AMAZON.COM, INC.
Forward-Looking Statements
This Annual Report on Form 10-K 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 Annual Report on Form 10-K 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, 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 I, "Risk Factors."
Overview
Our primary source of revenue is the sale of a wide range of products and
services to customers. The products offered through our stores include
merchandise and content we have purchased for resale and products offered by
third-party sellers, and we also manufacture and sell electronic devices and
produce media content. Generally, we recognize gross revenue from items we sell
from our inventory as product sales and recognize our net share of revenue of
items sold by third-party sellers as service sales. We seek to increase unit
sales across our stores, through increased product selection, across numerous
product categories. We also offer other services such as compute, storage, and
database offerings, fulfillment, advertising, publishing, and digital content
subscriptions.
Our financial focus is on long-term, sustainable growth in free cash flows. Free
cash flows are driven primarily by increasing operating income and efficiently
managing accounts receivable, inventory, accounts payable, and cash capital
expenditures, including our decision to purchase or lease property and
equipment. Increases in operating income primarily result from increases in
sales of products and services and efficiently managing our operating costs,
partially offset by investments we make in longer-term strategic initiatives,
including capital expenditures focused on improving the customer experience. To
increase sales of products and services, we focus on improving all aspects of
the customer experience, including lowering prices, improving availability,
offering faster delivery and performance times, increasing selection, producing
original content, increasing product categories and service offerings, expanding
product information, improving ease of use, improving reliability, and earning
customer trust. See "Results of Operations - Non-GAAP Financial Measures" below
for additional information on our non-GAAP free cash flows financial measures.
We seek to reduce our variable costs per unit and work to leverage our fixed
costs. Our variable costs include product and content costs, payment processing
and related transaction costs, picking, packaging, and preparing orders for
shipment, transportation, customer service support, costs necessary to run AWS,
and a portion of our marketing costs. Our fixed costs include the costs
necessary to build and run our technology infrastructure; to build, enhance, and
add features to our online stores, web services, electronic devices, and digital
offerings; and to build and optimize our fulfillment networks and related
facilities. Variable costs generally change directly with sales volume, while
fixed costs generally are dependent on the timing of capacity needs, geographic
expansion, category expansion, and other factors. To decrease our variable costs
on a per unit basis and enable us to lower prices for customers, we seek to
increase our direct sourcing, increase discounts from suppliers, and reduce
defects in our processes. To minimize unnecessary growth in fixed costs, we seek
to improve process efficiencies and maintain a lean culture.
Because of our model we are able to turn our inventory quickly and have a
cash-generating operating cycle1. On average, our high inventory velocity means
we generally collect from consumers before our payments to suppliers come due.
We expect variability in inventory turnover over time since it is affected by
numerous factors, including our product mix, the mix of sales
1 The operating cycle is the number of days of sales in inventory plus the
number of days of sales in accounts receivable minus accounts payable days.
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by us and by third-party sellers, our continuing focus on in-stock inventory availability and selection of product offerings, our investment in new geographies and product lines, and the extent to which we choose to utilize third-party fulfillment providers. We also expect some variability in accounts payable days over time since they are affected by several factors, including the mix of product sales, the mix of sales by third-party sellers, the mix of suppliers, seasonality, and changes in payment terms over time, including the effect of balancing pricing and timing of payment terms with suppliers. We expect spending in technology and content will increase over time as we add computer scientists, designers, software and hardware engineers, and merchandising employees. 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 seek to invest efficiently in several areas of technology and content, including AWS, and expansion of new and existing product categories and service offerings, as well as in technology infrastructure to enhance the customer experience and improve our process efficiencies. We believe that advances in technology, specifically the speed and reduced cost of processing power, data storage and analytics, improved wireless connectivity, and the practical applications of artificial intelligence and machine learning, will continue to improve users' experience on the Internet and increase its ubiquity in people's lives. To best take advantage of these continued advances in technology, we are investing in AWS, which offers a broad set of on-demand technology services, including compute, storage, database, analytics, and machine learning, and other services, to developers and