News Column

MARCUS & MILLICHAP, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 15, 2014

Unless the context requires otherwise, the words "Marcus & Millichap," "Marcus & Millichap Real Estate Investment Services," "MMREIS," "we," the "company," "us" and "our" refer to Marcus & Millichap, Inc., Marcus & Millichap Real Estate Investment Services, Inc. and its other consolidated subsidiaries.



Forward-Looking Statements

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2014, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Form 10-Q and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013 filed with SEC on March 21, 2014, including the "Risk Factors" section and the consolidated financial statements and notes included therein.



Overview

We are a leading national brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. We have been the top commercial real estate investment broker in the United States based on the number of investment transactions over the last 10 years, based on data from CoStar and Real Capital Analytics. As of March 31, 2014 and December 31, 2013, we had more than 1,300 investment sales and financing professionals in 76 offices who provide investment brokerage and financing services to sellers and buyers of commercial real estate. We also offer market research, consulting and advisory services to our clients. During the year ended December 31, 2013, we closed more than 6,600 sales, financing and other transactions with total volume of approximately $24.0 billion. For the three months ended March 31, 2014, we closed more than 1,600 sales, financing and other transactions with total volume of approximately $6.2 billion. We generate revenues by collecting real estate brokerage commissions upon the sale and fees upon the financing of commercial properties and, in addition, by providing consulting and advisory services. Real estate brokerage commissions are typically based upon the value of the property, and financing fees are typically based upon the size of the loan. During the year ended December 31, 2013, approximately 90% of our revenues were generated from real estate brokerage commissions, 6% from financing fees and 4% from other fees, including consulting and advisory services. For the three months ended March 31, 2014, approximately 92% of our revenues were generated from real estate brokerage commissions, 5% from financing fees and 3% from other fees, including consulting and advisory services.



Factors Affecting Our Business

Our business and our operating results, financial condition and liquidity are significantly affected by the number and size of commercial real estate sales and financing transactions. The number and size of these transactions is affected by our ability to recruit and retain sales and financing professionals and by the general trends in the economy and real estate industry, particularly including:



Economic and commercial real estate market conditions. Our business is

dependent on economic conditions and the demand for commercial real estate

and related services in the markets in which we operate. Changes in the economy on a national, regional or local basis can have a positive or negative impact on our business. Fluctuations in acquisition and



disposition activity, as well as general commercial real estate investment

activity, can impact commissions for arranging such transactions, as well

as impacting fees for arranging financing for acquirers and property

owners that are seeking to recapitalize their existing properties. Credit and liquidity in the financial markets. Since real estate purchases



are often financed with debt, credit and liquidity issues in the financial

markets have a direct impact on flow of capital to the commercial real estate markets as well as transaction activity and prices. Demand for investment in commercial real estate. The willingness of private investors to invest in commercial real estate is affected by factors beyond our control, including the performance of real estate assets when compared with the performance of other investments.



Fluctuations in interest rates. Changes in interest rates as well as

steady and protracted movements of interest rates in one direction

(increases or decreases) could adversely or positively affect the

operation and income of commercial real estate properties, as well as the

demand from investors for commercial real estate investments. In

particular, increased interest rates may cause prices to decrease due to

the increased costs of obtaining financing and could lead to decreases in

purchase and sale activities, thereby reducing the amounts of investment

sales and loan originations. In contrast, decreased interest rates will generally decrease the costs of obtaining financing which could lead to increases in purchase and sales activities. 18



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Operating Segments

Management has determined that each of the Company's offices represent individual operating segments with similar economic characteristics that meet the criteria for aggregation into a single reportable segment for financial statement purposes. The Company's financing operations also represent an individual operating segment, which does not meet the thresholds to be presented as a separate reportable segment.



Key Financial Measures and Indicators

Revenues

Our revenues are primarily generated from our real estate investment sales business. In addition to real estate brokerage commissions, we generate revenues from financing fees and from other revenues, which are primarily comprised of consulting and advisory fees.



