# GLOBAL INDUSTRIAL Co (GIC) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from GLOBAL INDUSTRIAL Co's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/945114/000094511422000009/gic-20211231.htm
Accession: 0000945114-22-000009
Filing date: 2022-03-17
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/GIC/
All MD&A years: /company/GIC/mda/
Next year: /company/GIC/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

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Global Industrial Company, through its subsidiaries, is a value-added industrial distributor of more than one million industrial and maintenance, repair and operation ("MRO") products in North America going to market through a system of branded e-commerce websites and relationship marketers.

Continuing Operations

The Company sells a wide array of industrial and MRO products, which are marketed in North America. These industrial and MRO products are manufactured by other companies. Some products are manufactured for us and sold as a white label product, and some are manufactured to our own design and marketed as private brand products under the trademarks: Global™, GlobalIndustrial.com™, Nexel™ Paramount™ and Interion™.

Discontinued Operations

The Company's discontinued operations include the results of the North American Technology Group ("NATG") business sold in December 2015 (see Note 1 and Note 6 to the Consolidated Financial Statements).

Operating Conditions

The North American industrial products market is highly fragmented and we compete against numerous competitors in multiple distribution channels. Industrial products distribution is working capital intensive, requiring us to incur significant costs associated with the warehousing of many products, including the costs of maintaining inventory, leasing warehouse space, inventory management systems and employing personnel to perform the associated tasks. We supplement our on-hand product availability by maintaining relationships with major distributors and manufacturers, utilizing a combination of stock and drop-shipment fulfillment.

The primary component of our operating expenses historically has been employee-related costs, which includes items such as wages, commissions, bonuses, employee benefits and equity-based compensation, as well as marketing expenses, primarily comprised of digital marketing spend, and occupancy related charges associated with our leased distribution and call center facilities. We continually assess our operations to ensure that they are efficient, aligned with market conditions and responsive to customer needs.

The discussion of our results of operations and financial condition that follows will provide information that will assist in understanding our financial statements, the factors that we believe may affect our future results and financial condition as well as information about how certain accounting policies and estimates affect the consolidated financial statements.

The Company has elected to omit discussion of the earliest year presented, December 31, 2019, in MD&A. This discussion can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in Form 10-K for the year ended December 31, 2020, filed on March 18, 2021.

Business Outlook

As we look to 2022, the Company is focused on the continued execution of our customer centric strategy, specifically in areas such as sales, marketing, private brand, digital transformation and distribution; all of which are targeted to help drive better execution, enhance our ability to deliver an exceptional customer service experience and support growth for the future. As the Company continues to take steps to deliver efficiency improvements through various technology and automation opportunities, we expect our capital expenditures in 2022 to be in the range of $7.0 to $9.0 million.

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Highlights from 2021

The following discussion of our results of operations and financial condition will provide information that will assist in understanding our financial statements and information about how certain accounting principles and estimates affect the consolidated financial statements. This discussion should be read in conjunction with the consolidated financial statements included herein.

•Consolidated sales increased 3.3% to $1.06 billion in U.S. dollars compared to $1.03 billion last year. Sales increased 5.0% on an average daily sales basis. Average daily sales is calculated based upon the number of selling days in each period, with Canadian sales converted to US dollars using the current year's average exchange rate. Fiscal year 2021 had four fewer selling days than 2020.

•Consolidated operating income increased 4.6% to $88.0 million compared to $84.1 million last year.

•Net income per diluted share from continuing operations increased 9.5% to $1.84 compared to $1.68 last year.

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Results of Operations(1)

Key Performance Indicators (in millions): 

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NM - not meaningful

[[GREPCENT_TABLE]]
[["","1","Global Industrial Company manages its business and reports using a 52-53 week fiscal year that ends at midnight on the Saturday closest to December 31. For clarity of presentation, fiscal years are described as if they ended on the last day of the respective calendar month. Fiscal years 2021 and 2020 ended on January 1, 2022 and January 2, 2021, respectively. The year ended 2021 included 52 weeks and 2020 included 53 weeks."]]
[[/GREPCENT_TABLE]]

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Management’s discussion and analysis that follows will include current operations and discontinued operations.

