UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________
FORM 10-K
____________________________________ 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
 
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
 ____________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
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
Aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2016
$
280,129,378,534

Number of shares of common stock outstanding as of January 25, 2017
477,170,618

____________________________________ 
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held in 2017, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.
 



AMAZON.COM, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2016
INDEX
 
 
 
Page
PART I
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
PART IV
 
Item 15.


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AMAZON.COM, INC.

PART I

Item 1.
Business
This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on expectations, estimates, and projections as of the date of this filing. Actual results may differ materially from those expressed in forward-looking statements. See Item 1A of Part I—“Risk Factors.”
Amazon.com, Inc. was incorporated in 1994 in the state of Washington and reincorporated in 1996 in the state of Delaware. Our principal corporate offices are located in Seattle, Washington. We completed our initial public offering in May 1997 and our common stock is listed on the NASDAQ Global Select Market under the symbol “AMZN.”
As used herein, “Amazon.com,” “we,” “our,” and similar terms include Amazon.com, Inc. and its subsidiaries, unless the context indicates otherwise.
General
Amazon.com opened its virtual doors on the World Wide Web in July 1995. We seek to be Earth’s most customer-centric company. We are guided by four principles: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking. In each of our segments, we serve our primary customer sets, consisting of consumers, sellers, developers, enterprises, and content creators. In addition, we provide services, such as advertising services and co-branded credit card agreements.
We have organized our operations into three segments: North America, International, and Amazon Web Services (“AWS”). These segments reflect the way the Company evaluates its business performance and manages its operations. Additional information on our operating segments and product information is contained in Item 8 of Part II, “Financial Statements and Supplementary Data—Note 11—Segment Information.” See Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Supplemental Information” for supplemental information about our net sales. Our company-sponsored research and development expense is set forth within “Technology and content” in Item 8 of Part II, “Financial Statements and Supplementary Data—Consolidated Statements of Operations.”
Consumers
We serve consumers through our retail websites and focus on selection, price, and convenience. We design our websites to enable hundreds of millions of unique products to be sold by us and by third parties across dozens of product categories. Customers access our websites directly and through our mobile websites and apps. We also manufacture and sell electronic devices, including Kindle e-readers, Fire tablets, Fire TVs, and Echo, and we develop and produce media content. We strive to offer our customers the lowest prices possible through low everyday product pricing and shipping offers, and to improve our operating efficiencies so that we can continue to lower prices for our customers. We also provide easy-to-use functionality, fast and reliable fulfillment, and timely customer service. In addition, we offer Amazon Prime, an annual membership program that includes unlimited free shipping on tens of millions of items, access to unlimited instant streaming of thousands of movies and TV episodes, and other benefits.
We fulfill customer orders in a number of ways, including through: North America and International fulfillment and delivery networks that we operate; co-sourced and outsourced arrangements in certain countries; and digital delivery. We operate customer service centers globally, which are supplemented by co-sourced arrangements. See Item 2 of Part I, “Properties.”
Sellers
We offer programs that enable sellers to grow their businesses, sell their products on our websites and their own branded websites, and fulfill orders through us. We are not the seller of record in these transactions. We earn fixed fees, a percentage of sales, per-unit activity fees, interest, or some combination thereof, for our seller programs.
Developers and Enterprises
We serve developers and enterprises of all sizes, including start-ups, government agencies, and academic institutions, through our AWS segment, which offers a broad set of global compute, storage, database, and other service offerings.

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Content Creators
We serve authors and independent publishers with Kindle Direct Publishing, an online service that lets independent authors and publishers choose a 70% royalty option and make their books available in the Kindle Store, along with Amazon’s own publishing arm, Amazon Publishing. We also offer programs that allow authors, musicians, filmmakers, app developers, and others to publish and sell content.
Competition
Our businesses encompass a large variety of product types, service offerings, and delivery channels. The international marketplace in which we compete is evolving rapidly and intensely competitive, and we face a broad array of competitors from many different industry sectors around the world. Our current and potential competitors include: (1) online, offline, and multichannel retailers, publishers, vendors, distributors, manufacturers, and producers of the products we offer and sell to consumers and businesses; (2) publishers, producers, and distributors of physical, digital, and interactive media of all types and all distribution channels; (3) web search engines, comparison shopping websites, social networks, web portals, and other online and app-based means of discovering, using, or acquiring goods and services, either directly or in collaboration with other retailers; (4) companies that provide e-commerce services, including website development, advertising, fulfillment, customer service, and payment processing; (5) companies that provide fulfillment and logistics services for themselves or for third parties, whether online or offline; (6) companies that provide information technology services or products, including on-premises or cloud-based infrastructure and other services; and (7) companies that design, manufacture, market, or sell consumer electronics, telecommunication, and electronic devices. We believe that the principal competitive factors in our retail businesses include selection, price, and convenience, including fast and reliable fulfillment. Additional competitive factors for our seller and enterprise services include the quality, speed, and reliability of our services and tools, as well as customers’ ability and willingness to change business practices. Some of our current and potential competitors have greater resources, longer histories, more customers, greater brand recognition, and greater control over inputs critical to our various businesses. They may secure better terms from suppliers, adopt more aggressive pricing, pursue restrictive distribution agreements that restrict our access to supply, direct consumers to their own offerings instead of ours, lock-in potential customers with restrictive terms, and devote more resources to technology, infrastructure, fulfillment, and marketing. Each of our businesses is also subject to rapid change and the development of new business models and the entry of new and well-funded competitors. Other companies also may enter into business combinations or alliances that strengthen their competitive positions.
Intellectual Property
We regard our trademarks, service marks, copyrights, patents, domain names, trade dress, trade secrets, proprietary technologies, 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, partners, and others to protect our proprietary rights. We have registered, or applied for the registration of, a number of U.S. and international domain names, trademarks, service marks, and copyrights. Additionally, we have filed U.S. and international patent applications covering certain of our proprietary technology. We have licensed in the past, and expect that we may license in the future, certain of our proprietary rights to third parties.
Seasonality
Our business is affected by seasonality, which historically has resulted in higher sales volume during our fourth quarter, which ends December 31. We recognized 33%, 33%, and 32% of our annual revenue during the fourth quarter of 2014, 2015, and 2016.
Employees
We employed approximately 341,400 full-time and part-time employees as of December 31, 2016. However, employment levels fluctuate due to seasonal factors affecting our business. Additionally, we utilize independent contractors and temporary personnel to supplement our workforce. We have works councils, statutory employee representation obligations, and union agreements in certain countries outside the United States. We consider our employee relations to be good. Competition for qualified personnel in our industry has historically been intense, particularly for software engineers, computer scientists, and other technical staff.
Available Information
Our investor relations website is www.amazon.com/ir and we encourage investors to use it as a way of easily finding information about us. We promptly make available on this website, free of charge, the reports that we file or furnish with the

