OWW 06.30.2012 10Q
 


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark One)
 
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 001-33599
ORBITZ WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-5337455
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
500 W. Madison Street, Suite 1000
 
 
Chicago, Illinois
 
60661
(Address of principal executive offices)
 
(Zip Code)
(312) 894-5000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes R     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes R     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer R
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No R

As of August 2, 2012, 105,025,721 shares of Common Stock, par value $0.01 per share, of Orbitz Worldwide, Inc. were outstanding.





 


Table of Contents

Table of Contents
 
 
Page
 
 
 
 
 
 
4 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

Forward-Looking Statements

This Quarterly Report on Form 10-Q and its exhibits contain forward-looking statements that are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different than the results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Forward-looking statements can generally be identified by phrases such as “believes,” “expects,” “potential,” “continues,” “may,” “should,” “seeks,” “predicts,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “could,” “designed,” “should be” and other similar expressions that denote expectations of future or conditional events rather than statements of fact. Forward-looking statements may relate to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in the sections entitled “Risk Factors” in this Quarterly Report on Form 10-Q and in our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2012 and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and in our 2011 Annual Report on Form 10-K. Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date on which they were made. We undertake no obligation to update any forward-looking statements in this Quarterly Report on Form 10-Q.

The use of the words “we,” “us,” “our” and “the Company” in this Quarterly Report on Form 10-Q refers to Orbitz Worldwide, Inc. and its subsidiaries, except where the context otherwise requires or indicates.


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PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements

ORBITZ WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Net revenue
$
200,977

 
$
201,826

 
$
390,756

 
$
386,749

Cost and expenses:
 
 
 
 
 
 
 
Cost of revenue
35,385

 
35,496

 
71,501

 
71,811

Selling, general and administrative
67,312

 
67,892

 
137,625

 
136,501

Marketing
69,136

 
63,159

 
134,664

 
128,516

Depreciation and amortization
14,272

 
15,442

 
28,150

 
30,716

Total operating expenses
186,105

 
181,989

 
371,940

 
367,544

Operating income
14,872

 
19,837

 
18,816

 
19,205

Other income/(expense):
 
 
 
 
 
 
 
Net interest expense
(9,284
)
 
(9,741
)
 
(19,239
)
 
(20,306
)
Other income/(expense)

 
(22
)
 
(44
)
 
368

Total other expense
(9,284
)
 
(9,763
)
 
(19,283
)
 
(19,938
)
Income/(loss) before income taxes
5,588

 
10,074

 
(467
)
 
(733
)
Provision for income taxes
1,004

 
1,186

 
1,460

 
1,272

Net income/(loss)
$
4,584

 
$
8,888

 
$
(1,927
)
 
$
(2,005
)
 
 
 
 
 
 
 
 
Net income/(loss) per share - basic:
 
 
 
 
 
 
 
Net income/(loss) per share
$
0.04

 
$
0.09

 
$
(0.02
)
 
$
(0.02
)
Weighted-average shares outstanding
105,150,691

 
103,717,099

 
104,981,607

 
103,526,844

 
 
 
 
 
 
 
 
Net income/(loss) per share - diluted:
 
 
 
 
 
 
 
Net income/(loss) per share
$
0.04

 
$
0.08

 
$
(0.02
)
 
$
(0.02
)
Weighted-average shares outstanding
107,434,031

 
105,129,716

 
104,981,607

 
103,526,844

 
 
 
 
 
 
 
 




See Notes to Unaudited Condensed Consolidated Financial Statements.


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Table of Contents

ORBITZ WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (UNAUDITED)
(in thousands)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Net income/(loss)
$
4,584

 
$
8,888

 
$
(1,927
)
 
$
(2,005
)
Other comprehensive income/(loss) (a):
 
 
 
 
 
 
 
Currency translation adjustment
3,303

 
(367
)
 
(1,124
)
 
(4,209
)
Unrealized gain on floating to fixed interest rate swaps
59

 
870

 
192

 
1,909

Other comprehensive income/(loss)
3,362

 
503

 
(932
)
 
(2,300
)
Comprehensive income/(loss)
$
7,946

 
$
9,391

 
$
(2,859
)
 
$
(4,305
)

(a)
There was no income tax impact to other comprehensive income/(loss) for the three and six months ended June 30, 2012 and 2011.


