MYRIAD GENETICS INC (MYGN) FY 2022 MD&A

Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section of Management's Discussion and Analysis discusses year-to-year comparisons between the year ended December 31, 2022 and the year ended December 31, 2021. Discussions of comparisons between the year ended December 31, 2021 and the year ended December 31, 2020 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on February 25, 2022. The following discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. Unless otherwise noted, all of the financial information in this Annual Report on Form 10-K is consolidated financial information for the Company.

Overview

We develop and offer genetic tests that help assess the risk of developing disease or disease progression and guide treatment decisions across medical specialties where genetic insights can significantly improve patient care and lower health care costs. Our mission is to advance health and well-being for all, empower individuals with vital insights and enable healthcare providers to better detect, treat and prevent disease.

Personalized genetic data, digital, and virtual consumer trends are converging to change traditional models of care. We believe significant growth opportunities exist to help patient populations with pressing health care needs through innovative solutions and services. Our focus is on organic growth, deployment of capital, including through opportunistic acquisitions, and the launch of new products. We are focusing our efforts in three key areas where we have specialized products, capabilities, and expertise: Oncology, Women's Health, and Mental Health. We believe our path to organic growth is driven by articulating our clinical differentiation, advancing a new commercial model in our Oncology and Women's Health businesses to reach a broader set of physicians and patients, raising awareness with patients who we believe would benefit from testing, and innovation that improves clinical outcomes, ease of use, and access. By investing in tech-enabled commercial tools, new lab facilities, and advanced automation, we believe we will be able to reduce complexity and cost. With a foundation of financial, commercial, operational and technological strength, we plan to launch new products and capabilities in 2023, such as our unified ordering portal, FirstGene, and, on a research use only basis, Precise MRD, which we expect will help accelerate our growth. We intend to develop and enhance our products to support growth, improve patient and provider experience, and reach more patients of all backgrounds. We are committed to disciplined management of a key set of initiatives to fulfill our mission and drive long-term growth and profitability.

Our consolidated revenues consist primarily of sales of tests through our wholly-owned subsidiaries.  During the year ended December 31, 2022, we reported total revenues of $678.4 million, net loss attributable to Myriad Genetics, Inc. stockholders of $112.0 million and basic and diluted loss per share of $1.39.

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Business Updates

During the year ended December 31, 2022, we took meaningful steps to fulfill our mission and execute our strategic transformation and growth plan. These steps included the following:

•the acquisition of Gateway Genomics, LLC (Gateway), a personal genomics company and developer of consumer genetic tests that gives families insight into their future children;

•the launch of Precise Oncology Solutions, a comprehensive offering designed to help oncologists determine effective and personalized treatment plans for individual patients;

•the appointment of several new leaders to our management team, including a new Chief Commercial Officer, Chief Operating Officer, Chief Scientific Officer, and Chief Marketing Officer, as part of our ongoing enhancement of our executive leadership team; and

•total revenue grew 6% year-over-year, excluding contributions from divested businesses. Pharmacogenomics volume growth continued to lead our portfolio, reporting 35% volume growth year-over-year, and hereditary cancer test volumes rebounded in the second half of the year, generating 10% volume growth in the second half of the year ended December 31, 2022 as compared to the second half of the year ended December 31, 2021.

Seasonality

We have historically experienced seasonality in our testing business. The quarter ended December 31st is generally strong as we typically experience an increase in volumes from patients who have met their annual insurance deductible. Conversely, in the quarter ended March 31st we typically experience a decrease in volumes due to the annual reset of patient deductibles. Additionally, the volume of testing is negatively impacted by the summer season, which is generally reflected in the quarter ended September 30th.

Components of Consolidated Operations

Revenue

Testing. Our tests are designed to analyze genes and their expression levels to assess an individual’s risk for developing disease, determine a patient’s likelihood of responding to a particular drug, assess a patient’s risk of disease progression, or identify factors which could lead to serious conditions in pregnancy. Revenue is recognized when the communication of test results has occurred.

Other. On July 1, 2021, we divested Myriad RBM, Inc., which provided pharmaceutical and clinical services. As a result, we ceased providing pharmaceutical and clinical services as of that date and no longer generate revenue from these services. Through Myriad RBM, Inc., we provided biomarker discovery, pharmaceutical and clinical services to the pharmaceutical, biotechnology, and medical research industries utilizing our multiplexed immunoassay technology. We also divested other clinical operations in February 2020. Revenue for these services was recognized at the completion of the pharmaceutical and clinical services.

