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AMAZON COM INC - Quarter Report: 2016 June (Form 10-Q)

Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________
FORM 10-Q
____________________________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to             .
Commission File No. 000-22513
____________________________________
AMAZON.COM, INC.
(Exact name of registrant as specified in its charter)
 ____________________________________
Delaware
 
91-1646860
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
410 Terry Avenue North, Seattle, Washington 98109-5210
(206) 266-1000
(Address and telephone number, including area code, of registrant’s principal executive offices)
 ____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
x
Accelerated filer
 
¨
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
 
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

474,073,542 shares of common stock, par value $0.01 per share, outstanding as of July 20, 2016
 


Table of Contents

AMAZON.COM, INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 2016
INDEX
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
Item 1
 
 
 
 
 
Item 2
Item 3
Item 4
 
 
PART II. OTHER INFORMATION
 
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6


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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
  
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
Twelve Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
$
12,470

 
$
10,237

 
$
15,890

 
$
14,557

 
$
10,269

 
$
5,057

OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
857

 
92

 
1,370

 
35

 
1,931

 
(188
)
Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
 
 
 
 
 
 
 
 
 
Depreciation of property and equipment, including internal-use software and website development, and other amortization, including capitalized content costs
1,909

 
1,504

 
3,736

 
2,930

 
7,087

 
5,557

Stock-based compensation
768

 
563

 
1,312

 
969

 
2,461

 
1,755

Other operating expense (income), net
53

 
42

 
97

 
87

 
166

 
153

Losses (gains) on sales of marketable securities, net
1

 
1

 
3

 
2

 
6

 
(1
)
Other expense (income), net
31

 
18

 
(21
)
 
109

 
115

 
229

Deferred income taxes
106

 
(43
)
 
117

 
(45
)
 
243

 
(130
)
Excess tax benefits from stock-based compensation
(113
)
 
(95
)
 
(320
)
 
(117
)
 
(323
)
 
(1
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
Inventories
(57
)
 
(27
)
 
712

 
693

 
(2,167
)
 
(1,291
)
Accounts receivable, net and other
(1,184
)
 
(430
)
 
(772
)
 
11

 
(2,538
)
 
(1,456
)
Accounts payable
977

 
373

 
(4,793
)
 
(3,876
)
 
3,377

 
2,901

Accrued expenses and other
(15
)
 
(129
)
 
(972
)
 
(1,068
)
 
1,007

 
387

Additions to unearned revenue
2,340

 
1,397

 
5,154

 
3,200

 
9,355

 
5,647

Amortization of previously unearned revenue
(2,208
)
 
(1,269
)
 
(4,318
)
 
(2,432
)
 
(7,994
)
 
(4,582
)
Net cash provided by (used in) operating activities
3,465

 
1,997

 
1,305

 
498

 
12,726

 
8,980

INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment, including internal-use software and website development, net
(1,711
)
 
(1,213
)
 
(2,890
)
 
(2,084
)
 
(5,395
)
 
(4,607
)
Acquisitions, net of cash acquired, and other
(14
)
 
(8
)
 
(30
)
 
(374
)
 
(452
)
 
(1,287
)
Sales and maturities of marketable securities
931

 
470

 
2,069

 
845

 
4,249

 
2,639

Purchases of marketable securities
(1,645
)
 
(625
)
 
(2,281
)
 
(1,610
)
 
(4,762
)
 
(3,379
)
Net cash provided by (used in) investing activities
(2,439
)
 
(1,376
)
 
(3,132
)
 
(3,223
)
 
(6,360
)
 
(6,634
)
FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Excess tax benefits from stock-based compensation
113

 
95

 
320

 
117

 
323

 
1

Proceeds from long-term debt and other
66

 
44

 
75

 
226

 
202

 
6,236

Repayments of long-term debt and other
(70
)
 
(215
)
 
(245
)
 
(531
)
 
(1,366
)
 
(797
)
Principal repayments of capital lease obligations
(1,116
)
 
(580
)
 
(1,917
)
 
(1,082
)
 
(3,298
)
 
(1,832
)
Principal repayments of finance lease obligations
(32
)
 
(35
)
 
(61
)
 
(74
)
 
(108
)
 
(155
)
Net cash provided by (used in) financing activities
(1,039
)
 
(691
)
 
(1,828
)
 
(1,344
)
 
(4,247
)
 
3,453

Foreign currency effect on cash and cash equivalents
64

 
102

 
286

 
(219
)
 
133

 
(587
)
Net increase (decrease) in cash and cash equivalents
51

 
32

 
(3,369
)
 
(4,288
)
 
2,252

 
5,212

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
12,521

 
$
10,269

 
$
12,521

 
$
10,269

 
$
12,521

 
$
10,269

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
 
 
 
 
 
 
 
Cash paid for interest on long-term debt
$
143

 
$
152

 
$
145

 
$
169

 
$
301

 
$
212

Cash paid for interest on capital and finance lease obligations
48

 
35

 
95

 
67

 
180

 
119

Cash paid for income taxes (net of refunds)
88

 
65

 
226

 
119

 
380

 
188

Property and equipment acquired under capital leases
1,422

 
1,384

 
2,297

 
2,338

 
4,676

 
4,710

Property and equipment acquired under build-to-suit leases
231

 
153

 
582

 
256

 
870

 
813

See accompanying notes to consolidated financial statements.

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Table of Contents

AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
 
  
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Net product sales
$
21,116

 
$
17,104

 
$
41,697

 
$
34,187

Net service sales
9,288

 
6,081

 
17,835

 
11,714

Total net sales
30,404

 
23,185

 
59,532

 
45,901

Operating expenses:
 
 
 
 
 
 
 
Cost of sales
19,180

 
15,160

 
38,047

 
30,555

Fulfillment
3,878

 
2,876

 
7,565

 
5,634

Marketing
1,546

 
1,150

 
2,982

 
2,233

Technology and content
3,880

 
3,020

 
7,405

 
5,774

General and administrative
580

 
467

 
1,077

 
894

Other operating expense (income), net
55

 
48

 
100

 
92

Total operating expenses
29,119

 
22,721

 
57,176

 
45,182

Operating income
1,285

 
464

 
2,356

 
719

Interest income
24

 
12

 
45

 
23

Interest expense
(116
)
 
(114
)
 
(233
)
 
(228
)
Other income (expense), net
(14
)
 

 
66

 
(131
)
Total non-operating income (expense)
(106
)
 
(102
)
 
(122
)
 
(336
)
Income before income taxes
1,179

 
362

 
2,234

 
383

Provision for income taxes
(307
)
 
(266
)
 
(782
)
 
(337
)
Equity-method investment activity, net of tax
(15
)
 
(4
)
 
(82
)
 
(11
)
Net income
$
857

 
$
92

 
$
1,370

 
$
35

Basic earnings per share
$
1.81

 
$
0.20

 
$
2.90

 
$
0.07

Diluted earnings per share
$
1.78

 
$
0.19

 
$
2.84

 
$
0.07

Weighted-average shares used in computation of earnings per share:
 
 
 
 
 
 
 
Basic
473

 
467

 
472

 
466

Diluted
483

 
476

 
482

 
475

See accompanying notes to consolidated financial statements.


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Table of Contents

AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(unaudited)
 
  
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
857

 
$
92

 
$
1,370

 
$
35

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax of $36, $1, $13, and $0
11

 
128

 
113

 
(114
)
Net change in unrealized gains (losses) on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains (losses), net of tax of $(17), $(8), $(17), and $(8)
31

 
6

 
37

 
7

Reclassification adjustment for losses (gains) included in “Other income (expense), net,” net of tax of $0, $0, $(1), and $(1)
1

 
1

 
2

 
1

Net unrealized gains (losses) on available-for-sale securities
32

 
7

 
39

 
8

Total other comprehensive income (loss)
43

 
135

 
152

 
(106
)
Comprehensive income (loss)
$
900

 
$
227

 
$
1,522

 
$
(71
)
See accompanying notes to consolidated financial statements.


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Table of Contents

AMAZON.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
 
 
June 30, 2016
 
December 31, 2015
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
12,521

 
$
15,890

Marketable securities
4,019

 
3,918

Inventories
9,588

 
10,243

Accounts receivable, net and other
6,092

 
5,654

Total current assets
32,220

 
35,705

Property and equipment, net
25,190

 
21,838

Goodwill
3,774

 
3,759

Other assets
3,892

 
3,445

Total assets
$
65,076

 
$
64,747

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
16,123

 
$
20,397

Accrued expenses and other
9,613

 
10,372

Unearned revenue
3,851

 
3,118

Total current liabilities
29,587

 
33,887

Long-term debt
8,212

 
8,227

Other long-term liabilities
10,739

 
9,249

Commitments and contingencies (Note 3)


 


Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value:
 
 
 
Authorized shares — 500
 
 
 
Issued and outstanding shares — none

 

Common stock, $0.01 par value:
 
 
 
Authorized shares — 5,000
 
 
 
Issued shares — 497 and 494
 
 
 
Outstanding shares — 474 and 471
5

 
5

Treasury stock, at cost
(1,837
)
 
(1,837
)
Additional paid-in capital
15,026

 
13,394

Accumulated other comprehensive loss
(571
)
 
(723
)
Retained earnings
3,915

 
2,545

Total stockholders’ equity
16,538

 
13,384

Total liabilities and stockholders’ equity
$
65,076

 
$
64,747

See accompanying notes to consolidated financial statements.


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Table of Contents

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1 — ACCOUNTING POLICIES
Unaudited Interim Financial Information
We have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our consolidated balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2016 due to seasonal and other factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of our 2015 Annual Report on Form 10-K.
Prior Period Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation, including the allocation of stock-based compensation and “Other operating expense (income), net” to segment results within “Note 7 — Segment Information.” These revised segment results reflect the way the Company evaluates its business performance and manages its operations. In Q1 2016, current deferred tax assets and current deferred tax liabilities were reclassified as non-current. See “Recent Accounting Pronouncements” below. We also reclassified our capitalized debt issuance costs from “Other assets” to “Long-term debt” as a result of the adoption of new accounting guidance. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Amazon.com, Inc., its wholly-owned subsidiaries, and those entities in which we have a variable interest and of which we are the primary beneficiary, including certain entities in India and China (collectively, the “Company”). Intercompany balances and transactions between consolidated entities are eliminated.
Use of Estimates
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. Estimates are used for, but not limited to, determining the selling price of products and services in multiple element revenue arrangements and determining the amortization period of these elements, incentive discount offers, sales returns, vendor funding, stock-based compensation forfeiture rates, income taxes, valuation and impairment of investments, inventory valuation and inventory purchase commitments, collectability of receivables, valuation of acquired intangibles and goodwill, depreciable lives of property and equipment, internal-use software and website development costs, acquisition purchase price allocations, investments in equity interests, and contingencies. Actual results could differ materially from those estimates.
Earnings per Share
Basic earnings per share is calculated using our weighted-average outstanding common shares. Diluted earnings per share is calculated using our weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method. In periods when we have a net loss, stock awards are excluded from our calculation of earnings per share as their inclusion would have an antidilutive effect.

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The following table shows the calculation of diluted shares (in millions):
  
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Shares used in computation of basic earnings per share
473

 
467

 
472

 
466

Total dilutive effect of outstanding stock awards
10

 
9

 
10

 
9

Shares used in computation of diluted earnings per share
483

 
476

 
482

 
475

Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date of the revenue recognition guidance to reporting periods beginning after December 15, 2017. Early adoption is permitted for reporting periods beginning after December 15, 2016. We are continuing to evaluate our method of adoption and the impact this ASU, and related amendments and interpretations, will have on our consolidated financial statements.
In November 2015, the FASB issued an ASU amending the accounting for income taxes and requiring all deferred tax assets and liabilities to be classified as non-current on the consolidated balance sheets. The ASU is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The ASU may be adopted either prospectively or retrospectively. We adopted this ASU in Q1 2016 and retrospectively adjusted prior periods. Upon adoption, current deferred tax assets of $769 million and current deferred tax liabilities of $13 million in our December 31, 2015 consolidated balance sheet were reclassified as non-current.
In February 2016, the FASB issued an ASU amending the accounting for leases. The new guidance requires the recognition of lease assets and liabilities for operating leases with terms of more than 12 months, in addition to those currently recorded, on our consolidated balance sheets. Presentation of leases within the consolidated statements of operations and consolidated statements of cash flows will be generally consistent with the current lease accounting guidance. The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of the ASU; however, we expect the ASU will have a material impact on our consolidated financial statements, primarily to the consolidated balance sheets and related disclosures.
In March 2016, the FASB issued an ASU amending the accounting for stock-based compensation and requiring excess tax benefits and deficiencies to be recognized as a component of income tax expense rather than equity. This guidance also requires excess tax benefits to be presented as an operating activity on the statement of cash flows and allows an entity to make an accounting policy election to either estimate expected forfeitures or to account for them as they occur. The ASU is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact of the ASU; however, we expect the ASU will have a material impact on our consolidated financial statements.
Note 2 — CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
As of June 30, 2016, and December 31, 2015, our cash, cash equivalents, and marketable securities primarily consisted of cash, U.S. and foreign government and agency securities, AAA-rated money market funds, and other investment grade securities. Cash equivalents and marketable securities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
We measure the fair value of money market funds and equity securities based on quoted prices in active markets for identical assets or liabilities. All other financial instruments were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by