NET SALES

The Company's net sales increased 3.3% to $1.06 billion compared to $1.03 billion in the prior year. The Company's performance continued to benefit from investments in our private brand offerings, as 2021 private brand offerings made up over 45% of net sales, and was its fastest growing sourcing channel. During 2021 the Company experienced disruptions in its supply chain, including container shortages, high levels of port congestion, and disruptions to the domestic less-than-truckload ("LTL") carrier network. These disruptions caused extended lead times for product order fulfillment and resulted in an increase in open orders for both stock and drop ship offerings. Net sales were negatively impacted as the conversion of customer demand to net sales was slower than the Company's typical conversion cycle. Net sales from our Canada business grew 13.6%, 6.3% on a local currency basis, compared to prior year. U.S. revenue increased 2.7% compared to prior year. Consolidated sales increased 5.0% on an average daily sales basis compared to prior year. There were 4 fewer selling days in 2021 compared to 2020.

GROSS MARGIN

Gross margin is dependent on variables such as product mix including sourcing and category, competition, pricing strategy, vendor volume rebates, freight pricing decisions including the use of free or other promotional freight plans, freight cost inflation including both domestic outbound freight as well as international inbound ocean freight, inventory valuation and obsolescence and other variables, any or all of which may result in fluctuations in gross margin. The Company expects to see continued margin variability due to the current economic environment, inflationary pressures on both transportation and raw material costs, changes in mix as a result of the normalization of our customer's demand of personal protective equipment ("PPE") and other related products and historical seasonality.

Gross margin was 35.2% compared to 34.7% in the prior year primarily driven by improvements in price rationalization, as well as a product mix shift to in stock and private brand products and the higher margins these sourcing channels provide as compared to nationally branded products fulfilled through a drop ship model. The Company did experience a number of margin pressures during 2021 including increased LTL freight costs during the first quarter, costs related to its transition to a new 3PL partner, ocean freight costs throughout the year, and approximately $3.5 million write down of PPE inventory as the demand for these pandemic related supplies declined over the course of the year. We expect continued inflationary cost pressures from both ocean freight and domestic freight costs but remain confident that efforts to optimize price as well as further grow our private brands will help offset these increases.

SELLING, DISTRIBUTION AND ADMINISTRATIVE EXPENSES (“SD&A”), EXCLUDING SPECIAL GAINS AND CHARGES

Selling, distribution and administrative expenses totaled $286.3 million and $272.8 million for the years ended December 31, 2021 and 2020, respectively.

SD&A costs as a percentage of sales increased in 2021 compared to 2020 by 40 basis points. This increased SD&A reflects increased marketing investment to support both core and private brand product lines, growth initiatives, as well as increased distribution center compensation. Significant cost increases related to increased salary, temporary labor, recruitment and other employee related costs of approximately $9.4 million, as distribution center labor availability continues to remains tight, offset by cost savings due to lower variable bonus, commissions and equity compensation expenses of approximately $6.3 million related to the Company's financial performance. Other cost increases related to our in-person national trade show held in the fourth quarter of 2021 compared to the virtual event held last year of approximately $1.2 million and increased internet advertising spend of approximately $3.4 million, increased consulting and professional fees of approximately $1.5 million primarily related to our customer centric strategy initiatives, increased facility costs of approximately $2.0 million and increased dues and subscription fees of approximately $1.4 million.

DISCONTINUED OPERATIONS

The Company's discontinued operations include the results of the NATG businesses sold in December 2015 (see Note 1 and Note 6 to the Consolidated Financial Statements).

During 2021, the Company recorded net income in its discontinued operations of approximately $33.2 million primarily related to the resolution of certain liabilities of these previously discontinued operations of $31.7 million, restitution receipts, net of

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related professional fees, of approximately $12.0 million and recorded approximately $10.7 million for the provision for income taxes.

OPERATING MARGIN

The Company's operating margin increased 10 basis points in 2021 compared to 2020, driven by improved gross margin that resulted primarily from the product mix shift to in stock and private brand products and efficiencies in our marketing efforts. Operating margin in 2021 was negatively impacted by PPE inventory write downs of approximately $3.5 million and continued freight pricing pressures.

INTEREST AND OTHER EXPENSE, NET

Interest and other expense, net from continuing operations was $0.1 million for 2021 and 2020. The Company also recorded foreign exchange losses of approximately $0.3 million in 2021 and $0.0 million for 2020.

INCOME TAXES

The Company recorded net tax expense in continuing operations for 2021 of $17.5 million, or 20.0%, and a net tax expense in discontinued operations of $10.7 million. Tax expense from continuing operations was primarily the result of pretax income in the U.S. and India operations, including tax expense for certain U.S. states. The tax rate was benefited by the reversal of valuation allowances against the Company's Canadian net operating loss carryforward and other deferred tax assets of approximately $3.4 million, as the Company now believes it is more likely than not that all of the net operating losses of the Canadian subsidiary will be utilized. Tax expense from continuing operations was also benefited by approximately $0.8 million of stock option exercises. Non-deductible expenses, including executive compensation, was approximately $0.4 million. Tax expense in discontinued operations is attributed to pretax income recorded in the discontinued North American Technology Products Group business.

The Company recorded net tax expense in continuing operations for 2020 of $19.9 million, or 23.7%, and a net tax expense in discontinued operations of $0.5 million. Tax expense from continuing operations was primarily the result of pretax income in the U.S. and India operations, including tax expense for certain U.S. states. The tax rate was benefited by pre-tax income in Canada of approximately $3.2 million as the Company had a full valuation allowance against the deferred tax assets, including net operating losses, of its Canadian subsidiary and taxable income is fully offset by these net operating losses. Tax expense from continuing operations was also benefited by approximately $0.6 million of stock option exercises and dividend equivalent payments. Non-deductible expenses, including executive compensation, was approximately $0.7 million. Tax expense in discontinued operations is attributed to pretax income recorded in the discontinued North American Technology Products Group business.

Financial Condition, Liquidity and Capital Resources

Selected liquidity data (in millions):

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Historical Cash Flows

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Our primary liquidity needs are to support working capital requirements in our business, including inflationary cost pressures within inventory, funding recently declared and any future dividends, funding capital expenditures, debt repayment, continuing investment in upgrading and expanding our technological capabilities and information technology infrastructure specifically related to our e-commerce shopping experience, sales force productivity and automation, continuing investment in upgrading and expanding our distribution footprint and funding acquisitions. We rely principally upon operating cash flows to meet these needs. We currently believe that current cash on hand and cash flow from operations and our availability under our credit facility will be sufficient to fund our working capital and other cash requirements for at least the next twelve months. We believe our current capital structure and cash resources are adequate for our internal growth initiatives. To the extent our growth initiatives expand, including major acquisitions, we would seek to raise additional capital. We believe that, if needed, we can access public or private funding alternatives to raise additional capital.

Our working capital increased $44.1 million primarily related to increased inventory balances and lower accounts payable and accrued expense balances. Our inventory balance increase is primarily associated with increased cost of capitalized freight associated with increased costs of inbound ocean freight, as well as expansion of safety stock and in transit inventory associated with the extended lead times caused by supply chain disruptions both at origin as well as at port in the United States. Accounts receivable days outstanding were 38.0 in 2021 compared to 37.4 in 2020. Inventory turns were 4.7 in 2021 compared to 5.3 in 2020 and accounts payable days outstanding were 69.1 in 2021 compared to 68.3 in 2020. We expect that future accounts receivable, inventory and accounts payable balances will fluctuate with net sales and the product mix of our net sales.

Operating Activities

Net cash provided by operating activities from continuing operations was $47.6 million attributable to cash generated from net income adjusted by other non-cash items which provided $76.3 million in 2021 compared to $73.6 million provided by these items in 2020. This increase is primarily related to the higher net income from continuing operations in 2021 compared to 2020. Offsetting this increase are the changes in our working capital accounts, which used $28.7 million in cash compared to $6.3 million used in 2020, primarily the result of changes in the inventory, accounts receivable, accounts payable and accrued expenses, other current liabilities and non-current liabilities balances in 2021. Net cash provided by operating activities from discontinued operations was $2.2 million and $0.9 million in 2021 and 2020, respectively.

Investing Activities

Net cash used in investing activities from continuing operations totaled $3.4 million and $2.7 million for 2021 and 2020, respectively. In 2021 and 2020, investing activities were primarily related to leasehold improvements, warehouse machinery and equipment, molds and computer equipment.