Costs and Expenses

Expenses. Personnel-related costs for each category of Costs and Expenses include salaries, bonuses, employee benefit costs, employer payroll taxes, and stock-based compensation.

Cost of Testing Revenue. Cost of testing revenue consists primarily of costs related to laboratory supplies, personnel-related costs, and overhead costs.

Cost of Other Revenue. Cost of other revenue consists primarily of costs related to laboratory supplies and personnel-related costs.

Research and Development Expense. Research and development expenses consist primarily of personnel-related costs and laboratory supplies, which includes costs incurred in formulating, improving, validating and creating alternative or modified processes related to and expanding the use of our current test offerings and costs incurred in the discovery, development and validation of our pipeline of test candidates.

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Selling, General, and Administrative Expense. Selling, general, and administrative expenses include costs associated with managing and growing our businesses. Selling, general, and administrative expenses consist primarily of personnel-related costs and third-party costs for sales, marketing, customer service, billing and collection, legal, finance and accounting, information technology, and human resources.

Legal Charges Pending Settlement. Legal charges pending settlement includes accruals related to potential legal settlements.

Goodwill and Long-Lived Asset Impairment Charges. Goodwill and long-lived asset impairment charges include the impairment loss recognized on our goodwill or long-lived assets, including impairments recognized on intangible assets and right-of-use (ROU) lease assets.

Other Income (Expense). Other income (expense) includes interest income earned on our cash, cash equivalents, and restricted cash held in short-term interest-bearing accounts; interest expense associated with our debt and amortization of deferred financing costs and original issue discount costs; gains or losses on the sale of assets or businesses; and foreign currency gains and losses, realized gain or loss on marketable securities, and other nonrecurring income and expenses.

Results of Operations

Revenue

Test revenues for the year ended December 31, 2022 increased $12.0 million compared to the prior year. Revenue from Pharmacogenomics increased $33.9 million compared to the prior year due primarily to a 35% increase in volume. Prenatal revenues increased $9.6 million due primarily to the acquisition of Gateway and an increase of 7% in average reimbursement per test excluding Gateway. Tumor Profiling revenues increased due to volume increases in our Prolaris and MyChoice CDx products, partially offset by a decrease in international revenue due to changes in foreign exchange rates and a one-time milestone revenue earned in the prior year. Autoimmune revenues decreased $27.9 million compared to the prior year due to the sale of the Myriad Autoimmune business on September 13, 2021. Hereditary Cancer revenues decreased $10.8 million due primarily to changes in foreign exchange rates.

Other revenue for the year ended December 31, 2022 declined $24.2 million compared to the year ended December 31, 2021, due to the sale of Myriad RBM, Inc. on July 1, 2021.

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Cost of Sales

The cost of testing revenue as a percentage of revenue increased from 27.9% to 29.8% during the year ended December 31, 2022 compared to the year ended December 31, 2021.  The increase was primarily driven by the shift in the product mix for the current period and an increase in compensation costs due to an increase in the number of employees and an increase in the average cost per employee during the 2022 period.

The cost of other revenue as a percentage of revenue was 49.2% for the year ended December 31, 2021. The sale of Myriad RBM, Inc. was completed on July 1, 2021, and as a result, there were no corresponding costs during the current period.

Research and Development Expense

Research and development expense for the year ended December 31, 2022 increased by $3.5 million compared to the prior year primarily due to an increase in compensation expense and information technology related costs, partially offset by a decrease in clinical trial costs and costs incurred in the 2022 period related to our strategic transformation initiatives as compared to the prior year.

