Callaway 2006 Annual Report Download - page 100

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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company’s
income before income taxes to the income tax provision is as follows (in thousands):
Year Ended December 31,
2006 2005 2004
Amounts computed at statutory U.S. tax rate .................. $12,246 $ 5,088 $ (8,300)
State income taxes, net of U.S. tax benefit .................... 1,219 (369) (1,466)
State tax credits, net of U.S. tax benefit ...................... (326) (418) (1,171)
Expenses with no tax benefit ............................... 1,289 634 706
Share based compensation ................................. 555 — —
Domestic manufacturing tax benefits ........................ (181) — —
Extra-territorial income exclusion benefit ..................... (263) (189) —
Change in deferred tax valuation allowance ................... 138 274 1,166
Income tax contingency reserve ............................ (2,983) (3,564) (4,382)
Other ................................................. 14 (203) (163)
Income tax provision ..................................... $11,708 $ 1,253 $(13,610)
The Company’s U.S. and foreign tax returns are subject to routine compliance reviews by the various tax
authorities. The Company accrues for federal, state and foreign tax contingencies based upon its best estimate of
the additional taxes, interest and penalties expected to be paid. These estimates are updated over time as more
definitive information becomes available from taxing authorities, completion of tax audits, expiration of statute
of limitations, or upon occurrence of other events.
In 2006, 2005 and 2004, the tax rate benefited from net favorable adjustments to previously estimated tax
liabilities in the amount of $2,983,000, 3,564,000 and 4,382,000, respectively. The most significant favorable
adjustments related to various agreements reached with the Internal Revenue Service (“IRS”) on certain issues
necessitating a reassessment of the Company’s tax exposures for all open tax years.
The Company and its domestic subsidiaries file a consolidated U.S. federal income tax return. The
Company and its consolidated subsidiaries are currently under examination for years 2001 through 2003 and this
review is expected to be completed in 2007. The Company believes the additional tax liability, if any, for such
years and subsequent years, will not have a material effect on the financial position of the Company.
As of December 31, 2006, the Company did not provide for United States income taxes or foreign
withholding taxes on a cumulative total of $58,044,000 of undistributed earnings from certain non-U.S.
subsidiaries that will be permanently reinvested outside the United States. Upon remittance, certain foreign
countries impose withholding taxes that are then available, subject to certain limitations, for use as credits against
the Company’s U.S. tax liability, if any. It is not practicable to estimate the amount of the deferred tax liability on
such unremitted earnings. Should the Company repatriate foreign earnings, the Company would have to adjust
the income tax provision in the period management determined that the Company would repatriate earnings.
Cash amounts paid during 2006 for income taxes, net of refunds received, was $18,859,000.
F-32