enterprises of all sizes. We are also investing in initiatives to build and deploy innovative and efficient software and electronic devices. We seek to efficiently manage shareholder dilution while maintaining the flexibility to issue shares for strategic purposes, such as financings, acquisitions, and aligning employee compensation with shareholders' interests. We utilize restricted stock units as our primary vehicle for equity compensation because we believe this compensation model aligns the long-term interests of our shareholders and employees. In measuring shareholder dilution, we include all vested and unvested stock awards outstanding, without regard to estimated forfeitures. Total shares outstanding plus outstanding stock awards were 512 million and 518 million as ofDecember 31, 2019 and 2020. Our financial reporting currency is theU.S. Dollar and changes in foreign exchange rates significantly affect our reported results and consolidated trends. For example, if theU.S. Dollar weakens year-over-year relative to currencies in our international locations, our consolidated net sales and operating expenses will be higher than if currencies had remained constant. Likewise, if theU.S. Dollar strengthens year-over-year relative to currencies in our international locations, our consolidated net sales and operating expenses will be lower than if currencies had remained constant. We believe that our increasing diversification beyond theU.S. economy through our growing international businesses benefits our shareholders over the long-term. We also believe it is useful to evaluate our operating results and growth rates before and after the effect of currency changes. In addition, the remeasurement of our intercompany balances can result in significant gains and losses associated with the effect of movements in foreign currency exchange rates. Currency volatilities may continue, which may significantly impact (either positively or negatively) our reported results and consolidated trends and comparisons. For additional information about each line item addressed above, refer to Item 8 of Part II, "Financial Statements and Supplementary Data - Note 1 - Description of Business, Accounting Policies, and Supplemental Disclosures." Our Annual Report on Form 10-K for the year endedDecember 31, 2019 includes a discussion and analysis of our financial condition and results of operations for the year endedDecember 31, 2018 in Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Effects of COVID-19 The COVID-19 pandemic and resulting global disruptions have affected 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 modified 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 400,000 full-time and part-time employees to increase our fulfillment network capacity. We incurred approximately$4.0 billion in COVID-19 related costs in Q4 2020, for a total of more than$11.5 billion during 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. 20
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Critical Accounting Judgments The preparation of financial statements in conformity with generally accepted accounting principles ofthe United States ("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." 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 ofDecember 31, 2020 , we would have recorded an additional cost of sales of approximately$270 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 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. 21
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Liquidity and Capital Resources
Cash flow information is as follows (in millions):
Year Ended December 31,
2019 2020
Cash provided by (used in):
Operating activities $ 38,514 $ 66,064
Investing activities (24,281) (59,611)
Financing activities (10,066) (1,104)
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 $84.4 billion as of December 31, 2019 and 2020.
Amounts held in foreign currencies were $15.3 billion and $23.5 billion as of
December 31, 2019 and 2020, and were primarily Euros, British Pounds, and
Japanese Yen.
Cash provided by (used in) operating activities was $38.5 billion and $66.1
billion in 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
in 2020, compared to the prior year, 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
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 $(24.3) billion and $(59.6) billion in 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 $12.7 billion , and $35.0 billion in
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 $2.5
billion and $2.3 billion in 2019 and 2020.
Cash provided by (used in) financing activities was $(10.1) billion and $(1.1)
billion in 2019 and 2020. Cash inflows from financing activities resulted from
proceeds of short-term debt, and other and long-term-debt of $2.3 billion and
$17.3 billion in 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 $12.3 billion and $18.4 billion in 2019 and 2020.
Property and equipment acquired under finance leases was $13.7 billion and $11.6
billion in 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 unsecured revolving credit facility
(the "Credit Agreement"), $725 million of borrowings outstanding under the
commercial paper program (the "Commercial Paper Program"), and $338 million of
borrowings outstanding under our secured revolving credit facility (the "Credit
Facility") as of December 31, 2020 . See Item 8 of Part II, "Financial Statements
and Supplementary Data - Note 6 - Debt" for additional information.
As of December 31, 2020 , cash, cash equivalents, and marketable securities held
by foreign subsidiaries were $17.2 billion . 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.