Selling, General, and Administrative Expense

Selling, general, and administrative expense decreased by $23.1 million for the year ended December 31, 2022 compared to the prior year due primarily to a $23.9 million decrease in legal expenses, which was driven in part by the receipt of insurance proceeds for certain legal matters of $12.0 million in 2022 and a decrease in litigation expenses during 2022. Additionally, costs from our strategic transformation initiative decreased by $11.6 million in 2022 due to a decrease in retention and severance costs as well as related consulting costs. The remaining decrease in selling, general, and administrative expenses in 2022 is due to a $9.7 million decrease in amortization expense due to intangible assets sold in the divestitures in the prior year and a $8.8 million decrease in bonus and commission expenses. The decreases were partially offset by a $17.4 million increase in sales and marketing expenses due to more in-person sales and marketing events and travel-related expenses in 2022, a $7.6 million increase in wages and other compensation expenses, a $5.5 million increase in consulting expenses, and a $3.3 million increase in information and technology expenses.

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Legal Charges Pending Settlement

Legal charges pending settlement decreased for the year ended December 31, 2022 compared to the prior year due to $62.0 million of accruals related to potential legal settlements recorded in the prior year, including $48.0 million in connection with the qui tam lawsuit against Crescendo Bioscience, LLC and the Company and $14.0 million in connection with the Abelli lawsuit. These amounts were subsequently paid in connection with the settlement of these cases in April 2022 and January 2022, respectively. There were no corresponding legal charges pending settlement in the year ended December 31, 2022.

Goodwill and Long-lived Asset Impairment Charges

Goodwill and long-lived asset impairment charges increased for the year ended December 31, 2022 compared to the prior year primarily due to the Company recognizing a $13.0 million impairment to ROU assets and a $3.9 million impairment to the related leasehold improvements in the current year as a result our decision to no longer use certain leased facilities in order to consolidate space. During the prior period, the Company recognized a $1.8 million impairment to ROU assets as a result of the voluntary early termination of certain lease agreements.

Other Income (Expense)

Other income (expense) decreased for the year ended December 31, 2022 compared to the prior year due primarily to the $121.0 million net gain recognized on the sale of Myriad RBM, Inc. and the $31.2 million net gain recognized on the sale of the Myriad myPath, LLC laboratory in the prior period, partially offset by charges in the prior period, including losses of $5.2 million and $6.5 million for a non-cancelable purchase commitment and inventory, respectively, recognized in connection with certain divestiture transactions, as well as a $3.4 million decrease in interest expense in the current period. The interest expense in the prior period is related to the debt outstanding at that time, which was repaid in full on July 30, 2021. There was no debt outstanding during the year ended December 31, 2022.

Income Tax Benefit

Our tax rate is the product of a U.S. federal effective rate of 21.0% and a blended state income tax rate of approximately 3.4%. Certain significant or unusual items are separately recognized during the period in which they occur and can be a source of variability in the effective tax rates from period to period.

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Income tax benefit for the year ended December 31, 2022 was $(28.6) million, and our effective tax rate was (20.3)%. For the year ended December 31, 2022, our effective tax rate differs from the U.S. federal statutory rate primarily due to disallowed executive compensation expenses, stock compensation, change in valuation allowance, and research and development credits. For the year ended December 31, 2021, our effective tax rate differs from the U.S. federal statutory rate primarily due to disallowed executive compensation expenses, differences between the book and tax basis of assets divested, the tax impact of the CARES Act, stock compensation, and release of a valuation allowance.

Liquidity and Capital Resources

Our primary sources of liquidity are our cash, cash equivalents and marketable investment securities, our cash flows from operations, and, in certain circumstances as discussed below, amounts available for borrowing under our Amended Facility. Our capital deployment strategy focuses on use of resources in the key areas of research and development, technology and acquisitions. We believe that investing organically through research and development and new product development or acquisitively to support our business strategy provides the best return on invested capital.

We believe that our existing capital resources will be sufficient to meet our projected operating requirements for the foreseeable future. In addition, our capital resources and cash on hand may be used for acquisitions or other strategic investments.

All previously outstanding borrowings under our Amended Facility, which matures on July 31, 2023, were repaid on July 30, 2021 using cash generated from divestitures and as such, we have no outstanding borrowings as of December 31, 2022.

