NETFLIX INC 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations This section of this Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Results of Operations The following represents our consolidated performance highlights: As of/Year Ended December 31, Change 2024 2023 2022 2024 vs. 2023 (in thousands, except revenue per membership and percentages) Financial Results: Streaming revenues $ 39,000,966 $ 33,640,458 $ 31,469,852 16 % DVD revenues (1) — 82,839 145,698 (100) % Total revenues $ 39,000,966 $ 33,723,297 $ 31,615,550 16 % Operating income $ 10,417,614 $ 6,954,003 $ 5,632,831 50 % Operating margin 27 % 21 % 18 % Global Streaming Memberships: Paid net membership additions 41,350 29,529 8,903 40 % Paid memberships at end of period (2) 301,626 260,276 230,747 16 % Average paying memberships 277,730 240,889 222,924 15 % Average monthly revenue per paying membership $ 11.70 $ 11.64 $ 11.76 1 % Constant currency change (3) 4 % (1) We discontinued our DVD-by-mail service in the year ended December 31, 2023. The discontinuance of our DVD business had an immaterial impact on our operations and financial results. (2) A paid membership (also referred to as a paid subscription) is defined as a membership that has the right to receive Netflix service following sign-up and a method of payment being provided, and that is not part of a free trial or certain other promotions that may be offered by the Company to new or rejoining members. Certain members have the option to add extra member sub accounts. These extra member sub accounts are not included in paid memberships. A membership is canceled and ceases to be reflected in the above metrics as of the effective cancellation date. Voluntary cancellations generally become effective at the end of the prepaid membership period. Involuntary cancellations, as a result of a failed method of payment, become effective immediately. Memberships are assigned to territories based on the geographic location used at time of sign-up as determined by the Company’s internal systems, which utilize industry standard geo-location technology. (3) We believe the non-GAAP financial measure of constant currency revenue is useful in analyzing the underlying trends in average monthly revenue per paying membership (“ARM”) absent foreign currency fluctuations. However, this non-GAAP financial measure should be considered in addition to, not as a substitute for, or superior to other financial measures prepared in accordance with GAAP. In order to exclude the effect of foreign currency rate fluctuations on ARM, we calculate current period revenue assuming foreign exchange rates had remained constant with foreign exchange rates from each of the corresponding months of the prior-year period and exclude the impact of hedging gains or losses realized as revenues. Constant currency percentage change in ARM is calculated as the percentage change between current period constant currency ARM and the prior comparative period ARM. The impact of hedging gains or losses is excluded from both the current and prior periods. For the year ended December 31, 2024, our revenues would have been approximately $1,424 million higher, excluding the impact of hedging and had foreign currency exchange rates remained constant with those for the year ended December 31, 2023. The unfavorable foreign exchange rate impacts in the year ended December 31, 2024 were primarily driven by the devaluation of the Argentine peso relative to the U.S. dollar coupled with significant price increases in the local currency in this jurisdiction. Operating margin for the year ended December 31, 2024 increased six percentage points as compared to the prior comparative period, primarily due to revenues growing at a faster rate as compared to the growth in cost of revenues, sales and marketing, and technology and development expenses, coupled with lower general and administrative expenses. 19 Table of Contents Streaming Revenues We primarily derive revenues from monthly membership fees for services related to streaming content to our members. We offer a variety of streaming membership plans, the price of which varies by country and the features of the plan. As of December 31, 2024, pricing on our paid plans ranged from the U.S. dollar equivalent of $1 to $32 per month, and pricing on our extra member sub accounts ranged from the U.S. dollar equivalent of $2 to $8 per month. We expect that from time to time the prices of our membership plans in each country may change and we may test other plan and price variations. We also earn revenue from advertisements presented on our streaming service, consumer products, live events and various other sources. Revenues earned from sources other than monthly membership fees were not a material component of streaming revenues for the years ended December 31, 2024, 2023, and 2022. Year Ended December 31, Change 2024 2023 2022 2024 vs. 2023 (in thousands, except percentages) Streaming revenues $ 39,000,966 $ 33,640,458 $ 31,469,852 $ 5,360,508 16 % Streaming revenues for the year ended December 31, 2024 increased 16% as compared