Real estate brokerage commissions. We earn real estate brokerage

commissions by acting as a broker for commercial real estate owners

seeking to sell or investors seeking to buy properties. Revenues from real

estate brokerage commissions are recognized at the earlier of the close of

escrow or the transfer of title between the seller and buyer. Financing fees. We earn financing fees by securing financing on purchase



transactions as well as by refinancing our clients' existing mortgage

debt. We recognize financing fee revenues at the time the loan closes and

we have no remaining significant obligations for performance in connection

with the transaction. To a lesser extent, we also earn ancillary fees associated with financings activities.



Other revenues. Other revenues include fees generated from consulting and

advisory services performed by our investment sales professionals, as well as referral fees from other real estate brokers. Revenues from these services are recognized as they are performed and completed. Substantially all of our transactions are success based, with a small percentage including retainer fees (such retainer fees are credited against a success-based fee upon the closing of a transaction) and/or breakage fees. Transactions that are terminated before completion will sometimes generate breakage fees, which are usually calculated as a set amount or a percentage of the fee we would have received had the transaction closed. The amount and timing of all of the fees paid vary by the type of transaction and are generally negotiated on a transaction-by-transaction basis.



Operating Expenses

Our operating expenses consist of cost of services, selling, general and administrative expenses and depreciation and amortization expense. The significant components of our expenses are further described below.

Cost of services. The majority of our cost of services expense is commission expense. Commission expenses are directly attributable to



providing services to our clients for investment sales and mortgage

brokerage services. Most of our transaction professionals are independent

contractors and are paid commissions; however, there are some who are

initially paid a salary and as such, these expenses also include

employee-related compensation, employer taxes and benefits. In addition,

some of our most senior investment sales professionals have the ability to

earn additional commissions after meeting certain annual revenue

thresholds. These additional commissions are recognized as cost of

services in the period in which they are earned. Payment of a portion of

these additional commissions are generally deferred for a period of three

years, at the Company's election and paid at the beginning of the fourth

calendar year. Cost of services also includes referral fees paid to other

real estate brokers. Selling, general & administrative expenses. The largest expense component



within selling, general and administrative expenses is personnel expenses

for our management team and support staff. In addition, these costs

include facilities costs (excluding depreciation and amortization), staff

related expenses, sales, marketing, legal, telecommunication, network,

data sources and other administrative expenses. Also included in selling,

general and administrative are expenses for non-IPO related stock-based

compensation to employees and independent contractors (i.e. sales and financing professionals). Prior to our IPO, we issued stock options and stock appreciation rights, or SARs, to key employees through a book value, stock-based compensation award program. The program gave certain employees the option to acquire unvested restricted stock and issued an equivalent number of unvested SARs, typically in exchange for a nonrecourse note receivable. Awards under the program typically vested over a three to five-year period, and could be redeemed or repurchased upon the occurrence of certain events, including termination of employment. Compensation expense was recognized over the vesting term based upon the formula settlement value of the awards. Subsequent to the IPO, we issue share-based awards to employees, non-employees and directors under the 2013 Plan. The Company values its restricted stock units and restricted 19



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stock awards based on the grant date closing price of the Company's common stock. The awards granted to our non-employees (i.e. sales and financing professionals) require remeasurement at the end of each reporting period until settlement. The awards typically vest over a three to five-year period. The Company recognizes the related expense on a straight-line basis over the requisite service period for the entire award, subject to periodic adjustments to ensure that the cumulative amount of expense recognized through the end of any reporting period is at least equal to the portion of the grant date value of the award that has vested through that date. As a result of being a public company, our costs for such items as insurance, accounting and legal advice has increased relative to our historical costs for such services. We also incurred costs which we have not previously incurred for directors fees, increased directors and officers insurance, investor relations fees, expenses for compliance with the Sarbanes-Oxley Act and rules of the Securities and Exchange Commission and the New York Stock Exchange, and various other costs of a public company.



Depreciation and amortization expense. Depreciation and amortization

expense consists of depreciation and amortization recorded on our property

and equipment assets. Depreciation is provided over their estimated useful

lives ranging from three to seven years.