Tax benefits relating to excess stock-based compensation deductions and
accelerated depreciation deductions are reducing our U.S. taxable income, and
all remaining federal tax credits, which were primarily related to the U.S.
federal research and development credit, reduced our federal tax liability in
2020. U.S. tax rules provide for enhanced accelerated depreciation deductions by
allowing the election of full expensing of qualified property, primarily
equipment, through 2022. Our federal tax provision included the election of full
expensing of qualified property for 2018 and 2019 and a partial election for
2020. Cash taxes paid (net of refunds) were $881 million and $1.7 billion for
2019 and 2020. 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
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European Commission's decision, of approximately €250 million, that we deposited into escrow inMarch 2018 , subject to adjustment pending conclusion of all appeals. As ofDecember 31, 2019 and 2020, restricted cash, cash equivalents, and marketable securities were$321 million and$257 million . See Item 8 of Part II, "Financial Statements and Supplementary Data - Note 7 - Commitments and Contingencies" 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$26.6 billion as ofDecember 31, 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 I, "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. These disruptions 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 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. 23
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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 8 of Part II, "Financial Statements and Supplementary Data - Note 10 - 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 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 fulfillment costs and cost of sales as a percentage of net sales, primarily due to the impact of lower productivity, increased employee hiring and benefits, and costs to maintain safe workplaces. We expect the effects of fulfillment network capacity and supply chain constraints, elevated collection risk in our accounts receivable, and increased fulfillment costs and cost of sales as a percentage of net sales to continue into all or portions of Q1 2021. 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. 24
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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):
Year Ended
2019 2020
Net Sales :
North America $ 170,773 $ 236,282
International 74,723 104,412
AWS 35,026 45,370
Consolidated $ 280,522 $ 386,064
Year-over-year Percentage Growth:
North America 21 % 38 %
International 13 40
AWS 37 30
Consolidated 20 38
Year-over-year Percentage Growth, excluding the effect of foreign
exchange rates:
North America 21 % 38 %
International 17 38
AWS 37 30
Consolidated 22 37
Net sales mix:
North America 61 % 61 %
International 27 27
AWS 12 12
Consolidated 100 % 100 %
Sales increased 38% in 2020, compared to the prior year. Changes in foreign
currency exchange rates impacted net sales by $(2.6) billion and $1.4 billion
for 2019 and 2020. For a discussion of the effect of foreign exchange rates on
sales growth, see "Effect of Foreign Exchange Rates" below.
North America sales increased 38% in 2020, compared to the prior year. 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 40% in 2020, compared to the prior year. 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 $(2.4) billion and $1.7 billion in 2019 and 2020.
AWS sales increased 30% in 2020, compared to the prior year. 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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Operating Income (Loss)
Operating income (loss) by segment is as follows (in millions):
Year Ended December 31,
2019 2020
Operating Income (Loss):
North America $ 7,033 $ 8,651
International (1,693) 717
AWS 9,201 13,531
Consolidated $ 14,541 $ 22,899
Operating income was $14.5 billion and $22.9 billion for 2019 and 2020. We
believe that operating income (loss) is a more meaningful measure than gross
profit and gross margin due to the diversity of our product categories and
services.
The increase in North America operating income in absolute dollars in 2020,
compared to the prior year, is primarily due to increased unit sales, including
sales by third-party sellers, and advertising sales and slower growth in certain
operating expenses, partially offset by increased shipping and fulfillment costs
due in part to COVID-19. We expect North America operating income to continue to
be negatively impacted through at least Q1 2021 by COVID-19 related costs.
Changes in foreign exchange rates impacted operating income by $23 million and
$8 million for 2019 and 2020.
The International operating income in 2020, as compared to the operating loss in
the prior year, is primarily due to increased unit sales, including sales by
third-party sellers, and advertising sales, and slower growth in certain
operating expenses, partially offset by increased shipping and fulfillment costs
due in part to COVID-19. We expect International operating income to continue to
be negatively impacted through at least Q1 2021 by COVID-19 related costs.
Changes in foreign exchange rates impacted operating income (loss) by $(116)
million and $411 million for 2019 and 2020.
The increase in AWS operating income in absolute dollars in 2020, compared to
the prior year, is primarily due to increased customer usage and cost structure
productivity, including a reduction in depreciation and amortization expense
from our change in the estimated useful life of our servers, partially offset by
increased payroll and related expenses and spending on technology
infrastructure, both 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 $273 million and $30 million
for 2019 and 2020.