to the year ended December 31, 2023, primarily due to the growth in average paying memberships and price increases, partially offset by unfavorable changes in foreign exchange rates. The following tables summarize streaming revenues and other streaming membership information by region for the years ended December 31, 2024, 2023 and 2022. Hedging gains of $124 million are included in “Streaming revenues” for the year ended December 31, 2024. No hedging gains and losses were recognized as “Streaming revenues” in the comparative prior year periods. See Note 7 Derivative Financial Instruments and Hedging Activities to the consolidated financial statements for further information regarding the Company’s derivative and non-derivative financial instruments. United States and Canada (UCAN) As of/Year Ended December 31, Change 2024 2023 2022 2024 vs. 2023 (in thousands, except revenue per membership and percentages) Streaming revenues $ 17,359,369 $ 14,873,783 $ 14,084,643 $ 2,485,586 17 % Paid net membership additions (losses) 9,497 5,832 (919) 3,665 63 % Paid memberships at end of period 89,625 80,128 74,296 9,497 12 % Average paying memberships 84,112 76,126 74,001 7,986 10 % Average monthly revenue per paying membership $ 17.20 $ 16.28 $ 15.86 $ 0.92 6 % Constant currency change 6 % Europe, Middle East, and Africa (EMEA) As of/Year Ended December 31, Change 2024 2023 2022 2024 vs. 2023 (in thousands, except revenue per membership and percentages) Streaming revenues $ 12,387,035 $ 10,556,487 $ 9,745,015 $ 1,830,548 17 % Paid net membership additions 12,320 12,084 2,693 236 2 % Paid memberships at end of period 101,133 88,813 76,729 12,320 14 % Average paying memberships 94,200 80,928 73,904 13,272 16 % Average monthly revenue per paying membership $ 10.96 $ 10.87 $ 10.99 $ 0.09 1 % Constant currency change 1 % 20 Table of Contents Latin America (LATAM) As of/Year Ended December 31, Change 2024 2023 2022 2024 vs. 2023 (in thousands, except revenue per membership and percentages) Streaming revenues $ 4,839,816 $ 4,446,461 $ 4,069,973 $ 393,355 9 % Paid net membership additions 7,330 4,298 1,738 3,032 71 % Paid memberships at end of period 53,327 45,997 41,699 7,330 16 % Average paying memberships 48,954 42,802 40,000 6,152 14 % Average monthly revenue per paying membership $ 8.24 $ 8.66 $ 8.48 $ (0.42) (5) % Constant currency change 21 % Asia-Pacific (APAC) As of/Year Ended December 31, Change 2024 2023 2022 2024 vs. 2023 (in thousands, except revenue per membership and percentages) Streaming revenues $ 4,414,746 $ 3,763,727 $ 3,570,221 $ 651,019 17 % Paid net membership additions 12,203 7,315 5,391 4,888 67 % Paid memberships at end of period 57,541 45,338 38,023 12,203 27 % Average paying memberships 50,466 41,033 35,019 9,433 23 % Average monthly revenue per paying membership $ 7.29 $ 7.64 $ 8.50 $ (0.35) (5) % Constant currency change (3) % Cost of Revenues Cost of revenues primarily consists of the amortization of content assets. Other costs of revenues include expenses associated with the acquisition, licensing and production of content, streaming delivery costs, and other operating costs. Expenses related to the acquisition, licensing and production of content not included in content amortization may include payroll, stock-based compensation, facilities, and other personnel-related expenses, costs associated with obtaining rights to music included in our content, overall deals with talent, miscellaneous production-related costs and participations and residuals. Streaming delivery costs are primarily related to our global content delivery network (“Open Connect”). We have built our own Open Connect network to help us efficiently stream a high volume of content to our members over the internet. Delivery expenses, therefore, include equipment costs related to Open Connect, payroll and related personnel expenses and all third-party costs, such as cloud computing costs, associated with delivering content over the internet. Other operating costs include customer service and payment processing fees, including those we pay to our integrated payment partners, as well as other costs directly incurred in making our content available to members. Year Ended December 31, Change 2024 2023 2022 2024 vs. 2023 (in thousands, except percentages) Cost of revenues $ 21,038,464 $ 19,715,368 $ 19,168,285 $ 1,323,096 7 % As a percentage of revenues 54 % 58 % 61 % The increase in cost of revenues for the year ended December 31, 2024 as compared to the year ended December 31, 2023 was due to a $1,104 million increase in content amortization relating to our existing and new content. Sales and Marketing Sales and marketing expenses consist primarily of advertising expenses and certain payments made to marketing and advertising sales partners, including consumer electronics ("CE") manufacturers, multichannel video programming distributors ("MVPDs"), mobile operators, and ISPs. Marketing expenses include promotional activities such as digital and television advertising. Sales and marketing expenses also include payroll, stock-based compensation, facilities, and other related expenses for personnel that support advertising sales and marketing activities. 