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Securities and Exchange Commission (“SEC”), corporate governance information (including our Code of Business Conduct and Ethics), and select press releases and social media postings.
Executive Officers and Directors
The following tables set forth certain information regarding our Executive Officers and Directors as of January 25, 2017:
Executive Officers of the Registrant
 
Name
 
Age
 
Position
Jeffrey P. Bezos
 
53
 
President, Chief Executive Officer, and Chairman of the Board
Jeffrey M. Blackburn
 
47
 
Senior Vice President, Business Development
Andrew R. Jassy
 
49
 
CEO Amazon Web Services
Brian T. Olsavsky
 
53
 
Senior Vice President and Chief Financial Officer
Shelley L. Reynolds
 
52
 
Vice President, Worldwide Controller, and Principal Accounting Officer
Jeffrey A. Wilke
 
50
 
CEO Worldwide Consumer
David A. Zapolsky
 
53
 
Senior Vice President, General Counsel, and Secretary
Jeffrey P. Bezos. Mr. Bezos has been Chairman of the Board of Amazon.com since founding it in 1994 and Chief Executive Officer since May 1996. Mr. Bezos served as President of the Company from founding until June 1999 and again from October 2000 to the present.
Jeffrey M. Blackburn. Mr. Blackburn has served as Senior Vice President, Business Development, since April 2006.
Andrew R. Jassy. Mr. Jassy has served as CEO Amazon Web Services since April 2016, and Senior Vice President, Amazon Web Services, from April 2006 until April 2016.
Brian T. Olsavsky. Mr. Olsavsky has served as Senior Vice President and Chief Financial Officer since June 2015, Vice President, Finance for the Global Consumer Business from December 2011 to June 2015, and numerous financial leadership roles across Amazon with global responsibility since April 2002.
Shelley L. Reynolds. Ms. Reynolds has served as Vice President, Worldwide Controller, and Principal Accounting Officer since April 2007.
Jeffrey A. Wilke. Mr. Wilke has served as CEO Worldwide Consumer since April 2016, Senior Vice President, Consumer Business, from February 2012 until April 2016, and as Senior Vice President, North America Retail, from January 2007 until February 2012.
David A. Zapolsky. Mr. Zapolsky has served as Senior Vice President, General Counsel, and Secretary since May 2014, Vice President, General Counsel, and Secretary from September 2012 to May 2014, and as Vice President and Associate General Counsel for Litigation and Regulatory matters from April 2002 until September 2012.
Board of Directors
 
Name
 
Age
 
Position
Jeffrey P. Bezos
 
53
 
President, Chief Executive Officer, and Chairman of the Board
Tom A. Alberg
 
76
 
Managing Director, Madrona Venture Group
John Seely Brown
 
76
 
Visiting Scholar and Advisor to the Provost, University of Southern California
William B. Gordon
 
66
 
Partner, Kleiner Perkins Caufield & Byers
Jamie S. Gorelick
 
66
 
Partner, Wilmer Cutler Pickering Hale and Dorr LLP
Daniel P. Huttenlocher
 
58
 
Dean and Vice Provost, Cornell Tech at Cornell University
Judith A. McGrath
 
64
 
President, Astronauts Wanted * No experience necessary
Jonathan J. Rubinstein
 
60
 
Co-CEO, Bridgewater Associates, LP
Thomas O. Ryder
 
72
 
Retired, Former Chairman, Reader’s Digest Association, Inc.
Patricia Q. Stonesifer
 
60
 
President and Chief Executive Officer, Martha’s Table
Wendell P. Weeks
 
57
 
Chief Executive Officer, Corning Incorporated


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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, particularly with our newly-launched products and services and in our newer geographic regions. They may secure better terms from vendors, adopt more aggressive pricing, and devote more resources to technology, infrastructure, fulfillment, and marketing.
Competition may intensify, including with the development of new business models and the entry of new and well-funded competitors, and 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;
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;

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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.;
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;

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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, 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, trade and protectionist measures, 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, or availability of, our products and services and increase our cost of doing business.
We Could Be Subject to Additional Sales Tax or Other Indirect Tax Liabilities
An increasing number of states and foreign jurisdictions have considered or adopted laws or administrative practices, with or without notice, that impose additional obligations on remote sellers and online marketplaces to collect transaction taxes such as sales, consumption, value added, or similar taxes. We may not have sufficient lead time to build systems and processes to collect these taxes. Failure to comply with such laws or administrative practices, or a successful assertion by such states or foreign jurisdictions requiring us to collect taxes where we do not, 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 are already subject to sales tax or other indirect tax obligations were successfully to challenge our positions, our tax liability could increase substantially. In the U.S., Supreme Court decisions restrict states’ rights to require remote sellers to collect state and local sales taxes (although some states are seeking to have the Supreme Court revisit these decisions). We support a federal law that would allow states to require sales tax collection by remote sellers under a nationwide system.
We are also subject to U.S. (federal and state) and foreign laws, regulations, and administrative practices that require us to collect information from our customers, vendors, merchants, and other third parties for tax reporting purposes and report such information to various government agencies. The scope of such requirements continues to expand, requiring us to develop and implement new compliance systems. Failure to comply with such laws and regulations could result in significant penalties.
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, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. 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 stock price, 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

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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, 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 or Manufacture
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-

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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 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.

Item 1B.
Unresolved Staff Comments

None.


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Item 2.
Properties
As of December 31, 2016, we operated the following facilities (in thousands):
 
Description of Use
 
Leased Square
Footage (1)
 
Owned Square Footage
 
Location
Office space
 
8,454

 
3,693

 
North America
Office space
 
7,314

 

 
International
Fulfillment, data centers, and other
 
97,215

 
2,237

 
North America
Fulfillment, data centers, and other
 
59,175

 
1,257

 
International
Total
 
172,158

 
7,187

 
 
 ___________________
(1)
For leased properties, represents the total leased space excluding sub-leased space.
Segment
 
Leased Square
Footage (1)
 
Owned Square Footage (1)
North America
 
93,716

 
586

International
 
57,243

 
218

AWS
 
5,431

 
2,690

Total
 
156,390

 
3,494

 ___________________
(1)
Segment amounts exclude corporate facilities. Shared facilities are allocated among the segments based on usage and primarily relate to facilities that hold our technology infrastructure. See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 11—Segment Information.”
We own and lease our corporate headquarters in Seattle, Washington. Additionally, we own and lease corporate office, fulfillment, sortation, delivery, warehouse operations, data center, customer service, and other facilities, principally in North America, Europe, and Asia.