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observable market data. We did not hold any cash, cash equivalents, or marketable securities categorized as Level 3 assets as of June 30, 2016, or December 31, 2015.
The following tables summarize, by major security type, our cash, cash equivalents, and marketable securities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in millions):
 
 
June 30, 2016
 
December 31, 2015
  
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Total
Estimated
Fair Value
 
Total
Estimated
Fair Value
Cash
$
6,126

 
$

 
$

 
$
6,126

 
$
6,201

Level 1 securities:
 
 
 
 
 
 
 
 
 
Money market funds
6,802

 

 

 
6,802

 
8,025

Equity securities
23

 
57

 

 
80

 
15

Level 2 securities:
 
 
 
 
 
 
 
 
 
Foreign government and agency securities
50

 

 

 
50

 
49

U.S. government and agency securities
3,180

 
4

 
(3
)
 
3,181

 
5,167

Corporate debt securities
538

 
2

 

 
540

 
477

Asset-backed securities
147

 

 
(1
)
 
146

 
117

Other fixed income securities
70

 
1

 

 
71

 
42

 
$
16,936

 
$
64

 
$
(4
)
 
$
16,996

 
$
20,093

Less: Restricted cash, cash equivalents, and marketable securities (1)
 
 
 
 
 
 
(456
)
 
(285
)
Total cash, cash equivalents, and marketable securities
 
 
 
 
 
 
$
16,540

 
$
19,808

___________________
(1)
We are required to pledge or otherwise restrict a portion of our cash, cash equivalents, and marketable securities as collateral for standby and trade letters of credit, guarantees, debt, real estate leases, and amounts due to third-party sellers in certain jurisdictions. We classify cash, cash equivalents, and marketable securities with use restrictions of less than twelve months as “Accounts receivable, net and other” and of twelve months or longer as non-current “Other assets” on our consolidated balance sheets. See “Note 3 — Commitments and Contingencies.”
The following table summarizes the contractual maturities of our cash equivalents and marketable fixed-income securities as of June 30, 2016 (in millions):
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$
9,138

 
$
9,140

Due after one year through five years
1,272

 
1,275

Due after five years through ten years
155

 
154

Due after ten years
222

 
221

Total
$
10,787

 
$
10,790

Actual maturities may differ from the contractual maturities because borrowers may have certain prepayment conditions.
We also hold equity warrant assets giving us the right to acquire stock of other companies. As of June 30, 2016, and December 31, 2015, these warrants had a fair value of $133 million and $16 million, and are recorded within “Other assets” on our consolidated balance sheets. The related gain (loss) recorded in “Other income (expense), net” was $(26) million and $0 in Q2 2016 and Q2 2015, and $(20) million and $2 million in the six months ended June 30, 2016 and 2015. These assets are primarily classified as Level 2 assets.

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Note 3 — COMMITMENTS AND CONTINGENCIES
Commitments
We have entered into non-cancellable operating, capital, and finance leases for equipment and office, fulfillment, sortation, delivery, data center, and renewable energy facilities. Rental expense under operating lease agreements was $336 million and $267 million for Q2 2016 and Q2 2015, and $657 million and $533 million for the six months ended June 30, 2016 and 2015.
The following summarizes our principal contractual commitments, excluding open orders for purchases that support normal operations, as of June 30, 2016 (in millions): 
 
Six Months Ended December 31,
 
Year Ended December 31,
 
 
 
 
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
Debt principal and interest
$
166

 
$
1,324

 
$
312

 
$
1,272

 
$
246

 
$
9,157

 
$
12,477

Capital lease obligations, including interest (1)
1,607

 
3,251

 
1,995

 
691

 
268

 
184

 
7,996

Finance lease obligations, including interest (2)
88

 
177

 
181

 
185

 
188

 
1,582

 
2,401

Operating leases
670

 
1,140

 
1,034

 
909

 
848

 
3,553

 
8,154

Unconditional purchase obligations (3)
341

 
699

 
506

 
263

 
123

 
35

 
1,967

Other commitments (4) (5)
736

 
573

 
430

 
339

 
283

 
2,062

 
4,423

Total commitments
$
3,608

 
$
7,164

 
$
4,458

 
$
3,659

 
$
1,956

 
$
16,573

 
$
37,418

___________________
(1)
Excluding interest, current capital lease obligations of $3.4 billion and $3.0 billion are recorded within “Accrued expenses and other” as of June 30, 2016, and December 31, 2015, and $4.3 billion and $4.2 billion are recorded within “Other long-term liabilities” as of June 30, 2016, and December 31, 2015.
(2)
Excluding interest, current finance lease obligations of $107 million and $99 million are recorded within “Accrued expenses and other” as of June 30, 2016, and December 31, 2015, and $1.8 billion and $1.7 billion are recorded within “Other long-term liabilities” as of June 30, 2016, and December 31, 2015.
(3)
Includes unconditional purchase obligations related to long-term agreements to acquire and license digital media content that are not reflected on the consolidated balance sheets. For those agreements with variable terms, we do not estimate the total obligation beyond any minimum quantities and/or pricing as of the reporting date. Purchase obligations associated with renewal provisions solely at the option of the content provider are included to the extent such commitments are fixed or a minimum amount is specified.
(4)
Includes the estimated timing and amounts of payments for rent and tenant improvements associated with build-to-suit lease arrangements and equipment lease arrangements that have not been placed in service and digital media content liabilities associated with long-term digital media content assets with initial terms greater than one year.
(5)
Excludes $1.6 billion of tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period of payment, if any.
Pledged Assets
As of June 30, 2016, and December 31, 2015, we have pledged or otherwise restricted $581 million and $418 million of our cash, cash equivalents, and marketable securities, and certain property and equipment as collateral for standby and trade letters of credit, guarantees, debt relating to certain international operations, real estate leases, and amounts due to third-party sellers in certain jurisdictions.
Other Contingencies
As previously disclosed, we recently determined that we processed and delivered orders of consumer products for certain individuals and entities located outside Iran covered by the Iran Threat Reduction and Syria Human Rights Act or other United States sanctions and export control laws. The consumer products included books, music, other media, apparel, home and kitchen, health and beauty, jewelry, office, consumer electronics, software, lawn and patio, grocery, and automotive products.  Our review is ongoing and we have voluntarily reported these orders to the United States Treasury Department’s Office of Foreign Assets Control and the United States Department of Commerce’s Bureau of Industry and Security. We intend to cooperate fully with OFAC and BIS with respect to their review, which may result in the imposition of penalties.  For additional information, see Item 5 of Part II, “Other Information - Disclosure Pursuant to Section 13(r) of the Exchange Act.”

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Legal Proceedings
The Company is involved from time to time in claims, proceedings, and litigation, including the matters described in Item 8 of Part II, “Financial Statements and Supplementary Data — Note 7 — Commitments and Contingencies — Legal Proceedings” of our 2015 Annual Report on Form 10-K and in Item 1 of Part 1, “Financial Statements — Note 3 — Commitments and Contingencies — Legal Proceedings” of our Quarterly Report on Form 10-Q for the Period Ended March 31, 2016, as supplemented by the following:
In December 2013, Appistry, Inc. filed a complaint against Amazon.com, Inc. and Amazon Web Services, Inc. for patent infringement in the United States District Court for the Eastern District of Missouri. The complaint alleges, among other things, that Amazon’s Elastic Compute Cloud infringes U.S. Patent Nos. 8,200,746, entitled “System And Method For Territory-Based Processing Of Information,” and 8,341,209, entitled “System And Method For Processing Information Via Networked Computers Including Request Handlers, Process Handlers, And Task Handlers.” The complaint seeks injunctive relief, an unspecified amount of damages, treble damages, costs, and interest. In March 2015, the case was transferred to the United States District Court for the Western District of Washington. In July 2015, the court granted our motion for judgment on the pleadings and invalidated the patents-in-suit. In August 2015, the court entered judgment in our favor. In September 2015, the plaintiff appealed that judgment to the United States Court of Appeals for the Federal Circuit, and filed a new complaint against Amazon.com, Inc. and Amazon Web Services, Inc. in the United States District Court for the Western District of Washington. The 2015 complaint alleges, among other things, that Amazon’s Elastic Compute Cloud, Simple Workflow, and Herd infringe U.S. Patent Nos. 8,682,959, entitled “System And Method For Fault Tolerant Processing Of Information Via Networked Computers Including Request Handlers, Process Handlers, And Task Handlers,” and 9,049,267, entitled “System And Method For Processing Information Via Networked Computers Including Request Handlers, Process Handlers, And Task Handlers.” The 2015 complaint seeks injunctive relief, an unspecified amount of damages, treble damages, costs, and interest. In July 2016, the court invalidated the patents asserted in the 2015 complaint and granted our motion to dismiss the complaint with prejudice. In July 2016, Appistry appealed that judgment to the United States Court of Appeals for the Federal Circuit. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in these matters.
In March 2014, Kaavo, Inc. filed a complaint against Amazon.com, Inc. and Amazon Web Services, Inc. for patent infringement in the United States District Court for the District of Delaware. The complaint alleges, among other things, that Amazon Web Services’ Elastic Beanstalk and CloudFormation infringe U.S. Patent No. 8,271,974, entitled “Cloud Computing Lifecycle Management For N-Tier Applications.” The complaint seeks injunctive relief, an unspecified amount of damages, costs, and interest. In June 2015, the case was stayed pending resolution of a motion for judgment on the pleadings in a related case. In May 2016, the case was reopened for claim construction discovery. In July 2015, Kaavo Inc. filed another complaint against Amazon.com, Inc. and Amazon Web Services, Inc. in the United States District Court for the District of Delaware. The 2015 complaint alleges, among other things, that CloudFormation infringes U.S. Patent No. 9,043,751, entitled “Methods And Devices For Managing A Cloud Computing Environment.” The 2015 complaint seeks injunctive relief, an unspecified amount of damages, enhanced damages, attorneys’ fees, costs, and interest. In January 2016, the 2015 case was stayed pending resolution of a motion for judgment on the pleadings. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in these matters.
In March 2015, Zitovault, LLC filed a complaint against Amazon.com, Inc., Amazon.com, LLC, Amazon Web Services, Inc., and Amazon Web Services, LLC for patent infringement in the United States District Court for the Eastern District of Texas. The complaint alleges that Elastic Compute Cloud, Virtual Private Cloud, Elastic Load Balancing, Auto-Scaling, and Elastic Beanstalk infringe U.S. Patent No. 6,484,257, entitled “System and Method for Maintaining N Number of Simultaneous Cryptographic Sessions Using a Distributed Computing Environment.” The complaint seeks injunctive relief, an unspecified amount of damages, enhanced damages, attorneys’ fees, costs, and interest. In January 2016, the case was transferred to the United States District Court for the Western District of Washington. In June 2016, the case was stayed pending resolution of a review petition we filed with the United States Patent and Trademark Office. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter.
The outcomes of our legal proceedings and other contingencies are inherently unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular period. In addition, for some matters for which a loss is probable or reasonably possible, an estimate of the amount of loss or range of losses is not possible and we may be unable to estimate the possible loss or range of losses that could potentially result from the application of non-monetary remedies.
See also “Note 6 — Income Taxes.”

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Note 4 — LONG-TERM DEBT
In December 2014, and November 2012, we issued $6.0 billion and $3.0 billion of unsecured senior notes, of which $8.3 billion is outstanding, as described in the table below (collectively, the “Notes”). As of June 30, 2016, and December 31, 2015, the unamortized discount on the Notes was $94 million and $97 million. We also have other long-term debt with a carrying amount, including the current portion, of $97 million and $312 million as of June 30, 2016, and December 31, 2015. The face value of our total long-term debt obligations is as follows (in millions):

 
June 30,
2016
 
December 31, 2015
1.20% Notes due on November 29, 2017 (1)
$
1,000

 
$
1,000

2.50% Notes due on November 29, 2022 (1)
1,250

 
1,250

2.60% Notes due on December 5, 2019 (2)
1,000

 
1,000

3.30% Notes due on December 5, 2021 (2)
1,000

 
1,000

3.80% Notes due on December 5, 2024 (2)
1,250

 
1,250

4.80% Notes due on December 5, 2034 (2)
1,250

 
1,250

4.95% Notes due on December 5, 2044 (2)
1,500

 
1,500

Other long-term debt
97

 
312

Total debt
8,347

 
8,562

Less current portion of long-term debt
(41
)
 
(238
)
Face value of long-term debt
$
8,306

 
$
8,324

_____________________________
(1)
Issued in November 2012, effective interest rates of the 2017 and 2022 Notes were 1.38% and 2.66%.
(2)
Issued in December 2014, effective interest rates of the 2019, 2021, 2024, 2034, and 2044 Notes were 2.73%, 3.43%, 3.90%, 4.92%, and 5.11%.
Interest on the Notes issued in 2014 is payable semi-annually in arrears in June and December. Interest on the Notes issued in 2012 is payable semi-annually in arrears in May and November. We may redeem the Notes at any time in whole, or from time to time, in part at specified redemption prices. We are not subject to any financial covenants under the Notes. The proceeds from the Notes are used for general corporate purposes. The estimated fair value of the Notes was approximately $9.1 billion and $8.5 billion as of June 30, 2016, and December 31, 2015, which is based on quoted prices for our publicly-traded debt as of those dates.
The other debt, including the current portion, had a weighted-average interest rate of 2.45% and 3.74% as of June 30, 2016, and December 31, 2015. We used the net proceeds from the issuance of this debt primarily to fund certain international operations. The estimated fair value of the other long-term debt, which is based on Level 2 inputs, approximated its carrying value as of June 30, 2016, and December 31, 2015.
On May 20, 2016, we entered into an unsecured revolving credit facility (the “Credit Agreement”) with a syndicate of lenders that provides us with a borrowing capacity of up to $3.0 billion. This Credit Agreement replaces the prior credit agreement entered into on September 5, 2014. The Credit Agreement has a term of three years, but it may be extended for up to three additional one-year terms if approved by the lenders. The initial interest rate applicable to outstanding balances under the Credit Agreement is the London interbank offered rate (“LIBOR”) plus 0.60%, with a commitment fee of 0.05% on the undrawn portion of the credit facility, under our current credit ratings. If our credit ratings are downgraded these rates could increase to as much as LIBOR plus 1.00% and 0.09%, respectively. There were no borrowings outstanding under the credit agreements as of June 30, 2016, and December 31, 2015.
Note 5 — STOCKHOLDERS’ EQUITY
Stock Repurchase Activity
In February 2016, the Board of Directors authorized a program to repurchase up to $5 billion of our common stock, with no fixed expiration. This stock repurchase authorization replaces the previous $2 billion stock repurchase authorization, approved by the Board of Directors in 2010. There were no repurchases of common stock in Q2 2016 or Q2 2015.