Our available capital resources, however, may be consumed more rapidly than currently expected, or may be insufficient for our business needs for many reasons, including as a result of our operational cash needs, capital expenditures, and litigation related costs not covered by, or above the limits set forth in, our insurance. As a result, we may need or want to raise additional financing. We may not be able to secure such financing in a timely manner or on favorable terms, if at all. The current rising interest rate environment, together with recessionary headwinds, could make any potential financing more difficult or expensive to obtain. In addition, as of December 31, 2022, our borrowing limit under the Amended Facility has decreased to $150.0 million, and we remain subject to financial covenants under our Amended Facility, which could limit our ability to incur additional indebtedness under the Amended Facility or otherwise or impact our decision to pursue other financing. Without additional funds, we may be forced to delay the build-out of our new laboratories, scale back or eliminate some of our sales and marketing efforts, research and development activities, or other operations, or delay development of our tests in an effort to provide sufficient funds to continue our operations. If any of these events occurs, our ability to achieve our development and commercialization goals could be adversely affected.

The Amended Facility restricts our ability to make future borrowings if unrestricted cash, cash equivalents and marketable securities exceed $150.0 million, unless such borrowings are in connection with certain permitted acquisitions. Unrestricted cash, cash equivalents, and marketable securities totaled $169.7 million as of December 31, 2022. Our revolving commitment amount under the Amended Facility is $150.0 million as of December 31, 2022. As our total unrestricted cash, cash equivalents, and marketable securities exceeded $150.0 million as of December 31, 2022, we are currently unable to make borrowings under the Amended Facility unless related to a permitted acquisition. In addition, we are subject to a minimum liquidity covenant, which requires us to maintain liquidity of $150.0 million. Liquidity is defined under the Amended Facility as the sum of our unrestricted cash, cash equivalents and marketable investment securities plus the aggregate undrawn and available amount of the revolving commitments under the Amended Facility.

From time to time, we enter into purchase commitments or other agreements that may materially impact our liquidity position in future periods. In February 2022, we entered into a non-cancelable operating lease for approximately 230,000 square feet in west Salt Lake City, Utah. The lease has a term of 15 years, which, along with rent payments, is expected to commence in the third quarter of 2023. Total future rent payments under the lease are approximately $78.0 million. We also entered into a non-cancelable operating lease for approximately 63,000 square feet of leased space in South San Francisco, California. The lease has a term of 10 years and, along with rent payments, is expected to commence in the third quarter of 2023. Total future rent payments under the lease are approximately $58.8 million.

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Because of the technical nature of our business and our focus on science, research, and development, we are highly dependent upon our ability to attract and retain highly qualified and experienced management, scientific, and technical personnel. Competition and increased compensation for such personnel and other qualified personnel have increased the difficulty and cost of hiring and retaining qualified personnel. Loss of the services of or failure to recruit additional key management, scientific, and technical personnel and other qualified personnel who are necessary to operate our business would adversely affect our business, and it may have a material adverse effect on our business as a whole. Additionally, disruptions to our supply chain could cause shortages of critical materials required to conduct our business, which may have a material adverse effect on our business as a whole. In addition, inflation has had, and we expect it will continue to have, an impact on the costs we incur to attract and retain qualified personnel, costs to generate sales and produce diagnostic testing results, and costs of lab supplies.

The following table represents the balances of cash, cash equivalents, and marketable investment securities as of December 31, 2022 and 2021:

The decrease in cash, cash equivalents, and marketable investment securities as of December 31, 2022 compared to December 31, 2021 was primarily driven by $106.3 million in cash used by operations, which included legal settlement payments of $62.0 million, as well as $57.2 million in cash used for our acquisition of Gateway, $45.3 million in cash used for capital expenditures, and $4.3 million in cash used for the payment of withholding tax in connection with the issuance of common stock, net of proceeds from the issuance of common stock. The Company also had restricted cash of $9.5 million and $1.4 million as of December 31, 2022 and 2021, respectively.

The following table represents the condensed cash flow statement:

Cash Flows from Operating Activities

In the year ended December 31, 2022, the decrease in cash flows from operating activities was primarily due to the change in the balance of prepaid taxes due to the receipt of an $89.0 million U.S. federal tax refund in the prior year and an $81.2 million decrease in accrued liabilities during the current year, which was primarily driven by legal settlement payments of $62.0 million in 2022.

Cash Flows from Investing Activities

In the year ended December 31, 2022, the decrease in cash flows provided by investing activities as compared to the prior year was primarily due to the receipt of $379.1 million in cash proceeds from divestitures in the prior year, with no corresponding proceeds in the current period and the acquisition of Gateway, net of cash acquired, for $57.2 million, partially offset by a $67.1 million increase in proceeds from marketable investment securities in the current period.

