KLDISCOVERY INC. OVERVIEW
KLD is a leading global provider of eDiscovery, information governance and data recovery solutions to corporations, law firms, insurance agencies and individuals. We provide technology solutions to help our clients solve complex legal, regulatory and data challenges. We have broad geographical coverage in the eDiscovery and data recovery industries with 25 locations in 16 countries, as well as 9 data centers and 13 data recovery labs globally. Our integrated proprietary technology solutions enable the efficient and accurate collection, processing, transmission, review and/or recovery of complex and large-scale enterprise data. In conjunction with proprietary technology, we provide immediate expert consultation and 24/7/365 support wherever a customer is located worldwide, which empowers us to become a "first-call" partner for mission-critical, time-sensitive, or nuanced eDiscovery and data recovery challenges. We are continuously innovating to provide a more reliable, secure and seamless experience when tackling various "big data" volume, velocity, and veracity challenges. A key example of our purpose-built innovation is Nebula, our flagship, end-to-end artificial intelligence/machine learning, or AI/ML, powered solution that serves as a singular platform of engagement for legal data.
Key factors affecting our performance
We believe that our future growth and performance will depend on many factors, including:
Maintaining our history of product innovation
We have significantly invested in developing proprietary technology and broadening our product functionality, which we believe differentiates our offerings, drives improved user experiences, and fuels strong client retention. We plan to continue our strong history of innovation by enhancing and scaling our Nebula platform and other offerings to capture a larger percentage of the eDiscovery, data recovery, and information governance markets. Our continued growth will depend in part on our ability to develop new products and features and drive adoption of our technology among our client base. As such, we intend to increase our investment in R&D and product development to support our growth.
Increased adoption of Nebula
Our long-term strategy includes pursuing widespread adoption of Nebula on a global scale. We expect the increased adoption of Nebula will enhance our business as we benefit from greater product affinity and stronger network effects. Nebula revenues also generally have higher margins than our traditional Legal Technology offerings because Nebula utilizes our own proprietary technologies. As we continue to innovate and invest in Nebula, we believe we will benefit from organic growth in client adoption and engagement. Nebula's success will depend on the continued effectiveness of our solution, the strength of our marketing and client support efforts, and competitive pricing.
Maintain and grow client base while driving greater penetration
Retaining and expanding revenues generated from existing clients, while
continuing to grow the number of net new clients, are among the key drivers of
our revenue growth. We believe our position as the differentiated legal
technology provider with proprietary, state of the art, EDRM software combined
with our white-glove services will help drive retention and support client
growth. With the proliferation of enterprise data and increasing technological
transformation within the legal industry, we believe there is a sizable and
growing potential untapped market seeking to harness technology-based solutions
like ours. By expanding our product offerings beyond eDiscovery to capture more
of the information governance market and other parts of the EDRM, specifically
data hosting and data processing, we believe we can drive increased product
spending on our platform from existing clients. We believe that our competitive
advantages enable us to effectively retain and further grow revenues derived
from our existing clients as well as acquire new clients, as demonstrated by the
consistent growth in our number of clients. As of
Growth in the number of matters, particularly large matters
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We continually pursue opportunities to grow the number of matters we cover, which will be an important aspect of our future growth. As the legal landscape continues to grow and evolve in complexity, we believe our proprietary technology and unique combination of technology-enabled solutions and services best position us to address the largest and most complex matters. Our ability to provide solutions that address the needs of large enterprises and the diverse and nuanced use cases they face will be an important factor in our future success.
Establishment of partner channel
In 2022, we began to build our partner channel by selling multi-year subscriptions for Nebula and leveraging and broadening our relationships with other eDiscovery providers, law firms, corporations, consulting firms and other organizations. Establishing and growing the partner channel can accelerate our growth through increased industry awareness of our offerings and improve sales efficiency. We also expect partner channel revenues to generally have higher margins than our traditional Legal Technology offerings because it is a software-only revenue stream. The extent of the success of our partner channel strategy will depend on our ability to continue to build and maintain relationships with key industry stakeholders.
Key business metrics
The following are among the key operational and financial metrics we use to measure and evaluate our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
Clients
We have a strong track record of growing our client base, and we believe that our ability to increase the number of clients utilizing our Legal Technology solutions, including Nebula, is an important indicator of our market penetration, our business growth, and our future opportunities.
