AMAZON COM INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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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. The
SEC has defined a company's critical accounting policies as the ones that are
most important to the portrayal of the company's financial condition and results
of operations, and which require the company to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based on this definition, we have identified the
critical accounting policies and judgments addressed below. We also have other
key accounting policies, which involve the use of estimates, judgments, and
assumptions that are significant to understanding our results. For additional
information, see Item 8 of Part II, "Financial Statements and Supplementary Data
- Note 1 - Description of Business, Accounting Policies, and Supplemental
Disclosures" of our 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 of June 30, 2022, we would have
recorded an additional cost of sales of approximately $425 million.

In addition, we make commitments to our suppliers for certain electronic device components and certain products. These commitments are based on expected customer demand. If we reduce these commitments, we may incur additional costs.

Income taxes

We are subject to income taxes in the U.S. (federal and state) and numerous
foreign jurisdictions. Tax laws, regulations, administrative practices,
principles, and interpretations in various jurisdictions may be subject to
significant change, with or without notice, due to economic, political, and
other conditions, and significant judgment is required in evaluating and
estimating our provision and accruals for these taxes. There are many
transactions that occur during the ordinary course of business for which the
ultimate tax determination is uncertain. In addition, our actual and forecasted
earnings are subject to
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changes due to economic, political and other conditions and significant judgment is required to determine 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.

Cash and capital resources

The 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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ended June 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 ended June 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 ended June 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 ended June 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 ended June 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 of June 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 current U.S.
taxation and the subsequent repatriation of those earnings is not subject to tax
in the U.S. We intend to invest substantially all of our foreign subsidiary
earnings, as well as our capital in our foreign subsidiaries, indefinitely
outside of the U.S. in those jurisdictions in which we would incur significant,
additional costs upon repatriation of such amounts.

Our U.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. Effective January 1, 2022, research and development expenses are
required to be capitalized and amortized for U.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 ended June 30, 2021 and 2022.

As of December 31, 2021 and June 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.
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Operating results

We have organized our operations into three segments: North America, International and AWS. These segments reflect how the Company assesses its business performance and manages its operations. See Item 1 of Part I, “Financial Statements – Note 8 – Segment Information”.

Insight

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 our North 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 our North 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

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               2022
Net 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 ended June 30, 2022. For a discussion of the
effect of foreign exchange rates on sales growth, see "Effect of Foreign
Exchange Rates" below.
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North America sales increased 10% in Q2 2022, and 9% for the six months ended
June 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 ended
June 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 ended June 30, 2022.

AWS sales increased 33% in Q2 2022, and 35% for the six months ended June 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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