Amazon.com 2008 Annual Report Download - page 45

Income Taxes
We recorded a provision for income taxes of $247 million, $184 million, and $187 million, in 2008, 2007,
and 2006. The effective tax rate in 2008 and 2007 was lower than the 35% U.S. federal statutory rate primarily
due to earnings of our subsidiaries outside of the U.S. in jurisdictions where our effective tax rate is lower than in
the U.S. The effective tax rate in 2006 was higher than the 35% U.S. federal statutory rate resulting from
establishment of our European headquarters in Luxembourg, which we expected to benefit our effective tax rate
over time. Associated with the establishment of our European headquarters, we transferred certain of our
operating assets in 2005 and 2006 from the U.S. to international locations. These transfers resulted in taxable
income and exposure to additional taxable income assertions by taxing jurisdictions.
Our effective tax rate is subject to significant variation due to several factors, including from accurately
predicting our taxable income, the taxable jurisdictions to which it relates, business acquisitions and investments,
and foreign currencies. We have current tax benefits and net operating losses relating to excess stock-based
compensation deductions that are being utilized to reduce our U.S. taxable income. As such, we expect a majority
of our net tax provision to be non-cash.
Effect of Exchange Rates
The effect on our consolidated statements of operations from changes in exchange rates versus the
U.S. Dollar is as follows (in millions, except per share data):
Year Ended
December 31, 2008
Year Ended
December 31, 2007
Year Ended
December 31, 2006
At Prior
Year
Rates (1)
Exchange
Rate
Effect (2)
As
Reported
At Prior
Year
Rates (1)
Exchange
Rate
Effect (2)
As
Reported
At Prior
Year
Rates (1)
Exchange
Rate
Effect (2)
As
Reported
Net sales ................. $19,039 $ 127 $19,166 $14,436 $ 399 $14,835 $10,687 $ 24 $10,711
Gross profit ............... 4,240 30 4,270 3,274 79 3,353 2,455 1 2,456
Operating expenses ......... 3,408 20 3,428 2,648 50 2,698 2,064 3 2,067
Income from operations ..... 832 10 842 626 29 655 391 (2) 389
Net interest income (expense)
and other (3) ............ 17 42 59 5 — 5 (19) 7 (12)
Net income ............... 609 36 645 456 20 476 188 2 190
Diluted earnings per share . . . $ 1.41 $0.08 $ 1.49 $ 1.07 $0.05 $ 1.12 $ 0.44 $0.01 $ 0.45
(1) Represents the outcome that would have resulted had exchange rates in the reported period been the same as
those in effect in the comparable prior year period for operating results, and if we did not incur the
variability associated with remeasurements for our 6.875% PEACS and intercompany balances.
(2) Represents the increase or decrease in reported amounts resulting from changes in exchange rates from
those in effect in the comparable prior year period for operating results, and if we did not incur the
variability associated with remeasurements for our 6.875% PEACS and intercompany balances.
(3) Includes foreign currency gains and losses on cross-currency investments, remeasurement of 6.875%
PEACS and intercompany balances.
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 measure of “Free cash flow”
meets the definition of a non-GAAP financial measure. Free cash flow is used in addition to and in conjunction
with results presented in accordance with GAAP and free cash flow should not be relied upon to the exclusion of
GAAP financial measures. Free cash flow reflects an additional way of viewing our liquidity that, when viewed
with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows.
Management strongly encourages shareholders to review our financial statements and publicly-filed reports in
their entirety and not to rely on any single financial measure.
37