21 Table of Contents Year Ended December 31, Change 2024 2023 2022 2024 vs. 2023 (in thousands, except percentages) Sales and marketing $ 2,917,554 $ 2,657,883 $ 2,530,502 $ 259,671 10 % As a percentage of revenues 7 % 8 % 8 % The increase in sales and marketing expenses for the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily driven by a $131 million increase in personnel-related costs due to the growth in advertising sales headcount. Other sales and marketing expenses increased $129 million primarily due to a $54 million increase in marketing expenses due to the timing of marketing spend on our content slate, coupled with an increase in expenses incurred in connection with our advertising offering, including increased payments to advertising sales partners and other advertising distribution expenses. Technology and Development Technology and development expenses consist primarily of payroll, stock-based compensation, facilities, and other related expenses for technology personnel responsible for making improvements to our service offerings, including testing, maintaining and modifying our user interface, our recommendations, merchandising and infrastructure. Technology and development expenses also include costs associated with general use computer hardware and software. Year Ended December 31, Change 2024 2023 2022 2024 vs. 2023 (in thousands, except percentages) Technology and development $ 2,925,295 $ 2,675,758 $ 2,711,041 $ 249,537 9 % As a percentage of revenues 8 % 8 % 9 % The increase in technology and development expenses for the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily due to a $224 million increase in personnel-related costs. General and Administrative General and administrative expenses consist of payroll, stock-based compensation, facilities, and other related expenses for corporate personnel. General and administrative expenses also include professional fees and other general corporate expenses. Year Ended December 31, Change 2024 2023 2022 2024 vs. 2023 (in thousands, except percentages) General and administrative $ 1,702,039 $ 1,720,285 $ 1,572,891 $ (18,246) (1) % As a percentage of revenues 4 % 5 % 5 % General and administrative expenses for the year ended December 31, 2024 as compared to the year ended December 31, 2023 remained relatively flat. Interest Expense Interest expense consists primarily of the interest associated with our outstanding debt obligations, including the amortization of debt issuance costs. See Note 6 Debt in the accompanying notes to our consolidated financial statements for further detail on our debt obligations. 22 Table of Contents Year Ended December 31, Change 2024 2023 2022 2024 vs. 2023 (in thousands, except percentages) Interest expense $ 718,733 $ 699,826 $ 706,212 $ 18,907 3 % As a percentage of revenues 2 % 2 % 2 % Interest expense primarily consists of interest on our Notes of $718 million for the year ended December 31, 2024. The increase in interest expense for the year ended December 31, 2024 as compared to the year ended December 31, 2023 was due to the increase in debt. Interest and Other Income (Expense) Interest and other income (expense) consists primarily of foreign exchange gains and losses on foreign currency denominated balances, gains and losses on certain derivative instruments, and interest earned on cash, cash equivalents and short-term investments. Year Ended December 31, Change 2024 2023 2022 2024 vs. 2023 (in thousands, except percentages) Interest and other income (expense) $ 266,776 $ (48,772) $ 337,310 $ 315,548 647 % As a percentage of revenues 1 % — % 1 % Interest and other income (expense) increased for the year ended December 31, 2024 primarily due to foreign exchange losses of $18 million, net of the impacts of derivatives and hedging, compared to the losses of $293 million for the corresponding period in 2023. In the year ended December 31, 2024, the foreign exchange losses were primarily driven by the remeasurement of cash and content liability positions in currencies other than the functional currencies, partially offset by a non-cash gain of $122 million, net of hedging impacts, from the remeasurement of our €5,170 million Senior Notes. The foreign exchange loss in the year ended December 31, 2023 was primarily driven by a non-cash loss of $176 million from the remeasurement of our Senior Notes denominated in euros, coupled with the remeasurement of cash and content liability positions in currencies other than the functional currencies. Provision for Income Taxes Year Ended December 31, Change 2024 2023 2022 2024 vs. 2023 (in thousands, except percentages) Provision for income taxes $ 1,254,026 $ 797,415 $ 772,005 $ 456,611 57 % Effective tax rate 13 % 13 % 15 % The effective tax rate for the year ended December 31, 2024 remained relatively flat as compared to the year ended December 31, 2023. See Note 10 Income Taxes to the consolidated financial statements for further information regarding income taxes. 