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Cash Flows from Financing Activities

In the year ended December 31, 2022, the decrease in cash flows used in financing activities as compared to the prior year was primarily due to the use of $226.4 million in cash for repayments of the outstanding debt balances under the Amended Facility during the prior year, partially offset by a decrease of $84.6 million in proceeds from the exercise of stock options, net of shares exchanged for payroll withholding tax in the current year as compared to the prior year.

Effects of Inflation

Inflation has had, and may continue to have, an impact on the labor costs we incur to attract and retain qualified personnel, costs to generate sales and produce testing results, and costs of laboratory supplies. Inflationary costs have impacted our profitability and continue to adversely affect our business, financial condition and results of operations. In addition, increased inflation has had, and may continue to have, an effect on interest rates. Increased interest rates may adversely affect our borrowing rate and our ability to obtain, or the terms under which we can obtain, additional funding.

Share Repurchase Program

Our Board of Directors has previously authorized us to repurchase up to $200.0 million of our outstanding common stock. We may repurchase our common stock from time to time or on an accelerated basis through open market transactions or privately negotiated transactions as determined by our management. The amount and timing of stock repurchases under the program will depend on business and market conditions, stock price, trading restrictions, acquisition activity, and other factors. As of December 31, 2022, we are authorized to repurchase up to $110.7 million under our current share repurchase authorization. See “Part II, Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Issuer Purchases of Equity Securities” above.

Critical Accounting Estimates

Critical accounting estimates are those policies which are both important to the portrayal of a company’s financial condition and results and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting estimates are as follows:

•revenue recognition;

•goodwill;

•purchase accounting; and

•income taxes.

Revenue Recognition.  Revenue is recognized when, or as, performance obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to a customer. We exclude sales, use, value-added, and other taxes we collect on behalf of third parties from revenue. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services to a customer.

We generate revenue primarily by performing genetic testing. We perform our obligation under a contract with a customer by processing those tests and communicating the test results to customers, in exchange for consideration from the customer. Revenue from the sale of tests is recorded at the estimated transaction price. We have determined that the communication of test results indicates transfer of control for revenue recognition purposes. We have the right to bill our customers upon the completion of performance obligations and thus do not record contract assets. Occasionally customers make payments prior to our performance of our contractual obligations. When this occurs, we record a contract liability as deferred revenue.

Significant judgments are required in determining the transaction price in connection with satisfying performance obligations under the revenue standard. In determining the transaction price, we estimate the expected amount of consideration as revenue. We apply this method consistently for similar contracts when estimating the effect of any uncertainty on an amount of variable consideration to which we will be entitled.  An estimate of transaction price does not include any estimated amount of variable consideration that is constrained. We consider all the information (historical, current, and forecast) that is reasonably available to identify possible consideration amounts. To determine our estimated transaction price, we apply the expected value method for sales where we have a large number of contracts with similar characteristics. We then consider the probability of the variable consideration for each possible scenario. We have significant experience with historical collection patterns and use this experience to estimate transaction prices.

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The estimate of revenue is affected by assumptions in payor mix and in payor behavior such as changes in payor collections, current customer contractual requirements, and experience with ultimate collection from third-party payors. When assessing the total consideration for insurance carriers and patients, revenues are further constrained for estimated refunds. We reserve certain amounts in accrued liabilities in the Consolidated Balance Sheets in anticipation of request for refunds of payments made previously by insurance carriers, which are accounted for as reductions in revenues in the Consolidated Statements of Operations and Comprehensive Loss.

Goodwill.  We test goodwill for impairment on an annual basis and in the interim by reporting unit if events and circumstances indicate that goodwill may be impaired.  The events and circumstances that are considered include business climate and market conditions, legal factors, operating performance indicators and competition. Impairment of goodwill is evaluated on a qualitative basis before calculating the fair value of the reporting unit. If the qualitative assessment suggests that impairment is more likely than not, a quantitative impairment analysis is performed.  The quantitative analysis involves comparison of the fair value of a reporting unit with its carrying amount. The valuation of a reporting unit requires judgment in estimating future cash flows, discount rates, residual growth rates and other factors. In making these judgments, we evaluate the financial health of our business, including such factors as industry performance, market saturation and opportunity, changes in technology and operating cash flows, and other relevant entity-specific events. Changes in our forecasts or decreases in the value of our common stock could cause book value of reporting units to exceed their fair values. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. If an event occurs that would cause a revision to the estimates and assumptions used in analyzing the value of the goodwill, the revision could result in a non-cash impairment charge that could have a material impact on the financial results.