Item 3.
Legal Proceedings
See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 7—Commitments and Contingencies—Legal Proceedings.”

Item 4.
Mine Safety Disclosures
Not applicable.


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PART II

Item 5.
Market for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol “AMZN.” The following table sets forth the high and low per share sale prices for our common stock for the periods indicated, as reported by the NASDAQ Global Select Market.
 
 
 
High
 
Low
Year ended December 31, 2015
 
 
 
 
First Quarter
 
$
389.37

 
$
285.25

Second Quarter
 
452.65

 
368.34

Third Quarter
 
580.57

 
425.57

Fourth Quarter
 
696.44

 
506.00

Year ended December 31, 2016
 
 
 
 
First Quarter
 
$
657.72

 
$
474.00

Second Quarter
 
731.50

 
585.25

Third Quarter
 
839.95

 
716.54

Fourth Quarter
 
847.21

 
710.10

Holders
As of January 25, 2017, there were 2,448 shareholders of record of our common stock, although there is a much larger number of beneficial owners.
Dividends
We have never declared or paid cash dividends on our common stock. See Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.


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Item 6.
Selected Consolidated Financial Data
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto in Item 8 of Part II, “Financial Statements and Supplementary Data,” and the information contained in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Historical results are not necessarily indicative of future results.
 
 
 
Year Ended December 31,
 
 
2012
 
2013
 
2014
 
2015
 
2016
 
 
(in millions, except per share data)
Statements of Operations:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
61,093

 
$
74,452

 
$
88,988

 
$
107,006

 
$
135,987

Operating income
 
$
676

 
$
745

 
$
178

 
$
2,233

 
$
4,186

Net income (loss)
 
$
(39
)
 
$
274

 
$
(241
)
 
$
596

 
$
2,371

Basic earnings per share (1)
 
$
(0.09
)
 
$
0.60

 
$
(0.52
)
 
$
1.28

 
$
5.01

Diluted earnings per share (1)
 
$
(0.09
)
 
$
0.59

 
$
(0.52
)
 
$
1.25

 
$
4.90

Weighted-average shares used in computation of earnings per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
453

 
457

 
462

 
467

 
474

Diluted
 
453

 
465

 
462

 
477

 
484

Statements of Cash Flows:
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
 
$
4,180

 
$
5,475

 
$
6,842

 
$
11,920

 
$
16,443

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
 
2012
 
2013
 
2014
 
2015
 
2016
 
 
(in millions)
Balance Sheets:
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
32,555

 
$
40,159

 
$
54,505

 
$
64,747

 
$
83,402

Total long-term obligations
 
$
5,361

 
$
7,433

 
$
15,675

 
$
17,476

 
$
20,301

 ___________________
(1)
For further discussion of earnings per share, see Item 8 of Part II, “Financial Statements and Supplementary Data—Note 1—Description of Business and Accounting Policies.”

 


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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects, or future results of operations or financial position, made in this Annual Report on Form 10-K are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results could differ materially for a variety of reasons, including, among others, fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, world events, the rate of growth of the Internet, online commerce, and cloud services, the amount that Amazon.com invests in new business opportunities and the timing of those investments, the mix of products and services sold to customers, the mix of net sales derived from products as compared with services, the extent to which we owe income or other taxes, competition, management of growth, potential fluctuations in operating results, international growth and expansion, the outcomes of 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 I, “Risk Factors.”
Overview
Our primary source of revenue is the sale of a wide range of products and services to customers. The products offered on our consumer-facing websites primarily include merchandise and content we have purchased for resale from vendors and those offered by third-party sellers, and we also manufacture and sell electronic devices. Generally, we recognize gross revenue from items we sell from our inventory as product sales and recognize our net share of revenue of items sold by third-party sellers as service sales. We also offer other services such as compute, storage, and database offerings, fulfillment, publishing, certain digital content subscriptions, advertising, and co-branded credit cards.
Our financial focus is on long-term, sustainable growth in free cash flows1. Free cash flows are driven primarily by increasing operating income and efficiently managing working capital2 and cash capital expenditures, including our decision to purchase or lease property and equipment. Increases in operating income primarily result from increases in sales of products and services and efficiently managing our operating costs, partially offset by investments we make in longer-term strategic initiatives. To increase sales of products and services, we focus on improving all aspects of the customer experience, including lowering prices, improving availability, offering faster delivery and performance times, increasing selection, increasing product categories and service offerings, expanding product information, improving ease of use, improving reliability, and earning customer trust.
We seek to reduce our variable costs per unit and work to leverage our fixed costs. Our variable costs include product and content costs, payment processing and related transaction costs, picking, packaging, and preparing orders for shipment, transportation, customer service support, costs necessary to run AWS, and a portion of our marketing costs. Our fixed costs include the costs necessary to build and run our technology infrastructure; to build, enhance, and add features to our websites and web services, our electronic devices, and digital offerings; and to build and optimize our fulfillment centers. Variable costs generally change directly with sales volume, while fixed costs generally are dependent on the timing of capacity needs, geographic expansion, category expansion, and other factors. To decrease our variable costs on a per unit basis and enable us to lower prices for customers, we seek to increase our direct sourcing, increase discounts from suppliers, and reduce defects in our processes. To minimize growth in fixed costs, we seek to improve process efficiencies and maintain a lean culture.








_______________________
(1)
See “Results of Operations—Non-GAAP Financial Measures” below for additional information on our non-GAAP free cash flows financial measures.
(2)
Working capital consists of accounts receivable, inventory, and accounts payable.