See Notes to Unaudited Condensed Consolidated Financial Statements.


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Table of Contents

ORBITZ WORLDWIDE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
 
June 30, 2012
 
December 31, 2011
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
170,436

 
$
136,171

Accounts receivable (net of allowance for doubtful accounts of $1,588
and $1,108, respectively)
80,008

 
62,377

Prepaid expenses
13,315

 
15,917

Due from Travelport, net
17,165

 
3,898

Other current assets
5,490

 
2,402

Total current assets
286,414

 
220,765

Property and equipment, net
138,494

 
141,702

Goodwill
647,300

 
647,300

Trademarks and trade names
108,232

 
108,194

Other intangible assets, net
3,303

 
4,162

Deferred income taxes, non-current
6,346

 
7,311

Other non-current assets
16,391

 
16,352

Total Assets
$
1,206,480

 
$
1,145,786

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
20,438

 
$
30,937

Accrued merchant payable
310,638

 
238,694

Accrued expenses
125,014

 
120,962

Deferred income
45,058

 
28,953

Term loan, current
25,800

 
32,183

Other current liabilities
11,839

 
2,034

Total current liabilities
538,787

 
453,763

Term loan, non-current
414,230

 
440,030

Tax sharing liability
70,822

 
68,411

Unfavorable contracts
2,220

 
4,440

Other non-current liabilities
19,878

 
18,617

Total Liabilities
1,045,937

 
985,261

Commitments and contingencies (see Note 7)


 


Shareholders’ Equity:
 
 
 
Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding

 

Common stock, $0.01 par value, 140,000,000 shares authorized, 104,768,061
and 103,814,769 shares issued, respectively
1,047

 
1,038

Treasury stock, at cost, 25,237 shares held
(52
)
 
(52
)
Additional paid-in capital
1,038,961

 
1,036,093

Accumulated deficit
(882,813
)
 
(880,886
)
Accumulated other comprehensive income (net of accumulated tax benefit of $2,558)
3,400

 
4,332

Total Shareholders’ Equity
160,543

 
160,525

Total Liabilities and Shareholders’ Equity
$
1,206,480

 
$
1,145,786




See Notes to Unaudited Condensed Consolidated Financial Statements.


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Table of Contents

ORBITZ WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Six Months Ended June 30,
 
2012
 
2011
Operating activities:
 
 
 
Net loss
$
(1,927
)
 
$
(2,005
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
28,150

 
30,716

Amortization of unfavorable contract liability
(2,220
)
 
(940
)
Non-cash net interest expense
7,490

 
7,177

Deferred income taxes
1,020

 
823

Stock compensation
4,292

 
4,927

Changes in assets and liabilities:
 
 
 
Accounts receivable
(17,496
)
 
(14,918
)
Deferred income
19,210

 
14,058

Due from Travelport, net
(13,233
)
 
(33
)
Accrued merchant payable
71,753

 
65,097

Accounts payable, accrued expenses and other current liabilities
16,790

 
4,732

Other
(9,700
)
 
(7,105
)
Net cash provided by operating activities
104,129

 
102,529

Investing activities:
 
 
 
Property and equipment additions
(23,770
)
 
(23,464
)
Changes in restricted cash
(650
)
 
(4,538
)
Net cash used in investing activities
(24,420
)
 
(28,002
)
Financing activities:
 
 
 
Payments on the term loan
(32,183
)
 
(19,808
)
Employee tax withholdings related to net share settlements of equity-based awards
(1,414
)
 
(941
)
Payments on tax sharing liability
(10,864
)
 
(7,228
)
Payments on note payable
(114
)
 
(114
)
Net cash used in financing activities
(44,575
)
 
(28,091
)
Effects of changes in exchange rates on cash and cash equivalents
(869
)
 
2,299

Net increase in cash and cash equivalents
34,265

 
48,735

Cash and cash equivalents at beginning of period
136,171

 
97,222

Cash and cash equivalents at end of period
$
170,436

 
$
145,957

Supplemental disclosure of cash flow information:
 
 
 
Income tax payments, net
$
1,016

 
$
1,154

Cash interest payments
$
15,446

 
$
13,915



See Notes to Unaudited Condensed Consolidated Financial Statements.


