LeapFrog 2012 Annual Report Download - page 33

level of certainty, to support an assertion that our domestic operations will generate sufficient taxable income
to realize all of our deferred tax assets. Accordingly, based on projected future earnings, a deferred tax
valuation allowance release of $21.6 million was recorded as an income tax benefit for the year. This benefit
was offset by a non-cash valuation allowance of $1.3 million recorded against the deferred tax assets of our
subsidiary in Mexico as we determined, at the required more-likely-than-not level of certainty, that our
subsidiary in Mexico will not generate sufficient future taxable income to realize the benefit of its deferred tax
assets. The change in our domestic and foreign valuation allowance balances resulted in a net $20.3 million
income tax benefit for the year. As of December 31, 2012, we have maintained a valuation allowance of
$70.4 million against our deferred tax assets related to various net operating loss carryforwards, tax credits,
and loss carryforwards that are capital in nature. We will continue to evaluate all evidence in future periods to
determine if further release of our valuation allowance is warranted.
In addition, the tax benefit for 2012 and 2011 included $6.4 million and $2.9 million, respectively, in benefit
associated with the recognition of previously unrecognized tax benefits due to the expiration of statutes of
limitation in some of our foreign jurisdictions, offset by foreign tax expense and certain discrete tax items
including amortization of goodwill for tax purposes and an accrual for potential interest and penalties on
certain tax positions. The income tax expense for 2010 was primarily attributable to our foreign operations
and certain discrete items such as amortization of goodwill for tax purposes. In 2012, 2011, and 2010, we
utilized $23.3 million, $8.8 million, and $2.0 million, respectively, of previously unrecognized income tax
benefit attributable to our domestic net operating loss and tax credit carryforwards.
SUMMARY OF RESULTS BY SEGMENT FOR FISCAL YEARS ENDED DECEMBER 31, 2012, 2011
and 2010
We organize, operate and assess our business in two primary operating segments: U.S. and International. This
presentation is consistent with how our chief operating decision maker reviews performance, allocates
resources and manages the business.
The net sales, cost of sales, gross margin, total operating expenses and operating income (loss) amounts in
this section are presented on a basis consistent with generally accepted accounting principles (‘‘GAAP’’) in
the U.S. and on an operating segment basis consistent with our internal management reporting structure. See
Note 20 — ‘‘Segment Reporting’’ in our Consolidated Financial Statements included in this Annual Report on
Form 10-K for certain detailed information on our segments and their financial results for the fiscal years
ended December 31, 2012, 2011 and 2010.
United States Segment
The U.S. segment includes net sales and related expenses directly associated with selling our products to
national and regional mass-market and specialty retailers, other retail stores, distributors, resellers, and online
channels including our online store and App Center. Certain corporate-level operating expenses associated
with sales and marketing, product support, human resources, legal, finance, information technology, corporate
development, procurement activities, R&D, legal settlements and other corporate costs are charged entirely to
our U.S. segment.
2012 2011 2010
% Change
2012 vs. 2011
% Change
2011 vs. 2010
(Dollars in millions)
Net sales .................. $424.8 $342.0 $344.3 24% (1)%
Cost of sales ................ 242.6 199.3 196.9 22% 1%
Gross margin* ............... 42.9% 41.7% 42.8% 1.2** (1.1)**
Operating expenses ........... 154.1 137.2 150.4 12% (9)%
Income (loss) from operations .... $ 28.1 $ 5.6 $ (3.0) 406% N/M
* Gross profit as a percentage of net sales
** Percentage point change in gross margin
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