MANTECH INTERNATIONAL CORPORATION The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and the notes to those statements included in Item 8 "'Financial Statements and Supplementary Data." This discussion contains forward-looking statements that involve risks and uncertainties. For a description of these forward-looking statements, refer to Part I "Cautionary Note Regarding Forward-Looking Statements." A description of factors that could cause actual results to differ materially from the results we anticipate include, but are not limited to, those discussed in Item 1A "Risk Factors," as well as those discussed elsewhere in this Annual Report.
The following discussion is intended to provide the readers of our financial statements with a narrative from management's perspective regarding our financial condition and results of operations, liquidity, and certain other factors that could affect our future results.
Overview
We provide mission-focused technology solutions and services forU.S. defense, intelligence community and federal civilian agencies. We excel in full-spectrum cyber, secure mission & enterprise IT, advanced data analytics, software and systems development, intelligent systems engineering, intelligence mission support and mission operations. Approximately 99% of our revenues during the year endedDecember 31, 2021 were generated from contracts with theU.S. government, or through prime contractors supporting theU.S. government. TheU.S. government is the largest consumer of services and solutions in theU.S. In government fiscal year (GFY) 2021, theU.S. government obligated approximately$387 billion on contracted services. Our business is impacted by the overallU.S. government budget and the alignment of our capabilities and offerings with theU.S. government's spending priorities. TheDepartment of Defense (DoD ) is the largest purchaser of services and solutions in theU.S. government. The President's GFY 2022 budget proposal included$753 billion for national defense programs. Included in the President's budget proposal is spending for infrastructure, economic stimulus, and education. InNovember 2021 , the President signed into law the Infrastructure, Investment and Jobs Act (IIJA). To date, the GFY 2022 budget appropriations have not been enacted and continue to be debated byCongress . Since the beginning of GFY 2022, theU.S. government has been, and continues to be, funded through a series of Continuing Resolutions (CR). The current CR is set to expire onMarch 11, 2022 . Absent an approval of GFY 2022 appropriations, or other stop gap spending measures, theU.S. government could experience periodic shutdowns which could materially impact our financial results and liquidity. In 2021, theU.S. government increased the debt ceiling by nearly$3 trillion . The current debt ceiling is expected to allow theU.S. government to operate into 2023. Exiting 2021, inflation has significantly increased. TheFederal Reserve has signaled their intent to increase interest rates over the coming year. Increasing interest rates will increase the amount of the federal budget used to satisfy interest payments on theU.S. debt which could impact the amount of funding allocated to programs that support national defense. While we cannot predict the future of theU.S. government's spending priorities, we believe the geopolitical aggression of adversarial nations as well as cyber threats from state and non-state actors remain prominent and align well to the services and capabilities we provide to our customers.
COVID-19 Pandemic
In March of 2020, theWorld Health Organization declared COVID-19 a pandemic. Over the past two years, the pandemic has had a significant impact on the global population and economy. In response to the pandemic, theU.S. government enacted legislation in an attempt to mitigate the economic impacts through stimulus spending. InMarch 2020 , the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act contained a provision (3610) under which government contractors could seek reimbursement for employee's salaries when they are prevented from accessing worksites or are subject to reduced work schedules and cannot telecommute. These provisions were extended throughSeptember 30, 2021 when the President signed into law the American Rescue Plan (ARP) Act of 2021. Amounts submitted for reimbursement under the CARES Act diminished significantly in our third quarter of 2021 and costs incurred in our fourth quarter of 2021 were no longer covered.
On
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the federal government be vaccinated (or to have an approved accommodation) by
December 8, 2021 . The vaccination deadline was subsequently extended to January
18, 2022 . On December 7, 2021 , a federal district judge suspended the
enforcement of this order. This suspension is currently under appeal.
We are continuing to monitor impacts of the global outbreak of the COVID-19
pandemic including new variants of the virus, specific impacts and mitigation
protocols enacted in regions in which we operate, and the vaccination status of
our employees. In preparation of the vaccine mandate and to promote the
well-being of our workforce, we have and continue to encourage our employees to
get vaccinated (or seek an approved accommodation). We cannot predict the
potential impact of the vaccination mandate or the overall evolution of the
pandemic and its further impacts on the economy or our business.