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Operating Expenses
Information about operating expenses is as follows (in millions):
Year Ended December 31,
2019 2020
Operating expenses:
Cost of sales $ 165,536 $ 233,307
Fulfillment 40,232 58,517
Technology and content 35,931 42,740
Marketing 18,878 22,008
General and administrative 5,203 6,668
Other operating expense (income), net 201 (75)
Total operating expenses $ 265,981 $ 363,165
Year-over-year Percentage Growth:
Cost of sales 19 % 41 %
Fulfillment 18 45
Technology and content 25 19
Marketing 37 17
General and administrative 20 28
Other operating expense (income), net (32) (137)
Percent of Net Sales :
Cost of sales 59.0 % 60.4 %
Fulfillment 14.3 15.2
Technology and content 12.8 11.1
Marketing 6.7 5.7
General and administrative 1.9 1.7
Other operating expense (income), net 0.1 -
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 2020, compared to the prior
year, is primarily due to increased product and shipping costs resulting from
increased sales. We expect cost of sales as a percentage of net sales to
continue to be negatively impacted through at least Q1 2021 by COVID-19 related
costs.
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 $37.9 billion and $61.1 billion in 2019 and 2020. 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.
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Fulfillment
Fulfillment costs primarily consist of those costs incurred in operating and staffing ourNorth 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 byAmazon 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 2020, compared to the prior year, is primarily due to variable costs corresponding with increased product and service sales volume and inventory levels, costs from expanding our fulfillment network, and the COVID-19 related impact of lower productivity, increased employee hiring and benefits, and costs to maintain safe workplaces. We expect fulfillment costs as a percentage of net sales to continue to be negatively impacted through at least Q1 2021 by COVID-19 related costs. 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 otherAmazon 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 2020, compared to the prior year, 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, offset by a reduction in depreciation and amortization expense from our change in the estimated useful life of our servers. See Item 8 of Part II, "Financial Statements and Supplementary Data - Note 1 - Description of Business, Accounting Policies, and Supplemental Disclosures - Use of Estimates" for additional information on our change in estimated useful life of our servers. 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, third party customer referrals, social and online advertising, 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 2020, compared to the prior year, is primarily due to increased payroll and related expenses for personnel engaged in marketing and selling activities, partially offset by lower spending on marketing channels as a result of COVID-19. While costs associated withAmazon 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. 28
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General and Administrative The increase in general and administrative costs in absolute dollars in 2020, compared to the prior year, 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$201 million and$(75) million during 2019 and 2020, and was primarily related to a benefit from accelerated vesting of warrants to acquire equity of a vendor in Q4 2020, offset by a lease impairment in Q2 2020 and the amortization of intangible assets. Interest Income and Expense Our interest income was$832 million and$555 million during 2019 and 2020. 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$1.6 billion in 2019 and 2020 and was primarily related to debt and finance leases. Our long-term lease liabilities were$39.8 billion and$52.6 billion as ofDecember 31, 2019 and 2020. Our long-term debt was$23.4 billion and$31.8 billion as ofDecember 31, 2019 and 2020. See Item 8 of Part II, "Financial Statements and Supplementary Data - Note 4 - Leases and Note 6 - Debt" for additional information. Other Income (Expense), Net Other income (expense), net was$203 million and$2.4 billion during 2019 and 2020. The primary components of other income (expense), net are related to equity warrant valuations, equity securities valuations and adjustments, and foreign currency. Income Taxes Our effective tax rate is subject to significant variation due to several factors, including variability in our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, intercompany transactions, the applicability of special tax regimes, changes in how we do business, acquisitions, investments, audit-related developments, changes in our stock price, changes in our deferred tax assets and liabilities and their valuation, foreign currency gains (losses), changes in statutes, regulations, case law, and 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, and relative changes of expenses or losses for which tax benefits are not recognized. Our effective tax rate can be more or less volatile based on the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower. In addition, we record valuation allowances against deferred tax assets when there is uncertainty about our ability to generate future income in relevant jurisdictions, and the effects of the COVID-19 pandemic on our business make estimates of future income more challenging. We recorded a provision for income taxes of$2.4 billion and$2.9 billion in 2019 and 2020. See Item 8 of Part II, "Financial Statements and Supplementary Data - Note 9 - Income Taxes" for additional information. Non-GAAP Financial Measures Regulation G, Conditions for Use of Non-GAAP Financial Measures, and otherSEC 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. 29
