Callaway 2011 Annual Report Download - page 105

Although the Company has set up a valuation allowance against the majority of its U.S. federal and state
deferred tax assets, which include net operating loss carry forwards (“NOLs”) and other losses, such allowance
does not preclude the Company from using the deferred tax assets in the future. However, the Company’s ability
to utilize the losses to offset future taxable income may be deferred or limited significantly if the Company were
to experience an “ownership change” as defined in section 382 of the Internal Revenue Code of 1986, as
amended (the “Code”). In general, an ownership change will occur if there is a cumulative increase in ownership
of the Company’s stock by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points
over a rolling three-year period. The determination of whether an ownership change has occurred for purposes of
Section 382 is complex and requires significant judgment. The extent to which the Company’s ability to utilize
the losses is limited as a result of such an ownership change depends on many variables, including the value of
the Company’s stock at the time of the ownership change. Although the Company’s ownership has changed
significantly during the three-year period ended December 31, 2011 (due in significant part to the Company’s
June 2009 preferred stock offering), the Company does not believe there has been a cumulative increase in
ownership in excess of 50 percentage points during that period. The Company continues to monitor changes in
ownership. If such a cumulative increase did occur in any three year period and the Company was limited in the
amount of losses it could use to offset taxable income, the Company’s results of operations and cash flows would
be adversely impacted.
A reconciliation of the effective tax rate on income or loss and the statutory tax rate is as follows:
Year Ended December 31,
2011 2010 2009
Statutory U.S. tax rate ...................................................... 35.0% 35.0% 35.0%
State income taxes, net of U.S. tax benefit ....................................... (0.8)% 1.5% 1.4%
Federal and State tax credits, net of U.S. tax benefit ............................... — 2.6% 5.4%
Expenses with no tax benefit ................................................. 0.2% (2.4)% (3.4)%
Domestic manufacturing tax benefits ........................................... — — (0.7)%
Effect of foreign rate changes ................................................ (0.5)% — —
Amortization of intangibles with an indefinite life ................................ (1.0)% — —
Release of prepaid taxes on intercompany profit .................................. (24.0)% — —
Change in deferred tax valuation allowance ..................................... (98.6)% 2.2% (0.8)%
Reversal of previously accrued taxes ........................................... — 1.4% 1.5%
Accrual for interest and income taxes related to uncertain tax positions ................ (0.6)% 5.2% 7.7%
Other .................................................................... (0.1)% 1.6% 2.4%
Effective tax rate .......................................................... (90.4)%47.1% 48.5%
In 2011, 2010 and 2009, the tax rate benefited from net favorable adjustments to previously estimated tax
liabilities in the amount of $2,000, $515,000 and $457,000, 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.
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