation under theU.S. Tax Act, which also repealsU.S. taxation on the subsequent repatriation of those earnings. 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. Tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions are reducing ourU.S. taxable income. TheU.S. Tax Act enhanced and extended accelerated depreciation deductions by allowing 21 -------------------------------------------------------------------------------- Table of Contents full expensing of qualified property, primarily equipment, through 2022. Cash taxes paid (net of refunds) were$241 million and$502 million for Q3 2019 and Q3 2020, and$692 million and$1.3 billion for the nine months ended September 30, 2019 and 2020. As ofDecember 31, 2019 , we had approximately$1.7 billion of federal tax credits potentially available to offset future tax liabilities. Our federal tax credits are primarily related to theU.S. federal research and development credit. As we utilize our federal tax credits we expect cash paid for taxes to increase. We endeavor to manage our global taxes on a cash basis, rather than on a financial reporting basis. In connection with theEuropean Commission's October 2017 decision against us on state aid, Luxembourg tax authorities computed an initial recovery amount, consistent with theEuropean Commission's decision, of approximately €250 million, that we deposited into escrow inMarch 2018 , subject to adjustment pending conclusion of all appeals. Our liquidity is also affected by restricted cash balances that are pledged as collateral for real estate leases, amounts due to third-party sellers in certain jurisdictions, debt, and standby and trade letters of credit. To the extent we process payments for third-party sellers or offer certain types of stored value to our customers, some jurisdictions may restrict our use of those funds. These restrictions would result in the reclassification of a portion of our cash and cash equivalents from "Cash and cash equivalents" to restricted cash, which is classified within "Accounts receivable, net and other" and "Other assets" on our consolidated balance sheets. As ofDecember 31, 2019 andSeptember 30, 2020 , restricted cash, cash equivalents, and marketable securities were$321 million and$275 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$31.4 billion as ofSeptember 30, 2020 . 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 COVID-19 pandemic and resulting global disruptions have caused significant market volatility. This disruption can contribute to defaults in our accounts receivable, affect asset valuations resulting in impairment charges, and affect the availability of lease and financing credit as well as other segments of the credit markets. We have utilized a range of financing methods to fund our 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 likely 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." Effects of COVID-19 The COVID-19 pandemic and resulting global disruptions have continued to affect our businesses, as well as those of our customers, suppliers, and third-party sellers. To serve our customers while also providing for the safety of our employees and service providers, we have adapted numerous aspects of our logistics, transportation, supply chain, purchasing, and third-party seller processes. Beginning in Q1 2020, we made numerous process updates across our operations worldwide, and adapted our fulfillment network, to implement employee and customer safety measures, such as enhanced cleaning and physical distancing, personal protective gear, disinfectant spraying, and temperature checks. SinceFebruary 2020 , we have hired over 250,000 full-time and part-time employees to increase our fulfillment network capacity. We incurred more than$2.5 billion in COVID-19 related costs in Q3 2020, for a total of more than$7.5 billion in the first three quarters of 2020. 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, the impact of the pandemic and actions taken in response to it had varying effects on our Q3 2020 results of operations. Higher net sales in theNorth America and International segments reflect increased demand, particularly as people are staying at home, including for household staples and other essential and home products, partially offset by fulfillment network capacity and supply chain constraints. Other effects in theNorth America and International segments include increased cost of sales and fulfillment costs as a percentage of net sales, primarily due to the impact of lower productivity, costs to maintain safe workplaces, and increased employee hiring and benefits. We expect the effects of fulfillment network capacity and supply chain constraints, elevated collection risk in our accounts receivable, and increased cost of sales and fulfillment costs as a percentage of net sales to continue into all or portions of Q4 2020. However, it is not possible to determine the duration and scope of the pandemic, including any recurrence, the actions taken in response to 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. 23 -------------------------------------------------------------------------------- Table of Contents 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,Amazon Prime membership fees, advertising services, and certain digital content subscriptions. Net sales information is as follows (in millions): Three Months Ended Nine Months Ended September 30, September 30, 2019 2020 2019 2020 Net Sales: North America$ 42,638 $ 59,373 $ 117,104 $ 160,936 International 18,348 25,171 50,910 66,945 AWS 8,995 11,601 25,072 32,628 Consolidated$ 69,981 $ 96,145 $ 193,086 $ 260,509 Year-over-year Percentage Growth: North America 24 % 39 % 20 % 37 % International 18 37 13 31 AWS 35 29 38 30 Consolidated 24 37 20 35 Year-over-year Percentage Growth, excluding the effect of foreign exchange rates: North America 24 % 39 % 21 % 38 % International 21 33 18 32 AWS 35 29 38 30 Consolidated 25 36 22 35 Net sales mix: North America 61 % 62 % 61 % 62 % International 26 26 26 26 AWS 13 12 13 12 Consolidated 100 % 100 % 100 % 100 % Sales increased 37% in Q3 2020 and 35% for the nine months ended September 30, 2020 compared to the comparable prior year periods. Changes in foreign currency exchange rates impacted net sales by$691 million for Q3 2020 and by$(278) million for the nine months endedSeptember 30, 2020 . For a discussion of the effect on sales growth of foreign exchange rates, see "Effect of Foreign Exchange Rates" below. North America sales increased 39% in Q3 2020, and 37% for the nine months endedSeptember 30, 2020 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, including for household staples and other essential and home products, partially offset by fulfillment network capacity and supply chain constraints. International sales increased 37% in Q3 2020 and 31% for the nine months endedSeptember 30, 2020 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, including for household staples and other essential and home products, partially offset by fulfillment network capacity and supply chain constraints. Changes in foreign currency exchange rates impacted International net sales by$747 million for Q3 2020, and by$(59) million for the nine months endedSeptember 30, 2020 . AWS sales increased 29% in Q3 2020 and 30% for the nine months ended September 30, 2020 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. 24
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