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ORBITZ WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.
Basis of Presentation

Description of the Business

Orbitz, Inc. (“Orbitz”) was formed in early 2000 by American Airlines, Inc., Continental Airlines, Inc., Delta Air Lines, Inc., Northwest Airlines, Inc. and United Air Lines, Inc. (the “Founding Airlines”). In November 2004, Orbitz was acquired by Cendant Corporation (“Cendant”), whose online travel distribution businesses included the HotelClub and RatesToGo brands (collectively referred to as “HotelClub”) and the CheapTickets brand. In February 2005, Cendant acquired ebookers Limited, an international online travel brand which currently has operations in 12 countries throughout Europe (“ebookers”).

On August 23, 2006, Travelport Limited (“Travelport”), which consisted of Cendant's travel distribution services businesses, including the businesses that currently comprise Orbitz Worldwide, Inc., was acquired by affiliates of The Blackstone Group (“Blackstone”) and Technology Crossover Ventures. We refer to this acquisition as the “Blackstone Acquisition.”

Orbitz Worldwide, Inc. was incorporated in Delaware on June 18, 2007 and was formed to be the parent company of the business-to-consumer travel businesses of Travelport, including Orbitz, ebookers and HotelClub and the related subsidiaries and affiliates of those businesses. We are the registrant as a result of the completion of the initial public offering (the “IPO”) of 34,000,000 shares of our common stock on July 25, 2007. At June 30, 2012 and December 31, 2011, Travelport and investment funds that own and/or control Travelport's ultimate parent company beneficially owned approximately 54% and 55% of our outstanding common stock, respectively.

We are a leading global online travel company that uses innovative technology to enable leisure and business travelers to search for and book a broad range of travel products and services. Our brand portfolio includes Orbitz, CheapTickets, The Away Network and Orbitz for Business in the United States; ebookers in Europe; and HotelClub based in Australia, which has operations globally. We provide customers with the ability to book a wide array of travel products and services from suppliers worldwide, including air travel, hotels, vacation packages, car rentals, cruises, travel insurance and destination services such as ground transportation, event tickets and tours.

Basis of Presentation

The accompanying condensed consolidated financial statements of Orbitz Worldwide, Inc. and subsidiaries (the “Company,” “we,” “us,” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Certain information and note disclosures normally included in comprehensive annual financial statements presented in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations.

 
Management believes that the accompanying condensed consolidated financial statements contain all adjustments, composed of normal recurring adjustments that are, in the opinion of management, necessary to present fairly the Company’s consolidated financial condition, results of operations and cash flows for the periods presented. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our 2011 Annual Report on Form 10-K.

 
The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to matters that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. Actual amounts may differ from these estimates.

 


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ORBITZ WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.
Property and Equipment, Net

Property and equipment, net, consisted of the following:
 
June 30, 2012
 
December 31, 2011
 
(in thousands)
Capitalized software
$
302,004

 
$
285,277

Furniture, fixtures and equipment
81,032

 
78,157

Leasehold improvements
13,632

 
13,650

Construction in progress
17,277

 
13,868

Gross property and equipment
413,945

 
390,952

Less: accumulated depreciation
(275,451
)
 
(249,250
)
Property and equipment, net
$
138,494

 
$
141,702


We recorded depreciation expense related to property and equipment in the amount of $13.9 million and $14.2 million for the three months ended June 30, 2012 and 2011, respectively, and $27.3 million and $28.3 million for the six months ended June 30, 2012 and 2011, respectively.