Financing Activities

Net cash used in financing activities was $55.0 million and $138.8 million in 2021 and 2020, respectively. In 2021, net cash used in financing activities primarily related to the special dividend of $1.00 per share declared in December 2021, and the regular quarterly dividends of $0.16 per share, which totaled approximately $62.5 million. During 2021, the Company had net borrowings under its credit facility of approximately $4.5 million and proceeds from the issuance of common stock from stock option exercises, net of payments for payroll taxes through shares withheld, totaled $1.9 million and proceeds from the issuance of common stock from our employee stock purchase plan totaled $1.1 million. In 2020, cash used in financing activities was primarily related to the payment of the special dividend of $2.00 declared in December 2020 and regular quarterly dividends of $0.14 per share, which totaled approximately $134.3 million and the Company purchased treasury shares totaling approximately $7.2 million. Proceeds from stock option exercises, net of payments for payroll taxes through shares withheld,

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totaled $1.9 million and proceeds from the issuance of common stock from our employee stock purchase plan totaled $0.8 million in 2020.

The Company maintains a $75.0 million secured revolving credit facility with one financial institution which has a five-year term, maturing on October 19, 2026 and provides for borrowings in the United States. The credit agreement contains certain operating, financial and other covenants, including limits on annual levels of capital expenditures, availability tests related to payments of dividends and stock repurchases and fixed charge coverage tests related to acquisitions.  The revolving credit agreement requires that a minimum level of availability be maintained. If such availability is not maintained, the Company will be required to maintain a fixed charge coverage ratio (as defined).  The borrowings under the agreement are subject to borrowing base limitations of up to 85% of eligible accounts receivable and the inventory advance rate computed as the lesser of 60% or 85% of the net orderly liquidation value (“NOLV”).   Borrowings are secured by substantially all of the Borrower’s assets, as defined, including all accounts receivable, inventory and certain other assets, subject to limited exceptions, including the exclusion of certain foreign assets from the collateral.  The interest rate under the amended and restated facility is computed at applicable market rates based on the London interbank offered rate (“LIBOR”), the Federal Reserve Bank of New York (“NYFRB”) or the Prime Rate, plus an applicable margin. The applicable margin varies based on borrowing base availability.  As of December 31, 2021, eligible collateral under the credit agreement was $75.0 million, total availability was $72.5 million, total outstanding letters of credit was $1.5 million, total outstanding borrowings was $4.5 million and total excess availability was $66.5 million. The Company was in compliance with all of the covenants of the credit agreement in place as of December 31, 2021.

Levels of earnings and cash flows are dependent on factors such as consolidated gross margin and selling, distribution and administrative costs, product mix and relative levels of domestic and foreign sales. Unusual gains or expense items, such as special (gains) charges and settlements, may impact earnings and are separately disclosed.  We expect that past performance may not be indicative of future performance due to the competitive nature of our business segments where the need to adjust prices to gain or hold market share is prevalent.

Macroeconomic conditions, such as business and consumer sentiment, may affect our revenues, cash flows or financial condition.  However, we do not believe that there is a direct correlation between any specific macroeconomic indicator and our revenues, cash flows or financial condition.  We are not currently interest rate sensitive, as we have minimal debt.

The expenses and capital expenditures described above will require significant levels of liquidity, which we believe can be adequately funded from our currently available cash resources, cash flow from operations and borrowing under our current credit facility. In 2022 we anticipate capital expenditures to be in the range of $7.0 to $9.0 million, though at this time we are not contractually committed to incur these expenditures. 

In the past we have engaged in opportunistic acquisitions, choosing to pay the purchase price in cash, and may do so in the future as favorable situations arise.  However, a deep and prolonged period of reduced business spending could adversely impact our cash resources and force us to either forego future acquisition opportunities or to pay the purchase price using stock, debt or a combination of consideration which could have an adverse effect on our earnings. We believe that our cash balances and future cash flows from operations and availability under our credit facility will be sufficient to fund our working capital and other cash requirements for at least the next twelve months.

We maintain our cash and cash equivalents in money market funds or their equivalent that have maturities of less than three months and in non-interest bearing accounts that partially offset banking fees. As of December 31, 2021, we had no investments with maturities of greater than three months.  Accordingly, we do not believe that our cash balances have significant exposure to interest rate risk. At December 31, 2021 cash balances held in foreign subsidiaries totaled approximately $6.5 million. These balances are held in local country banks and are held primarily to support local working capital needs. The Company had in excess of $75 million of liquidity (cash and an undrawn line of credit) in the U.S. as of December 31, 2021.

