Callaway 2011 Annual Report Download - page 104

income, and the dates on which any deferred tax assets are expected to expire. These assumptions require a
significant amount of judgment, including estimates of future taxable income. These estimates are based on the
Company’s best judgment at the time made based on current and projected circumstances and conditions.
At December 31, 2011, the Company had deferred tax assets of $119,197,000. Approximately $115,296,000
of the deferred tax assets pertain to the Company’s U.S. business and $3,901,000 pertain to foreign jurisdictions.
In evaluating the likelihood that these deferred tax assets will be realized, the Company considered the
Company’s taxable loss in the United States in each of the past three years, the reasons for such loss, the
Company’s projected financial forecast for the U.S business, and the dates on which the deferred tax assets are
expected to expire. When evaluated in light of the applicable standards, this evidence suggests that the Company
should establish a valuation allowance. As a result, in 2011, the Company recorded a $52,455,000 increase to
income tax expense in order to establish a valuation allowance against its U.S. deferred tax assets and
discontinued recognizing income tax benefits related to its U.S. net operating losses. If sufficient positive
evidence arises in the future, such as a sustained return to profitability, any existing valuation allowance could be
reversed as appropriate, decreasing income tax expense in the period that such conclusion is reached. The
Company has concluded that with respect to non-U.S. entities, there is sufficient positive evidence to conclude
that realization of its deferred tax assets is deemed to be more likely than not under applicable accounting rules,
and no allowances have been established.
The non-cash charge to establish a valuation allowance does not have any impact on the Company’s
consolidated cash flows, nor does such an allowance preclude the Company from using loss carry forwards or
other deferred tax assets in the future, except as described below. Until the Company re-establishes a pattern of
continuing profitability, in accordance with the applicable accounting guidance, U.S. income tax expense or
benefit related to the recognition of deferred tax assets in the consolidated statement of operations for future
periods will be offset by decreases or increases in the valuation allowance with no net effect on the consolidated
statement of operations.
As a result of the establishment of the valuation allowance against its U.S. deferred tax assets, the Company
does not recognize a tax benefit on taxable losses generated in the U.S. Furthermore, income taxes related to
intercompany profits generated from sales in the U.S. to the Company’s foreign subsidiaries that would typically
impact the statement of operations in periods with no valuation allowance are no longer deferred and amounts
previously accumulated as prepaid tax expense are charged to the provision for income taxes in the statement of
operations. The reversal of the prepaid tax asset is included in the determination of the annual estimated effective
tax rate resulting in $21,634,000 of tax expense for the year ended 2011.
The Company has federal and state income tax credit carryforwards of $5,166,000 and $6,363,000
respectively, which will expire at various dates beginning in 2020. Such credit carryforward expire as follows:
U.S. foreign tax credit .................................................. 3,579,000 2020 - 2021
U.S. research tax credit ................................................. 1,587,000 2030 - 2031
State investment tax credits .............................................. 555,000 Do not expire
State research tax credits ................................................ 5,808,000 Do not expire
The Company has recorded a deferred tax asset reflecting the benefit of operating loss carryforwards. The
net operating losses expire as follows:
U.S. loss carryforwards ............................................... $159,917,000 2031
State loss carryforwards .............................................. $121,919,000 2012 - 2034
Foreign loss carryforwards ............................................ $ 1,174,000 2019
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