Orbitz 2011 Annual Report Download - page 51

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Our testing for impairment involves estimates of our future cash flows, which requires us to assess current and projected
market conditions as well as operating performance. Our estimates may differ from actual cash flows due to changes in our
operating performance, capital structure or capital expenditure needs as well as changes to general economic and travel
industry conditions. We must also make estimates and judgments in the selection of a discount rate that reflects the risk inherent
in those future cash flows. The impairment analysis may also require certain assumptions about other businesses with limited
financial histories. A variation of the assumptions used could lead to a different conclusion regarding the fair value of an asset
and could have a significant effect on our consolidated financial statements.
During the year ended December 31, 2011, we performed our annual impairment test of goodwill and trademarks and
trade names as of October 1, 2011. We used the income approach to estimate the fair value of our reporting units which had
goodwill balances and used the market approach to corroborate these estimates. We considered the market approach from a
reasonableness standpoint by comparing the multiples of guideline companies with the implied multiples from the income
approach, but primarily relied upon our observed market capitalization to assess reasonableness of the income approach
conclusions. We used an income valuation approach to estimate the fair value of the relevant trademarks and trade names.
We determined that the estimated fair value of our domestic reporting unit exceeded its carrying value by greater than
15%. The carrying value of our HotelClub reporting unit exceeded its fair value and additional procedures were required to
determine the fair value of its other assets, including property and equipment and trademarks, and we determined that the
carrying value of our Orbitz and HotelClub trademarks exceeded their respective fair values. The estimated fair value of our
CheapTickets and ebookers trademarks each exceeded their respective carrying values by 10% and 300%, respectively.
In connection with our annual impairment test and as a result of lower performance and anticipated future cash flows for
Orbitz and HotelClub, we recorded a non-cash impairment charge of $49.9 million during the year ended December 31, 2011,
of which $29.8 million was to impair the goodwill of HotelClub, which was reduced to $0, and $20.1 million was to impair the
trademarks and trade names associated with Orbitz and HotelClub. These charges were included in impairment of goodwill and
intangible assets expense in our consolidated statement of operations. In addition, we changed our annual testing date from
October 1 to December 31. In connection with our annual impairment test as of December 31, 2011, we determined that the
estimated fair value of our domestic reporting unit exceeded its carrying value by greater than 15%. Based on this step one
analysis, no further impairment was identified.
For sensitivity purposes, we considered the impact of each of the following scenarios on the estimated fair value of the
Orbitz trademark: if estimated future revenues were reduced by 10%; if the terminal growth rate was decreased by 100 basis
points; if the assumed royalty rate was decreased by 50 basis points; or if the discount rate was increased by 100 basis points.
Based on our analysis, a change in each assumption, assuming all other assumptions and estimates remain constant, would have
resulted in an additional impairment charge of up to $11 million for the Orbitz trademark. As a result, if actual results and/or
the underlying assumptions differ from our expectations, a future impairment charge may be necessary. Since the goodwill
balance for HotelClub was reduced to $0 and the carrying value of the HotelClub and CheapTickets trademark and trade names
are not significant, no sensitivity analysis was performed.
Income Taxes
Our provision for income taxes is determined using the asset and liability method. Under this method, deferred tax assets
and liabilities are calculated based upon the temporary differences between the financial statement and income tax bases of
assets and liabilities using the combined federal and state effective tax rates that are applicable to us in a given year. The
deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, we believe it is
more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Increases
to the valuation allowance are recorded as increases to the provision for income taxes. The realization of the deferred tax assets,
net of a valuation allowance, is primarily dependent on estimated future taxable income, as well as the consideration of other
factors. We currently have a valuation allowance for our deferred tax assets of $298.9 million, of which $192.1 million relates
to U.S. jurisdictions. As of December 31, 2011, we maintained full valuation allowances in all jurisdictions that had previously
established a valuation allowance. On a quarterly basis, we assess the level of valuation allowance required; if sufficient
positive evidence exists in future periods to support a release of some or all of the valuation allowance, such a release would
likely have a material impact on our results of operations. Due to expected continued improvement in the U.S. operations,
management believes a reasonable possibility exists that, within the next year, sufficient positive evidence may become
available to reach a conclusion that a significant portion of the U.S. valuation allowance will no longer be needed.