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Because of our model we are able to turn our inventory quickly and have a cash-generating operating cycle3. On average, our high inventory velocity means we generally collect from consumers before our payments to suppliers come due. We expect variability in inventory turnover over time since it is affected by numerous factors, including our product mix, the mix of sales by us and by third-party sellers, our continuing focus on in-stock inventory availability and selection of product offerings, our investment in new geographies and product lines, and the extent to which we choose to utilize third-party fulfillment providers. We also expect some variability in accounts payable days over time since they are affected by several factors, including the mix of product sales, the mix of sales by third-party sellers, the mix of suppliers, seasonality, and changes in payment terms over time, including the effect of balancing pricing and timing of payment terms with suppliers.
We expect spending in technology and content will increase over time as we add computer scientists, designers, software and hardware engineers, and merchandising employees. Our technology and content investment and capital spending projects often support a variety of product and service offerings due to geographic expansion and the cross-functionality of our systems and operations. We seek to invest efficiently in several areas of technology and content, including AWS, and expansion of new and existing product categories and service offerings, as well as in technology infrastructure to enhance the customer experience and improve our process efficiencies. We believe that advances in technology, specifically the speed and reduced cost of processing power and the advances of wireless connectivity, will continue to improve the consumer experience on the Internet and increase its ubiquity in people’s lives. To best take advantage of these continued advances in technology, we are investing in initiatives to build and deploy innovative and efficient software and electronic devices. We are also investing in AWS, which offers a broad set of global compute, storage, database, and other service offerings to developers and enterprises of all sizes.
We seek to efficiently manage shareholder dilution while maintaining the flexibility to issue shares for strategic purposes, such as financings, acquisitions, and aligning employee compensation with shareholders’ interests. We utilize restricted stock units as our primary vehicle for equity compensation because we believe this compensation model aligns the long-term interests of our shareholders and employees. In measuring shareholder dilution, we include all vested and unvested stock awards outstanding, without regard to estimated forfeitures. Total shares outstanding plus outstanding stock awards were 490 million and 497 million as of December 31, 2015 and 2016.
Our financial reporting currency is the U.S. Dollar and changes in foreign exchange rates significantly affect our reported results and consolidated trends. For example, if the U.S. Dollar weakens year-over-year relative to currencies in our international locations, our consolidated net sales and operating expenses will be higher than if currencies had remained constant. Likewise, if the U.S. Dollar strengthens year-over-year relative to currencies in our international locations, our consolidated net sales and operating expenses will be lower than if currencies had remained constant. We believe that our increasing diversification beyond the U.S. economy through our growing international businesses benefits our shareholders over the long-term. We also believe it is useful to evaluate our operating results and growth rates before and after the effect of currency changes.
In addition, the remeasurement of our intercompany balances can result in significant gains and losses associated with the effect of movements in foreign currency exchange rates. Currency volatilities may continue, which may significantly impact (either positively or negatively) our reported results and consolidated trends and comparisons.
For additional information about each line item summarized above, refer to Item 8 of Part II, “Financial Statements and Supplementary Data—Note 1—Description of Business and Accounting Policies.”
 














_______________________
(3)
The operating cycle is the number of days of sales in inventory plus the number of days of sales in accounts receivable minus accounts payable days.

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Critical Accounting Judgments
The preparation of financial statements in conformity with generally accepted accounting principles of the United States (“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.” 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 December 31, 2016, we would have recorded an additional cost of sales of approximately $130 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.
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, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. 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 stock price, 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, 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.

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Recent Accounting Pronouncements
See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 1—Description of Business and Accounting Policies—Recent Accounting Pronouncements.”
Liquidity and Capital Resources
Cash flow information is as follows (in millions):
 
  
Year Ended December 31,
 
2014
 
2015
 
2016
Cash provided by (used in):
 
 
 
 
 
Operating activities
$
6,842

 
$
11,920

 
$
16,443

Investing activities
(5,065
)
 
(6,450
)
 
(9,876
)
Financing activities
4,432

 
(3,763
)
 
(2,911
)
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 $17.4 billion, $19.8 billion, and $26.0 billion as of December 31, 2014, 2015, and 2016. Amounts held in foreign currencies were $5.4 billion, $7.3 billion, and $9.1 billion, as of December 31, 2014, 2015, and 2016, and were primarily Euros, Japanese Yen, and British Pounds.
Cash provided by (used in) operating activities was $6.8 billion, $11.9 billion, and $16.4 billion in 2014, 2015, and 2016. 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 in 2015, 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, and changes in working capital. The increase in operating cash flow in 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. Cash provided by (used in) operating activities is also subject to 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 $(5.1) billion, $(6.5) billion, and $(9.9) billion in 2014, 2015, and 2016, 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 $4.9 billion, $4.6 billion, and $6.7 billion in 2014, 2015, and 2016, which primarily reflect additional capacity to support our fulfillment operations and additional investments in support of continued business growth due to investments in technology infrastructure (the majority of which is to support AWS), during all three periods. Capital expenditures included $537 million, $528 million, and $417 million for internal-use software and website development in 2014, 2015, and 2016. Stock-based compensation capitalized for internal-use software and website development costs does not affect cash flows. In 2014, 2015, and 2016, we made cash payments, net of acquired cash, related to acquisition and other investment activity of $979 million, $795 million, and $116 million.
Cash provided by (used in) financing activities was $4.4 billion, $(3.8) billion, and $(2.9) billion in 2014, 2015, and 2016. 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 $1.9 billion, $4.2 billion, and $4.4 billion in 2014, 2015, and 2016. The increase in 2015 primarily reflects additional repayments on capital leases as well as a $750 million repayment on our unsecured senior notes. Property and equipment acquired under capital leases were $4.0 billion, $4.7 billion, and $5.7 billion in 2014, 2015, and 2016, with the increase 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 $6.4 billion, $353 million, and $621 million in 2014,

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2015, and 2016. During 2014, cash inflows from financing activities consisted primarily of net proceeds from the issuance of $6.0 billion of senior nonconvertible unsecured debt in five tranches maturing in 2019 through 2044. See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 5—Long-Term Debt” for additional discussion of the notes. 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 $6 million, $119 million, and $829 million in 2014, 2015, and 2016.
We had no borrowings outstanding under our $3.0 billion unsecured revolving credit facility (the “Credit Agreement”) and $495 million of borrowings outstanding under our $500 million secured revolving credit facility (the “Credit Facility”) as of December 31, 2016. See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 5—Long-Term Debt” for additional information. 
In 2014, 2015, and 2016, we recorded net tax provisions of $167 million, $950 million, and $1.4 billion. 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. As of December 31, 2016, cash, cash equivalents, and marketable securities held by foreign subsidiaries was $8.6 billion, which included undistributed earnings of foreign subsidiaries indefinitely invested outside of the U.S. of $2.8 billion. 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 $177 million, $273 million, and $412 million for 2014, 2015, and 2016. As of December 31, 2016, our federal net operating loss carryforward was approximately $76 million and we had approximately $608 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. 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 December 31, 2015 and 2016, restricted cash, cash equivalents, and marketable securities were $285 million and $600 million. See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 7—Commitments and Contingencies” for additional discussion of our principal contractual commitments, as well as our pledged assets. Purchase obligations and open purchase orders, consisting of inventory and significant non-inventory commitments, were $8.5 billion as of December 31, 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. 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, which includes the maturation of $1.0 billion of our unsecured senior notes. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. See Item 1A of Part I, “Risk Factors.” We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities, obtain 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 credit lines or financing instruments will be available in amounts or on terms acceptable to us, if at all.