Other (Expense) Income, Net

Other income primarily consists of gains or losses, net on our deferred compensation plan assets, interest income and other non-operating gains or losses.

Interest Expense

Interest expense consists of interest expense associated with SARs liability and notes payable to former stockholders. See Note 3 - "Selected Balance Sheet Data" and Note 4 - "Notes Payable to Former Stockholders" of our Notes to Condensed Consolidated Financial Statements for additional information on SARs liability and notes payable to former stockholders, respectively.



Provision for Income Taxes

From inception through the effective date of the IPO on October 31, 2013, our provision for income taxes was based on a tax-sharing agreement between us and MMC, which stipulated an effective tax rate annual rate of 43.5% and was utilized to compute the our income tax provision (benefit) and the resulting amount due (from) to MMC, which included deferred tax assets and liabilities. The tax-sharing agreement with MMC was terminated effective October 31, 2013. We now file as a stand-alone tax entity for tax purposes beginning for the period ending December 31, 2013. As a stand-alone tax entity, our taxable income is subject to the applicable U.S. federal and state and local tax rates in the jurisdictions in which the taxable income is generated. The change to a stand-alone entity for tax purposes may result in material changes to our income tax provision in future years. 20



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Results of Operations

Following is a discussion of our results of operations for the three months ended March 31, 2014 and 2013. The tables included in the period comparisons below provide summaries of our results of operations.

Key Metrics

We regularly review a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Such key metrics include the following: Three Months Ended March 31, Real Estate Brokerage Commissions 2014



2013

Average Number of Sales Professionals 1,236



1,061

Average Number of Transactions per Sales Professional 1.0



0.8

Average Commission per Transaction $ 88,694$ 71,077 Average Transaction Size $ 3,746,384$ 3,406,706 Total Number of Transactions 1,181 861 Total Sales Volume (in millions) $ 4,424$ 2,933 Three Months Ended March 31, Financing Fees 2014 2013 Average Number of Financing Professionals 76 66 Average Number of Transactions per Financing Professional 3.8 3.5 Average Fee per Transaction $ 21,181$ 21,517 Average Transaction Size $ 2,160,611$ 1,943,969 Total Number of Transactions 288 233 Total Dollar Volume (in millions) $ 622$ 453 21



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Comparison of Three Months Ended March 31, 2014 and 2013

Three Three Months Months Ended Percentage Ended Percentage Total Total March 31, of March 31, of Dollar Percentage 2014 Revenue 2013 Revenue Change Change (dollars and share amounts in thousands, except per share amounts) Revenues: Real estate brokerage commissions $ 104,748 91.4 % $ 61,198 88.2 % $ 43,550 71.2 % Financing fees 6,100 5.3 5,014 7.2 1,086 21.7 Other revenues 3,742 3.3 3,158 4.6 584 18.5 Total revenues 114,590 100.0 69,370 100.0 45,220 65.2 Operating expenses: Cost of services 68,396 59.7 41,221 59.4 27,175 65.9 Selling, general, and administrative expense 33,357 29.1 24,732 35.7 8,625 34.9 Depreciation and amortization expense 775 0.7 760 1.1 15 2.0 Total operating expenses 102,528 89.5 66,713 96.2 35,815 53.7 Operating income 12,062 10.5 2,657 3.8 9,405 354.0 Other (expense) income, net (61 ) (0.0 ) 242 0.3 (303 ) (125.2 ) Interest expense (404 ) (0.4 ) - - (404 ) - Income before provision for income taxes 11,597 10.1 2,899 4.2 8,698 300.0 Provision for income taxes 4,815 4.2 1,261 1.8 3,554 281.8 Net income $ 6,782 5.9 % $ 1,638 2.4 % $ 5,144 314.0 % Adjusted EBITDA (1) $ 13,490 11.8 % $ 4,054 5.8 % $ 9,436 232.8 % Earnings per share (2): Basic 0.17 Diluted 0.17 Weighted average common shares outstanding (2): Basic 38,847 Diluted 38,907



(1) Adjusted EBITDA is not a measurement of our financial performance under U.S.