23 Table of Contents Liquidity and Capital Resources As of December 31, Change 2024 2023 2024 vs. 2023 (in thousands, except percentages) Cash, cash equivalents, restricted cash and short-term investments $ 9,586,343 $ 7,139,488 $ 2,446,855 34 % Short-term and long-term debt 15,582,804 14,543,261 1,039,543 7 % Cash, cash equivalents, restricted cash and short-term investments increased $2,447 million in the year ended December 31, 2024 primarily due to cash provided by operations, issuance of debt, and proceeds from issuance of common stock, partially offset by the repurchase of stock and repayment of debt. Debt, net of debt issuance costs and discounts, increased $1,040 million primarily due to the issuance of $1,800 million in additional Senior Notes, partially offset by the repayment upon maturity of the $400 million aggregate principal amount of our 5.750% Senior Notes and the remeasurement of our euro-denominated notes in the year ended December 31, 2024. The amount of principal and interest due in the next twelve months is $2,487 million. As of December 31, 2024, no amounts had been borrowed under our $3 billion Revolving Credit Agreement. See Note 6 Debt in the accompanying notes to our consolidated financial statements. We anticipate that we may periodically raise additional debt capital. Our ability to obtain this or any additional financing that we may choose or need, including for the refinancing of upcoming maturities or potential strategic acquisitions and investments, will depend on, among other things, our development efforts, business plans, operating performance, and the condition of the capital markets at the time we seek financing. We may not be able to obtain such financing on terms acceptable to us or at all. If we raise additional funds through the issuance of equity or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common stock, and our stockholders may experience dilution. In September 2023, the Board of Directors authorized the repurchase of up to $10 billion of our common stock, with no expiration date, and in December 2024, the Board of Directors increased the share repurchase authorization by an additional $15 billion, also with no expiration date. Stock repurchases may be effected through open market repurchases in compliance with Rule 10b-18 under the Exchange Act, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act, privately-negotiated transactions, accelerated stock repurchase plans, block purchases, or other similar purchase techniques and in such amounts as management deems appropriate. We are not obligated to repurchase any specific number of shares, and the timing and actual number of shares repurchased will depend on a variety of factors, including our stock price, general economic, business and market conditions, and alternative investment opportunities. We may discontinue any repurchases of our common stock at any time without prior notice. In the fiscal year ended December 31, 2024, the Company repurchased 9,861,935 shares of common stock for an aggregate amount of $6,211 million (excluding the 1% excise tax on stock repurchases as a result of the Inflation Reduction Act of 2022). As of December 31, 2024, $17.1 billion remains available for repurchases. Our primary uses of cash include the acquisition, licensing and production of content, marketing programs, streaming delivery and personnel-related costs, as well as strategic acquisitions and investments. Cash payment terms for non-original content have historically been in line with the amortization period. Investments in original content, and in particular content that we produce and own, require more cash upfront relative to licensed content. For example, production costs are paid as the content is created, well in advance of when the content is available on the service and amortized. We expect to continue to significantly invest in global content, particularly in original content, which will impact our liquidity. We currently anticipate that cash flows from operations, available funds and access to financing sources, including our revolving credit facility, will continue to be sufficient to meet our cash needs for the next twelve months and beyond. Our material cash requirements from known contractual and other obligations primarily relate to our content, debt and lease obligations. As of December 31, 2024, the expected timing of those payments are as follows: Contractual obligations (in thousands): Total Next 12 Months Beyond 12 Months Content obligations (1) $ 23,248,931 $ 11,424,696 $ 11,824,235 Debt (2) 19,841,462 2,486,945 17,354,517 Operating lease obligations (3) 2,761,120 514,625 2,246,495 Total $ 45,851,513 $ 14,426,266 $ 31,425,247 (1) As of December 31, 2024, content obligations were comprised of $4.4 billion included in "Current content liabilities" and $1.8 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $17.0 billion of obligations that are not reflected on the Consolidated Balance Sheets as they did not then meet the criteria for recognition. Content obligations include amounts related to the acquisition, licensing and production of