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Stock Award Activity
Common shares outstanding plus shares underlying outstanding stock awards totaled 495 million as of June 30, 2016, and 490 million as of December 31, 2015. These totals include all vested and unvested stock awards outstanding, including those awards we estimate will be forfeited. Stock-based compensation expense is as follows (in millions):
  
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Fulfillment
$
186

 
$
132

 
$
302

 
$
222

Marketing
80

 
50

 
136

 
84

Technology and content
419

 
319

 
737

 
552

General and administrative
83

 
62

 
137

 
111

Total stock-based compensation expense
$
768

 
$
563

 
$
1,312

 
$
969

The compensation expense for stock options, the total intrinsic value for stock options outstanding, the amount of cash received from the exercise of stock options, and the related tax benefits were not material for the six months ended June 30, 2016.
The following table summarizes our restricted stock unit activity for the six months ended June 30, 2016 (in millions):
 
Number of Units
 
Weighted-Average
Grant-Date
Fair Value
Outstanding as of December 31, 2015
18.9

 
$
362

Units granted
6.3

 
609

Units vested
(3.1
)
 
309

Units forfeited
(1.2
)
 
401

Outstanding as of June 30, 2016
20.9

 
$
443

Scheduled vesting for outstanding restricted stock units as of June 30, 2016, is as follows (in millions):
 
Six Months Ended December 31,
 
Year Ended December 31,
 
 
 
 
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
Scheduled vesting—restricted stock units
3.1

 
7.1

 
6.9

 
2.7

 
0.8

 
0.3

 
20.9

As of June 30, 2016, there was $4.5 billion of net unrecognized compensation cost related to unvested stock-based compensation arrangements. This compensation is recognized on an accelerated basis with approximately half of the compensation expected to be expensed in the next twelve months, and has a weighted-average recognition period of 1.2 years.
Note 6 — INCOME TAXES
Our tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant variation due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, changes in how we do business, acquisitions (including integrations) and investments, audit-related developments, foreign currency gains (losses), tax law developments (including changes in statutes, regulations, case law, and administrative practices), and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, 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.
For 2016, our effective tax rate will be favorably affected by the impact of the U.S. federal research and development credit, an increase in amount of pre-tax income relative to income tax expense, an increase in amortization deductions for which we will realize a tax benefit, and a decline in the proportion of nondeductible expenses and losses for which we may not realize a related tax benefit. We record valuation allowances against the deferred tax assets associated with losses for which we

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may not realize a related tax benefit. Our effective tax rate will also be adversely affected by state income taxes. We will generate income and losses in lower tax jurisdictions primarily related to our European operations, which are headquartered in Luxembourg.
Our income tax provision for the six months ended June 30, 2016 was $782 million, which included $70 million of discrete tax benefits primarily attributable to audit-related and tax law developments. Our income tax provision for the six months ended June 30, 2015 was $337 million, which included $41 million of discrete tax expense primarily attributed to acquisition integrations. Cash paid for income taxes (net of refunds) was $88 million and $65 million in Q2 2016 and Q2 2015 and $226 million and $119 million for the six months ended June 30, 2016 and 2015.
As of June 30, 2016, and December 31, 2015, tax contingencies were $1.6 billion and $1.2 billion. We expect the total amount of tax contingencies will grow in 2016. In addition, changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax examinations in one or more jurisdictions. These assessments or settlements may or may not result in changes to our contingencies related to positions on prior years’ tax filings.
We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for the calendar year 2005 and thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses with respect to years under examination as well as subsequent periods. As previously disclosed, we have received Notices of Proposed Adjustment from the IRS for transactions undertaken in the 2005 and 2006 calendar years relating to transfer pricing with our foreign subsidiaries. The IRS is seeking to increase our U.S. taxable income by an amount that would result in additional federal tax of approximately $1.5 billion, subject to interest. To date, we have not resolved this matter administratively and are currently contesting it in U.S. Tax Court. We continue to disagree with these IRS positions and intend to defend ourselves vigorously in this matter. In addition to the risk of additional tax for 2005 and 2006 transactions, if this litigation is adversely determined or if the IRS were to seek transfer pricing adjustments of a similar nature for transactions in subsequent years, we could be subject to significant additional tax liabilities.
Certain of our subsidiaries are under examination or investigation or may be subject to examination or investigation by the French Tax Administration (“FTA”) for calendar year 2006 and thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes. In September 2012, we received proposed tax assessment notices for calendar years 2006 through 2010 relating to the allocation of income between foreign jurisdictions. In June 2015, we received final tax collection notices for these years assessing additional French tax of €196 million, including interest and penalties through September 2012. We disagree with the assessment and intend to contest it vigorously. We plan to pursue all available administrative remedies, and if we are not able to resolve this matter, we plan to pursue judicial remedies. In addition to the risk of additional tax for years 2006 through 2010, if this litigation is adversely determined or if the FTA were to seek adjustments of a similar nature for subsequent years, we could be subject to significant additional tax liabilities. In addition, in October 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Luxembourg with regard to the corporate income tax paid by certain of our subsidiaries comply with European Union rules on state aid. If this matter is adversely resolved, Luxembourg may be required to assess, and we may be required to pay, additional amounts with respect to current and prior periods from 2003 onwards and our taxes in the future could increase. We are also subject to taxation in various states and other foreign jurisdictions including Canada, China, Germany, India, Italy, Japan, Luxembourg, and the United Kingdom. We are under, or may be subject to, audit or examination and additional assessments by the relevant authorities in respect of these particular jurisdictions primarily for 2008 and thereafter.
Note 7 — SEGMENT INFORMATION
We have organized our operations into three segments: North America, International, and AWS. We allocate to segment results the operating expenses “Fulfillment,” “Marketing,” “Technology and content,” and “General and administrative” based on usage, which is generally reflected in the segment in which the costs are incurred. The majority of technology infrastructure expenses are allocated to the AWS segment based on usage. The majority of the remaining non-infrastructure technology costs are incurred in the U.S. and are allocated to our North America segment. In Q1 2016, we began allocating stock-based compensation and “Other operating expense (income), net” to our segment results. In our segment results, these amounts are combined and titled “Stock-based compensation and other.” There are no internal revenue transactions between our reportable segments. These segments reflect the way the Company evaluates its business performance and manages its operations.
North America
The North America segment primarily consists of amounts earned from retail sales of consumer products (including from sellers) and subscriptions through North America-focused websites such as www.amazon.com, www.amazon.ca, and www.amazon.com.mx. This segment includes export sales from these websites.

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International
The International segment primarily consists of amounts earned from retail sales of consumer products (including from sellers) and subscriptions through internationally-focused websites such as www.amazon.com.au, www.amazon.com.br, www.amazon.cn, www.amazon.fr, www.amazon.de, www.amazon.in, www.amazon.it, www.amazon.co.jp, www.amazon.nl, www.amazon.es, and www.amazon.co.uk. This segment includes export sales from these internationally-focused websites (including export sales from these sites to customers in the U.S., Mexico, and Canada), but excludes export sales from our North American websites.
AWS
The AWS segment consists of amounts earned from global sales of compute, storage, database, and other AWS service offerings for start-ups, enterprises, government agencies, and academic institutions.
Information on reportable segments and reconciliation to consolidated net income is as follows (in millions):
  
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
North America
 
 
 
 
 
 
 
Net sales
$
17,674

 
$
13,796

 
$
34,670

 
$
27,202

Operating expenses
16,517

 
13,093

 
32,590

 
25,982

Operating income before stock-based compensation and other
1,157

 
703

 
$
2,080

 
$
1,220

Stock-based compensation and other
455

 
355

 
790

 
617

Operating income
$
702

 
$
348

 
$
1,290

 
$
603

International
 
 
 
 
 
 
 
Net sales
$
9,844

 
$
7,565

 
$
19,410

 
$
15,310

Operating expenses
9,756

 
7,584

 
19,301

 
15,405

Operating income (loss) before stock-based compensation and other
88

 
(19
)
 
$
109

 
$
(95
)
Stock-based compensation and other
223

 
170

 
364

 
288

Operating income (loss)
$
(135
)
 
$
(189
)
 
$
(255
)
 
$
(383
)
AWS
 
 
 
 
 
 
 
Net sales
$
2,886

 
$
1,824

 
$
5,452

 
$
3,389

Operating expenses
2,023

 
1,433

 
3,873

 
2,734

Operating income before stock-based compensation and other
863

 
391

 
$
1,579

 
$
655

Stock-based compensation and other
145

 
86

 
258

 
156

Operating income
$
718

 
$
305

 
$
1,321

 
$
499

Consolidated
 
 
 
 
 
 
 
Net sales
$
30,404

 
$
23,185

 
$
59,532

 
$
45,901

Operating expenses
28,296

 
22,110

 
55,764

 
44,121

Operating income before stock-based compensation and other
2,108

 
1,075

 
3,768

 
1,780

Stock-based compensation and other
823

 
611

 
1,412

 
1,061

Operating income
1,285

 
464

 
2,356

 
719

Total non-operating income (expense)
(106
)
 
(102
)
 
(122
)
 
(336
)
Provision for income taxes
(307
)
 
(266
)
 
(782
)
 
(337
)
Equity-method investment activity, net of tax
(15
)
 
(4
)
 
(82
)
 
(11
)
Net income
$
857

 
$
92

 
$
1,370

 
$
35


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We have aggregated our products and services into groups of similar products and services and provided the supplemental disclosure of net sales (in millions) below. We evaluate whether additional disclosure is appropriate when a product or service category begins to approach a significant level of net sales. For the periods presented, no individual product or service represented more than 10% of net sales.
  
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Net Sales:
 
 
 
Media
$
5,211

 
$
4,714

 
$
10,899

 
$
10,002

Electronics and other general merchandise
21,963

 
16,412

 
42,507

 
32,041

AWS
2,886

 
1,824

 
5,452

 
3,389

Other (1)
344

 
235

 
674

 
469

Consolidated
$
30,404

 
$
23,185

 
$
59,532

 
$
45,901

___________________
(1)
Includes sales from non-retail activities, such as certain advertising services and our co-branded credit card agreements.