3.
Accrued Expenses
Accrued expenses consisted of the following:
 
June 30, 2012
 
December 31, 2011
 
(in thousands)
Advertising and marketing
$
36,241

 
$
26,461

Employee costs 
19,162

 
21,220

Tax sharing liability (see Note 5)
14,447

 
20,579

Contract exit costs
10,722

 
10,017

Customer service costs
8,745

 
8,337

Professional fees
7,442

 
6,458

Customer refunds
6,286

 
5,328

Technology costs
5,914

 
5,406

Airline rebates
4,852

 
4,534

Unfavorable contracts (see Note 6)
4,440

 
4,440

Customer incentive costs
3,544

 
2,861

Other
3,219

 
5,321

Total accrued expenses
$
125,014

 
$
120,962



4.
Term Loan and Revolving Credit Facility

On July 25, 2007, we entered into a $685.0 million senior secured credit agreement (the “Credit Agreement”) consisting of a seven-year $600.0 million term loan facility (the “Term Loan”) and a six-year $85.0 million revolving credit facility, which was effectively reduced to a $72.5 million revolving credit facility following the bankruptcy of Lehman Commercial Paper Inc. in October 2008 (the “Revolver”).

Term Loan

The Term Loan bears interest at a variable rate, at our option, of LIBOR plus a margin of 300 basis points or an alternative base rate plus a margin of 200 basis points. The alternative base rate is equal to the higher of the Federal Funds Rate plus one half of 1% and the prime rate (the “Alternative Base Rate”). The principal amount of the Term Loan is payable in quarterly installments of $1.3 million, with the final installment (equal to the remaining outstanding balance) due upon maturity in July 2014. In addition, we are required to make an annual prepayment on the Term Loan in the first quarter of each fiscal

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ORBITZ WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

year in an amount up to 50% of the prior year’s excess cash flow, as defined in the Credit Agreement. Prepayments from excess cash flow are applied, in order of maturity, to the scheduled quarterly Term Loan principal payments. Due to the total excess cash flow payments that we have made, we are not required to make any scheduled principal payments on the Term Loan for the remainder of its term.
The change in the Term Loan during the six months ended June 30, 2012 was as follows:
 
Amount
 
(in thousands)
Balance at December 31, 2011
$
472,213

Prepayment from excess cash flow
(32,183
)
Balance at June 30, 2012
$
440,030


Based on our current financial projections for the year ending December 31, 2012, we estimate that we will be required to make a $25.8 million prepayment from excess cash flow in the first quarter of 2013. The amount of prepayment required is subject to change based on actual results, which could differ materially from our financial projections as of June 30, 2012. The potential amount of prepayment from excess cash flow that will be required beyond the first quarter of 2013 is not reasonably estimable as of June 30, 2012.

At June 30, 2012, $100.0 million of the Term Loan had a fixed interest rate as a result of interest rate swaps and $340.0 million had a variable interest rate based on LIBOR, resulting in a blended weighted-average interest rate of 3.3% (see Note 9 - Derivative Financial Instruments).

Revolver

The Revolver provides for borrowings and letters of credit of up to $72.5 million ($42.6 million in U.S. dollars and the equivalent of $29.9 million denominated in Euros and Pounds sterling) and at June 30, 2012 bears interest at a variable rate, at our option, of LIBOR plus a margin of 175 basis points or the Alternative Base Rate plus a margin of 75 basis points. The margin is subject to change based on our total leverage ratio, as defined in the Credit Agreement, with a maximum margin of 250 basis points on LIBOR-based loans and 150 basis points on Alternative Base Rate loans. We incur a commitment fee of 37.5 basis points on any unused amounts on the Revolver. The Revolver matures in July 2013.

At June 30, 2012 and December 31, 2011, there were no outstanding borrowings under the Revolver and the equivalent of $15.2 million and $10.8 million of outstanding letters of credit issued under the Revolver, respectively, the majority of which were denominated in Pounds sterling. The amount of letters of credit issued under the Revolver reduces the amount available for borrowings. Due to the letters of credit issued under the Revolver, we had $57.3 million and $61.7 million of availability at June 30, 2012 and December 31, 2011, respectively. Commitment fees on unused amounts under the Revolver were $0.0 million and $0.1 million for the three months ended June 30, 2012 and 2011 and $0.1 million and $0.2 million for the six months ended June 30, 2012 and 2011.