content. An obligation for the production of content includes non-cancelable commitments under creative talent and employment agreements and other production related 24 Table of Contents commitments. An obligation for the acquisition and licensing of content is incurred at the time we enter into an agreement to obtain future titles. Once a title becomes available, a content liability is recorded on the Consolidated Balance Sheets. Certain agreements include the obligation to license rights for unknown future titles, the ultimate quantity and/or fees for which are not yet determinable as of the reporting date. Traditional film output deals, or certain TV series license agreements where the number of seasons to be aired is unknown, are examples of these types of agreements. The contractual obligations table above does not include any estimated obligation for the unknown future titles, payment for which could range from less than one year to more than five years. However, these unknown obligations are expected to be significant and we believe could include approximately $1 billion to $4 billion over the next three years, with the payments for the vast majority of such amounts expected to occur after the next twelve months. The foregoing range is based on considerable management judgments and the actual amounts may differ. Once we know the title that we will receive and the license fees, we include the amount in the contractual obligations table above. (2) Debt obligations include our Notes consisting of principal and interest payments. See Note 6 Debt in the accompanying notes to our consolidated financial statements for further details. (3) Operating lease obligations are comprised of operating lease liabilities included in "Accrued expenses and other liabilities" and "Other non-current liabilities" on the Consolidated Balance Sheets, inclusive of imputed interest. Operating lease obligations also include additional obligations that are not reflected on the Consolidated Balance Sheets as they did not meet the criteria for recognition. As of December 31, 2024, the Company has additional operating leases for real estate that have not yet commenced of $38 million which has been included above. See Note 5 Balance Sheet Components in the accompanying notes to our consolidated financial statements for further details regarding leases. As of December 31, 2024, we had gross unrecognized tax benefits of $432 million, of which $302 million was classified in “Other non-current liabilities" in the Consolidated Balance Sheets. At this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made. In addition, we may be required to pay deposits of approximately $800 million related to certain direct and indirect taxes in the next twelve months, which are in excess of our typical annual obligations. Cash Flows The following table summarizes our cash flows: Year Ended December 31, Change 2024 2023 2022 2024 vs. 2023 (in thousands) Net cash provided by operating activities $ 7,361,364 $ 7,274,301 $ 2,026,257 $ 87,063 1 % Net cash provided by (used in) investing activities (2,181,784) 541,751 (2,076,392) (2,723,535) (503) % Net cash used in financing activities (4,074,427) (5,950,803) (664,254) (1,876,376) (32) % Net cash provided by operating activities for the year ended December 31, 2024 increased $87 million as compared to the year ended December 31, 2023, primarily driven by a $3,304 million or 61% increase in net income, an increase in adjustments for non-cash expenses, and favorable changes in working capital, partially offset by an increase in payments for content assets. The payments for content assets increased $3,862 million, from $13,140 million to $17,003 million, or 29%. Net cash provided by (used in) investing activities for the year ended December 31, 2024 decreased $2,724 million as compared to the year ended December 31, 2023, primarily due to there being no maturities of investments in the year ended December 31, 2024, as compared to maturities of investments of $1,395 million in the year ended December 31, 2023, coupled with an increase in purchases of investments of $1,237 million and an increase in purchases of property and equipment of $91 million. Net cash used in financing activities for the year ended December 31, 2024 decreased $1,876 million as compared to the year ended December 31, 2023, primarily due to proceeds from the issuance of debt of $1,794 million in the year ended December 31, 2024 and a $663 million increase in the proceeds from the issuance of common stock. These cash inflows were partially offset by the repayment upon maturity of the $400 million aggregate principal amount of our 5.750% Senior Notes in the year ended December 31, 2024 as compared to no repayments of debt in the corresponding period in 2023, coupled with a $218 million increase in the repurchases of common stock. Indemnifications The information set forth under Note 8 Commitments and Contingencies in the accompanying notes to our consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K is incorporated herein by reference. 