Acquisitions
We continually monitorU.S. government spending and budgetary priorities to align our investments in new capabilities to drive organic growth. We will selectively pursue acquisitions that broaden our domain expertise and service offerings and/or establish relationships with new customers. In 2021, we acquiredGryphon Technologies, Inc. (Gryphon) andTechnical and Management Assistance Corporation (TMAC). Gryphon provides a broad array of advanced digital and systems engineering capabilities forDepartment of Defense agencies. TMAC provides advanced data engineering services and solutions that ensure the delivery of vital information to theU.S. Intelligence Community . Since going public in 2002, we have acquired and integrated 34 businesses into our operations.
Pricing
Our industry remains competitive on price. While there has been a trend away from the lowest-price technically acceptable procurement model for a majority of our customers, contracts continue to be awarded through a competitive bidding process (including indefinite delivery, indefinite quantity and other multi-award contracts), which could increase pricing pressure. To ensure our cost structure remains competitive, we continually evaluate and adjust our levels of indirect spending to stay in line with the expected business opportunities. Our industry also remains competitive with respect to attracting and retaining employees with the necessary skills and security clearances to perform certain services that are a priority for our customers. We classify indirect expenses either as cost of services or general and administrative in manner consistent with disclosure statements submitted and approved by theDefense Contract Management Agency (DCMA). EffectiveJanuary 1, 2021 , changes in indirect cost allocations reclassified certain expenses from general and administrative to cost of sales (overhead). While this does not impact indirect expenses in total, it does reduce general and administrative as compared to prior periods. Revenues Substantially all of our revenues are derived from services and solutions provided to theU.S. government or to prime contractors supporting theU.S. government, including services provided by our employees and our subcontractors, and solutions that include third-party hardware and software that we purchase and integrate as a part of our overall solutions. Customer requirements may vary from period-to-period depending on specific contract and customer requirements. We provide our services and solutions under three types of contracts: cost-reimbursable; time-and-materials; and fixed-price. In general, cost-reimbursable contracts are the least profitable of our government contracts but offer the lowest risk of loss. Under time-and-materials contracts, to the extent that our actual labor costs are higher or lower than the billing rates under the contract, our profit under the contract may either be greater or less than we anticipated or we may suffer a loss under the contract. In general, we realize a higher profit margin on work performed under time-and-materials contracts than cost-reimbursable contracts. Fixed-price contracts generally offer higher profit margin opportunities but can involve greater financial risk because we bear the impact of cost overruns in return for the full benefit of any cost savings. Cost of Services Cost of services primarily includes direct costs incurred to provide services and solutions to our customers. The most significant portion of these costs are direct labor costs, including salaries and wages, plus associated fringe benefits of our employees directly serving customers, in addition to the related management, facilities and infrastructure costs. Cost of services also includes other direct costs, such as the costs of subcontractors and outside consultants and third-party materials, including hardware or software that we purchase and provide to the customer as part of an integrated solution. Changes in the mix of services and equipment provided under our contracts can result in variability in the proportion that cost of services bears to revenues. As we typically earn higher profits on our own labor services, we expect the ratio of cost of 18 -------------------------------------------------------------------------------- services as a percentage of revenues to decline when our labor services mix increases relative to subcontracted labor or third-party materials. Conversely, as subcontracted labor or third-party material purchases for customers increases relative to our own labor services, we expect the ratio of cost of services as a percentage of revenues to increase.
General and Administrative Expenses
General and administrative expenses include the salaries and wages, plus associated fringe benefits of our employees not performing work directly for customers, and associated facilities costs. Among the functions covered by these costs are business development, bid and proposal, contracts administration, finance and accounting, legal, corporate governance and executive and senior management. In addition, we included stock-based compensation, as well as depreciation and amortization expenses related to the general and administrative function. Depreciation and amortization expenses include the depreciation of computers, furniture and other equipment, the amortization of third-party software used internally, leasehold improvements and intangible assets. Intangible assets include customer relationships and contract backlogs acquired in business combinations, which are amortized over their estimated useful lives.
Interest Expense
Interest expense is primarily related to interest expense incurred or accrued under our outstanding borrowings on our debt and deferred financing charges.
Interest Income
Interest income is primarily from cash on hand and late invoice payments by the government.
