Amazon.com 2011 Annual Report Download - page 38

the U.S. Earnings of our subsidiaries outside of the U.S. primarily relate to our European operations, which are
headquartered in Luxembourg. The favorable effective tax rate impact of earnings in lower tax rate jurisdictions is
offset by other items, principally losses incurred in jurisdictions for which we may not able to realize a related tax
benefit. Depending upon the jurisdictional mix and amount of our income in 2012, the losses for which we may not
receive a tax benefit in 2012 could result in an effective tax rate that is higher than the 35% U.S. federal statutory
rate.
Our effective tax rate is subject to significant variation due to several factors, including variability in
accurately predicting our taxable income, the taxable jurisdictions to which it relates, business acquisitions and
investments, foreign exchange rates, and expenses or losses for which tax benefits are not recognized. We have
tax benefits relating to excess stock-based compensation deductions that are being utilized to reduce our U.S.
taxable income. As of December 31, 2011, our federal net operating loss carryforward was approximately $384
million. We also have approximately $273 million of federal tax credits potentially available to offset future tax
liabilities. Once we utilize our federal net operating losses and tax credits, we expect cash paid for taxes to
significantly increase. As a result of U.S. legislation enacted in December 2010, we accelerated our depreciation
deductions for qualifying property acquired in 2010 and 2011.
Equity–Method Investment Activity, Net of Tax
Equity–method investment gains (losses), net of tax, were $(12) million, $7 million, and $(6) million in
2011, 2010, and 2009. The increase in equity-method investment activity in 2011 compared to 2010 is primarily
due to $175 million of equity-method losses, partially offset by gains of $163 million as a result of reductions in
our equity ownership, through dilution, and a recovery on the sale of an equity position. The increase in equity-
method investment activity in 2010 compared to 2009 is primarily due to the recognition of a non-cash gain on a
previously held equity position in a company that was acquired in 2010.
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, 2011
Year Ended
December 31, 2010
Year Ended
December 31, 2009
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 ............... $46,985 $1,092 $48,077 $34,290 $(86) $34,204 $24,691 $(182) $24,509
Operating expenses ....... 46,176 1,039 47,215 32,856 (58) 32,798 23,522 (142) 23,380
Income from operations . . . 809 53 862 1,434 (28) 1,406 1,170 (41) 1,129
(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.
(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.
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 flow,”
operating expenses with and without stock-based compensation, and the effect of exchange rates on our
consolidated statement of operations, meet the definition of non-GAAP financial measures.
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.
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