25 Table of Contents Critical Accounting Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. The Securities and Exchange Commission ("SEC") has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. Content We acquire, license and produce content, including original programming, in order to offer our members unlimited viewing of video entertainment. The content licenses are for a fixed fee and specific windows of availability. Payment terms for certain content licenses and the production of content require more upfront cash payments relative to the amortization expense. Payments for content, including additions to content assets and the changes in related liabilities, are classified within "Net cash provided by operating activities" on the Consolidated Statements of Cash Flows. We recognize content assets (licensed and produced) as "Content assets, net" on the Consolidated Balance Sheets. For licensed content, we capitalize the fee per title and record a corresponding liability at the gross amount of the liability when the license period begins, the cost of the title is known and the title is accepted and available for streaming. For produced content, we capitalize costs associated with the production, including development costs, direct costs and production overhead. Based on factors including historical and estimated viewing patterns, we amortize the content assets (licensed and produced) in “Cost of revenues” on the Consolidated Statements of Operations over the shorter of each title's contractual window of availability or estimated period of use or ten years, beginning with the month of first availability. The amortization is on an accelerated basis, as we typically expect more upfront viewing, and film amortization is more accelerated than TV series amortization. On average, over 90% of a licensed or produced content asset is expected to be amortized within four years after its month of first availability. We review factors that impact the amortization of the content assets on a regular basis. Our estimates related to these factors require considerable management judgment. In the normal course of business, we, or a third-party producing content on our behalf, may qualify for tax incentives through eligible spend on productions. The accounting for tax incentives is dependent on the particular type of incentive, including the nature of the benefit and the location the incentive is earned. In general, tax incentives are realized as cash receipts and may be received prior to or after a title launches on our service. Upon a title’s launch, any amounts we are eligible for through qualified production spend but have not received, are recognized in “Other current assets” or “Other non-current assets” on the Consolidated Balance Sheets as receivables. Tax incentives are generally accounted for as a reduction to the cost basis of content assets (presented in “Content assets, net”) and reduce content amortization over the life of the title (as presented in “Cost of revenues”) on the Consolidated Statements of Operations. Our business model is subscription based as opposed to a model generating revenues at a specific title level. Content assets (licensed and produced) are predominantly monetized as a group and therefore are reviewed at a group level when an event or change in circumstances indicates a change in the expected usefulness of the content or that the fair value may be less than unamortized cost. To date, we have not identified any such event or changes in circumstances. If such changes are identified in the future, these aggregated content assets will be stated at the lower of unamortized cost or fair value. In addition, unamortized costs for assets that have been, or are expected to be, abandoned are written off. Income Taxes We record a provision for income taxes for the anticipated tax consequences of our reported results of operations using the asset and liability method. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance when it is more likely than not they will not be realized. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements. In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, our forecast of future earnings and future taxable income, and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying business. Actual operating results in future years could differ from our current assumptions, judgments and estimates. 26 Table of Contents We do not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. We may recognize a tax benefit only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Due to uncertainties in any tax audit outcome, our estimates of the ultimate settlement of our unrecognized tax positions may change and the actual tax benefits may differ significantly from the estimates. See Note 10 Income Taxes to the consolidated financial statements for further information regarding income taxes. Recent Accounting Pronouncements The information set forth under Note 1 to the consolidated financial statements under the caption “Basis of Presentation and Summary of Significant Accounting Policies” is incorporated herein by reference.