GAAP and should not be considered as an alternative to net income, operating

income or any other measures derived in accordance with U.S. GAAP. For a

definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net

income, see "-Non-GAAP Financial Measure."

(2) Earnings per share information has not been presented for periods prior to

the IPO on October 31, 2013. See Note 10 - "Earnings Per Share" of our Notes

to Condensed Consolidated Financial Statements for additional information on earnings per share. 22



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Revenues.

Our total revenues were $114.6 million for the three months ended March 31, 2014 compared to $69.4 million for the same period in 2013, an increase of $45.2 million, or 65.2%. Total revenues increased primarily as a result of increases in real estate brokerage commissions, which contributed 96.3% of the total increase, as well as increases in financing fees and other revenues. A portion of three months ended March 31, 2014 year-over-year growth was caused by the fears of the "fiscal cliff" which lead to abnormally low sales volumes during the three months ended March 31, 2013 as some sales were accelerated into 2012.



Real estate brokerage commissions. Revenues from real estate brokerage

commissions increased to $104.7 million for the three months ended

March 31, 2014 from $61.2 million for the same period in 2013, an increase

of $43.6 million or 71.2%. The increase was primarily driven by a

combination of an increase in the number of investment sales transactions

(37.2%), an increase in the average commission size (24.8%) and an

increase in average transaction size (10.0%) during the three months ended

March 31, 2014 as compared to the same period in 2013.



Financing fees. Revenues from financing fees increased to $6.1 million for

the three months ended March 31, 2014 from $5.0 million for the same period in 2013, an increase of $1.1 million or 21.7%. The increase was



driven by an increase in the number of loan transactions (23.6%) due to an

increase in the number of financing professionals combined with an

increase in their productivity levels, partially offset by a decrease in

average loan fees (1.6%) due in part to an increase in the proportion of

fees from larger loan transactions and lower ancillary fees during the

three months ended March 31, 2014 as compared to the same period in 2013. Other revenues. Other revenues increased to $3.7 million for the three



months ended March 31, 2014 from $3.2 million for the same period in 2013,

an increase of $0.6 million or 18.5%. The increase was primarily driven by

an increase in fees generated from consulting and advisory services and

referral fees from other real estate brokers during three months ended March 31, 2014 as compared to the same period in 2013.



Total operating expenses.

Our total operating expenses were $102.5 million for the three months ended March 31, 2014 compared to $66.7 million for the same period in 2013, an increase of 35.8 million, or 53.7%. Expenses increased primarily due to an increase in cost of services, which is primarily commissions paid to our investment sales professionals and compensation-related costs related to our financing activities. Selling, general and administrative costs increased as well, as described below.



Cost of services. Cost of services for the three months ended March 31,

2014 increased approximately $27.2 million, or 65.9% to $68.4 million from

$41.2 million for the same period in 2013. The increase was primarily due

to increased commission expenses driven by the related increased revenues

noted above. Cost of services as a percentage of total revenues remained

stable at 59.7% for the three months ended March 31, 2014 compared to 59.4% for the same period in 2013. Selling, general and administrative expense. Selling, general and



administrative expense for the three months ended March 31, 2014 increased

$8.6 million, or 34.9%, to $33.4 million from $24.7 million for the same

period in 2013. The increase was primarily due to (i) a $4.0 million

increase in management performance compensation driven by the increase in

operating results during the three months ended March 31, 2014 as compared

to the same period in 2013, (ii) a $2.0 million increase in staff salaries

and related benefits expenses primarily driven by an increase in headcount

in the areas of recruiting, sales force support and corporate in

connection with our projected growth and with being a public company,

(iii) a $1.0 million increase in legal costs and reserves and (iv) an $0.8

million increase in third party service fees primarily driven by operating

as a public company. Depreciation and amortization expense. There were no significant changes

in depreciation and amortization expenses for the three months ended March 31, 2014 as compared to the same period in 2013.