As of December 31, 2022, we have recorded goodwill of $286.8 million on our Consolidated Balance Sheets. This goodwill is attributable to the Myriad Mental Health, Myriad International, Myriad Women's Health, and Gateway reporting units. We qualitatively evaluated our reporting units for impairment. The factors that are considered in the qualitative analysis include macroeconomic conditions, industry and market considerations, revenue growth rates, current and financial performance, other factors that would have a negative effect on earnings and cash flows, and other relevant entity-specific events and information. Significant judgment is required in assessing the weight of the qualitative factors. We noted no indicators of impairment during the year ended December 31, 2022.

Goodwill impairment testing requires us to make a number of assumptions and estimates concerning future levels of revenue growth, operating margins, and other financial assumptions, which are based upon our long-term plan. The discount rate is an estimate of the overall after-tax rate of return required by a market participant whose weighted average cost of capital includes both debt and equity, including a risk premium. While we use the best available information to prepare our cash flows and discount rate assumptions, actual future cash flows and/or market conditions could differ significantly resulting in future impairment charges related to recorded goodwill balances. While there are always changes in assumptions to reflect changing business and market conditions, our overall methodology used has remained unchanged.

Purchase Accounting. We account for acquisitions of entities that include inputs and processes and have the ability to create outputs as business combinations. The tangible and identifiable intangible assets acquired and liabilities assumed in a business combination are recorded based on their estimated fair values as of the business combination date, including identifiable intangible assets which either arise from a contractual or legal right or are separable from goodwill. Significant judgment is often required in estimating the fair value of assets acquired, particularly intangible assets. We base the estimated fair value of identifiable intangible assets acquired in a business combination on third-party valuations that use information and assumptions provided by our management, which consider our estimates of inputs and assumptions that a market participant would use. Any excess purchase price over the estimated fair value assigned to the net tangible and identifiable intangible assets acquired and liabilities assumed is recorded to goodwill. The use of alternative valuation assumptions, including estimated revenue projections, growth rates, estimated cost savings, cash flows, discount rates, estimated useful lives and probabilities surrounding the achievement of contingent milestones could result in different purchase price allocations and amortization expense in current and future periods.

In circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability under Accounting Standards Codification (ASC) 480 - Distinguishing Liabilities from Equity, a liability is recognized equal to the fair value of the contingent payments we expect to make as of the acquisition date. This liability is remeasured each reporting period and changes in the fair value are recorded in change in fair value of contingent consideration in our Consolidated Statements of Operations.

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Income Taxes.  Our income tax provision is based on income before taxes and is computed using the liability method in accordance with ASC 740 – Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates projected to be in effect for the year in which the differences are expected to reverse.  Significant estimates are required in determining our provision for income taxes.  Some of these estimates are based on interpretations of existing tax laws or regulations, or the expected results from any future tax examinations.  Various internal and external factors may have favorable or unfavorable effects on our future provision for income taxes.  Those factors include, but are not limited to, changes in tax laws, regulations and/or rates, the results of any future tax examinations, changing interpretations of existing tax laws or regulations, changes in estimates of prior years’ items, past levels of research and development spending, acquisitions, changes in our corporate structure, and changes in overall levels of income before taxes all of which may result in periodic revisions to our provision for income taxes.

Developing our provision for income taxes, including our effective tax rate and analysis of potential uncertain tax positions, if any, requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and any estimated valuation allowance we deem necessary to offset deferred tax assets.  If we do not maintain taxable income from operations in future periods, we may increase the valuation allowance for our deferred tax assets and record material adjustments to our income tax expense.  Our judgment and tax strategies are subject to audit by various taxing authorities.  While we believe we have provided adequately for our uncertain income tax positions in our consolidated financial statements, an adverse determination by these taxing authorities could have a material adverse effect on our consolidated financial condition, results of operations or cash flows. Interest and penalties on income tax items are included as a component of overall income tax expense.

Recent Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements.