LeapFrog 2012 Annual Report Download - page 60

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
respectively. Based on a more-likely-than-not determination of future projected taxable income, a portion of
the Company’s domestic deferred tax assets was deemed to be realizable in the future. Accordingly, based on
projected future earnings, a deferred tax valuation allowance release of $21,614 was recorded as an income
tax benefit in 2012. This benefit was offset by a non-cash valuation allowance of $1,274 recorded against the
deferred tax assets of its subsidiary in Mexico as the Company determined, at the required
more-likely-than-not level of certainty, that its subsidiary in Mexico will not generate sufficient future taxable
income to realize the benefit of its deferred tax assets. The change in the Company’s domestic and foreign
valuation allowance balances resulted in a net $20,340 income tax benefit for the year.
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $13,139 at
December 31, 2012. The earnings are considered to be permanently reinvested and, accordingly, no deferred
U.S. income tax has been provided thereon. Repatriation of the Company’s foreign earnings in its entirety
would result in a U.S. tax liability of approximately $4,927. In the event all foreign undistributed earnings
were remitted to the U.S., any incremental tax liability would be fully offset by the Company’s domestic net
operating loss.
Deferred income taxes reflect the impact of ‘‘temporary differences’’ between asset and liability amounts for
financial reporting purposes and such amounts as determined based on existing tax laws. The tax effect of
temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows:
December 31,
2012 2011
Deferred tax assets:
NOL and credits carryover ............................. $67,576 $ 91,221
Inventory and other reserves ............................ 5,670 7,058
Depreciation and amortization ........................... 3,968 3,599
Other ............................................ 15,755 16,378
Gross deferred tax assets ............................ 92,969 118,256
Less: valuation allowance .............................. (70,385) (115,948)
Net deferred tax assets ............................. $22,584 $ 2,308
Deferred tax liabilities:
Goodwill ......................................... $ 3,759 $ 3,542
Total deferred tax liabilities .......................... $ 3,759 $ 3,542
Starting in 2006, the Company recorded a non-cash charge to establish a valuation allowance against all of its
gross domestic deferred tax assets. The valuation allowance in both 2012 and 2011 includes $8,503 related to
excess tax benefits of stock option deductions prior to the adoption of the authoritative guidance regarding
stock-based compensation. The benefits will increase additional paid-in capital when realized. The valuation
allowance was reduced in the current year by $23,298 due to the utilization of federal and state net operating
loss and tax credit balances and by $1,925 due to certain provisions to return true-ups relating to 2011.
During 2012, after considering the relative impact of all evidence, positive and negative, the Company
determined, at the required more-likely-than-not level of certainty, that a portion of its domestic deferred tax
assets will be realized. Due to the high seasonality of its business with a significant portion of its annual
income earned late in the year, this determination was made at the end of the fourth quarter after the critical
holiday season had passed and actual results for the year were known. Although the Company believes
profitability will continue in the near term and add to its three-year cumulative profit position, based on the
duration and severity of losses in prior years, rapidly changing consumer demands, increasing pace of
technological innovation, significant product, retailer and seasonal revenue concentrations, transition at the
highest levels of its management, and unproven new product pipeline, the Company could not project future
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