5.
Tax Sharing Liability

We have a liability included in our condensed consolidated balance sheets that relates to a tax sharing agreement between Orbitz and the Founding Airlines. As of June 30, 2012, the estimated remaining payments that may be due under this agreement were approximately $128.5 million. We estimated that the net present value of our obligation to pay tax benefits to the Founding Airlines was $85.3 million and $89.0 million at June 30, 2012 and December 31, 2011, respectively. The change in the tax sharing liability for the six months ended June 30, 2012 is as follows:
 
Amount
 
(in thousands)
Balance at December 31, 2011
$
88,990

Accretion of interest expense (a)
7,143

Cash payments
(10,864
)
Balance at June 30, 2012
$
85,269



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ORBITZ WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(a)
We accreted interest expense related to the tax sharing liability of $3.5 million and $3.1 million for the three months ended June 30, 2012 and 2011, respectively, and $7.1 million and $6.5 million for the six months ended June 30, 2012 and 2011, respectively.

Based upon the estimated timing of future payments we expect to make, the current portion of the tax sharing liability of $14.4 million and $20.6 million was included in accrued expenses in our condensed consolidated balance sheets at June 30, 2012 and December 31, 2011, respectively. The long-term portion of the tax sharing liability of $70.8 million and $68.4 million was reflected as the tax sharing liability in our condensed consolidated balance sheets at June 30, 2012 and December 31, 2011, respectively.


6.
Unfavorable Contracts

In December 2003, we entered into amended and restated airline charter associate agreements (the “Charter Associate Agreements”) with the Founding Airlines as well with US Airways (the “Charter Associate Airlines”). These agreements pertain to our Orbitz brand, which was owned by the Founding Airlines at the time we entered into the agreements. Under the Charter Associate Agreements, we must pay a portion of the global distribution system (“GDS”) incentive revenue we earn from Worldspan back to the Charter Associate Airlines in the form of a rebate. The rebate payments are required when airline tickets for travel on a Charter Associate Airline are booked through our Orbitz.com and OrbitzforBusiness.com websites utilizing Worldspan.

The rebate structure under the Charter Associate Agreements was considered unfavorable when compared with market conditions at the time of the Blackstone Acquisition. As a result, a net unfavorable contract liability was established on the acquisition date. The amount of this liability was determined based on the discounted cash flows of the expected future rebate payments we would be required to make to the Charter Associate Airlines, net of the fair value of the expected in-kind marketing and promotional support we would receive from the Charter Associate Airlines. The portion of the net unfavorable contract liability related to the expected future rebate payments is amortized as an increase to net revenue, whereas the partially offsetting asset for the expected in-kind marketing and promotional support is amortized as an increase to marketing expense in our condensed consolidated statements of operations, both on a straight-line basis over the remaining contractual term.

The change in the net unfavorable contract liability for the six months ended June 30, 2012 is as follows:
 
Amount
 
(in thousands)
Balance at December 31, 2011
$
8,880

Amortization (a)
(2,220
)
Balance at June 30, 2012
$
6,660

(a)
We recognized net amortization of $1.1 million ($1.8 million was recorded as an increase to net revenue and $0.7 million was recorded as an increase to marketing expense) for the three months ended June 30, 2012 and $0.3 million ($1.8 million was recorded as an increase to net revenue and $1.5 million was recorded as an increase to marketing expense) for the three months ended June 30, 2011. We recognized net amortization of $2.2 million ($3.7 million was recorded as an increase to net revenue and $1.5 million was recorded as an increase to marketing expense) for the six months ended June 30, 2012 and $0.9 million ($3.7 million was recorded as an increase to net revenue and $2.8 million was recorded as an increase to marketing expense) for the six months ended June 30, 2011.
The current portion of the liability of $4.4 million was included in accrued expenses in our condensed consolidated balance sheets at June 30, 2012 and December 31, 2011. The long-term portion of the liability of $2.2 million and $4.4 million was reflected as unfavorable contracts in our condensed consolidated balance sheets at June 30, 2012 and December 31, 2011, respectively.


7.
Commitments and Contingencies

Our commitments as of June 30, 2012 did not materially change from the amounts set forth in our 2011 Annual Report on Form 10-K, except for changes in the timing of future payments on the Term Loan (see Note 4 - Term Loan and Revolving Credit Facility).