Material Cash Requirements

We are obligated under non-cancelable operating leases for the rental of our facilities and certain of our equipment which expires at various dates through 2032. As of December 31, 2021 we were obligated for approximately $99.6 million under these non-cancelable operating leases. In 2022 we anticipate cash expenditures of approximately $14.5 million for these operating leases.  We have sublease agreements for unused space we lease in the United States.  In the event the sub lessee is unable to fulfill its obligations, we would be responsible for remaining rents due under the leases.

Our purchase and other obligations consist primarily of purchase commitments for certain employment, consulting and service agreements. As of December 31, 2021 we were obligated for approximately $31.8 million under these commitments. In 2022

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we anticipate cash expenditures of approximately $7.3 million related to these commitments. In addition to the previously mentioned commitments, we had $1.5 million of standby letters of credit outstanding as of December 31, 2021.

We are party to certain litigation, the outcome of which we believe, based on discussions with legal counsel, will not have a material adverse effect on our consolidated financial statements.

Tax contingencies are related to uncertain tax positions taken on income tax returns that may result in additional tax, interest and penalties being paid to taxing authorities. As of December 31, 2021, the Company had no material uncertain tax positions.

Discontinued Operations

The Company's discontinued operations include the former North American Technology Group business sold in December 2015 (see Note 1 and Note 6 to the Consolidated Financial Statements).

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in Item 15 of this Form 10-K. Certain accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty, and as a result, actual results could differ materially from those estimates. These judgments are based on historical experience, observation of trends in the industry, information provided by customers, forecasts of future economic conditions and information available from other outside sources, as appropriate. Management believes that full consideration has been given to all relevant circumstances that we may be subject to, and the consolidated financial statements of the Company accurately reflect management's best estimate of the consolidated results of operations, financial position and cash flows of the Company for the years presented. We identify below a number of policies that entail significant judgments or estimates, the assumptions and/or judgments used to determine those estimates and the potential effects on reported financial results if actual results differ materially from these estimates.

Revenue Recognition

The Company recognizes revenue from contracts with its customers utilizing the following steps:

•Identifying the contract with the customer

▪Identifying the performance obligations under the contract

▪Determine the transaction price

▪Allocate transaction price to performance obligations, if necessary

▪Recognizing revenue as performance obligations are satisfied

The Company's invoice, and the terms and conditions of sale contained therein, constitutes the evidence of an arrangement and is a contract with the customer. The performance obligations are generally delivery of the products listed on the invoice and the transaction price for each product is listed. Allocation of transaction price is generally not needed. Performance obligations are satisfied, and revenue is recognized upon the shipment of goods from one of the Company’s distribution centers or drop shippers for most contracts or in certain cases revenue will be recognized upon delivery and acceptance by the customer. Customer acceptance occurs when the customer accepts the shipment. The Company's standard terms, provided on its invoices as well as on its websites, are included in communications with the customer and have standard payment terms of 30 days. Certain customers may have extended payment terms that have been pre-approved by the Company's credit department, but generally none extend longer than 90 days.

Provisions for sales returns and allowances are estimated based on historical data and are recorded concurrently with the recognition of revenue. These provisions are reviewed and adjusted periodically by the Company. Revenue is presented net of sales taxes collected from customers and remitted to government authorities. Revenue is reduced for any early payment discounts or volume incentive rebates offered to customers.

The Company’s revenue is shown as “Net sales” in the accompanying Consolidated Statements of Operations and is measured as the determined transaction price, net of any variable consideration consisting primarily of rights to return product. The Company has elected to treat shipping and handling revenues as activities to fulfill its performance obligation. Billings for freight and shipping and handling are recorded in net sales and costs of freight and shipping and handling are recorded in cost of sales in the accompanying Consolidated Statements of Operations.

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The Company will record a contract liability in cases where customers pay in advance of the Company satisfying its performance obligation. The Company did not have any material unsatisfied performance obligations or liabilities as of December 31, 2021.

The Company offers customers rights to return product within a certain time, usually 30 days. The Company estimates its sales returns liability quarterly based upon its historical returns rates as a percentage of historical sales for the trailing twelve-month period. The total accrued sales returns liability was approximately $2.2 million and $1.9 million at December 31, 2021 and 2020, respectively, and was recorded as a refund liability in Accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets.