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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects, or future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results could differ materially for a variety of reasons, including, among others, fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, 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 taxes, competition, management of growth, potential fluctuations in operating results, international growth and expansion, the outcomes of legal proceedings and claims, fulfillment, sortation, delivery, and data center optimization, risks of inventory management, seasonality, the degree to which we enter into, maintain, and develop commercial agreements, acquisitions and strategic transactions, payments risks, and risks of fulfillment throughput and productivity. In addition, the current global economic climate amplifies 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 2015 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 assets and 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 and Accounting Policies,” of our 2015 Annual Report on Form 10-K and Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies,” 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 or market 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, 2016, we would have recorded an additional cost of sales of approximately $110 million.
In addition, we enter into supplier commitments for certain electronic device components. These commitments are based on forecasted customer demand. If we reduce these commitments, we may incur additional costs.
Goodwill
We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The measurement date of our annual goodwill impairment test is April 1. In testing goodwill for impairment, we may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a two-step impairment test. We test goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired,

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a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on expected category expansion, pricing, market segment share, and general economic conditions. Certain estimates of discounted cash flows involve businesses and geographies with limited financial history and developing revenue models. Changes in these forecasts could significantly change the amount of impairment recorded, if any.
We completed the required annual testing of goodwill for impairment for all reporting units as of April 1, 2016, and determined that goodwill was not impaired. During the quarter, management monitored the actual performance of the business relative to the fair value assumptions used during our annual goodwill impairment test. For the periods presented, no triggering events were identified that required an interim impairment test. As a measure of sensitivity, a 10% decrease in the fair value of any of our reporting units as of April 1, 2016, would have had no impact on the carrying value of our goodwill.
Financial and credit market volatility directly impacts the fair value measurement through our weighted-average cost of capital that we use to determine a discount rate and through our stock price that we use to determine our market capitalization. During times of volatility, significant judgment must be applied to determine whether credit or stock price changes are short-term in nature or a longer-term trend. We have not made any significant changes to the accounting methodology used to evaluate goodwill for impairment. Changes in our estimated future cash flows and asset fair values may cause us to realize material impairment charges in the future. As a measure of sensitivity, a prolonged 20% decrease from our June 30, 2016 closing stock price would not be an indicator of possible impairment.
Stock-Based Compensation
We measure compensation cost for stock awards at fair value and recognize it as compensation expense over the service period for awards expected to vest. The fair value of restricted stock units is determined based on the number of shares granted and the quoted price of our common stock and the fair value of stock options is estimated on the date of grant using a Black-Scholes model. The estimated number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including employee level, economic conditions, time remaining to vest, and historical forfeiture experience. We update our estimated forfeiture rate quarterly. We have not made any significant changes to the accounting methodology used to evaluate stock-based compensation. Changes in our estimates and assumptions may cause us to realize material changes in stock-based compensation expense in the future. As a measure of sensitivity, a 1% change to our estimated forfeiture rate would have had an approximately $60 million impact on our Q2 2016 operating income. Our estimated forfeiture rate as of June 30, 2016, and December 31, 2015, was 28%.
We utilize the accelerated method, rather than the straight-line method, for recognizing compensation expense. For example, over 50% of the compensation cost related to an award vesting ratably over four years is expensed in the first year. If forfeited early in the life of an award, the compensation expense adjustment is much greater under an accelerated method than under a straight-line method.
Income Taxes
We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change 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. Our effective tax rates could be affected by 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 the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies and changes to our existing businesses, acquisitions (including integrations) and investments, changes in our deferred tax assets and liabilities and their valuation, and changes in the relevant tax, accounting, and other laws, regulations, administrative practices, principles, and interpretations, including fundamental changes to the tax laws applicable to corporate multinationals. The U.S., the European Union and its member states, and a number of other countries are actively pursuing changes in this regard.
Except as required under U.S. tax laws, we do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries that have not been previously taxed since we intend to invest such undistributed earnings indefinitely outside of the U.S. If our intent changes or if these funds are needed for our U.S. operations, we would be required to accrue or pay U.S. taxes on some or all of these undistributed earnings and our effective tax rate would be adversely affected. We are also currently subject to audit in various jurisdictions, and these jurisdictions may assess additional income tax liabilities against us.

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Developments in an audit, litigation, or the relevant laws, regulations, administrative practices, principles, and interpretations 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. For instance, the IRS is seeking to increase our U.S. taxable income related to transfer pricing with our foreign subsidiaries for transactions undertaken in 2005 and 2006, and we are currently contesting the matter in U.S. Tax Court. In addition to the risk of additional tax for 2005 and 2006 transactions, if this litigation is adversely determined or if the IRS were to seek transfer pricing adjustments of a similar nature for transactions in subsequent years, we could be subject to significant additional tax liabilities. In addition, in October 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Luxembourg with regard to the corporate income tax paid by certain of our subsidiaries comply with European Union rules on state aid. If this matter is adversely resolved, Luxembourg may be required to assess, and we may be required to pay, additional amounts with respect to current and prior periods and our taxes in the future could increase. Although we believe our tax estimates are reasonable, the final outcome of tax audits, investigations, and any related litigation could be materially different from our historical income tax provisions and accruals.
Recent Accounting Pronouncements
See Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies — Recent Accounting Pronouncements.”



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Liquidity and Capital Resources
Cash flow information is as follows (in millions):
  
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
Twelve Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
 
Operating activities
$
3,465

 
$
1,997

 
$
1,305

 
$
498

 
$
12,726

 
$
8,980

Investing activities
(2,439
)
 
(1,376
)
 
(3,132
)
 
(3,223
)
 
(6,360
)
 
(6,634
)
Financing activities
(1,039
)
 
(691
)
 
(1,828
)
 
(1,344
)
 
(4,247
)
 
3,453

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 $16.5 billion and $19.8 billion as of June 30, 2016, and December 31, 2015. Amounts held in foreign currencies were $5.9 billion and $7.3 billion as of June 30, 2016, and December 31, 2015, and were primarily Euros, Japanese Yen, and British Pounds.
Cash provided by (used in) operating activities was $3.5 billion and $2.0 billion for Q2 2016 and Q2 2015, and $1.3 billion and $498 million for the six months ended June 30, 2016 and 2015. Our operating cash flows result primarily from cash received from our consumer, seller, developer, enterprise, and content creator customers, advertising agreements, and our co-branded credit card agreements, offset by cash payments we make for products and services, employee compensation (less amounts capitalized related to internal-use software that are reflected as cash used in investing activities), 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 ended June 30, 2016, compared to the comparable prior year period, was primarily due to the increase in net income, excluding non-cash charges such as depreciation, amortization, and stock-based compensation, offset by 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, internal-use software and website development costs, 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 $(2.4) billion and $(1.4) billion for Q2 2016 and Q2 2015, and $(3.1) billion and $(3.2) billion for the six months ended June 30, 2016 and 2015, with the variability caused primarily by our decision to purchase or lease property and equipment, purchases, maturities, and sales of marketable securities, and changes in cash paid for acquisitions. Cash capital expenditures were $1.7 billion and $1.2 billion during Q2 2016 and Q2 2015, and $2.9 billion and $2.1 billion for the six months ended June 30, 2016 and 2015. This primarily reflects additional investments in support of continued business growth due to investments in technology infrastructure (the majority of which is to support AWS) and additional capacity to support our fulfillment operations. Capital expenditures included $118 million and $150 million for internal-use software and website development during Q2 2016 and Q2 2015, and $229 million and $279 million for the six months ended June 30, 2016 and 2015. Stock-based compensation capitalized for internal-use software and website development costs does not affect cash flows. We made cash payments, net of acquired cash, related to acquisition and other investment activity of $14 million and $8 million during Q2 2016 and Q2 2015, and $30 million and $374 million for the six months ended June 30, 2016 and 2015.
Cash provided by (used in) financing activities was $(1.0) billion and $(691) million for Q2 2016 and Q2 2015, and $(1.8) billion and $(1.3) billion for the six months ended June 30, 2016 and 2015. Cash outflows from financing activities result from principal repayments on obligations related to capital leases and finance leases and repayments of long-term debt and other. Principal repayments on obligations related to capital leases and finance leases and repayments of long-term debt and other were $1.2 billion and $830 million in Q2 2016 and Q2 2015, and $2.2 billion and $1.7 billion for the six months ended June 30, 2016 and 2015. Property and equipment acquired under capital leases was $1.4 billion during Q2 2016 and Q2 2015, and $2.3 billion for the six months ended June 30, 2016 and 2015, reflecting investments in support of continued business growth primarily due to investments in technology infrastructure for AWS, which investments we expect to continue over time. Cash inflows from financing activities primarily result from proceeds from long-term debt and other and tax benefits relating to excess stock-based compensation deductions. Proceeds from long-term debt and other were $66 million and $44 million in Q2 2016 and Q2 2015, and $75 million and $226 million for the six months ended June 30, 2016 and 2015. Tax benefits relating to excess stock-based compensation deductions are presented as financing cash flows. Cash inflows from tax benefits related to stock-based compensation deductions were $113 million and $95 million in Q2 2016 and Q2 2015, and $320 million and $117 million for the six months ended June 30, 2016 and 2015.
We had no borrowings outstanding under our $3.0 billion Credit Agreement as of June 30, 2016. See Item 1 of Part I, “Financial Statements — Note 4 — Long-Term Debt” for additional information. 

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We recorded net tax provisions of $307 million and $266 million in Q2 2016 and Q2 2015, and $782 million and $337 million for the six months ended June 30, 2016 and 2015. Except as required under U.S. tax laws, we do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries that have not been previously taxed since we intend to invest such undistributed earnings indefinitely outside of the U.S. If our intent changes or if these funds are needed for our U.S. operations, we would be required to accrue or pay U.S. taxes on some or all of these undistributed earnings, and our effective tax rate would be adversely affected. We have tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions that are being utilized to reduce our U.S. taxable income. In December 2015, U.S. legislation was enacted that extended accelerated depreciation deductions on qualifying property through 2019. Cash taxes paid (net of refunds) were $88 million and $65 million for Q2 2016 and Q2 2015, and $226 million and $119 million for the six months ended June 30, 2016 and 2015. As of December 31, 2015, our federal net operating loss carryforward was approximately $1.1 billion and we had approximately $622 million of federal tax credits potentially available to offset future tax liabilities. Our federal tax credits are primarily related to the U.S. federal research and development credit, which was made permanent in 2015. As we utilize our federal net operating losses and tax credits, we expect cash paid for taxes to significantly increase. We endeavor to manage our global taxes on a cash basis, rather than on a financial reporting basis.
Our liquidity is also affected by restricted cash balances that are pledged as collateral for standby and trade letters of credit, guarantees, debt, and real estate leases. 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” on our consolidated balance sheets. As of June 30, 2016, and December 31, 2015, restricted cash, cash equivalents, and marketable securities were $456 million and $285 million. See Item 1 of Part I, “Financial Statements — Note 3 — Commitments and Contingencies” for additional discussion of our principal contractual commitments, as well as our pledged assets. Purchase obligations and open purchase orders, consisting of inventory and significant non-inventory commitments, were $8.7 billion as of June 30, 2016. Purchase obligations and open purchase orders are generally cancellable in full or in part through the contractual provisions.
On average, our high inventory velocity means we generally collect from consumers before our payments to suppliers come due. Inventory turnover1 was 9 for Q2 2016 and Q2 2015. We expect variability in inventory turnover over time since it is affected by several factors, including our product mix, the mix of sales 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 believe that cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, as well as borrowing available under our credit agreements, will be sufficient to meet our anticipated operating cash needs for at least the next 12 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 capital, finance, and operating lease arrangements, 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 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 lines-of-credit or financing instruments will be available in amounts or on terms acceptable to us, if at all.









_______________________
(1)
Inventory turnover is the quotient of trailing twelve month cost of sales to average inventory over five quarter ends.

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Results of Operations
We have organized our operations into three segments: North America, International, and AWS. In the first quarter of 2016, we began allocating stock-based compensation and “Other operating expense (income), net” to our segment results. These segments reflect the way the Company evaluates its business performance and manages its operations. See Item 1 of Part I, “Financial Statements — Note 7 — Segment Information.”
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 represent third-party seller fees earned (including commissions) and related shipping fees, AWS sales, digital content subscriptions, advertising services, and our co-branded credit card agreements. Amazon Prime membership fees are allocated between product sales and service sales and amortized over the life of the membership according to the estimated delivery of services. Net sales information is as follows (in millions):
  
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Net Sales:
 
 
 
 
 
 
 
North America
$
17,674

 
$
13,796

 
$
34,670

 
$
27,202

International
9,844

 
7,565

 
19,410

 
15,310

AWS
2,886

 
1,824

 
5,452

 
3,389

Total consolidated
$
30,404

 
$
23,185

 
$
59,532

 
$
45,901

Year-over-year Percentage Growth:
 
 
 
 
 
 
 
North America
28
%
 
26
%
 
27
%
 
25
%
International
30

 
3

 
27

 
1

AWS
58

 
81

 
61

 
65

Total consolidated
31

 
20

 
30

 
17

Year-over-year Percentage Growth, excluding the effect of foreign exchange rates:
 
 
 
 
 
 
 
North America
28
%
 
26
%
 
28
%
 
25
%
International
28

 
22

 
27

 
18

AWS
58

 
81

 
61

 
65

Total consolidated
30

 
27

 
30

 
24

Net Sales Mix:
 
 
 
 
 
 
 
North America
58
%
 
59
%
 
58
%
 
59
%
International
32

 
33

 
33

 
33

AWS
10

 
8

 
9

 
8

Total consolidated
100
%
 
100
%
 
100
%
 
100
%
Sales increased 31% in Q2 2016 and 30% for the six months ended June 30, 2016, compared to the comparable prior year periods. Changes in foreign currency exchange rates impacted net sales by $166 million and $(1.4) billion for Q2 2016 and Q2 2015, and by $(44) million and $(2.7) billion for the six months ended June 30, 2016 and 2015. For a discussion of the effect on sales growth of foreign exchange rates, see “Effect of Foreign Exchange Rates” below.
North America sales increased 28% in Q2 2016 and 27% for the six months ended June 30, 2016, compared to the comparable prior year periods. The sales growth primarily reflects increased unit sales, including sales by marketplace sellers. Increased unit sales were driven largely by our continued efforts to reduce prices for our customers, including from our shipping offers, sales in faster growing categories such as electronics and other general merchandise, increased in-stock inventory availability, and increased selection of product offerings.
International sales increased 30% in Q2 2016 and 27% for the six months ended June 30, 2016, compared to the comparable prior year periods. The sales growth primarily reflects increased unit sales, including sales by marketplace sellers. Changes in foreign currency exchange rates impacted International net sales by $184 million and $(1.4) billion for Q2 2016 and Q2 2015, and $7 million and $(2.6) billion for the six months ended June 30, 2016 and 2015. Increased unit sales were driven largely by our continued efforts to reduce prices for our customers, including from our shipping offers, sales in faster growing