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Year Ended
The following table sets forth certain items from our consolidated statements of income and the relative percentages that certain items of expense and earnings bear to revenues as well as the year-over-year change fromDecember 31, 2020 toDecember 31, 2021 . Year Ended December 31, Year-to-Year Change 2021 2020 2021 2020 2020 to 2021 Dollars Percentages Dollars Percent (dollars in thousands) REVENUES$ 2,553,956 $ 2,518,384 100.0 % 100.0 % $ 35,572 1.4 % Cost of services 2,174,545 2,138,791 85.1 % 84.9 % 35,754 1.7 % General and administrative expenses 192,595 221,544 7.6 % 8.8 % (28,949) (13.1) % OPERATING INCOME 186,816 158,049 7.3 % 6.3 % 28,767 18.2 % Interest expense (2,389) (1,900) 0.1 % 0.1 % 489 25.7 % Interest income 128 247 - % - % (119) (48.2) % Other income (expense), net (277) 1 - % - % (278) (27,800.0) % INCOME FROM OPERATIONS BEFORE INCOME TAXES AND EQUITY METHOD INVESTMENTS 184,278 156,397 7.2 % 6.2 % 27,881 17.8 % Provision for income taxes (47,541) (35,865) 1.8 % 1.4 % 11,676 32.6 % Equity in earnings (losses) of unconsolidated subsidiaries 280 (2) - % - % 282 14,100.0 % NET INCOME$ 137,017 $ 120,530 5.4 % 4.8 % $ 16,487 13.7 % Revenues The primary drivers of the increase in our revenues are revenues from new contract awards, growth on existing contracts and the acquisitions we completed in the prior year. These increases were offset by contracts and tasks that ended during the year and reduced scope of work on some contracts including contracts with variable material purchase requirements. We expect revenues to increase in 2022 due to our recent acquisitions, growth on existing programs and new contracts.
Cost of services
The increase in cost of services was primarily due to increases in revenues. As a percentage of revenues, direct labor costs were 50% and 49% for the years endedDecember 31, 2021 and 2020, respectively. As a percentage of revenues, other direct costs, which include subcontractors and third party equipment and materials used in the performance of our contracts, were 36% for both the years endedDecember 31, 2021 and 2020. With COVID-19 mitigation protocols being reduced or lifted, direct labor has been impacted as employees have begun utilizing paid time off at a normalized level. Profitability has increased due to higher program profits including improved award fees as compared to the prior period.
General and administrative expenses
The decrease in general and administrative expenses was primarily the result of changes in the classification of certain indirect cost allocations of approximately$30.1 million . These decreases were partially offset by a return to more normalized indirect spending compared to 2020, which experienced reduced travel, conference expenses and other indirect expenses due to the impacts of COVID-19. As a percentage of revenues, general and administrative expenses decreased for the year endedDecember 31, 2021 as compared to the same period in 2020. We expect general and administrative expenses as a percentage of revenue to increase slightly in 2022, due to higher amortization expenses and continued return to normalized indirect spending. 20 --------------------------------------------------------------------------------
Provision for income taxes
Our effective tax rate is affected by recurring items, such as the relative amount of income we earn in various taxing jurisdictions and their tax rates. It is also affected by discrete items that may occur in any given year, but are not consistent from year-to-year. Our effective income tax rate was 26% and 23% for the years endedDecember 31, 2021 and 2020, respectively. The increase in our effective tax rate is primarily due to an increase in nondeductible executive equity compensation and a reduced research and development credit. For additional information concerning the research and development tax credit, see Note 13 to our consolidated financial statements in Item 8.
Year Ended
To review the comparison of our results of operations for the fiscal year endedDecember 31, 2020 with our results of operations for the fiscal year endedDecember 31, 2019 , please refer to the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 .
Backlog
For the years endedDecember 31, 2021 and 2020 our backlog was$10.6 billion and$10.2 billion , respectively, of which$1.6 billion and$1.2 billion , respectively, was funded backlog. The increase in our backlog is due to contract awards and acquisitions during the year. We believe our backlog, together with new contract awards, will support continued growth in our business. Backlog represents estimates that we calculate on a consistent basis. For additional information on how we compute backlog, see "Backlog" in Item 1 "Business."
Liquidity and Capital Resources
Our primary sources of liquidity are cash provided by operations and our credit facilities. OnDecember 31, 2021 , our cash and cash equivalents balance was$53.4 million . There were$300.0 million in outstanding borrowings under our credit facilities atDecember 31, 2021 . The maximum available borrowings under our credit facilities atDecember 31, 2021 were$796.6 million . These sources of liquidity have met the short-term and long-term liquidity needs for financing of acquisitions, working capital, payment under our cash dividend program and capital expenditures. Cash provided by operating activities has been adequate to fund our operations, including payments under our regular cash dividend program. When there are short-term fluctuations in our cash flows and level of operations, we may from time-to-time increase borrowings under our credit facilities to meet cash demands.