We define Legal Technology clients as each primary law firm and corporation to which we provided services in a litigation matter that we billed during the past two years. We define Nebula clients, each of which is included in the number of Legal Technology clients, as the total number of primary law firm, corporation, insurance company and service provider clients to which we provided legal technology solutions for a matter that we billed for use of our Nebula solution during the two years prior to the applicable date.
The following table sets forth the number of Legal Technology clients and Nebula clients as of the dates shown:
December 31,
2022 2021
Legal Technology clients 5,870 5,482
Nebula clients 1,593 1,200
Number and size of matters
We believe our ability to continuously grow the number of matters on our platform over time is an important measure of scale for our business and is indicative of our future growth prospects.
We define Legal Technology matters as the total number of matters on which our Legal Technology solutions were used in the twelve months preceding the applicable date. Matters refer to a range of activities that include collecting, tracking, analyzing, and exchanging relevant data. Legal Technology solutions currently drive the majority of our revenue, and provide the foundation for additional adoption of our proprietary technology solutions and other offerings. We define Nebula matters, which are included in the number of Legal Technology matters, as the total number of matters on which our Nebula solution was used in the twelve months preceding the applicable date. Nebula is our ecosystem of proprietary technology solutions that enables clients to collect, process, store, analyze, and govern their data on a single platform. Nebula comprises a steadily growing component of our revenue and we
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expect Nebula adoption to increase and the number of Nebula matters to grow in the long term as we continue to introduce new product capabilities and cross-sell Nebula to our existing clients.
The following table sets forth the number of Legal Technology matters and Nebula matters as of the dates shown:
December 31,
2022 2021
Legal Technology matters 8,009 7,823
Nebula matters 1,175 927
Our comprehensive product offerings, technology-enabled service offerings and
reputation as a trusted partner to our clients enable us to capture matters of
large size and complexity. During the years ended
Legal Technology net revenue retention
We calculate our Legal Technology net revenue retention rate by dividing (1) total Legal Technology revenue in the twelve-month period from accounts that generated Legal Technology revenue during the corresponding immediately preceding twelve-month period by (2) total Legal Technology revenue in the immediately preceding twelve-month period generated from those same accounts. Our Legal Technology net revenue retention rate includes revenue from use of Nebula.
Twelve Months Ended December 31,
2022 2021
Legal Technology net revenue retention 94% 107%
For the years ended
Our Legal Technology net revenue retention rate is impacted by our usage-based
pricing model, and revenue could fluctuate in any given period due to frequency
of matters, client upsell, cross-sell, and churn. We believe global
macroeconomic challenges, including inflation and the war in
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KEY COMPONENTS OF OUR RESULTS OF OPERATIONS
Revenue
The Company primarily generates revenue from selling solutions that fall into the following categories:
(1)
Legal Technology, including Nebula and our expansive suite of technology solutions, such as our end-to-end eDiscovery technology solutions, managed review solutions, collections, processing, analytics, hosting, production, and professional services; and
(2)
Data recovery solutions, which provides data restoration, data erasure and data management services.
The Company generates the majority of its revenues by providing Legal Technology solutions to our clients. Most of the Company's eDiscovery contracts are time and materials types of arrangements, while others are subscription-based, fixed-fee arrangements.
Time and materials arrangements are based on units of data stored or processed. Unit-based revenues are recognized as services are provided, based on either the amount of data stored or processed, the number of concurrent users accessing the information or the number of pages or images processed for a client, at agreed upon per unit rates. The Company recognizes revenues for these arrangements utilizing a right-to-invoice practical expedient because it has a contractual right to consideration for services completed to date.
Certain of the Company's eDiscovery contracts are subscription-based, fixed fee arrangements, which have tiered pricing based on the quantity of data hosted. For a fixed monthly fee, the Company's clients receive a variety of optional eDiscovery solutions, which are included in addition to the data hosting. The Company recognizes revenues for these arrangements based on predetermined monthly fees as determined in its contractual agreements, utilizing a right-to-invoice practical expedient because the Company has a contractual right to consideration for services completed to date.
Other eDiscovery agreements are time and material arrangements that require the client to pay us based on the number of hours worked at contractually agreed-upon rates. The Company recognizes revenues for these arrangements based on hours incurred and contracted rates utilizing a right-to-invoice practical expedient because it has a contractual right to consideration for services completed to date.