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ORBITZ WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company Litigation

We are involved in various claims, legal proceedings and governmental inquiries related to contract disputes, business practices, intellectual property and other commercial, employment and tax matters.

We are party to various cases brought by consumers and municipalities and other U.S. governmental entities involving hotel occupancy taxes and our merchant hotel business model. Some of the cases are purported class actions, and most of the cases were brought simultaneously against other online travel companies, including Expedia, Travelocity and Priceline. The cases allege, among other things, that we violated the jurisdictions' hotel occupancy tax ordinances. While not identical in their allegations, the cases generally assert similar claims, including violations of local or state occupancy tax ordinances, violations of consumer protection ordinances, conversion, unjust enrichment, imposition of a constructive trust, demand for a legal or equitable accounting, injunctive relief, declaratory judgment, and in some cases, civil conspiracy. The plaintiffs seek relief in a variety of forms, including: declaratory judgment, full accounting of monies owed, imposition of a constructive trust, compensatory and punitive damages, disgorgement, restitution, interest, penalties and costs, attorneys' fees, and where a class action has been claimed, an order certifying the action as a class action. An adverse ruling in one or more of these cases could require us to pay tax retroactively and prospectively and possibly pay penalties, interest and fines. The proliferation of additional cases could result in substantial additional defense costs.

We have also been contacted by several municipalities or other taxing bodies concerning our possible obligations with respect to state or local hotel occupancy or related taxes. The following taxing bodies have issued notices to the Company: the Louisiana Department of Revenue; the Montana Department of Revenue; the Wyoming Department of Revenue; an entity representing 84 cities and 14 counties in Alabama; 43 cities in California; the cities of Paradise Valley and Phoenix, Arizona; North Little Rock and Pine Bluff, Arkansas; Aurora, Broomfield, Colorado Springs, Golden, Greenwood Village, Lakewood, Littleton, Loveland, and Steamboat Springs, Colorado; and the counties of Jefferson, Arkansas; Brunswick and Stanly, North Carolina; Duval, Florida; and Davis, Summit, Salt Lake and Weber, Utah. These taxing authorities have not issued assessments, but have requested information to conduct an audit and/or have requested that the Company register to pay local hotel occupancy taxes. On May 17, 2012, the Louisiana Department of Revenue announced that it had suspended its audit of the online travel companies.

Assessments that are administratively final and subject to judicial review have been issued by the cities of Anaheim, San Francisco, Santa Monica and San Diego, California; the city of Denver, Colorado; the counties of Miami-Dade and Broward, Florida; the Indiana Department of Revenue; the Hawaii Department of Taxation; and the Wisconsin Department of Revenue. In addition, the following taxing authorities have issued assessments which are subject to further review by the taxing authorities: the Colorado Department of Revenue; the City of Aurora, Colorado; the Maryland Comptroller; the Texas Comptroller; the West Virginia Department of Revenue; the South Carolina Department of Revenue; the city of Los Angeles, California; the city of Philadelphia, Pennsylvania; the City of Portland, Oregon; the cities of Alpharetta, Cartersville, Cedartown, College Park, Dalton, East Point, Hartwell, Macon, Rockmart, Rome, Tybee Island and Warner Robins, Georgia; and the counties of Augusta, Clayton, Cobb, DeKalb, Fulton, Gwinnett, Hart and Richmond, Georgia; Osceola, Florida; and Montgomery Maryland. The Company disputes that any hotel occupancy or related tax is owed under these ordinances and is challenging the assessments made against the Company. These assessments range from $250 to approximately $58.0 million, and total approximately $79.8 million. Some of these assessments, including a $58.0 million assessment from the Hawaii Department of Taxation, do not appear to be based on historical transaction data. If the Company is found to be subject to the hotel occupancy tax ordinance by a taxing authority and appeals the decision in court, certain jurisdictions may attempt to require us to provide financial security or pay the assessment to the municipality in order to challenge the tax assessment in court.