Allowance for Credit Losses

The Company’s trade accounts receivable is one portfolio comprised of commercial businesses operating in the U.S. and to a much lesser extent, Canada. The Company develops its allowances for credit losses, which represent an estimate of expected losses over the remaining contractual life of its receivables, considering customer financial condition, historical loss experience with its customers, current market economic conditions and forecasts of future economic conditions when appropriate. When the Company becomes aware of a customer's inability to meet its financial obligation, a specific reserve is recorded to reduce the receivable to the expected amount to be collected. For the balance of its trade receivables, the Company uses a loss rate method to estimate its credit loss reserve. Historical loss experience rates are calculated using receivable write offs over a trailing twelve-month period and comparing that to the average receivable balances over the same period. That rate is applied to the current accounts receivable portfolio, excluding accounts that have been specifically reserved. Any write offs incurred are recorded against the established reserves.

The Company grants credit to commercial business customers using an electronic application process that evaluates the customer's detailed credit report, reference responses, availability under credit facilities, existing liens, tenure of management and business history, among other factors. Credit terms are typically net 30 days payment required with larger businesses eligible for up to net 90 day terms, if qualified.

Our estimates for the years ended December 31, 2021 and 2020 have not been materially different than our actual experience. While bad debt allowances have been within expectations, there can be no assurance that we will continue to experience the same allowance rate we have in the past particularly if business or economic conditions change or actual results deviate from historical trends.

Inventory Valuation

We value our inventories at the lower of cost or net realizable value; cost being determined on the first-in, first-out method. Excess and obsolete or unmarketable merchandise are written down based on historical experience, assumptions about future product demand and market conditions. If market conditions are less favorable than projected or if technological developments result in accelerated obsolescence, additional write-downs may be required. While obsolescence and resultant markdowns have been within expectations, there can be no guarantee that we will continue to experience the same level of markdowns we have in the past. The Company estimates the net realizable value of its inventory by considering factors such as inventory levels, historical write-off information, historical and current demand trends, market conditions, estimated direct selling costs and physical condition of the inventory as well as credits that we may obtain for returned merchandise.

Our inventory reserve estimates for the years ended December 31, 2021 and 2020 have not been materially different than our actual experience. However, if in the future our estimates are materially different than our actual experience we could have a material loss adjustment.

Income Taxes

We are subject to taxation from federal, state and foreign jurisdictions and the determination of our tax provision is complex and requires significant management judgment.

We conduct operations in numerous U.S. states and several foreign locations. Our effective tax rate depends upon the geographic distribution of our pre-tax income or losses among locations with varying tax rates and rules. As the geographic mix of our pre-tax results among various tax jurisdictions changes, the effective tax rate may vary from period to period. We are

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also subject to periodic examination from domestic and foreign tax authorities regarding the amount of taxes due. These examinations include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. We establish as needed, and periodically reevaluate, an estimated income tax reserve on our consolidated balance sheet to provide for the possibility of adverse outcomes in income tax proceedings. While management believes that we have identified all reasonably identifiable exposures and whether or not a reserve is appropriate, it is possible that additional exposures exist and/or that exposures may be settled at amounts different than the amounts reserved. The determination of deferred tax assets and liabilities and any valuation allowances that might be necessary requires management to make significant judgments concerning the ability to realize net deferred tax assets. The realization of our net deferred tax assets is significantly dependent upon the generation of future taxable income. In estimating future taxable income there are judgments and uncertainties related to the development of forecasts of future results that may not be reliable. Significant management judgment is also necessary to evaluate the operating environment and economic conditions that exist to develop a forecast for a reporting unit. Where management has determined that it is more likely than not that some portion or the entire deferred tax asset will not be realized, we have provided a valuation allowance. If the realization of those deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination is made. We have not made any material changes to our income tax policy in the past and we do not anticipate making any material changes to this policy in the near future.

We do not believe it is reasonably likely that the estimates or assumptions used to determine our deferred tax assets and liabilities and related valuation allowances will change materially in the future. However, if our estimates are materially different than our actual experience we could have a material gain or loss adjustment.

Recent Accounting Pronouncements

For information about recent accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplemental Data, of this Annual Report on Form 10-K.