Build-A-Bear Workshop 2011 Annual Report Download - page 45

BUILD-A-BEAR WORKSHOP, INC. 2011 FORM 10-K
Income Taxes
Our income tax expense is based on our income, statutory tax
rates, and tax planning opportunities available in the various
jurisdictions in which we operate. Tax laws are complex and
subject to different interpretations by the taxpayer and
respective governmental taxing authorities. Significant
judgment is required in determining our income tax expense
and in evaluating our tax positions, including evaluating
uncertainties. Management reviews tax positions at least
quarterly and adjusts the balances as new information
becomes available. Deferred income tax assets represent
amounts available to reduce income taxes payable on taxable
income in future years. Such assets arise because of
temporary differences between the financial reporting and tax
bases of assets and liabilities, as well as from net operating
loss and tax credit carryforwards. As we have incurred a
cumulative book loss over the three year period ended
December 31, 2011, we evaluated the realizability of our
deferred tax assets. We performed an analysis of all
available evidence, both positive and negative, consistent
with the provisions of ASC 740-10-30-17. Some of that
evidence evaluated includes our historical operating
performance, the macroeconomic factors contributing to the
recent fiscal loss for which the tax benefits have been fully
realized by the carryback availability, and our forecast of
future taxable income, including the availability of prudent
and feasible tax planning strategies. The three-year cumulative
loss is a significant piece of negative evidence and while
management believes that it is primarily a result of losses that
were primarily attributable to the significant economic
downturn experienced in 2009 and not an indication of
continuing operations, we are required to give objective
historical evidence more weight than subjective evidence,
such as forecasts of future income. Accordingly, in the fiscal
2011 fourth quarter, the Company recorded a $15.6 million
valuation allowance on its US deferred tax assets. This
allowance does not preclude us from utilizing the deferred tax
assets in the future, nor does it reflect a change in our long-
term outlook.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no recently issued but not yet adopted accounting
pronouncements that are expected to significantly impact our
financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Our market risks relate primarily to changes in interest rates,
and we bear this risk in two specific ways. First, our revolving
credit facility carries a variable interest rate that is tied to
market indices and, therefore, our results of operations and
our cash flows can be impacted by changes in interest
rates. Outstanding balances under our credit facility bear
interest at LIBOR plus 1.8%. We had no borrowings during
fiscal 2011. Accordingly, a 100 basis point change in
interest rates would result in no material change to our annual
interest expense. The second component of interest rate risk
involves the short term investment of excess cash in short term,
investment grade interest-bearing securities. If there are
changes in interest rates, those changes would affect the
investment income we earn on these investments and,
therefore, impact our cash flows and results of operations.
We conduct operations in various countries, which
expose us to changes in foreign exchange rates. The financial
results of our foreign subsidiaries and franchisees may be
materially impacted by exposure to fluctuating exchange
rates. Reported sales, costs and expenses at our foreign
subsidiaries, when translated into U.S. dollars for financial
reporting purposes, can fluctuate due to exchange rate
movement. While exchange rate fluctuations can have a
material impact on reported revenues, costs and expenses,
and earnings, this impact is principally the result of the
translation effect and does not materially impact our short-term
cash flows.
Although we enter into a significant amount of purchase
obligations outside of the U.S., these obligations are settled
primarily in U.S. dollars and, therefore, we believe we have
only minimal exposure at present to foreign currency
exchange risks for our purchase obligations. Historically, we
have not hedged our currency risk and do not currently
anticipate doing so in the future.
We do not engage in financial transactions for trading or
speculative purposes.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The financial statements and schedules are listed under
Item 15(a) and filed as part of this Annual Report on
Form 10-K.
37