Cash Flows from Operating Activities
Our operating cash flow is primarily affected by our ability to invoice and collect from our clients in a timely manner, our ability to manage our vendor payments and the overall profitability of our contracts. We bill most of our customers monthly after services are rendered. Our accounts receivable days sales outstanding (DSO) were 68 and 56 for the quarters endedDecember 31, 2021 and 2020, respectively. The increase in DSO is primarily due to increases in accounts receivable from companies acquired inDecember 2021 . For the years endedDecember 31, 2021 and 2020, our net cash flows from operating activities were$212.2 million and$247.2 million , respectively. The decrease in net cash flows from operating activities during the year endedDecember 31, 2021 when compared to the same period in 2020 was primarily due to the timing of accrued salaries and related expenses and payment of vendors.
Cash Used in Investing Activities
Our cash used in investing activities consists primarily of business combinations, purchases of property and equipment and investments in capitalized software for internal use. For the years endedDecember 31, 2021 and 2020, our net cash used in investing activities were$425.2 million and$150.1 million , respectively. For the year endedDecember 31, 2021 , our net cash used in investing activities were primarily due to the acquisitions of Gryphon and TMAC as well as the purchase of equipment to support our managed IT service contracts and infrastructure investments. For the year endedDecember 31, 2020 , our net cash used in investing activities were primarily due to the acquisitions of Minerva Engineering and Tapestry Technologies and the purchase of equipment to support our managed IT service contracts and infrastructure investments. 21 --------------------------------------------------------------------------------
Cash Flows Used in Financing Activities
For the year endedDecember 31, 2021 , our net cash flows from financing activities were$225.2 million , primarily due to net borrowing under our credit facilities to fund acquisitions, offset by dividends paid. For the year endedDecember 31, 2020 , our net cash used in financing activities were$64.8 million , primarily due to dividends paid and net repayments under our revolving credit facility, offset by the proceeds from the exercise of stock options.
Credit Facility
OnJuly 20, 2021 , we amended and restated our credit agreement (Third Amended and Restated Credit Agreement) with a syndicate of lenders led byBank of America, N.A ., as sole administrative agent. The Third Amended and Restated Credit Agreement includes an aggregate principal amount of up to$1.1 billion made available through (i) a$500 million revolving credit facility with a$100 million letter of credit sublimit and a$50 million swing line loan sublimit and (ii) a$600 million delayed-draw term loan facility. Under the delayed-draw term loan facility, borrowings are available to be drawn prior to the first anniversary of the Third Amended and Restated Credit Agreement in up to three separate drawings in a minimal amount of$50 million . The Third Amended and Restated Credit Agreement also includes an accordion feature that permits us to arrange with the lenders for the provision of additional commitments. The maturity date of the Third Amended and Restated Credit Agreement isJuly 20, 2026 . We have deferred$3.7 million in debt issuance costs, including$3.3 million due to the Third Amended and Restated Credit Agreement, which are being amortized over the term of the new credit agreement. Borrowings under the Third Amended and Restated Credit Agreement are collateralized by substantially all of our assets and those of our Material Subsidiaries and bear interest at one of the following variable rates as selected by us at the time of borrowing: a London Interbank Offer Rate base rate plus market-rate spreads (1.25% to 2.00% based on our consolidated total leverage ratio) orBank of America's base rate plus market spreads (0.25% to 1.00% based on our consolidated total leverage ratio). The terms of the Third Amended and Restated Credit Agreement permit prepayment and termination of the loan commitments at any time, subject to certain conditions. The Third Amended and Restated Credit Agreement requires us to comply with specified financial covenants, including the maintenance of certain leverage ratios and a consolidated coverage ratio. The Third Amended and Restated Credit Agreement also contains various covenants, including affirmative covenants with respect to certain reporting requirements and maintaining certain business activities, and negative covenants that, among other things, may limit or impose restrictions on our ability to incur liens, incur additional indebtedness, make investments, make acquisitions and undertake certain other actions. As of, and during the fiscal years endingDecember 31, 2021 and 2020, we were in compliance with our financial covenants under the credit agreement.