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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, net” to our segment results, and we conformed prior period segment results to the current presentation. These segments reflect the way the Company evaluates its business performance and manages its operations. See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 11—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, certain digital content subscriptions, certain 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):
 
  
Year Ended December 31,
 
2014
 
2015
 
2016
Net Sales:
 
 
 
 
 
North America
$
50,834

 
$
63,708

 
$
79,785

International
33,510

 
35,418

 
43,983

AWS
4,644

 
7,880

 
12,219

Total consolidated
$
88,988

 
$
107,006

 
$
135,987

Year-over-year Percentage Growth:
 
 
 
 
 
North America
23
%
 
25
%
 
25
%
International
12

 
6

 
24

AWS
49

 
70

 
55

Total consolidated
20

 
20

 
27

Year-over-year Percentage Growth, excluding the effect of foreign exchange rates:
 
 
 
 
 
North America
23
%
 
26
%
 
25
%
International
14

 
21

 
26

AWS
49

 
70

 
55

Total consolidated
20

 
26

 
28

Net Sales Mix:
 
 
 
 
 
North America
57
%
 
60
%
 
59
%
International
38

 
33

 
32

AWS
5

 
7

 
9

Total consolidated
100
%
 
100
%
 
100
%
Sales increased 20%, 20%, and 27% in 2014, 2015, and 2016, compared to the comparable prior year periods. Changes in foreign currency exchange rates impacted net sales by $(636) million, $(5.2) billion, and $(550) million for 2014, 2015, and 2016. For a discussion of the effect on sales growth of foreign exchange rates, see “Effect of Foreign Exchange Rates” below.
North America sales increased 23%, 25%, and 25% in 2014, 2015, and 2016, compared to the comparable prior year periods. The sales growth in each year 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 12%, 6%, and 24% in 2014, 2015, and 2016, compared to the comparable prior year periods. The sales growth in each year primarily reflects increased unit sales, including sales by marketplace sellers. Changes in foreign currency exchange rates impacted International net sales by $(580) million, $(5.0) billion, and $(489) million in 2014, 2015, and 2016. Increased unit sales were driven largely by our continued efforts to reduce prices for our customers, including from

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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.
AWS sales increased 49%, 70%, and 55% in 2014, 2015, and 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):
 
Year Ended December 31,
 
2014
 
2015
 
2016
Operating Income (Loss):
 
 
 
 
 
North America
$
360

 
$
1,425

 
$
2,361

International
(640
)
 
(699
)
 
(1,283
)
AWS
458

 
1,507

 
3,108

Total consolidated
$
178


$
2,233


$
4,186

Operating income was $178 million, $2.2 billion, and $4.2 billion for 2014, 2015, and 2016. We believe that operating income (loss) is a more meaningful measure than gross profit and gross margin due to the diversity of our product categories and services.
The increase in North America operating income in absolute dollars in 2014, 2015, and 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. Changes in foreign exchange rates impacted operating income by $0 million, $30 million, and $27 million for 2014, 2015, and 2016.
The increase in International operating loss in absolute dollars in 2014, 2015, and 2016, compared to the comparable prior year periods, is primarily due to increased levels of operating expenses to expand our fulfillment capacity and spending on technology infrastructure and marketing efforts, partially offset by increased unit sales, including sales by marketplace sellers. Changes in foreign exchange rates impacted operating income (loss) by $(27) million, $(278) million, and $89 million for 2014, 2015, and 2016.
The increase in AWS operating income in absolute dollars in 2014, 2015, and 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. Changes in foreign exchange rates impacted operating income by $41 million, $264 million, and $(5) million for 2014, 2015, and 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):
 
 
Year Ended December 31,
 
2014
 
2015
 
2016
Outbound Shipping Activity:
 
 
 
 
 
Shipping revenue (1)(2)(3)
$
4,486

 
$
6,520

 
$
8,976

Shipping costs (4)
(8,709
)
 
(11,539
)
 
(16,167
)
Net shipping cost
$
(4,223
)
 
$
(5,019
)
 
$
(7,191
)
Year-over-year Percentage Growth:
 
 
 
 
 
Shipping revenue
45
%
 
45
%
 
38
%
Shipping costs
31

 
32

 
40

Net shipping cost
19

 
19

 
43

___________________
(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 centers and transportation 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 our fulfillment network, negotiating better terms with our suppliers, and achieving better operating efficiencies. We believe that offering low prices to our customers is fundamental to our future success, and one way we offer lower prices is through shipping offers.

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Supplemental information about products and services for our North America and International segments is as follows (in millions):    
  
Year Ended December 31,
 
2014
 
2015
 
2016
Net Sales:
 
 
 
 
 
North America
 
 
 
 
 
Media
$
11,567

 
$
12,483

 
$
13,580

Electronics and other general merchandise
38,517

 
50,401

 
64,887

Other (1)
750

 
824

 
1,318

Total North America
$
50,834


$
63,708


$
79,785

International
 
 
 
 
 
Media
$
10,938

 
$
10,026

 
$
10,631

Electronics and other general merchandise
22,369

 
25,196

 
33,107

Other (1)
203

 
196

 
245

Total International
$
33,510


$
35,418


$
43,983

Year-over-year Percentage Growth:
 
 
 
 
 
North America
 
 
 
 
 
Media
7
 %
 
8
 %
 
9
%
Electronics and other general merchandise
28

 
31

 
29

Other
22

 
10

 
60

Total North America
23

 
25

 
25

International
 
 
 
 
 
Media
 %
 
(8
)%
 
6
%
Electronics and other general merchandise
19

 
13

 
31

Other
(3
)
 
(3
)
 
25

Total International
12

 
6

 
24

Year-over-year Percentage Growth, excluding the effect of
foreign exchange rates:
 
 
 
 
 
North America
 
 
 
 
 
Media
7
 %
 
8
 %
 
9
%
Electronics and other general merchandise
29

 
31

 
29

Other
22

 
10

 
60

Total North America
23

 
26

 
25

International
 
 
 
 
 
Media
2
 %
 
4
 %
 
7
%
Electronics and other general merchandise
21

 
29

 
33

Other
(3
)
 
10

 
30

Total International
14

 
21

 
26

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


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Operating Expenses
Information about operating expenses is as follows (in millions):
 
 
Year Ended December 31,
  
2014
 
2015
 
2016
Operating Expenses:
 
 
 
 
 