Interest expense.

Interest expense was $0.4 million related to interest expense associated with the SARs liability and notes payable to former stockholders. There were no similar costs for the same period in 2013. See Note 3 - "Selected Balance Sheet Data" and Note 4 - "Notes Payable to Former Stockholders" of our Notes to Condensed Consolidated Financial Statements for additional information on SARs liability and notes payable to former stockholders, respectively. 23



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Provision for income taxes.

Income tax expense totaled $4.8 million for the three months ended March 31, 2014 as compared to $1.3 million in same period in 2013, an increase of $3.6 million or 281.8%. The effective income tax rate for the three months ended March 31, 2014 was 41.5%, compared with 43.5% for the same period in 2013. The effective tax rate for the three months ended March 31, 2014 is based on our forecasted tax rate for 2014. During the three months ended March 31, 2013, our income tax expense was based on the rate specified in the tax-sharing agreement between us and MMC, which was terminated effective October 31, 2013 in conjunction with the IPO. We calculate our provision for income taxes using an effective tax rate based on projected taxable income for the year adjusted for the effects of permanent items and discrete items. We anticipate our effective tax rate as a stand-alone tax entity to be approximately 41.5% in 2014. Deferred taxes are adjusted for significant changes in temporary items in the period in which they occur. The future effective tax rate may vary from this estimated annual effective rate due to several factors, including but not limited to, the level of state specific and foreign jurisdiction activity, future changes in tax laws, the amount of future book versus income tax items that are permanent in nature and changes, if any, in a valuation allowance as it relates to deferred tax assets.



Seasonality

Our real estate brokerage commissions and financing fees are seasonal, which can affect an investor's ability to compare our financial condition and results of operation on a quarter-by-quarter basis. Historically, this seasonality has caused our revenue, operating income, net income and cash flows from operating activities to be lower in the first nine months of the year and higher in the second half of the year, particularly in the fourth quarter. The concentration of earnings and cash flows in the last nine months of the year, particularly in the fourth quarter, is due to an industry-wide focus of clients to complete transactions towards the end of the calendar year. In addition, our operating margins are typically lower during the second half of each year due to our commission structure for some of our senior sales and financing professionals. These senior sales and financing professionals are on a graduated commission schedule that resets annually in which higher commissions are paid for higher sales volumes. 24



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Non-GAAP Financial Measure

In this Form 10-Q, we include a non-GAAP financial measure, adjusted earnings before interest income/expense, taxes, depreciation and amortization and stock-based compensation, or Adjusted EBITDA. We define Adjusted EBITDA as net income before (i) interest income/expense, (ii) income tax expense, (iii) depreciation and amortization and (iv) stock-based compensation expense. We use Adjusted EBITDA in our business operations to, among other things, evaluate the performance of our business, develop budgets and measure our performance against those budgets. We also believe that analysts and investors use Adjusted EBITDA as supplemental measures to evaluate our overall operating performance. However, Adjusted EBITDA has material limitations as an analytical tool and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. We find Adjusted EBITDA as a useful tool to assist in evaluating performance because it eliminates items related to capital structure and taxes and non-cash stock-based compensation charges. In light of the foregoing limitations, we do not rely solely on Adjusted EBITDA as a performance measure and also consider our U.S. GAAP results. Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP. Because Adjusted EBITDA is not calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies.



A reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measure, net income, is as follows (in thousands):

Three Months Ended March 31, 2014, (in thousands) 2014 2013 Net income $ 6,782$ 1,638 Adjustments: Interest income (3 ) (41 ) Interest expense (404 ) - Provision for income taxes 4,815 1,261 Depreciation and amortization 775 760 Stock-based compensation 717 436 Adjusted EBITDA $ 13,490$ 4,054



Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents on hand and cash flows from operations. Although we have historically funded our operations through our operating cash flows, there can be no assurance that we can continue to meet our cash requirements entirely through our operations. In addition, we may determine that obtaining debt financing to be advantageous to our business in the future. 25



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Our total cash and cash equivalents balance decreased by $17.7 million or 17.5 % to $83.3 million at March 31, 2014, compared to $101.0 million at December 31, 2013. The following table sets forth our summary cash flows for the three months ended March 31, 2014 and 2013: Cash Flows Three Months Ended March 31, (in thousands) 2014 2013



Net cash (used in) provided by operating activities $ (17,076 )$ 35,506

Net cash used in investing activities (567 )



(1,218 )

Net cash (used in) provided by financing activities (11 )

37

Net (decrease) increase in cash and cash equivalents (17,654 ) 34,325

Cash and cash equivalents at beginning of period 100,952 3,107

Cash and cash equivalents at end of period $ 83,298 $



37,432

Prior to its termination on June 30, 2013, the Company was subject to a cash sweep arrangement with MMC and the change in the Company's cash held by MMC was considered to be an operating activity. Under the arrangement, the Company's cash was swept daily into an MMC money market account. The Company received interest on the balances held in the sweep accounts. The Company earned interest of $0.2 million on the balances for the three months ended March 31, 2013.



Operating Activities

Cash flows used in operating activities were $17.1 million for the three months ended March 31, 2014, compared to cash flows provided by operating activities of $35.5 million for the same period in 2013. Net cash (used in) provided by operating activities is driven by our net income adjusted for non-cash items and changes in net working capital. For the three months ended March 31, 2013, cash flows from operating activities were impacted positively by a decrease in due from affiliates ($52.9 million) principally as a result of the return of cash related to the cash sweep arrangement with MMC partially offset by a reduction in deferred compensation and commissions and commissions payable ($13.4 million) and accounts payable and accrued expenses ($10.3 million). For the three months ended March 31, 2014, cash flows from operating activities were primarily impacted by decreases in commissions payable ($13.7 million), accrued employee expenses ($9.5 million), deferred compensation and commissions ($3.2 million), and income tax payable ($3.2 million) due to the timing of payments of these liabilities. Investing Activities Cash flows used for investing activities were $0.6 million for the three months ended March 31, 2014, as compared to $1.2 million for the same period in 2013. The decrease in cash flows used for investing activities for the three months ended March 31, 2014, as compared to the same period in 2013 was primarily due to a $0.7 million decrease in cash paid for investment in information technology, computer hardware and software and furniture, fixtures and equipment.



Financing Activities

Cash flows used for financing activities were not significant for the three months ended March 31, 2014 or 2013.

We believe that our existing balances of cash and cash equivalents, and cash flows expected to be generated from our operations will be sufficient to satisfy our operating requirements for at least the next twelve months. If we need to raise additional capital through public or private debt or equity financings, strategic relationships or other arrangements, this capital might not be available to us in a timely manner, on acceptable terms, or at all. Our failure to raise sufficient capital when needed could prevent us from, among other factors, to fund acquisitions or to otherwise finance our growth or operations. In addition, our notes payable to former stockholders and SARs liability have provisions, which could accelerate repayment of outstanding principal and accrued interest and adversely impact our liquidity.



Contractual Obligations and Commitments

There have been no material changes in our commitments under contractual obligations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

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Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements at this time.

Inflation

Our commissions and other variable costs related to revenue are primarily affected by real estate market supply and demand, which may be affected by general economic conditions including inflation. However, to date, we do not believe that general inflation has had a material impact upon our operations.

Critical Accounting Policies; Use of Estimates

We prepare our financial statements in accordance with U.S. generally accepted accounting principles. In applying many of these accounting principles, we make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and/or judgments, however, are often subjective and our actual results may change negatively based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. There were no material changes in our critical accounting policies, as disclosed in in our Annual Report on Form 10-K for the year ended December 31, 2013.



Recent Accounting Pronouncements

See Note 1 - "Description of Business, Basis of Presentation, Recent Accounting Pronouncements and Accounting Policies" of our Notes to Condensed Consolidated Financial Statements. 27



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