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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 2019 and 2020 (in
millions):
Year Ended December 31,
2019 2020
Net cash provided by (used in) operating activities $ 38,514 $ 66,064
Purchases of property and equipment, net of proceeds from sales and
incentives (12,689) (35,044)
Free cash flow $ 25,825 $ 31,020
Net cash provided by (used in) investing activities $ (24,281) $ (59,611)
Net cash provided by (used in) financing activities $ (10,066) $ (1,104)
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 2019 and 2020 (in
millions):
Year Ended December 31,
2019 2020
Net cash provided by (used in) operating activities $ 38,514 $ 66,064 Purchases of property and equipment, net of proceeds from sales and incentives
(12,689) (35,044)
Free cash flow 25,825 31,020
Principal repayments of finance leases (9,628) (10,642)
Principal repayments of financing obligations (27) (53)
Free cash flow less principal repayments of finance leases and financing obligations
$ 16,170 $ 20,325 Net cash provided by (used in) investing activities$ (24,281) $ (59,611) Net cash provided by (used in) financing activities$ (10,066) $ (1,104) 30
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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 2019 and 2020 (in millions):
Year Ended
2019 2020
Net cash provided by (used in) operating activities $ 38,514 $ 66,064 Purchases of property and equipment, net of proceeds from sales and incentives
(12,689) (35,044)
Free cash flow 25,825 31,020
Equipment acquired under finance leases (1) (12,916) (9,104)
Principal repayments of all other finance leases (2) (392) (427)
Principal repayments of financing obligations (27) (53)
Free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations
$ 12,490 $ 21,436 Net cash provided by (used in) investing activities$ (24,281) $ (59,611) Net cash provided by (used in) financing activities$ (10,066) $ (1,104)
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(1)For the year endedDecember 31, 2019 and 2020, this amount relates to equipment included in "Property and equipment acquired under finance leases" of$13,723 million and$11,588 million . (2)For the year endedDecember 31, 2019 and 2020, this amount relates to property included in "Principal repayments of finance leases" of$9,628 million and$10,642 million . All of these free cash flows measures have limitations as they omit certain components of the overall cash flow statement and do not represent the residual cash flow available for discretionary expenditures. For example, these measures of free cash flows do not incorporate the portion of payments representing principal reductions of debt or cash payments for business acquisitions. Additionally, our mix of property and equipment acquisitions with cash or other financing options may change over time. Therefore, we believe it is important to view free cash flows measures only as a complement to our entire consolidated statements of cash flows. 31
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Effect of Foreign Exchange Rates Information regarding the effect of foreign exchange rates, versus theU.S. Dollar, on our net sales, operating expenses, and operating income is provided to show reported period operating results had the foreign exchange rates remained the same as those in effect in the comparable prior year periods. The effect on our net sales, operating expenses, and operating income from changes in our foreign exchange rates versus theU.S. Dollar is as follows (in millions): Year Ended December 31, 2019 Year Ended December 31, 2020 Exchange At Prior Exchange At Prior As Rate Year As Rate Year Reported Effect (1) Rates (2) Reported Effect (1) Rates (2) Net sales$ 280,522 $ 2,560 $ 283,082 $ 386,064 $ (1,438) $ 384,626 Operating expenses 265,981 2,740 268,721 363,165 (989) 362,176 Operating income 14,541 (180) 14,361 22,899 (449) 22,450 ___________________ (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. Guidance We provided guidance onFebruary 2, 2021 , in our earnings release furnished on Form 8-K as set forth below. These forward-looking statements reflect Amazon.com's expectations as ofFebruary 2, 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 those outlined in Item 1A of Part I, "Risk Factors." This guidance reflects our estimates as ofFebruary 2, 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 first 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 first quarter of 2021, or whether other currently unanticipated direct or indirect consequences of the pandemic are reasonably likely to materially affect our operations. First Quarter 2021 Guidance •Net sales are expected to be between$100.0 billion and$106.0 billion , or to grow between 33% and 40% compared with first quarter 2020. This guidance anticipates a favorable impact of approximately 300 basis points from foreign exchange rates. •Operating income is expected to be between$3.0 billion and$6.5 billion , compared with$4.0 billion in first quarter 2020. This guidance assumes approximately$2.0 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. 32
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