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categories such as electronics and other general merchandise, increased in-stock inventory availability, and increased selection of product offerings.
AWS sales increased 58% in Q2 2016 and 61% for the six months ended June 30, 2016, compared to the comparable prior year periods. The sales growth primarily reflects increased customer usage, partially offset by pricing changes. Pricing changes were driven largely by our continued efforts to reduce prices for our customers.
Operating Income (Loss)
Operating income (loss) by segment is as follows (in millions):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Operating Income (Loss):
 
 
 
 
 
 
 
North America
$
702

 
$
348

 
$
1,290

 
$
603

International
(135
)
 
(189
)
 
(255
)
 
(383
)
AWS
718

 
305

 
1,321

 
499

Total consolidated
$
1,285

 
$
464

 
$
2,356

 
$
719

Operating income increased to $1.3 billion in Q2 2016, from $464 million in Q2 2015, and increased to $2.4 billion for the six months ended June 30, 2016, from $719 million for the six months ended June 30, 2015. We believe that operating income 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 Q2 2016 and for the six months ended June 30, 2016, compared to the comparable prior year periods, is primarily due to increased unit sales, including sales by marketplace sellers, partially offset by increased levels of operating expenses to expand our fulfillment capacity and spending on technology infrastructure and marketing efforts. There was a favorable impact from foreign exchange rates of $5 million for Q2 2016 and $11 million for the six months ended June 30, 2016.
The decrease in International operating loss in absolute dollars in Q2 2016 and for the six months ended June 30, 2016, compared to the comparable prior year periods, is primarily due to increased unit sales, including sales by marketplace sellers, partially offset by increased levels of operating expenses to expand our fulfillment capacity and spending on technology infrastructure and marketing efforts. There was a favorable impact from foreign exchange rates of $40 million for Q2 2016 and $61 million for the six months ended June 30, 2016.
The increase in AWS operating income in absolute dollars in Q2 2016 and for the six months ended June 30, 2016, compared to the comparable prior year periods, is primarily due to increased customer usage and cost structure productivity, partially offset by pricing changes and increased spending on technology infrastructure, which was primarily driven by additional investments to support the business growth. There was no impact from foreign exchange rates for Q2 2016 and a favorable impact of $24 million for the six months ended June 30, 2016.

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Supplemental Information
Supplemental information about outbound shipping results for our North America and International segments is as follows (in millions):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Outbound Shipping Activity:
 
 
 
 
 
 
 
Shipping revenue (1)(2)(3)
$
2,000

 
$
1,399

 
$
3,819

 
$
2,698

Shipping costs (4)
(3,362
)
 
(2,340
)
 
(6,636
)
 
(4,649
)
Net shipping cost
$
(1,362
)
 
$
(941
)
 
$
(2,817
)
 
$
(1,951
)
Year-over-year Percentage Growth:
 
 
 
 
 
 
 
Shipping revenue
43
%
 
57
%
 
42
%
 
55
%
Shipping costs
44

 
29

 
43

 
28

Net shipping cost
45

 
2

 
44

 
3

___________________
(1)
Excludes amounts charged on shipping activities by third-party sellers where we do not provide the fulfillment service.
(2)
Includes a portion of amounts earned from Amazon Prime memberships.
(3)
Includes amounts earned from Fulfillment by Amazon programs related to shipping services.
(4)
Includes sortation and delivery center costs.
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, our product mix shifts to the electronics and other general merchandise category, we reduce shipping rates, we use more expensive shipping methods, and we offer additional services. We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing placement of fulfillment centers, 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.

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Table of Contents

We have aggregated our North America and International segments’ products and services into groups of similar products and services and provided the supplemental disclosure of net sales (in millions) below. We evaluate whether additional disclosure is appropriate when a product or service category begins to approach a significant level of net sales. For the periods presented, no individual product or service represented more than 10% of net sales.
  
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Net Sales:
 
 
 
North America
 
 
 
 
 
 
 
Media
$
2,928

 
$
2,620

 
$
6,136

 
$
5,589

Electronics and other general merchandise
14,459

 
10,987

 
27,970

 
21,237

Other (1)
287

 
189

 
564

 
376

Total North America
$
17,674

 
$
13,796

 
$
34,670

 
$
27,202

International
 
 
 
 
 
 
 
Media
$
2,283

 
$
2,094

 
$
4,763

 
$
4,413

Electronics and other general merchandise
7,504

 
5,425

 
14,537

 
10,804

Other (1)
57

 
46

 
110

 
93

Total International
$
9,844

 
$
7,565

 
$
19,410

 
$
15,310

Year-over-year Percentage Growth:
 
 
 
 
 
 
 
North America
 
 
 
 
 
 
 
Media
12
%
 
6
 %
 
10
%
 
6
 %
Electronics and other general merchandise
32

 
31

 
32

 
31

Other
52

 
16

 
50

 
19

Total North America
28

 
26

 
27

 
25

International
 
 
 
 
 
 
 
Media
9
%
 
(12
)%
 
8
%
 
(12
)%
Electronics and other general merchandise
38

 
10

 
35

 
7

Other
25

 
(7
)
 
18

 
(10
)
Total International
30

 
3

 
27

 
1

Year-over-year Percentage Growth, excluding the effect of foreign exchange rates:
 
 
 
 
 
 
 
North America
 
 
 
 
 
 
 
Media
12
%
 
7
 %
 
10
%
 
6
 %
Electronics and other general merchandise
32

 
32

 
32

 
31

Other
52

 
16

 
50

 
19

Total North America
28

 
26

 
28

 
25

International
 
 
 
 
 
 
 
Media
7
%
 
3
 %
 
8
%
 
2
 %
Electronics and other general merchandise
36

 
31

 
35

 
26

Other
25

 
8

 
20

 
5

Total International
28

 
22

 
27

 
18

_____________________________
(1)
Includes sales from non-retail activities, such as certain advertising services and our co-branded credit card agreements.



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Table of Contents

Operating Expenses
Information about operating expenses follows (in millions):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Operating Expenses:
 
 
 
 
 
 
 
Cost of sales
$
19,180

 
$
15,160

 
$
38,047

 
$
30,555

Fulfillment
3,878

 
2,876

 
7,565

 
5,634

Marketing
1,546

 
1,150

 
2,982

 
2,233

Technology and content
3,880

 
3,020

 
7,405

 
5,774

General and administrative
580

 
467

 
1,077

 
894

Other operating expense (income), net
55

 
48

 
100

 
92

Total operating expenses
$
29,119

 
$
22,721

 
$
57,176

 
$
45,182

Year-over-year Percentage Growth:
 
 
 
 
 
 
 
Cost of sales
27
%
 
13
%
 
25
%
 
11
%
Fulfillment
35

 
21

 
34

 
20

Marketing
35

 
22

 
34

 
23

Technology and content
28

 
36

 
28

 
37

General and administrative
24

 
24

 
20

 
27

Other operating expense (income), net
14

 
71

 
9

 
47

Percent of Net Sales:
 
 
 
 
 
 
 
Cost of sales
63.0
%
 
65.4
%
 
63.9
%
 
66.6
%
Fulfillment
12.8

 
12.4

 
12.7

 
12.3

Marketing
5.1

 
5.0

 
5.0

 
4.9

Technology and content
12.8

 
13.0

 
12.4

 
12.6

General and administrative
1.9

 
2.0

 
1.8

 
1.9

Other operating expense (income), net
0.2

 
0.2

 
0.2

 
0.2

Cost of Sales
Cost of sales primarily consists of the purchase price of consumer products, digital media content costs where we record revenue gross, including Prime Video and Prime Music, packaging supplies, sortation and delivery centers and related equipment costs, and inbound and outbound shipping costs, including where we are the transportation service provider. 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.
The increase in cost of sales in absolute dollars in Q2 2016 and for the six months ended June 30, 2016, compared to the comparable prior year periods, is primarily due to increased product and shipping costs resulting from increased sales.
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.
Fulfillment
Fulfillment costs primarily consist of those costs incurred in operating and staffing our North America and International fulfillment 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, timing of fulfillment capacity 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, because payment processing and fulfillment costs associated with seller transactions are based on the gross purchase price of underlying transactions, and payment processing and related transaction

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Table of Contents

and fulfillment costs are higher as a percentage of sales versus our retail sales, sales by our sellers have higher fulfillment costs as a percent of net sales.
The increase in fulfillment costs in absolute dollars in Q2 2016 and for the six months ended June 30, 2016, compared to the comparable prior year periods, is primarily due to variable costs corresponding with increased physical and digital product and service sales volume, inventory levels, and sales mix; costs from expanding fulfillment capacity; and payment processing and related transaction costs.
We seek to expand our fulfillment capacity 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.
Marketing
We direct customers to our websites primarily through a number of targeted online marketing channels, such as our Associates program, sponsored search, portal advertising, email marketing campaigns, direct sales, and other initiatives. Our marketing expenses 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 expense.
The increase in marketing costs in absolute dollars in Q2 2016 and for the six months ended June 30, 2016, compared to the comparable prior year periods, is primarily due to increased spending on online marketing channels and television and print advertising, as well as payroll and related expenses.
While costs associated with Amazon Prime memberships 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.
Technology and Content
Technology costs consist principally of research and development activities including payroll and related expenses for employees involved in application, production, maintenance, operation, and development for new and existing products and services, as well as AWS and other technology infrastructure expenses. Content costs consist principally of payroll and related expenses for employees involved in category expansion, editorial content, buying, and merchandising selection. Digital media content costs related to revenue recorded gross, including Prime Video, are included in cost of sales.
We seek to invest efficiently in several 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. The increase in technology and content costs in absolute dollars in Q2 2016 and for the six months ended June 30, 2016, compared to the comparable prior year periods, is primarily due to increased spending on technology infrastructure principally allocated to our AWS segment, and an increase in payroll and related costs associated with expanding our products and services.
Technology infrastructure expenses consist of servers, networking equipment, and data center related depreciation, rent, utilities, and payroll expenses. These costs are allocated to segments based on usage. During Q2 2016, we expanded our technology infrastructure principally by increasing our capacity for AWS service offerings globally, compared to the comparable prior year period. Additionally, the costs associated with operating and maintaining our expanded infrastructure have increased over time, corresponding with increased usage. We expect these trends to continue over time as we invest in technology infrastructure to support increased usage. See Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” of our 2015 Annual Report on Form 10-K for a discussion of how management views advances in technology and the importance of innovation.
The increase in payroll and related costs is primarily due to the expansion of existing product categories and service offerings, including AWS, and initiatives to introduce new product and service offerings.
During Q2 2016 and Q2 2015, we capitalized $145 million (including $27 million of stock-based compensation) and $184 million (including $35 million of stock-based compensation) of costs associated with internal-use software and website development. For the six months ended June 30, 2016 and 2015, we capitalized $280 million (including $51 million of stock-based compensation) and $338 million (including $59 million of stock-based compensation) of costs associated with internal-use software and website development. Amortization of previously capitalized amounts was $160 million and $157 million for Q2 2016 and Q2 2015, and $321 million and $309 million for the six months ended June 30, 2016 and 2015.

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General and Administrative
The increase in general and administrative costs in absolute dollars in Q2 2016 and for the six months ended June 30, 2016, compared to the comparable prior year periods, is primarily due to increases in payroll and related expenses.
Other Operating Expense (Income), Net
Other operating expense (income), net was $55 million and $48 million for Q2 2016 and Q2 2015, and $100 million and $92 million for the six months ended June 30, 2016 and 2015, and was primarily related to the amortization of intangible assets.
Interest Income and Expense
Our interest income was $24 million and $12 million during Q2 2016 and Q2 2015, and $45 million and $23 million for the six months ended June 30, 2016 and 2015. We generally invest our excess cash in investment grade short- to intermediate-term fixed income securities and AAA-rated money market funds. 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 $116 million and $114 million during Q2 2016 and Q2 2015, and $233 million and $228 million for the six months ended June 30, 2016 and 2015. The increase is primarily due to increases in our long-term debt and capital and finance lease arrangements.
Other Income (Expense), Net
Other income (expense), net was $(14) million and $0 during Q2 2016 and Q2 2015, and $66 million and $(131) million for the six months ended June 30, 2016 and 2015. The primary component of other income (expense), net is related to foreign currency and equity warrant gains (losses).
Income Taxes
Our tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant variation due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, changes in how we do business, acquisitions (including integrations) and investments, audit-related developments, foreign currency gains (losses), tax law developments (including changes in statutes, regulations, case law, and administrative practices), and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, 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.
For 2016, our effective tax rate will be favorably affected by the impact of the U.S. federal research and development credit, an increase in amount of pre-tax income relative to income tax expense, an increase in amortization deductions for which we will realize a tax benefit, and a decline in the proportion of nondeductible expenses and losses for which we may not realize a related tax benefit. We record valuation allowances against the deferred tax assets associated with losses for which we may not realize a related tax benefit. Our effective tax rate will also be adversely affected by state income taxes. We will generate income and losses in lower tax jurisdictions primarily related to our European operations, which are headquartered in Luxembourg.
Our income tax provision for the six months ended June 30, 2016 was $782 million, which included $70 million of discrete tax benefits primarily attributable to audit-related and tax law developments. Our income tax provision for the six months ended June 30, 2015 was $337 million, which included $41 million of discrete tax expense primarily attributed to acquisition integrations.
Equity-Method Investment Activity, Net of Tax
Equity-method investment activity, net of tax, was $(15) million and $(4) million during Q2 2016 and Q2 2015, and $(82) million and $(11) million for the six months ended June 30, 2016 and 2015. The primary components of this activity were impairments recorded in Q1 2016 and our equity-method investment losses during the periods.