In July 2011, related to the city of San Antonio, Texas hotel occupancy tax case, the United States District Court for the Western District of Texas issued its findings of fact and conclusions of law in which it held the defendant online travel companies, including Orbitz, liable for hotel occupancy taxes on markup, fees, and breakage revenue, and also imposed penalties and interest. The online travel companies have asked the court to modify its findings of fact and conclusions of law to conform to the Texas Court of Appeals' decision in the City of Houston case, which determined that the online travel companies are not liable under an ordinance that is similar to the ones at issue in the San Antonio class action. The court has not yet ruled on the online travel companies' motion. If the court does not grant the motion, and enters judgment, we intend to appeal. Because we expect to prevail, we have not accrued any expenses related to this case. It is possible, however, that we will not prevail, and if that occurs, we estimate that the amount of the judgment that we would be required to pay would be approximately $2.9 million.


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ORBITZ WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Also in July 2011, Trilegiant Corporation filed an action for breach of contract and declaratory judgment in the Supreme Court of New York against us, alleging that we are obligated to make a series of termination payments arising out of a promotion agreement that we terminated in 2007. In 2007, we accrued the present value of the termination payments, and as of June 30, 2012, we had a remaining accrual totaling $11.7 million, which was included within accrued expenses and other long-term liabilities in our condensed consolidated balance sheet; in 2010, in connection with a dispute with Trilegiant, we ceased making termination payments.

We believe that we have meritorious defenses, and we are vigorously defending against these claims, proceedings and inquiries. At June 30, 2012 and December 31, 2011, we had a $1.0 million and $0.9 million accrual related to various legal proceedings, respectively. Litigation is inherently unpredictable and, although we believe we have valid defenses in these matters, unfavorable resolutions could occur. We cannot estimate our range of loss, except to the extent taxing authorities have issued assessments against us. Although we believe it is unlikely that an adverse outcome will result from these proceedings, an adverse outcome could be material to us with respect to earnings or cash flows in any given reporting period.

Financing Arrangements

We are required to issue letters of credit to support certain suppliers, commercial agreements, leases and non-U.S. regulatory and governmental agencies primarily to satisfy consumer protection requirements. The majority of these letters of credit were issued by Travelport on our behalf under the terms of the Separation Agreement, as amended (the “Separation Agreement”), entered into in connection with the IPO. Travelport charges us fees for issuing, renewing or extending letters of credit on our behalf. In February 2012, we made a one-time payment to Travelport of $3.0 million related to fees associated with an amendment to the Travelport credit facility, entered into during 2011, under which Travelport issues letters of credit on our behalf. This payment is subject to a refund provision through September 30, 2013 if Travelport is no longer obligated to provide letters of credit on our behalf or if we obtain our own letter of credit facility. We are recognizing the $3.0 million payment to Travelport over the term of its underlying credit facility, or approximately two and a half years. The expenses related to these fees are included in interest expense in our consolidated statements of operations.

At June 30, 2012 and December 31, 2011, there were $73.4 million and $74.2 million of outstanding letters of credit issued by Travelport on our behalf, respectively (see Note 11 - Related Party Transactions). In addition, at June 30, 2012 and December 31, 2011, there were the equivalent of $15.2 million and $10.8 million of outstanding letters of credit issued under the Revolver, respectively, the majority of which were denominated in Pounds sterling. Total letter of credit fees were $1.6 million and $1.3 million for the three months ended June 30, 2012 and 2011, respectively, and $3.4 million and $2.7 million for the six months ended June 30, 2012 and 2011, respectively.


8.
Equity-Based Compensation

We issue share-based awards under the Orbitz Worldwide, Inc. 2007 Equity and Incentive Plan, as amended (the “Plan”). The Plan provides for the grant of equity-based awards, including restricted stock, restricted stock units, stock options, stock appreciation rights and other equity-based awards to our directors, officers and other employees, advisors and consultants who are selected by the Compensation Committee of the Board of Directors for participation in the Plan. At our Annual Meeting of Shareholders on June 12, 2012, our shareholders approved an amendment to the Plan, increasing the total number of shares of our common stock available for issuance under the Plan from 21,100,000 shares to 24,100,000 shares, subject to adjustment as provided by the Plan. As of June 30, 2012, 8,294,590 shares were available for future issuance under the plan.