There was
Contractual Obligations
Our primary contractual obligations include operating lease obligations and debt obligations. Our operating lease obligations as ofDecember 31, 2021 were$96.1 million . These obligations will be paid within the time period of less than one year to more than 5 years. See Note 5 to our consolidated financial statements in Item 8 for additional information regarding leases. Our debt obligations as ofDecember 31, 2021 were$300.0 million . We may elect to pay all of or a portion of this obligation earlier than contractually required. See Note 9 to our consolidated financial statements in Item 8 for additional information regarding debt and related matters.
Capital Resources
We believe the capital resources available to us from cash on hand, our
remaining capacity under our credit facilities, and cash from our operations are
adequate to fund our anticipated cash requirements for at least the next year.
We anticipate financing our external growth from acquisitions and our
longer-term internal growth through one or more of the following sources: cash
from operations; use of our credit facilities; and additional borrowings of debt
or issuance of equity.
Cash Management
To the extent possible, we invest our available cash in short-term, investment
grade securities in accordance with our investment policy. Under our investment
policy, we manage our investments in accordance with the priorities of
maintaining the safety of our principal, maintaining the liquidity of our
investments, maximizing the yield on our investments and investing our cash to
the fullest extent possible. Our investment policy provides that no investment
security can have a final maturity that
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exceeds six months and that the weighted average maturity of the portfolio
cannot exceed 60 days. Cash and cash equivalents include cash on hand, amounts
due from banks and short-term investments with maturity dates of three months or
less at the date of purchase.
Dividend
During the years endedDecember 31, 2021 and 2020, we declared and paid quarterly dividends in the amount of$0.38 and$0.32 per share on both classes of common stock. OnFebruary 22, 2022 , we declared a quarterly cash dividend in the amount of$0.41 per share, to be paid onMarch 25, 2022 . While we expect to continue the regular cash dividend program, any future dividends declared will be at the discretion of our Board of Directors and will depend, among other factors, upon our results of operations, financial condition and cash requirements, as well as such other factors our Board of Directors deems relevant.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles (GAAP). Our significant accounting policies are described in Note 2 to our consolidated financial statements in Item 8. We consider certain of these policies to be critical accounting policies as they require management to make significant estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition and Cost Estimation
At contract inception, we identify our performance obligations; then we
determine the transaction price for the contract. The transaction price can be a
fixed or variable amount. It is common for our contracts to contain award fees,
incentive fees or other provisions that can either increase or decrease the
transaction price. These variable amounts generally are awarded upon achievement
of certain performance metrics, program milestones or cost targets and can be
based upon customer discretion. We estimate variable consideration as the most
likely amount to which we expect to be entitled. We include estimated amounts in
the transaction price when it is probable that a significant reversal of
cumulative revenue recognized will not occur when the uncertainty associated
with the variable consideration is resolved. Our estimates of variable
consideration and determination of whether to include estimated amounts in the
transaction price are based largely on an assessment of our anticipated
performance and historical, current and forecasted information that is
reasonably available to us. The transaction price is allocated to each distinct
performance obligation using our best estimate of the standalone selling price
for each distinct good or service promised in the contract. The primary method
used to estimate standalone selling price is the expected cost plus a margin
approach, under which we forecast our expected costs of satisfying a performance
obligation and then add an appropriate margin for that distinct good or service
promised. Revenue is recognized when, or as, the performance obligation is
satisfied.
Based on the nature of the products and services provided in the contract, we
use our judgment to determine if an input measure or output measure best depicts
the transfer of control over time. For services contracts, we typically satisfy
our performance obligations as services are rendered. We typically use a
cost-based input method to measure progress. Contract costs include labor,
material and allocable indirect expenses. Revenue is recognized proportionally
as contract costs are incurred plus estimated fees. For time-and-material
contracts, we bill the customer per labor hour and per material, and revenue is
recognized in the amount invoiced since the amount corresponds directly to the
value of our performance to date. For stand-ready service contracts, a
time-elapsed output method is used to measure progress, and revenue is
recognized straight-line over the term of the contract. We also consider control
to transfer when we have a present right to payment and our customer has legal
title. Determining a measure of progress and when control transfers requires us
to make judgments that affect the timing of when revenue is recognized.
The effect of a contract modification on the transaction price and our measure
of progress for the performance obligation to which it relates is recognized as
a cumulative adjustment to revenue and profit. A significant change in one or
more estimates could affect the profitability of our contracts. We recognize
adjustments in estimated profit on contracts in the period identified. The
impact of adjustments in contract estimates can be reflected in either revenue
or operating expenses on our consolidated statement of income.
