Callaway 2007 Annual Report Download - page 97

The current year change in net deferred taxes of $4,474,000 is comprised of a net deferred benefit of
$6,184,000 recorded as of January 1, 2007 as a component of the cumulative effect of the FIN 48 accounting
method change offset by a net deferred expense of $1,710,000 recorded through current income tax expense for
the year ended December 31, 2007.
Of the total tax credit carryforwards of $3,667,000 at December 31, 2007, the Company has state investment
tax credits of $952,000 which expire at various dates through 2010 and $1,638,000 that generally do not expire,
foreign tax credit carryforwards of $30,000 which expire at various dates through 2009, and state research and
development credit carryforwards of $30,000 which expire at various dates through 2022 and $1,017,000 that
generally do not expire. Of the $1,705,000 of operating loss carryforwards, $1,283,000 relates to state loss
carryforwards that expire in 2008 through 2010, $194,000 relates to foreign loss carryforwards that will expire in
2012 and $228,000 relates to loss carryforwards that do not expire.
The Company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are not, in
management’s estimation, more likely than not to be realized. This allowance primarily relates to the uncertainty of
realizing certain state tax credit carryforwards, state operating loss carryforwards, and a portion of other deferred tax
assets. Of the $4,702,000 valuation allowance at December 31, 2007, $660,000 is related to certain Top-Flite
deferred tax assets existing at the time of the acquisition. In the future, if the Company determines that the
realization of these Top-Flite deferred tax assets is more likely than not, the reversal of the related valuation
allowance will reduce goodwill instead of the provision for income taxes. Based on management’s assessment, it is
more likely than not that the net deferred tax assets will be realized through future earnings.
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,
2007 2006 2005
Amounts computed at statutory U.S. tax rate .............................. $30,896 $12,246 $ 5,088
State income taxes, net of U.S. tax benefit ................................ 3,282 1,219 (369)
State tax credits, net of U.S. tax benefit .................................. (761) (326) (418)
Federal research tax credits ............................................ (500) (51) (20)
Expenses with no tax benefit .......................................... 807 1,289 634
Share based compensation ............................................ 432 555 —
Domestic manufacturing tax benefits .................................... (735) (181) —
Extra-territorial income exclusion benefit ................................ — (263) (189)
Effect of foreign rate changes .......................................... 164 — —
Change in deferred tax valuation allowance ............................... 619 90 274
Reversal of previously accrued taxes .................................... (1,620) (2,983) (3,564)
Accrual for interest and income taxes related to uncertain tax positions ......... 967 — —
Other ............................................................. 137 113 (183)
Income tax provision ................................................. $33,688 $11,708 $ 1,253
In 2007, 2006 and 2005, the tax rate benefited from net favorable adjustments to previously estimated tax
liabilities in the amount of $1,620,000, $2,983,000 and $3,564,000, respectively. The most significant favorable
adjustments in each year related to adjustments resulting from the finalization of the Company’s prior year U.S.
and state income tax returns as well as agreements reached with the Internal Revenue Service (“IRS”) and other
major jurisdictions on certain issues necessitating a reassessment of the Company’s tax exposures for all open tax
years, with no individual year being significantly affected.
Effective January 1, 2007, the Company was required to adopt and implement the provisions of FIN 48,
which requires the Company to accrue for the estimated additional amount of taxes for uncertain tax positions if
it is more likely than not that the Company would be required to pay such additional taxes. An uncertain income
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