Cost of sales
$
62,752

 
$
71,651

 
$
88,265

Fulfillment
10,766

 
13,410

 
17,619

Marketing
4,332

 
5,254

 
7,233

Technology and content
9,275

 
12,540

 
16,085

General and administrative
1,552

 
1,747

 
2,432

Other operating expense, net
133

 
171

 
167

Total operating expenses
$
88,810


$
104,773


$
131,801

Year-over-year Percentage Growth:
 
 
 
 
 
Cost of sales
16
%
 
14
%
 
23
 %
Fulfillment
25

 
25

 
31

Marketing
38

 
21

 
38

Technology and content
41

 
35

 
28

General and administrative
37

 
13

 
39

Other operating expense, net
16

 
28

 
(2
)
Percent of Net Sales:
 
 
 
 
 
Cost of sales
70.5
%
 
67.0
%
 
64.9
 %
Fulfillment
12.1

 
12.5

 
13.0

Marketing
4.9

 
4.9

 
5.3

Technology and content
10.4

 
11.7

 
11.8

General and administrative
1.7

 
1.6

 
1.8

Other operating expense, net
0.2

 
0.2

 
0.1

In 2014, we recorded charges estimated at $170 million primarily related to Fire phone inventory valuation and supplier commitment costs, the majority of which was included in our North America segment.
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 2014, 2015, and 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

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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 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 2014, 2015, and 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, social and online advertising, television advertising, 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 2014, 2015, and 2016, compared to the comparable prior year periods, is primarily due to increased spending on online marketing channels and television 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 of new and existing products and services, as well as AWS and other technology infrastructure costs. Content costs consist principally of payroll and related expenses for employees involved in category expansion, editorial content, buying, and merchandising selection.
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 2014, 2015, and 2016, compared to the comparable prior year periods, is primarily due to increased payroll and related costs associated with expanding our products and services, and an increase in spending on technology infrastructure principally allocated to our AWS segment.
Technology infrastructure costs consist of servers, networking equipment, and data center related depreciation, rent, utilities, and payroll expenses. These costs are allocated to segments based on usage. In 2014, 2015, and 2016, we expanded our technology infrastructure principally by increasing our capacity for AWS service offerings globally, compared to the comparable prior year periods. 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.
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.
For 2014, 2015, and 2016, we capitalized $641 million (including $104 million of stock-based compensation), $642 million (including $114 million of stock-based compensation), and $511 million (including $94 million of stock-based compensation) of costs associated with internal-use software and website development. Amortization of previously capitalized amounts was $559 million, $635 million, and $634 million for 2014, 2015, and 2016.
General and Administrative
The increase in general and administrative costs in absolute dollars in 2014, 2015, and 2016, compared to the comparable prior year period, is primarily due to increases in payroll and related expenses.

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Other Operating Expense, Net
Other operating expense, net was $133 million, $171 million, and $167 million during 2014, 2015, and 2016, and was primarily related to the amortization of intangible assets.
Interest Income and Expense
Our interest income was $39 million, $50 million, and $100 million during 2014, 2015, and 2016. 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 $210 million, $459 million, and $484 million in 2014, 2015, and 2016. The increase is primarily due to increases in our long-term debt and capital and finance lease arrangements.
Our long-term debt was $8.2 billion and $7.7 billion as of December 31, 2015 and 2016. Our other long-term liabilities were $9.2 billion and $12.6 billion as of December 31, 2015 and 2016. See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 5—Long-Term Debt and Note 6—Other Long-Term Liabilities” for additional information.
Other Income (Expense), Net
Other income (expense), net was $(118) million, $(256) million, and $90 million during 2014, 2015, and 2016. The primary component of other income (expense), net is related to foreign currency and equity warrant valuation gains (losses).
Income Taxes
Our effective tax rate is subject to significant variation due to several factors, including variability in our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, 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.
We recorded a provision for income taxes of $167 million, $950 million, and $1.4 billion in 2014, 2015, and 2016. Our provision for income taxes in 2015 was higher than in 2014 primarily due to an increase in U.S. pre-tax income and increased losses in certain foreign subsidiaries for which we may not realize a tax benefit. Losses for which we may not realize a related tax benefit, primarily due to losses of foreign subsidiaries, reduce our pre-tax income without a corresponding reduction in our tax expense, and therefore increase our effective tax rate. We have recorded valuation allowances against the deferred tax assets associated with losses for which we may not realize a related tax benefit. We also generated income in lower tax jurisdictions primarily related to our European operations, which are headquartered in Luxembourg.
Our provision for income taxes in 2016 was higher than in 2015 primarily due to an increase in U.S. pre-tax income, partially offset by an increase in the proportion of foreign losses for which we may realize a tax benefit, an increase in tax amortization deductions, and a decline in the proportion of nondeductible expenses. We have recorded valuation allowances against the deferred tax assets associated with losses for which we may not realize a related tax benefit. We generated income and losses in lower tax jurisdictions primarily related to our European operations.
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 and made permanent the U.S. federal research and development credit. As of December 31, 2016, our federal net operating loss carryforward was approximately $76 million and we had approximately $608 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.
See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 10—Income Taxes” for additional information.

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Equity-Method Investment Activity, Net of Tax
Equity-method investment activity, net of tax, was $37 million, $(22) million, and $(96) million in 2014, 2015, and 2016. The primary component of this activity during 2014 was our share of a gain recorded by LivingSocial related to the sale of its Korean operations. This gain was partially offset by operating losses incurred by LivingSocial during the period. The primary components of this activity during 2015 and 2016 were our equity-method investment losses during the periods and impairments recorded in 2016.
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 2014, 2015, and 2016 (in millions):
 
Year Ended December 31,
 
2014
 
2015
 
2016
Net cash provided by (used in) operating activities
$
6,842

 
$
11,920

 
$
16,443

Purchases of property and equipment, including internal-use software and website development, net
(4,893
)
 
(4,589
)
 
(6,737
)
Free cash flow
$
1,949


$
7,331


$
9,706

 
 
 
 
 
 
Net cash provided by (used in) investing activities
$
(5,065
)
 
$
(6,450
)
 
$
(9,876
)
Net cash provided by (used in) financing activities
$
4,432

 
$
(3,763
)
 
$
(2,911
)
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 2014, 2015, and 2016 (in millions):
 
Year Ended December 31,
 
2014
 
2015
 
2016
Net cash provided by (used in) operating activities
$
6,842

 
$
11,920

 
$
16,443

Purchases of property and equipment, including internal-use software and website development, net
(4,893
)
 
(4,589
)
 
(6,737
)
Principal repayments of capital lease obligations
(1,285
)
 
(2,462
)
 
(3,860
)
Principal repayments of finance lease obligations
(135
)
 
(121
)
 
(147
)
Free cash flow less lease principal repayments
$
529

 
$
4,748

 
$
5,699

 
 
 
 
 
 
Net cash provided by (used in) investing activities
$
(5,065
)
 
$
(6,450
)
 
$
(9,876
)
Net cash provided by (used in) financing activities
$
4,432

 
$
(3,763
)
 
$
(2,911
)

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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 2014, 2015, and 2016 (in millions):
 
Year Ended December 31,
 
2014
 
2015
 
2016
Net cash provided by (used in) operating activities
$
6,842

 
$
11,920

 
$
16,443

Purchases of property and equipment, including internal-use software and website development, net
(4,893
)
 
(4,589
)
 
(6,737
)
Property and equipment acquired under capital leases
(4,008
)
 
(4,717
)
 
(5,704
)
Principal repayments of finance lease obligations
(135
)
 
(121
)
 
(147
)
Free cash flow less finance lease principal repayments and assets acquired under capital leases
$
(2,194
)
 
$
2,493

 
$
3,855

 
 
 
 
 
 
Net cash provided by (used in) investing activities
$
(5,065
)
 
$
(6,450
)
 
$
(9,876
)
Net cash provided by (used in) financing activities
$
4,432

 
$
(3,763
)
 
$
(2,911
)
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 periods. The effect on our net sales, operating expenses, and operating income is as follows (in millions):
 
Year Ended December 31, 2014
 
Year Ended December 31, 2015
 
Year Ended December 31, 2016
  
As
Reported
 
Exchange
Rate
Effect (1)
 
At Prior
Year
Rates (2)
 
As
Reported
 
Exchange
Rate
Effect (1)
 
At Prior
Year
Rates (2)
 
As
Reported
 
Exchange
Rate
Effect (1)
 
At Prior
Year
Rates (2)
Net sales
$
88,988

 
$
636

 
$
89,624

 
$
107,006

 
$
5,167

 
$
112,173

 
$
135,987

 
$
550

 
$
136,537

Operating expenses
88,810

 
656

 
89,466

 
104,773

 
5,183

 
109,956

 
131,801

 
660

 
132,461

Operating income (loss)
178

 
(20
)
 
158

 
2,233

 
(16
)
 
2,217

 
4,186

 
(110
)
 
4,076

___________________
(1)
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.
(2)
Represents the outcome that would have resulted had foreign exchange rates in the reported period been the same as those in effect in the comparable prior year period for operating results.

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Item 7A.
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 7 of Part II, “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.
The following table provides information about our cash equivalents and marketable fixed income securities, including principal cash flows by expected maturity and the related weighted-average interest rates as of December 31, 2016 (in millions, except percentages):
 
 
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
Estimated Fair Value as of December 31, 2016
Money market funds
 
$
11,940

 
$

 
$

 
$

 
$

 
$

 
$
11,940

 
$
11,940

Weighted-average interest rate
 
0.21
%
 


 


 


 


 
%
 
0.21
%
 
 
Corporate debt securities
 
1,300

 
577

 
156

 
28

 
30

 

 
2,091

 
2,104

Weighted-average interest rate
 
1.27
%
 
1.58
%
 
1.26
 %
 
0.60
 %
 
2.24
%
 
%
 
1.36
%
 
 
U.S. government and agency securities
 
3,545

 
1,136

 
88

 
28

 
10

 

 
4,807

 
4,816

Weighted-average interest rate
 
0.71
%
 
1.20
%
 
1.67
 %
 
1.99
 %
 
2.28
%
 
%
 
0.85
%
 
 
Asset backed securities
 
217

 
84

 
40

 
10

 

 

 
351

 
353

Weighted-average interest rate
 
1.41
%
 
1.52
%
 
1.78
 %
 
2.38
 %
 


 
%
 
1.51
%
 
 
Foreign government and agency securities
 
163

 
129

 
39

 
2

 
1

 

 
334

 
337

Weighted-average interest rate
 
1.10
%
 
0.94
%
 
(0.45
)%
 
(0.01
)%
 
0.79
%
 
%
 
0.85
%
 
 
Other securities
 
59

 
15

 
11

 
4

 
7

 

 
96

 
97

Weighted-average interest rate
 
1.33
%
 
1.67
%
 
1.90
 %
 
2.07
 %
 
2.33
%
 
%
 
1.56
%
 
 
 
 
$
17,224

 
$
1,941

 
$
334

 
$
72

 
$
48

 
$

 
$
19,619

 
 
Cash equivalent and marketable fixed income securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
19,647

As of December 31, 2016, we had $8.8 billion of debt, including the current portion, primarily consisting of the following fixed rate unsecured debt (in millions):
1.20% Notes due on November 29, 2017
$
1,000

2.60% Notes due on December 5, 2019
$
1,000

3.30% Notes due on December 5, 2021
$
1,000

2.50% Notes due on November 29, 2022
$
1,250

3.80% Notes due on December 5, 2024
$
1,250

4.80% Notes due on December 5, 2034
$
1,250

4.95% Notes due on December 5, 2044
$
1,500


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Based upon quoted market prices and Level 2 inputs, the fair value of our total debt was $9.3 billion as of December 31, 2016.
Foreign Exchange Risk
During 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 during 2016, International segment net sales decreased by $489 million in comparison with the prior year.
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 December 31, 2016, of $9.1 billion, an assumed 5%, 10%, and 20% adverse change to foreign exchange would result in fair value declines of $455 million, $915 million, and $1.8 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 December 31, 2016, an assumed 5%, 10%, and 20% adverse change to foreign exchange would result in losses of $225 million, $476 million, and $1.1 billion, recorded to “Other income (expense), net.”
See Item 7 of Part II, “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 December 31, 2016, our recorded value in equity and equity warrant investments in public and private companies was $467 million. We record our equity and equity warrant investments in publicly traded companies at fair value, which is subject to market price volatility, and represents $242 million of our investments as of December 31, 2016. We evaluate our equity and equity warrant investments in private companies 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 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Amazon.com, Inc.
We have audited the accompanying consolidated balance sheets of Amazon.com, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Amazon.com, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Amazon.com, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 9, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Seattle, Washington
February 9, 2017


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AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
  
Year Ended December 31,
 
2014
 
2015
 
2016
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
$
8,658

 
$
14,557

 
$
15,890

OPERATING ACTIVITIES:
 
 
 
 
 
Net income (loss)
(241
)
 