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Effect of Foreign Exchange Rates
The effect on our net sales, operating expenses, and operating income from changes in foreign exchange rates versus the U.S. Dollar is as follows (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
  
At Prior
Year
Rates (1)
 
Exchange
Rate
Effect (2)
 
As
Reported
 
At Prior
Year
Rates (1)
 
Exchange
Rate
Effect (2)
 
As
Reported
 
At Prior
Year
Rates (1)
 
Exchange
Rate
Effect (2)
 
As
Reported
 
At Prior
Year
Rates (1)
 
Exchange
Rate
Effect (2)
 
As
Reported
Net sales
$
30,238

 
$
166

 
$
30,404

 
$
24,578

 
$
(1,393
)
 
$
23,185

 
$
59,576

 
$
(44
)
 
$
59,532

 
$
48,581

 
$
(2,680
)
 
$
45,901

Operating expenses
28,998

 
121

 
29,119

 
24,105

 
(1,384
)
 
22,721

 
57,315

 
(139
)
 
57,176

 
47,830

 
(2,648
)
 
45,182

Operating income
1,240

 
45

 
1,285

 
473

 
(9
)
 
464

 
2,261

 
95

 
2,356

 
751

 
(32
)
 
719

___________________
(1)
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.
(2)
Represents the increase or decrease in reported amounts resulting from changes in foreign exchange rates from those in effect in the comparable prior year period for operating results.
The effect of foreign exchange rates is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below.
Non-GAAP Financial Measures
Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other SEC regulations define and prescribe the conditions for use of certain non-GAAP financial information. Our measures of free cash flows and the effect of foreign exchange rates on our consolidated statements of operations, meet the definition of non-GAAP financial measures.
We provide multiple measures of free cash flows because we believe these measures provide additional perspective on the impact of acquiring property and equipment with cash and through capital and finance leases.
Free Cash Flow
Free cash flow is cash flow from operations reduced by “Purchases of property and equipment, including internal-use software and website development, net,” which is included in cash flow from investing activities. The following is a reconciliation of free cash flow to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for the trailing twelve months ended June 30, 2016 and 2015 (in millions):
 
 
Twelve Months Ended 
 June 30,
 
2016
 
2015
Net cash provided by (used in) operating activities
$
12,726

 
$
8,980

Purchases of property and equipment, including internal-use software and website development, net
(5,395
)
 
(4,607
)
Free cash flow
$
7,331

 
$
4,373

 
 
 
 
Net cash provided by (used in) investing activities
$
(6,360
)
 
$
(6,634
)
Net cash provided by (used in) financing activities
$
(4,247
)
 
$
3,453


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Free Cash Flow Less Lease Principal Repayments
Free cash flow less lease principal repayments is free cash flow reduced by “Principal repayments of capital lease obligations,” and “Principal repayments of finance lease obligations,” which are included in cash flow from financing activities. Free cash flow less lease principal repayments approximates the actual payments of cash for our capital and finance leases. The following is a reconciliation of free cash flow less lease principal repayments to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for the trailing twelve months ended June 30, 2016 and 2015 (in millions):
 
Twelve Months Ended 
 June 30,
 
2016
 
2015
Net cash provided by (used in) operating activities
$
12,726

 
$
8,980

Purchases of property and equipment, including internal-use software and website development, net
(5,395
)
 
(4,607
)
Principal repayments of capital lease obligations
(3,298
)
 
(1,832
)
Principal repayments of finance lease obligations
(108
)
 
(155
)
Free cash flow less lease principal repayments
$
3,925

 
$
2,386

 
 
 
 
Net cash provided by (used in) investing activities
$
(6,360
)
 
$
(6,634
)
Net cash provided by (used in) financing activities
$
(4,247
)
 
$
3,453

Free Cash Flow Less Finance Lease Principal Repayments and Assets Acquired Under Capital Leases
Free cash flow less finance lease principal repayments and assets acquired under capital leases is free cash flow reduced by “Principal repayments of finance lease obligations,” which are included in cash flow from financing activities, and property and equipment acquired under capital leases. In this measure, property and equipment acquired under capital 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 finance lease principal repayments and assets acquired under capital leases to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for the trailing twelve months ended June 30, 2016 and 2015 (in millions):
 
Twelve Months Ended 
 June 30,
 
2016
 
2015
Net cash provided by (used in) operating activities
$
12,726

 
$
8,980

Purchases of property and equipment, including internal-use software and website development, net
(5,395
)
 
(4,607
)
Property and equipment acquired under capital leases
(4,676
)
 
(4,710
)
Principal repayments of finance lease obligations
(108
)
 
(155
)
Free cash flow less finance lease principal repayments and assets acquired under capital leases
$
2,547

 
$
(492
)
 
 
 
 
Net cash provided by (used in) investing activities
$
(6,360
)
 
$
(6,634
)
Net cash provided by (used in) financing activities
$
(4,247
)
 
$
3,453

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.
Effect of Foreign Exchange Rates
Information regarding the effect of foreign exchange rates, versus the U.S. Dollar, on our net sales, operating expenses, and operating income is provided to show reported period operating results had the foreign exchange rates remained the same as those in effect in the comparable prior year period.

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Guidance
We provided guidance on July 28, 2016, in our earnings release furnished on Form 8-K as set forth below. These forward-looking statements reflect Amazon.com’s expectations as of July 28, 2016, 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 II, “Risk Factors.”
Third Quarter 2016 Guidance
Net sales are expected to be between $31.0 billion and $33.5 billion, or to grow between 22% and 32% compared with third quarter 2015.
Operating income is expected to be between $50 million and $650 million, compared with $406 million in third quarter 2015.
This guidance assumes, among other things, that no additional business acquisitions, investments, restructurings, or legal settlements are concluded.


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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk for the effect of interest rate changes, foreign currency fluctuations, and changes in the market values of our investments. Information relating to quantitative and qualitative disclosures about market risk is set forth below and in Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our long-term debt. Our long-term debt is carried at amortized cost and fluctuations in interest rates do not impact our consolidated financial statements. However, the fair value of our debt, which pays interest at a fixed rate, will generally fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest. All of our cash equivalent and marketable fixed income securities are designated as available-for-sale and, accordingly, are presented at fair value on our consolidated balance sheets. We generally invest our excess cash in investment grade short- to intermediate-term fixed income securities and AAA-rated money market funds. Fixed income securities may have their fair market value adversely affected due to a rise in interest rates, and we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates.
Foreign Exchange Risk
During Q2 2016, net sales from our International segment accounted for 32% of our consolidated revenues. Net sales and related expenses generated from our internationally-focused websites, and from www.amazon.ca and www.amazon.com.mx (which are included in our North America segment), are primarily denominated in the functional currencies of the corresponding websites and primarily include Euros, Japanese Yen, and British Pounds. The results of operations of, and certain of our intercompany balances associated with, our internationally-focused websites and AWS are exposed to foreign exchange rate fluctuations. Upon consolidation, as foreign exchange rates vary, net sales and other operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances. For example, as a result of fluctuations in foreign exchange rates throughout the period compared to rates in effect the prior year, International segment revenues in Q2 2016 increased by $184 million in comparison with Q2 2015.
We have foreign exchange risk related to foreign-denominated cash, cash equivalents, and marketable securities (“foreign funds”). Based on the balance of foreign funds as of June 30, 2016, of $5.9 billion, an assumed 5%, 10%, and 20% adverse change to foreign exchange would result in fair value declines of $295 million, $590 million, and $1.2 billion. All investments are classified as “available-for-sale.” Fluctuations in fair value are recorded in “Accumulated other comprehensive loss,” a separate component of stockholders’ equity.
We have foreign exchange risk related to our intercompany balances denominated in various foreign currencies. Based on the intercompany balances as of June 30, 2016, an assumed 5%, 10%, and 20% adverse change to foreign exchange would result in losses of $200 million, $420 million, and $940 million, recorded to “Other income (expense), net.”
See Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Effect of Foreign Exchange Rates” for additional information on the effect on reported results of changes in foreign exchange rates.
Investment Risk
As of June 30, 2016, our recorded basis in equity investments was $380 million. These investments primarily relate to equity-method and cost-method investments in private companies. We review our investments for impairment when events and circumstances indicate that the decline in fair value of such assets below the carrying value is other-than-temporary. Our analysis includes a review of recent operating results and trends, recent sales/acquisitions of the investee securities, and other publicly available data. The current global economic climate provides additional uncertainty. Valuations of private companies are inherently more complex due to the lack of readily available market data. As such, we believe that market sensitivities are not practicable.

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Item 4.
Controls and Procedures
We carried out an evaluation required by the Securities Exchange Act of 1934 (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the 1934 Act, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
During the most recent fiscal quarter, there has not occurred any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.


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PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings
See Item 1 of Part I, “Financial Statements — Note 3 — Commitments and Contingencies — Legal Proceedings.”

Item 1A.
Risk Factors
Please carefully consider the following risk factors. If any of the following risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected. In addition, the current global economic climate amplifies many of these risks.
We Face Intense Competition
Our businesses are rapidly evolving and intensely competitive, and we have many competitors in different industries, including retail, e-commerce services, digital content and electronic devices, and web and infrastructure computing services. Some of our current and potential competitors have greater resources, longer histories, more customers, and/or greater brand recognition. They may secure better terms from vendors, adopt more aggressive pricing, and devote more resources to technology, infrastructure, fulfillment, and marketing.
Competition may intensify as our competitors enter into business combinations or alliances and established companies in other market segments expand to become competitive with our business. In addition, new and enhanced technologies, including search, web and infrastructure computing services, digital content, and electronic devices, may increase our competition. The Internet facilitates competitive entry and comparison shopping, and increased competition may reduce our sales and profits.
Our Expansion Places a Significant Strain on our Management, Operational, Financial, and Other Resources
We are rapidly and significantly expanding our global operations, including increasing our product and service offerings and scaling our infrastructure to support our retail and services businesses. This expansion increases the complexity of our business and places significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions. We may not be able to manage growth effectively, which could damage our reputation, limit our growth, and negatively affect our operating results.
Our Expansion into New Products, Services, Technologies, and Geographic Regions Subjects Us to Additional Business, Legal, Financial, and Competitive Risks
We may have limited or no experience in our newer market segments, and our customers may not adopt our new offerings. These offerings may present new and difficult technology challenges, and we may be subject to claims if customers of these offerings experience service disruptions or failures or other quality issues. In addition, profitability, if any, in our newer activities may be lower than in our older activities, and we may not be successful enough in these newer activities to recoup our investments in them. If any of this were to occur, it could damage our reputation, limit our growth, and negatively affect our operating results.
We May Experience Significant Fluctuations in Our Operating Results and Growth Rate
We may not be able to accurately forecast our growth rate. We base our expense levels and investment plans on sales estimates. A significant portion of our expenses and investments is fixed, and we may not be able to adjust our spending quickly enough if our sales are less than expected.
Our revenue growth may not be sustainable, and our percentage growth rates may decrease. Our revenue and operating profit growth depends on the continued growth of demand for the products and services offered by us or our sellers, and our business is affected by general economic and business conditions worldwide. A softening of demand, whether caused by changes in customer preferences or a weakening of the U.S. or global economies, may result in decreased revenue or growth.
Our sales and operating results will also fluctuate for many other reasons, including due to risks described elsewhere in this section and the following:
our ability to retain and increase sales to existing customers, attract new customers, and satisfy our customers’ demands;
our ability to retain and expand our network of sellers;