Data recovery engagements are mainly fixed fee arrangements requiring the client to pay a pre-established fee in exchange for the successful completion of such engagement on a predetermined device. For the recovery performed by the Company's technicians, the revenue is recognized at a point in time, when the recovered data is sent to the customer.
Data erasure engagements are also fixed fee arrangements for which revenue is recognized at a point in time when the certificate of erasure is sent to the customer.
The Company offers term license subscriptions to Ontrack PowerControls software to customers with on-premises installations of the software pursuant to contracts that are historically one to four years in length. The term license subscriptions include maintenance and support, as well as access to future software upgrades and patches. The license and the additional support services are deemed to be one performance obligation, and thus revenue for these arrangements is recognized ratably over the term of the agreement.
For the years ended
We currently expect non-Nebula Legal Technology revenues to remain relatively consistent over time and that Nebula revenue will continue to accelerate, with Nebula growing as a larger percentage of the mix of total revenue over time.
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Cost of Revenues
Cost of revenue consists primarily of technology infrastructure costs, personnel costs and amortization of capitalized developed technology costs. Infrastructure costs include hardware, software, occupancy and cloud costs to support our legal technology and data recovery solutions. Personnel costs include salaries, benefits, bonuses, and stock-based compensation as well as costs associated with document reviewers which are variable based on managed review revenue. We intend to continue to invest additional resources in our infrastructure to expand the capability of solutions and enable our customers to realize the full benefit of our solutions. The level, timing and relative investment in our cloud infrastructure could affect our cost of revenue in the future. Additionally, cost of revenue in future periods could be impacted by fluctuations in document reviewer costs associated with managed review revenue.
Operating expenses
Our operating expenses consist of research and development, sales and marketing, general and administrative and amortization and depreciation expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, share-based compensation and sales commissions. Operating expenses also include occupancy, software expense and professional services. We intend to continue to increase our investment in research and development to further develop our proprietary technology and support further penetration and adoption of our offerings, including our end-to-end Nebula platform, including through hiring additional personnel. We expect these investments to cause research and development expense to slightly increase over the prior year, while staying fairly consistent as a percentage of revenue in 2023 and thereafter. We expect sales and marketing expense to decline in the next year as we realize the full year benefits of the optimization of data recovery personnel as we unified our inbound and business development teams. The optimization of personnel combined with anticipated increased revenue will result in slightly decreasing sales and marketing expense as a percentage of revenue in the next year and normalizing as a percentage of revenues thereafter. We also expect general and administrative expense to decrease in the next year due to savings associated with the consolidation of our real estate footprint, as well as vacated lease costs and public offering costs that are not expected to recur in 2023. General and administrative expense as a percentage of revenue is expected to decline over time due to our ability to scale as revenues increase and as a result of historical cost-cutting measures.
Interest Expense
Interest expense consists primarily of interest payments and accruals relating to outstanding borrowings. We expect interest expense to vary each reporting period depending on the amount of outstanding borrowings and prevailing interest rates.
Income Tax (Benefit) Provision
Income tax (benefit) provision is primarily related to foreign tax activity and
Non-
We prepare financial statements in accordance with
Our management believes EBITDA and Adjusted EBITDA reflect our ongoing operating performance because the isolation of non-cash charges, such as amortization and depreciation, and other items, such as interest, income taxes, equity compensation, acquisition and transaction costs, restructuring costs, systems establishment and costs
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associated with strategic initiatives which are incurred outside the ordinary
course of our business, provides information about our cost structure and helps
us to track our operating progress. We encourage investors and potential
investors to carefully review our
EBITDA and Adjusted EBITDA
We define EBITDA as net income (loss) plus interest (income) expense, income tax
expense (benefit), extinguishment of debt, impairment losses, and depreciation
and amortization. We view adjusted EBITDA as an operating performance measure
and as such, we believe that the most directly comparable
•
Acquisition, financing and transaction costs generally represent earn-out payments, rating agency fees and letter of credit and revolving facility fees, as well as professional service fees and direct expenses related to acquisitions and public offerings. Because we do not acquire businesses or effect financings on a regular or predictable cycle, we do not consider the amount of these costs to be a representative component of the day-to-day operating performance of our business.