596

 
2,371

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
4,746

 
6,281

 
8,116

Stock-based compensation
1,497

 
2,119

 
2,975

Other operating expense, net
129

 
155

 
160

Other expense (income), net
59

 
250

 
(20
)
Deferred income taxes
(316
)
 
81

 
(246
)
Excess tax benefits from stock-based compensation
(6
)
 
(119
)
 
(829
)
Changes in operating assets and liabilities:
 
 
 
 
 
Inventories
(1,193
)
 
(2,187
)
 
(1,426
)
Accounts receivable, net and other
(1,039
)
 
(1,755
)
 
(3,367
)
Accounts payable
1,759

 
4,294

 
5,030

Accrued expenses and other
706

 
913

 
1,724

Additions to unearned revenue
4,433

 
7,401

 
11,931

Amortization of previously unearned revenue
(3,692
)
 
(6,109
)
 
(9,976
)
Net cash provided by (used in) operating activities
6,842


11,920


16,443

INVESTING ACTIVITIES:
 
 
 
 
 
Purchases of property and equipment, including internal-use software and website development, net
(4,893
)
 
(4,589
)
 
(6,737
)
Acquisitions, net of cash acquired, and other
(979
)
 
(795
)
 
(116
)
Sales and maturities of marketable securities
3,349

 
3,025

 
4,733

Purchases of marketable securities
(2,542
)
 
(4,091
)
 
(7,756
)
Net cash provided by (used in) investing activities
(5,065
)
 
(6,450
)

(9,876
)
FINANCING ACTIVITIES:
 
 
 
 
 
Excess tax benefits from stock-based compensation
6

 
119

 
829

Proceeds from long-term debt and other
6,359

 
353

 
621

Repayments of long-term debt and other
(513
)
 
(1,652
)
 
(354
)
Principal repayments of capital lease obligations
(1,285
)
 
(2,462
)
 
(3,860
)
Principal repayments of finance lease obligations
(135
)
 
(121
)
 
(147
)
Net cash provided by (used in) financing activities
4,432


(3,763
)

(2,911
)
Foreign currency effect on cash and cash equivalents
(310
)
 
(374
)
 
(212
)
Net increase (decrease) in cash and cash equivalents
5,899


1,333


3,444

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
14,557


$
15,890


$
19,334

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
 
Cash paid for interest on long-term debt
$
91

 
$
325

 
$
290

Cash paid for interest on capital and finance lease obligations
86

 
153

 
206

Cash paid for income taxes, net of refunds
177

 
273

 
412

Property and equipment acquired under capital leases
4,008

 
4,717

 
5,704

Property and equipment acquired under build-to-suit leases
920

 
544

 
1,209

See accompanying notes to consolidated financial statements.

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AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
 
  
Year Ended December 31,
 
2014
 
2015
 
2016
Net product sales
$
70,080

 
$
79,268

 
$
94,665

Net service sales
18,908

 
27,738

 
41,322

Total net sales
88,988

 
107,006

 
135,987

Operating expenses:
 
 
 
 
 
Cost of sales
62,752

 
71,651

 
88,265

Fulfillment
10,766

 
13,410

 
17,619

Marketing
4,332

 
5,254

 
7,233

Technology and content
9,275

 
12,540

 
16,085

General and administrative
1,552

 
1,747

 
2,432

Other operating expense, net
133

 
171

 
167

Total operating expenses
88,810

 
104,773

 
131,801

Operating income
178

 
2,233

 
4,186

Interest income
39

 
50

 
100

Interest expense
(210
)
 
(459
)
 
(484
)
Other income (expense), net
(118
)
 
(256
)
 
90

Total non-operating income (expense)
(289
)
 
(665
)
 
(294
)
Income (loss) before income taxes
(111
)
 
1,568

 
3,892

Provision for income taxes
(167
)
 
(950
)
 
(1,425
)
Equity-method investment activity, net of tax
37

 
(22
)
 
(96
)
Net income (loss)
$
(241
)
 
$
596

 
$
2,371

Basic earnings per share
$
(0.52
)
 
$
1.28

 
$
5.01

Diluted earnings per share
$
(0.52
)
 
$
1.25

 
$
4.90

Weighted-average shares used in computation of earnings per share:
 
 
 
 
 
Basic
462

 
467

 
474

Diluted
462

 
477

 
484

See accompanying notes to consolidated financial statements.


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AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)

  
Year Ended December 31,
 
2014
 
2015
 
2016
Net income (loss)
$
(241
)
 
$
596

 
$
2,371

Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustments, net of tax of $(3), $10, and $(49)
(325
)
 
(210
)
 
(279
)
Net change in unrealized gains (losses) on available-for-sale securities:
 
 
 
 
 
Unrealized gains (losses), net of tax of $1, $(5), and $(12)
2

 
(7
)
 
9

Reclassification adjustment for losses (gains) included in “Other income (expense), net,” net of tax of $(1), $0, and $0
(3
)
 
5

 
8

Net unrealized gains (losses) on available-for-sale securities
(1
)
 
(2
)
 
17

Total other comprehensive income (loss)
(326
)
 
(212
)
 
(262
)
Comprehensive income (loss)
$
(567
)
 
$
384

 
$
2,109

See accompanying notes to consolidated financial statements.


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AMAZON.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
 
 
December 31,
 
2015
 
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
15,890

 
$
19,334

Marketable securities
3,918

 
6,647

Inventories
10,243

 
11,461

Accounts receivable, net and other
5,654

 
8,339

Total current assets
35,705

 
45,781

Property and equipment, net
21,838

 
29,114

Goodwill
3,759

 
3,784

Other assets
3,445

 
4,723

Total assets
$
64,747

 
$
83,402

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
20,397

 
$
25,309

Accrued expenses and other
10,372

 
13,739

Unearned revenue
3,118

 
4,768

Total current liabilities
33,887

 
43,816

Long-term debt
8,227

 
7,694

Other long-term liabilities
9,249

 
12,607

Commitments and contingencies (Note 7)
 
 


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 — 494 and 500
 
 
 
Outstanding shares — 471 and 477
5

 
5

Treasury stock, at cost
(1,837
)
 
(1,837
)
Additional paid-in capital
13,394

 
17,186

Accumulated other comprehensive loss
(723
)
 
(985
)
Retained earnings
2,545

 
4,916

Total stockholders’ equity
13,384

 
19,285

Total liabilities and stockholders’ equity
$
64,747

 
$
83,402

See accompanying notes to consolidated financial statements.


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AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)

 
 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Treasury
Stock
 
Additional
Paid-In
Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained
Earnings
 
Total
Stockholders’
Equity
Balance as of January 1, 2014
459

 
$
5