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our ability to offer products on favorable terms, manage inventory, and fulfill orders;
the introduction of competitive websites, products, services, price decreases, or improvements;
changes in usage or adoption rates of the Internet, e-commerce, electronic devices, and web services, including outside the U.S.;
timing, effectiveness, and costs of expansion and upgrades of our systems and infrastructure;
the success of our geographic, service, and product line expansions;
the extent to which we finance, and the terms of any such financing for, our current operations and future growth;
the outcomes of legal proceedings and claims, which may include significant monetary damages or injunctive relief and could have a material adverse impact on our operating results;
variations in the mix of products and services we sell;
variations in our level of merchandise and vendor returns;
the extent to which we offer free shipping, continue to reduce prices worldwide, and provide additional benefits to our customers;
the extent to which we invest in technology and content, fulfillment, and other expense categories;
increases in the prices of fuel and gasoline, as well as increases in the prices of other energy products and commodities like paper and packing supplies;
the extent to which our equity-method investees record significant operating and non-operating items;
the extent to which operators of the networks between our customers and our websites successfully charge fees to grant our customers unimpaired and unconstrained access to our online services;
our ability to collect amounts owed to us when they become due;
the extent to which use of our services is affected by spyware, viruses, phishing and other spam emails, denial of service attacks, data theft, computer intrusions, outages, and similar events; and
terrorist attacks and armed hostilities.
Our International Operations Expose Us to a Number of Risks
Our international activities are significant to our revenues and profits, and we plan to further expand internationally. In certain international market segments, we have relatively little operating experience and may not benefit from any first-to-market advantages or otherwise succeed. It is costly to establish, develop, and maintain international operations and websites, and promote our brand internationally. Our international operations may not be profitable on a sustained basis.
In addition to risks described elsewhere in this section, our international sales and operations are subject to a number of risks, including:
local economic and political conditions;
government regulation of e-commerce and other services, electronic devices, and competition, and restrictive governmental actions (such as trade protection measures, including export duties and quotas and custom duties and tariffs), nationalization, and restrictions on foreign ownership;
restrictions on sales or distribution of certain products or services and uncertainty regarding liability for products, services, and content, including uncertainty as a result of less Internet-friendly legal systems, local laws, lack of legal precedent, and varying rules, regulations, and practices regarding the physical and digital distribution of media products and enforcement of intellectual property rights;
business licensing or certification requirements, such as for imports, exports, web services, and electronic devices;
limitations on the repatriation and investment of funds and foreign currency exchange restrictions;
limited fulfillment and technology infrastructure;
shorter payable and longer receivable cycles and the resultant negative impact on cash flow;
laws and regulations regarding consumer and data protection, privacy, network security, encryption, payments, and restrictions on pricing or discounts;
lower levels of use of the Internet;
lower levels of consumer spending and fewer opportunities for growth compared to the U.S.;

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lower levels of credit card usage and increased payment risk;
difficulty in staffing, developing, and managing foreign operations as a result of distance, language, and cultural differences;
different employee/employer relationships and the existence of works councils and labor unions;
compliance with the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties;
laws and policies of the U.S. and other jurisdictions affecting trade, foreign investment, loans, and taxes; and
geopolitical events, including war and terrorism.
As international e-commerce and other online and web services grow, competition will intensify. Local companies may have a substantial competitive advantage because of their greater understanding of, and focus on, the local customer, as well as their more established local brand names. We may not be able to hire, train, retain, and manage required personnel, which may limit our international growth.
The People’s Republic of China (“PRC”) and India regulate Amazon’s and its affiliates’ businesses and operations in country through regulations and license requirements that may restrict (i) foreign investment in and operation of the Internet, IT infrastructure, data centers, retail, delivery, and other sectors, (ii) Internet content, and (iii) the sale of media and other products and services. For example, in order to meet local ownership and regulatory licensing requirements, www.amazon.cn is operated by PRC companies that are indirectly owned, either wholly or partially, by PRC nationals. In addition, we provide certain technology services in China in conjunction with third parties that hold PRC licenses to provide services. In India, the government restricts the ownership or control of Indian companies by foreign entities involved in online multi-brand retail trading activities. For www.amazon.in, we provide certain marketing tools and logistics services to third party sellers to enable them to sell online and deliver to customers, and we hold an indirect minority interest in an entity that is a third-party seller on the www.amazon.in marketplace. Although we believe these structures and activities comply with existing laws, they involve unique risks, and the PRC is actively considering changes in its foreign investment rules that could impact these structures and activities. There are substantial uncertainties regarding the interpretation of PRC and Indian laws and regulations, and it is possible that these governments will ultimately take a view contrary to ours. In addition, our Chinese and Indian businesses and operations may be unable to continue to operate if we or our affiliates are unable to access sufficient funding or in China enforce contractual relationships with respect to management and control of such businesses. If our international activities were found to be in violation of any existing or future PRC, Indian or other laws or regulations or if interpretations of those laws and regulations were to change, our businesses in those countries could be subject to fines and other financial penalties, have licenses revoked, or be forced to shut down entirely.
If We Do Not Successfully Optimize and Operate Our Fulfillment Network and Data Centers, Our Business Could Be Harmed
If we do not adequately predict customer demand or otherwise optimize and operate our fulfillment network and data centers successfully, it could result in excess or insufficient fulfillment or data center capacity, or result in increased costs, impairment charges, or both, or harm our business in other ways. As we continue to add fulfillment and data center capability or add new businesses with different requirements, our fulfillment and data center networks become increasingly complex and operating them becomes more challenging. There can be no assurance that we will be able to operate our networks effectively.
In addition, a failure to optimize inventory in our fulfillment network will increase our net shipping cost by requiring long-zone or partial shipments. We and our co-sourcers may be unable to adequately staff our fulfillment network and customer service centers. If the other businesses on whose behalf we perform inventory fulfillment services deliver product to our fulfillment centers in excess of forecasts, we may be unable to secure sufficient storage space and may be unable to optimize our fulfillment network.
We rely on a limited number of shipping companies to deliver inventory to us and completed orders to our customers. If we are not able to negotiate acceptable terms with these companies or they experience performance problems or other difficulties, it could negatively impact our operating results and customer experience. In addition, our ability to receive inbound inventory efficiently and ship completed orders to customers also may be negatively affected by inclement weather, fire, flood, power loss, earthquakes, labor disputes, acts of war or terrorism, acts of God, and similar factors.
Under some of our commercial agreements, we maintain the inventory of other companies, thereby increasing the complexity of tracking inventory and operating our fulfillment network. Our failure to properly handle such inventory or the inability of these other companies to accurately forecast product demand would result in unexpected costs and other harm to our business and reputation.

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The Seasonality of Our Business Places Increased Strain on Our Operations
We expect a disproportionate amount of our net sales to occur during our fourth quarter. If we do not stock or restock popular products in sufficient amounts such that we fail to meet customer demand, it could significantly affect our revenue and our future growth. If we overstock products, we may be required to take significant inventory markdowns or write-offs and incur commitment costs, which could reduce profitability. We may experience an increase in our net shipping cost due to complimentary upgrades, split-shipments, and additional long-zone shipments necessary to ensure timely delivery for the holiday season. If too many customers access our websites within a short period of time due to increased holiday demand, we may experience system interruptions that make our websites unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of our products and services. In addition, we may be unable to adequately staff our fulfillment network and customer service centers during these peak periods and delivery and other fulfillment companies and customer service co-sourcers may be unable to meet the seasonal demand. We also face risks described elsewhere in this Item 1A relating to fulfillment network optimization and inventory.
We generally have payment terms with our retail vendors that extend beyond the amount of time necessary to collect proceeds from our consumer customers. As a result of holiday sales, as of December 31 of each year, our cash, cash equivalents, and marketable securities balances typically reach their highest level (other than as a result of cash flows provided by or used in investing and financing activities). This operating cycle results in a corresponding increase in accounts payable as of December 31. Our accounts payable balance generally declines during the first three months of the year, resulting in a corresponding decline in our cash, cash equivalents, and marketable securities balances.
Our Business Could Suffer if We Are Unsuccessful in Making, Integrating, and Maintaining Commercial Agreements, Strategic Alliances, and Other Business Relationships
We provide e-commerce and other services to businesses through commercial agreements, strategic alliances, and business relationships. Under these agreements, we provide web services, technology, fulfillment, computing, digital storage, and other services, as well as enable sellers to offer products or services through our websites. These arrangements are complex and require substantial infrastructure capacity, personnel, and other resource commitments, which may limit the amount of business we can service. We may not be able to implement, maintain, and develop the components of these commercial relationships, which may include web services, fulfillment, customer service, inventory management, tax collection, payment processing, hardware, content, and third-party software, and engaging third parties to perform services. The amount of compensation we receive under certain of our commercial agreements is partially dependent on the volume of the other company’s sales. Therefore, if the other company’s offering is not successful, the compensation we receive may be lower than expected or the agreement may be terminated. Moreover, we may not be able to enter into additional commercial relationships and strategic alliances on favorable terms. We also may be subject to claims from businesses to which we provide these services if we are unsuccessful in implementing, maintaining, or developing these services.
As our agreements terminate, we may be unable to renew or replace these agreements on comparable terms, or at all. We may in the future enter into amendments on less favorable terms or encounter parties that have difficulty meeting their contractual obligations to us, which could adversely affect our operating results.
Our present and future e-commerce services agreements, other commercial agreements, and strategic alliances create additional risks such as:
disruption of our ongoing business, including loss of management focus on existing businesses;
impairment of other relationships;
variability in revenue and income from entering into, amending, or terminating such agreements or relationships; and
difficulty integrating under the commercial agreements.
Our Business Could Suffer if We Are Unsuccessful in Making, Integrating, and Maintaining Acquisitions and Investments
We have acquired and invested in a number of companies, and we may acquire or invest in or enter into joint ventures with additional companies. These transactions create risks such as:
disruption of our ongoing business, including loss of management focus on existing businesses;
problems retaining key personnel;
additional operating losses and expenses of the businesses we acquired or in which we invested;
the potential impairment of tangible and intangible assets and goodwill, including as a result of acquisitions;

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the potential impairment of customer and other relationships of the company we acquired or in which we invested or our own customers as a result of any integration of operations;
the difficulty of incorporating acquired technology and rights into our offerings and unanticipated expenses related to such integration;
the difficulty of integrating a new company’s accounting, financial reporting, management, information and information security, human resource, and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented;
for investments in which an investee’s financial performance is incorporated into our financial results, either in full or in part, the dependence on the investee’s accounting, financial reporting, and similar systems, controls, and processes;
the difficulty of implementing at companies we acquire the controls, procedures, and policies appropriate for a larger public company;
potential unknown liabilities associated with a company we acquire or in which we invest; and
for foreign transactions, additional risks related to the integration of operations across different cultures and languages, and the economic, political, and regulatory risks associated with specific countries.
As a result of future acquisitions or mergers, we might need to issue additional equity securities, spend our cash, or incur debt, contingent liabilities, or amortization expenses related to intangible assets, any of which could reduce our profitability and harm our business. In addition, valuations supporting our acquisitions and strategic investments could change rapidly given the current global economic climate. We could determine that such valuations have experienced impairments or other-than-temporary declines in fair value which could adversely impact our financial results.
We Have Foreign Exchange Risk
The results of operations of, and certain of our intercompany balances associated with, our international websites and product and service offerings are exposed to foreign exchange rate fluctuations. Upon translation, operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances. As we have expanded our international operations, our exposure to exchange rate fluctuations has increased. We also hold cash equivalents and/or marketable securities in foreign currencies including British Pounds, Chinese Yuan, Euros, and Japanese Yen. If the U.S. Dollar strengthens compared to these currencies, cash equivalents, and marketable securities balances, when translated, may be materially less than expected and vice versa.
The Loss of Key Senior Management Personnel Could Negatively Affect Our Business
We depend on our senior management and other key personnel, particularly Jeffrey P. Bezos, our President, CEO, and Chairman. We do not have “key person” life insurance policies. The loss of any of our executive officers or other key employees could harm our business.
We Could Be Harmed by Data Loss or Other Security Breaches
As a result of our services being web-based and the fact that we process, store, and transmit large amounts of data, including personal information, for our customers, failure to prevent or mitigate data loss or other security breaches, including breaches of our vendors’ technology and systems, could expose us or our customers to a risk of loss or misuse of such information, adversely affect our operating results, result in litigation or potential liability for us, and otherwise harm our business. We use third party technology and systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery to customers, back-office support, and other functions. Some subsidiaries had past security breaches, and, although they did not have a material adverse effect on our operating results, there can be no assurance of a similar result in the future. Although we have developed systems and processes that are designed to protect customer information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach at a third party vendor, such measures cannot provide absolute security.
We Face Risks Related to System Interruption and Lack of Redundancy
We experience occasional system interruptions and delays that make our websites and services unavailable or slow to respond and prevent us from efficiently fulfilling orders or providing services to third parties, which may reduce our net sales and the attractiveness of our products and services. If we are unable to continually add software and hardware, effectively upgrade our systems and network infrastructure, and take other steps to improve the efficiency of our systems, it could cause system interruptions or delays and adversely affect our operating results.