•
Stock compensation and other primarily represent portions of compensation paid to our employees and executives through stock-based instruments. Determining the fair value of the stock-based instruments involves a high degree of judgment and estimation and the expenses recorded may not align with the actual value realized upon the future exercise or termination of the related stock-based awards. Additionally, stock compensation is a non-cash expense. Therefore, we believe it is useful to exclude stock-based compensation to better understand the long-term performance of our core business.
•
Change in fair value of Private Warrants relates to changes in the fair market value of the Private Warrants issued in conjunction with the Business Combination. We do not consider the amount to be representative of a component of the day-to-day operating performance of our business.
•
Restructuring costs generally represent non-ordinary course costs incurred in connection with a change in a contract or a change in the makeup of our personnel often related to an acquisition, such as severance payments, recruiting fees and retention charges. We do not consider the amount of restructuring costs to be a representative component of the day-to-day operating performance of our business.
•
Systems establishment costs relate to non-ordinary course expenses incurred to develop our IT infrastructure, including system automation and enterprise resource planning system implementation. We do not consider the amount to be representative of a component of the day-to-day operating performance of our business.
Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by any of these adjustments, or that our projections and estimates will be realized in their entirety or at all. In addition, because of these limitations, adjusted EBITDA should not be considered as a measure of liquidity or discretionary cash available to us to fund our cash needs, including investing in the growth of our business and meeting our obligations.
The use of EBITDA and adjusted EBITDA instead of
•
our cash expenditures or future requirements for capital expenditures;
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•
changes in, or cash requirements for, our working capital needs;
•
interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;
•
any cash income taxes that we may be required to pay;
•
any cash requirements for replacements of assets that are depreciated or amortized over their estimated useful lives and may have to be replaced in the future; or
•
all non-cash income or expense items that are reflected in our statements of cash flows.
See "-Results of Operations" below for reconciliations of adjusted EBITDA to net loss.
RESULTS OF OPERATIONS
Impacts of the COVID-19 pandemic on the Company's Business
The COVID-19 pandemic continues to impact the global economy and cause significant macroeconomic uncertainty as well as uncertainty within our business and industry. We have taken proactive measures to protect the health and safety of our employees, customers, partners and suppliers, consistent with governmental guidelines.
The Company modified employee travel and work locations, and cancelled certain
events, among other actions taken in response to the COVID-19 pandemic. During
2020, the Company implemented a salary exchange program pursuant to which
certain employees took a temporary reduction in salary through
On
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For the year ended
The results for the periods shown below should be reviewed in conjunction with our audited consolidated financial statements included in "Item 8 - Financial Statements and Supplementary Data."
For The Years Ended
December 31,
(in millions) 2022 2021
Revenues $ 317.4 $ 320.5
Cost of revenues 165.4 164.0
Gross profit 152.0 156.5
Operating expenses $ 139.9 161.8
Income (loss) from operations 12.1 (5.3 )
Interest expense 54.7 50.4
Change in fair value of Private Warrants (1.2 ) (2.0 )
Loss on debt extinguishment - 7.3
Other expense 0.1 0.0
Loss before income taxes (41.5 ) (61.0 )
Income tax provision (benefit) 1.7 (0.5 )
Net loss (43.2 ) (60.5 )
Total other comprehensive income, net of tax (6.9 ) (4.5 )
Comprehensive loss $ (50.1 ) $ (65.0 )
For The Years Ended
December 31,
(in millions) 2022 2021
Net loss $ (43.2 ) $ (60.5 )
Interest expense 54.7 50.4
Income tax provision (benefit) 1.7 (0.5 )
Extinguishment of debt - 7.3
Impairment of intangible asset - 22.5
Depreciation and amortization expense 31.2 38.0
EBITDA (1) $ 44.4 $ 57.2
Acquisition, financing and transaction costs 5.8 2.7
Stock compensation and other 5.3 4.2
Change in fair value of Private Warrants (1.2 ) (2.0 )
Restructuring costs 2.8 1.0
Systems establishment 1.0 2.1
Adjusted EBITDA (1) $ 58.1 $ 65.2 (1) EBITDA and adjusted EBITDA are non-GAAP measures. See "-Non-
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Revenues
Revenues decreased by
Cost of Revenues
Cost of revenues increased by
Gross Profit
Gross profit decreased by
Operating Expenses
Operating expenses decreased by
Interest Expense
Interest expense increased by
Loss on Debt Extinguishment
For the year ended
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Change in Fair Value of Private Warrants
During the first quarter of 2021, the Company determined that the Private
Warrants, which had historically been accounted for as a component of equity,