We have an Estimate at Completion process in which management reviews the
progress and execution of our performance obligations. As part of this process,
management reviews information including, but not limited to, any outstanding
key
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contract matters, progress towards completion and the related program schedule,
identified risks and opportunities and the related changes in estimates of
revenue and costs. The risks and opportunities include management's judgment
about the ability and cost to achieve the contract milestones and other
technical contract requirements. Management must make assumptions and estimates
regarding labor productivity and availability, the complexity of the work to be
performed, the availability of materials, the length of time to complete the
performance obligation, execution by our subcontractors, the availability and
timing of funding from our customer and overhead cost rates, among other
variables. A significant change in one or more of these estimates could affect
the profitability of our contracts. For the years ended December 31, 2021 , 2020
and 2019, the aggregate impact of adjustments in contract estimates increased
our revenue by $8.8 million , $10.8 million and $11.3 million , respectively. No
adjustment on any one contract was material to our consolidated financial
statements for the years ended December 31, 2021 , 2020 and 2019.
Estimates in Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations
Determining the fair value of assets acquired and liabilities assumed requires significant judgment, which includes, among other factors, analysis of historical performance and estimates of future performance. These factors may cause final amounts to differ materially from original estimates. In some cases, we use discounted cash flow analyses, which are based on our best estimate of future revenue, earnings and cash flows as well as our discount rate adjusted for risk.
Estimates in Fair Value of Reporting Units in Goodwill Impairment
The fair values of the reporting units are determined based on a weighting of the income approach, market approach and market transaction approach. The income approach is a valuation technique in which fair value is based from forecasted future cash flow discounted at the appropriate rate of return commensurate with the risk as well as current rates of return for equity and debt capital as of the valuation date. The forecast used in our estimation of fair value was developed by management based on a contract basis, incorporating adjustments to reflect known contract and market considerations (such as reductions and uncertainty in government spending, pricing pressure and opportunities). The discount rate utilizes a risk adjusted weighted average cost of capital. The market approach is a valuation technique in which the fair value is calculated based on market prices realized in an actual arm's length transaction. The technique consists of undertaking a detailed market analysis of publicly traded companies that provides a reasonable basis for comparison to us. Valuation ratios, which relate market prices to selected financial statistics derived from comparable companies, are selected and applied to us after consideration of adjustments for financial position, growth, market, profitability and other factors. The market transaction approach is a valuation technique in which the fair value is calculated based on market prices realized in actual arm's length transactions. The technique consists of undertaking a detailed market analysis of merged and acquired companies that provides a reasonable basis for comparison to us. Valuation ratios, which relate market prices to selected financial statistics derived from comparable companies, are selected and applied to us after consideration of adjustments for financial position, growth, market, profitability and other factors. To assess the reasonableness of the calculated reporting unit fair values, we compare the sum of the reporting units' fair values to our market capitalization (per share stock price times the number of shares outstanding) and calculate an implied control premium (the excess of the sum of the reporting units' fair values over the market capitalization), and then assess the reasonableness of our implied control premium. Due to the many variables inherent in the estimation of a reporting unit's fair value and the relative size of our recorded goodwill, differences in assumptions may have a material effect on the results of our goodwill impairment analysis.
Estimates in Accounting for Income Taxes
We account for income taxes in accordance with ASC 740, Income Taxes, as a
result our deferred income taxes are determined based on the estimated future
tax effects of differences between the financial statement and tax bases of
assets and liabilities given the provisions of enacted tax laws. Deferred income
tax provisions and benefits are based on changes to the assets or liabilities
from year-to-year. In providing for deferred taxes, we consider tax regulations
of the jurisdictions in which we operate, estimates of future taxable income and
available tax planning strategies. If tax regulations, operating results or the
ability to implement tax-planning strategies vary, adjustments to the carrying
value of deferred tax assets and liabilities may be required. Valuation
allowances are recorded related to deferred tax assets based on the "more likely
than not" criteria. We recognize the financial statement benefit of a tax
position only after determining that the relevant tax authority would "more
likely than not" sustain the position following an audit. For tax positions
meeting the "more likely than not" threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the relevant tax
authority. The determination that a tax position meets the "more likely than
not"
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Recently Issued But Not Yet Adopted Accounting Standards Updates
For information on the recently issued but not yet adopted Accounting Standards Updates, see Note 2 to our consolidated financial statements in Item 8.
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