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Our computer and communications systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, earthquakes, acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins, and similar events or disruptions. Any of these events could cause system interruption, delays, and loss of critical data, and could prevent us from accepting and fulfilling customer orders and providing services, which could make our product and service offerings less attractive and subject us to liability. Our systems are not fully redundant and our disaster recovery planning may not be sufficient. In addition, we may have inadequate insurance coverage to compensate for any related losses. Any of these events could damage our reputation and be expensive to remedy.
We Face Significant Inventory Risk
In addition to risks described elsewhere in this Item 1A relating to fulfillment network and inventory optimization by us and third parties, we are exposed to significant inventory risks that may adversely affect our operating results as a result of seasonality, new product launches, rapid changes in product cycles and pricing, defective merchandise, changes in consumer demand and consumer spending patterns, changes in consumer tastes with respect to our products, and other factors. We endeavor to accurately predict these trends and avoid overstocking or understocking products we manufacture and/or sell. Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale. In addition, when we begin selling or manufacturing a new product, it may be difficult to establish vendor relationships, determine appropriate product or component selection, and accurately forecast demand. The acquisition of certain types of inventory or components may require significant lead-time and prepayment and they may not be returnable. We carry a broad selection and significant inventory levels of certain products, such as consumer electronics, and we may be unable to sell products in sufficient quantities or during the relevant selling seasons. Any one of the inventory risk factors set forth above may adversely affect our operating results.
We May Not Be Able to Adequately Protect Our Intellectual Property Rights or May Be Accused of Infringing Intellectual Property Rights of Third Parties
We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and patent law, trade secret protection, and confidentiality and/or license agreements with our employees, customers, and others to protect our proprietary rights. Effective intellectual property protection may not be available in every country in which our products and services are made available. We also may not be able to acquire or maintain appropriate domain names in all countries in which we do business. Furthermore, regulations governing domain names may not protect our trademarks and similar proprietary rights. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon, or diminish the value of our trademarks and other proprietary rights.
We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. Third parties that license our proprietary rights also may take actions that diminish the value of our proprietary rights or reputation. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or other intellectual property rights.
Other parties also may claim that we infringe their proprietary rights. We have been subject to, and expect to continue to be subject to, claims and legal proceedings regarding alleged infringement by us of the intellectual property rights of third parties. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against us, or the payment of damages, including to satisfy indemnification obligations. We may need to obtain licenses from third parties who allege that we have infringed their rights, but such licenses may not be available on terms acceptable to us or at all. In addition, we may not be able to obtain or utilize on terms that are favorable to us, or at all, licenses or other rights with respect to intellectual property we do not own. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims.
Our digital content offerings depend in part on effective digital rights management technology to control access to digital content. If the digital rights management technology that we use is compromised or otherwise malfunctions, we could be subject to claims, and content providers may be unwilling to include their content in our service.
We Have a Rapidly Evolving Business Model and Our Stock Price Is Highly Volatile
We have a rapidly evolving business model. The trading price of our common stock fluctuates significantly in response to, among other risks, the risks described elsewhere in this Item 1A, as well as:
changes in interest rates;
conditions or trends in the Internet and the industry segments we operate in;

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quarterly variations in operating results;
fluctuations in the stock market in general and market prices for Internet-related companies in particular;
changes in financial estimates by us or securities analysts and recommendations by securities analysts;
changes in our capital structure, including issuance of additional debt or equity to the public;
changes in the valuation methodology of, or performance by, other e-commerce or technology companies; and
transactions in our common stock by major investors and certain analyst reports, news, and speculation.
Volatility in our stock price could adversely affect our business and financing opportunities and force us to increase our cash compensation to employees or grant larger stock awards than we have historically, which could hurt our operating results or reduce the percentage ownership of our existing stockholders, or both.
Government Regulation Is Evolving and Unfavorable Changes Could Harm Our Business
We are subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet, e-commerce, electronic devices, and other services. Existing and future laws and regulations may impede our growth. These regulations and laws may cover taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, energy consumption, environmental regulation, electronic contracts and other communications, competition, consumer protection, web services, the provision of online payment services, information reporting requirements, unencumbered Internet access to our services or access to our facilities, the design and operation of websites, the characteristics and quality of products and services, and the commercial operation of unmanned aircraft systems. It is not clear how existing laws governing issues such as property ownership, libel, and personal privacy apply to the Internet, e-commerce, digital content, and web services. Jurisdictions may regulate consumer-to-consumer online businesses, including certain aspects of our seller programs. Unfavorable regulations and laws could diminish the demand for our products and services and increase our cost of doing business.
We Could Be Subject to Additional Sales Tax or Other Indirect Tax Liabilities
U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales taxes with respect to remote sales in the U.S. However, an increasing number of states, and certain foreign jurisdictions, have considered or adopted laws or administrative practices that attempt to impose obligations on remote sellers and online marketplaces to collect taxes on their behalf. We support a Federal law that would allow states to require sales tax collection by remote sellers under a nationwide system. More than half of our revenue is already earned in jurisdictions where we collect sales tax or its equivalent. A successful assertion by one or more states or foreign countries requiring us to collect taxes where we do not do so could result in substantial tax liabilities, including for past sales, as well as penalties and interest. In addition, if the tax authorities in jurisdictions where we already collect sales tax or other indirect taxes were successfully to challenge our positions, our tax liability could increase substantially.
We Could Be Subject to Additional Income Tax Liabilities
We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change 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. Our effective tax rates could be affected by 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 the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies and changes to our existing businesses, acquisitions (including integrations) and investments, changes in our deferred tax assets and liabilities and their valuation, and changes in the relevant tax, accounting, and other laws, regulations, administrative practices, principles, and interpretations, including fundamental changes to the tax laws applicable to corporate multinationals. The U.S., the European Union and its member states, and a number of other countries are actively pursuing changes in this regard.
Except as required under U.S. tax laws, we do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries that have not been previously taxed since we intend to invest such undistributed earnings indefinitely outside of the U.S. If our intent changes or if these funds are needed for our U.S. operations, we would be required to accrue or pay U.S. taxes on some or all of these undistributed earnings and our effective tax rate would be adversely affected. We are also currently subject to audit in various jurisdictions, and these jurisdictions may assess additional income tax liabilities against us. Developments in an audit, litigation, or the relevant laws, regulations, administrative practices, principles, and interpretations could have a material effect on our operating results or cash flows in the period or periods for which that development occurs,

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as well as for prior and subsequent periods. For instance, the IRS is seeking to increase our U.S. taxable income related to transfer pricing with our foreign subsidiaries for transactions undertaken in 2005 and 2006, and we are currently contesting the matter in U.S. Tax Court. In addition to the risk of additional tax for 2005 and 2006 transactions, if this litigation is adversely determined or if the IRS were to seek transfer pricing adjustments of a similar nature for transactions in subsequent years, we could be subject to significant additional tax liabilities. In addition, in October 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Luxembourg with regard to the corporate income tax paid by certain of our subsidiaries comply with European Union rules on state aid. If this matter is adversely resolved, Luxembourg may be required to assess, and we may be required to pay, additional amounts with respect to current and prior periods and our taxes in the future could increase. Although we believe our tax estimates are reasonable, the final outcome of tax audits, investigations, and any related litigation could be materially different from our historical income tax provisions and accruals.
Our Supplier Relationships Subject Us to a Number of Risks
We have significant suppliers, including licensors, and in some cases, limited or single-sources of supply, that are important to our sourcing, services, manufacturing, and any related ongoing servicing of merchandise and content. We do not have long-term arrangements with most of our suppliers to guarantee availability of merchandise, content, components, or services, particular payment terms, or the extension of credit limits. If our current suppliers were to stop selling or licensing merchandise, content, components, or services to us on acceptable terms, or delay delivery, including as a result of one or more supplier bankruptcies due to poor economic conditions, as a result of natural disasters, or for other reasons, we may be unable to procure alternatives from other suppliers in a timely and efficient manner and on acceptable terms, or at all. In addition, if our suppliers or other vendors violate applicable laws, regulations, our code of standards and responsibilities, or implement practices regarded as unethical, unsafe, or hazardous to the environment, it could damage our reputation, limit our growth, and negatively affect our operating results.
We May Be Subject to Risks Related to Government Contracts and Related Procurement Regulations
Our contracts with U.S., as well as state, local, and foreign, government entities are subject to various procurement regulations and other requirements relating to their formation, administration, and performance. We may be subject to audits and investigations relating to our government contracts, and any violations could result in various civil and criminal penalties and administrative sanctions, including termination of contract, refunding or suspending of payments, forfeiture of profits, payment of fines, and suspension or debarment from future government business. In addition, such contracts may provide for termination by the government at any time, without cause.
We May Be Subject to Product Liability Claims if People or Property Are Harmed by the Products We Sell
Some of the products we sell or manufacture may expose us to product liability claims relating to personal injury, death, or environmental or property damage, and may require product recalls or other actions. Certain third parties also sell products using our e-commerce services that may increase our exposure to product liability claims, such as if these sellers do not have sufficient protection from such claims. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. In addition, some of our agreements with our vendors and sellers do not indemnify us from product liability.
We Are Subject to Payments-Related Risks
We accept payments using a variety of methods, including credit card, debit card, credit accounts (including promotional financing), gift cards, direct debit from a customer’s bank account, consumer invoicing, physical bank check, and payment upon delivery. For existing and future payment options we offer to our customers, we may become subject to additional regulations and compliance requirements (including obligations to implement enhanced authentication processes that could result in significant costs and reduce the ease of use of our payments products), as well as fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide certain Amazon-branded payment methods and payment processing services, including the processing of credit cards, debit cards, electronic checks, and promotional financing. In each case, it could disrupt our business if these companies become unwilling or unable to provide these services to us. We also offer co-branded credit card programs, which could adversely affect our operating results if terminated. We are also subject to payment card association operating rules, including data security rules, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for card issuing banks’ costs, subject to fines and higher transaction fees, and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating

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results could be adversely affected.
In addition, we provide regulated services in certain jurisdictions because we enable customers to keep account balances with us and transfer money to third parties, and because we provide services to third parties to facilitate payments on their behalf. In these jurisdictions, we may be subject to requirements for licensing, regulatory inspection, bonding and capital maintenance, the use, handling, and segregation of transferred funds, consumer disclosures, and authentication. We are also subject to or voluntarily comply with a number of other laws and regulations relating to payments, money laundering, international money transfers, privacy and information security, and electronic fund transfers. If we were found to be in violation of applicable laws or regulations, we could be subject to additional requirements and civil and criminal penalties, or forced to cease providing certain services.
We Could Be Liable for Fraudulent or Unlawful Activities of Sellers
The law relating to the liability of providers of online payment services is currently unsettled. In addition, governmental agencies could require changes in the way this business is conducted. Under our seller programs, we may be unable to prevent sellers from collecting payments, fraudulently or otherwise, when buyers never receive the products they ordered or when the products received are materially different from the sellers’ descriptions. Under our A2Z Guarantee, we reimburse buyers for payments up to certain limits in these situations, and as our marketplace seller sales grow, the cost of this program will increase and could negatively affect our operating results. We also may be unable to prevent sellers on our sites or through other seller sites from selling unlawful goods, selling goods in an unlawful manner, or violating the proprietary rights of others, and could face civil or criminal liability for unlawful activities by our sellers.


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Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3.
Defaults Upon Senior Securities
None.

Item 4.
Mine Safety Disclosures
Not applicable.

Item 5.
Other Information

Disclosure Pursuant to Section 13(r) of the Exchange Act
We recently determined that, between January 2012 and June 2016, we processed and delivered orders of consumer products for certain individuals and entities located outside Iran covered by the Iran Threat Reduction and Syria Human Rights Act (“ITRA”), in addition to those we have previously disclosed, as follows: consumer products valued at approximately $96,000 for individuals who may have been acting on behalf of Iranian embassies and diplomatic organizations located in countries other than Iran; consumer products valued at approximately $1,600 for two entities considered to be owned or controlled by the Iranian government; and consumer products valued at approximately $23,000 for one individual and three entities designated under Executive Order 13382 or Executive Order 13224 and owned or controlled by the Iranian government. The consumer products included books, music, other media, apparel, home and kitchen, health and beauty, jewelry, office, consumer electronics, software, lawn and patio, grocery, and automotive products. We are unable accurately to calculate the net profit attributable to these transactions. We do not plan to continue selling to these accounts in the future. Our review is ongoing and we are enhancing our processes designed to identify transactions associated with individuals and entities covered by the ITRA.

Item 6.
Exhibits
See exhibits listed under the Exhibit Index below.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
AMAZON.COM, INC. (REGISTRANT)
 
 
 
 
By:
/s/ Shelley Reynolds
 
 
Shelley Reynolds
 
 
Vice President, Worldwide Controller
 
 
(Principal Accounting Officer)
Dated: July 28, 2016

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EXHIBIT INDEX
 
Exhibit
Number
 
Description
 
 
 
3.1
 
Restated Certificate of Incorporation of the Company (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2000).
 
 
 
3.2
 
Amended and Restated Bylaws of the Company (incorporated by reference to the Company’s Current Report on Form 8-K, filed February 25, 2016).
 
 
 
10.1
 
Credit Agreement, dated as of May 20, 2016, among Amazon.com, Inc., Bank of America, N.A., as administrative agent, and the other lenders party thereto.
 
 
 
31.1
 
Certification of Jeffrey P. Bezos, Chairman and Chief Executive Officer of Amazon.com, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
 
 
31.2
 
Certification of Brian T. Olsavsky, Senior Vice President and Chief Financial Officer of Amazon.com, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
 
 
32.1
 
Certification of Jeffrey P. Bezos, Chairman and Chief Executive Officer of Amazon.com, Inc., pursuant to 18 U.S.C. Section 1350.
 
 
 
32.2
 
Certification of Brian T. Olsavsky, Senior Vice President and Chief Financial Officer of Amazon.com, Inc., pursuant to 18 U.S.C. Section 1350.
 
 
 
101
 
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, formatted in XBRL: (i) Consolidated Statements of Cash Flows, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Balance Sheets, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.

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