should be reclassified and recorded as a liability at fair value during each
reporting period. For the twelve months ended
Income Tax (Benefit) Provision
During the years ended
A valuation allowance has been established against our net
We reported pre-tax loss of
We reported pre-tax loss of
Net Loss
Net loss for the year ended
Liquidity and Capital Resources
Our primary cash needs have been to meet debt service requirements and to fund working capital and capital expenditures. We fund these requirements from cash generated by our operations, as well as funds available under our revolving credit facility discussed below. We may also seek to access the capital markets opportunistically from time-to-time depending on, among other things, financial market conditions. Although our eDiscovery solutions and information archiving services are billed on a monthly basis in arrears with amounts typically due within 30 to 45 days, the eDiscovery industry tends towards longer collectability trends. As a result, we have typically collected the majority of our eDiscovery accounts receivable within 90 to 120 days, which is consistent within the industry. With respect to our data recovery services, they are billed as the services are provided, with payments due within 30 days of billing. We typically collect our data recovery services accounts receivables within 30 to 45 days. Lastly, the majority of our data recovery software is billed monthly in advance with amounts typically due within 30 to 45 days; however, depending on the client contract, billing can occur annually, quarterly or monthly. Long outstanding receivables are not uncommon due to the nature of our Legal Technology services as litigation cases can continue for years, and in certain instances, our collections are delayed until the customer has received payment for their services in connection with a legal matter or the case has been settled. These long-outstanding invoices are a function of the industry in which we operate, rather than indicative of an inability to collect. We have experienced
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no material seasonality trends as it relates to collection of our accounts
receivable. As of
Our Debentures mature in
2021 Credit Agreement
On
The 2021 Credit Agreement provides for (i) initial term loans in an aggregate
principal amount of
The Initial Term Loans and Delayed Draw Term Loans bear interest, at the Loan
Parties' option, at the rate of (x) with respect to Eurocurrency Rate Loans (as
defined in the 2021 Credit Agreement), the Adjusted Eurocurrency Rate (as
defined in the 2021 Credit Agreement) with a 1.0% floor, plus 6.50% per annum,
or (y) with respect to Base Rate Loans (as defined in the 2021 Credit
Agreement), the Base Rate (as defined in the 2021 Credit Agreement) plus 5.50%
per annum. The Revolving Credit Loans bear interest, at our option, at the rate
of (x) with respect to Eurocurrency Rate Loans, the Adjusted Eurocurrency Rate
plus 4.00% per annum, or (y) with respect to Base Rate Loans, the Base Rate plus
3.00% per annum. The Initial Term Loans and Delayed Draw Term Loans amortize at
a rate of 1.00% of the aggregate principal amount of Initial Term Loans and
Delayed Draw Term Loans outstanding, payable in consecutive quarterly
installments of
The Initial Term Loans, Delayed Draw Term Loans and Revolving Credit Loans are
each scheduled to mature on
The obligations under the 2021 Credit Agreement are secured by substantially all
of the Loan Parties' assets. The 2021 Credit Agreement contains customary
affirmative and negative covenants as well as a financial maintenance covenant
that requires the Loan Parties to maintain a First Lien Net Leverage Ratio (as
defined in the 2021 Credit Agreement) of less than or equal to 7.00 to 1.00,
tested at the end of each fiscal quarter. The Company was in compliance with all
Credit Agreement covenants as of
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Revolving Credit Loans
The 2021 Credit Agreement also provides for the Revolving Credit Loans, an
unfunded revolver commitment for borrowing up to
2016 Credit Agreement and Revolving Credit Facility
On
Convertible Debentures
On
The Debentures mature on
At any time, upon notice as set forth in the Debentures, the Debentures are redeemable at the Company's option, in whole or in part, at a price equal to 100% of the principal amount of the Debentures redeemed, plus accrued and unpaid interest thereon.
The Debentures are convertible into shares of the common stock at the option of
the Debenture holders at any time and from time to time at a price of
The Debentures contain covenants that limit the Company's ability to, among
other things: (i) incur additional debt; (ii) create liens on assets; (iii)
engage in certain transactions with affiliates; or (iv) designate the Company's
subsidiaries as unrestricted subsidiaries. The Debentures provide for customary
events of default, including non-payment, failure to comply with covenants or
other agreements in the Debentures and certain events of bankruptcy or
insolvency. If an event of default occurs and continues, the holders of at least
25% in aggregate principal amount of the outstanding Debentures may declare the
entire principal amount of all the Debentures to be due and payable immediately.
As of
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Cash Flows
Our net cash flows from operating, investing and financing activities for the
years ended
2022 2021
Net cash provided by (used in):
Operating activities $ 7,950 $ 10,099
Investing activities $ (16,189 ) $ (12,488 )
Financing activities $ (4,981 ) $ (1,761 ) Effect of foreign exchange rates
Cash Flows Provided By Operating Activities
Net cash provided by operating activities was
Net cash provided by operating activities for the year ended
Cash Flows Used In Investing Activities
Net cash used in investing activities was
Cash Flows Used In Financing Activities
For the year ended
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 1-Organization, business and summary of significant accounting policies to our audited consolidated financial statements.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with
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may be based on subjective inputs, assumptions and information known and unknown
to us. Material changes in certain of the estimates that we use could
potentially affect, by a material amount, our consolidated financial position
and results of operations. Although results may vary, we believe our estimates
are reasonable and appropriate. See Note 1-Organization, business and summary of
significant accounting policies to our audited consolidated financial statements
for a summary of our significant accounting policies. There were no material
changes during the year ended
Intangible assets and other long-lived assets
We evaluate the recoverability of our long-lived assets, including finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of any asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the difference between the fair value of the asset compared to its carrying amount.
We test goodwill resulting from acquisitions for impairment annually on
The fair value of each reporting unit is estimated using a combination of a discounted cash flow, or DCF, analysis and market-based valuation methodologies such as comparable public company trading values and values observed in recent business combinations. Determining fair value requires the exercise of significant judgments, including the amount and timing of expected future cash flows, long-term growth rates, discount rates and relevant comparable public company earnings multiples and relevant transaction multiples. The cash flows employed in the DCF analyses are based on our best estimate of future sales, earnings and cash flows after considering factors such as general market conditions, changes in working capital, long term business plans and recent operating performance.
Accordingly, we have not identified any indicators of impairment, nor have any impairment charges been recorded related to goodwill as a result of the annual impairment test.
Income Taxes
Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax expense and in evaluating our tax positions.
Tax law requires certain items to be included in our tax returns at different times than when the items are reflected in the financial statements. The annual tax expense reflected in the Consolidated Statements of Comprehensive Loss is different than that reported in our tax returns. Some of these differences are permanent (for example, expenses
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recorded for accounting purposes that are not deductible in the returns such as
certain entertainment expenses) and some differences are temporary and reverse
over time, such as depreciation expense. Temporary differences create deferred
tax assets and liabilities. Deferred tax liabilities generally represent tax
expense recognized in the financial statements for which payment has been
deferred, or expense for which a deduction has been taken already in the tax
return, but the expense has not yet been recognized in the financial statements.
Deferred tax assets generally represent items that can be used as a tax
deduction or credit in tax returns in future years for which a benefit has
already been recorded in the financial statements, as well as tax losses that
can be carried over and used in future years. Valuation allowances are
established when necessary to reduce deferred income tax assets to the amounts
we believe are more likely than not to be recovered. In evaluating the amount of
any such valuation allowance, we consider the existence of cumulative income or
losses in recent years, the reversal of existing temporary differences, the
existence of taxable income in prior carry back years, available tax planning
strategies and estimates of future taxable income for each of our taxable
jurisdictions. The latter two factors involve the exercise of significant
judgment. As of
We determine whether it is more likely than not that a tax position will be
sustained upon examination by the appropriate taxing authorities before any part
of the benefit is recorded in our financial statements. A tax position is
measured as the portion of the tax benefit that is greater than 50% likely to be
realized upon settlement with a taxing authority (that has full knowledge of all
relevant information). We may be required to change our provision for income
taxes when the ultimate treatment of certain items is challenged or agreed to by
taxing authorities, when estimates used in determining valuation allowances on
deferred tax assets significantly change, or when receipt of new information
indicates the need for adjustment in valuation allowances. Future events, such
as changes in tax laws, tax regulations, or interpretations of such laws or
regulations, could have an impact on the provision for income tax and the
effective tax rate. Any such changes could significantly affect the amounts
reported in the consolidated financial statements in the year these changes
occur. As of
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