Restricted Stock Units

We granted 1,684,000 restricted stock units (“RSUs”) during the six months ended June 30, 2012 with a weighted-average grant date fair value per share of $3.63. The fair value of RSUs is amortized on a straight-line basis over the requisite service period, and the majority of these RSUs vest annually over a four-year period.

Performance-Based Restricted Stock Units

We granted 1,425,000 performance-based restricted stock units (“PSUs”) in June 2012 with a fair value per share of $3.65 to certain of our executive officers. The PSUs entitle the executives to receive one share of our common stock for each PSU, subject to the satisfaction of a performance condition. The performance condition requires that the Company's net revenue for fiscal year 2012 equal or exceed a certain threshold, or each PSU will be forfeited. If this performance condition is met, the

13

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ORBITZ WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

PSUs will vest annually over a four-year period. As of June 30, 2012, we expect that the performance condition will be satisfied, and as such, the fair value of the PSUs is being amortized on a straight-line basis over the requisite service period.

Non-Employee Directors Deferred Compensation Plan

We granted 276,373 deferred stock units to our non-employee directors during the six months ended June 30, 2012 with a weighted-average grant date fair value per share of $3.62. These deferred stock units are issued as restricted stock units under the Plan and are immediately vested and non-forfeitable. The entire grant date fair value of deferred stock units is recognized on the date of grant.

Compensation Expense

We recognized total equity-based compensation expense of $2.6 million and $2.9 million for the three months ended June 30, 2012 and 2011, respectively, and $4.3 million and $4.9 million for the six months ended June 30, 2012 and 2011, respectively, none of which has provided us with a tax benefit. As of June 30, 2012, a total of $16.8 million of unrecognized compensation costs related to unvested restricted stock units, unvested stock options and unvested PSUs are expected to be recognized over the remaining weighted-average period of 3.1 years.


9.
Derivative Financial Instruments

Interest Rate Hedges

At June 30, 2012, we had the following interest rate swap outstanding that effectively converted $100.0 million of the Term Loan from a variable to a fixed interest rate. We pay a fixed interest rate on the swap and in exchange receive a variable interest rate based on the one-month LIBOR.
Notional Amount
 
Effective Date
 
Maturity Date
 
Fixed Interest
Rate Paid
 
Variable Interest
Rate Received
$100.0 million
 
July 29, 2011
 
July 31, 2013
 
0.68%
 
One-month LIBOR

The following interest rate swaps that effectively converted an additional $200.0 million of the Term Loan from a variable to a fixed interest rate matured in January 2012:
Notional Amount
 
Effective Date
 
Maturity Date
 
Fixed Interest
Rate Paid
 
Variable Interest
Rate Received
$100.0 million
 
January 29, 2010
 
January 31, 2012
 
1.15%
 
One-month LIBOR
$100.0 million
 
January 29, 2010
 
January 31, 2012
 
1.21%
 
Three-month LIBOR

The objective of entering into our interest rate swaps is to protect against volatility of future cash flows and effectively hedge a portion of the variable interest payments on the Term Loan. We determined that these designated hedging instruments qualify for cash flow hedge accounting treatment. Our interest rate swaps are the only derivative financial instruments that we have designated as hedging instruments.

The interest rate swaps were reflected in our condensed consolidated balance sheets at market value. The corresponding market adjustment was recorded to accumulated other comprehensive income. The following table shows the fair value of our interest rate swaps:
 
 
 
Fair Value Measurements as of
 
Balance Sheet Location
 
June 30, 2012
 
December 31, 2011
 
 
 
(in thousands)
Interest rate swaps
Other current liabilities
 
$

 
$
275

Interest rate swaps
Other non-current liabilities
 
$
395

 
$
311



14

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ORBITZ WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table shows the market adjustments recorded during the three months ended June 30, 2012 and 2011:
 
Gain in Other
Comprehensive
Income
 
(Loss) Reclassified
from Accumulated
OCI into
Interest Expense
(Effective Portion)
 
Gain/(Loss) Recognized
in Income (Ineffective Portion and the Amount Excluded
from Effectiveness
Testing)
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
(in thousands)
 
 
 
 
Interest rate swaps
$
59

 
$
870

 
$
(105
)
 
$
(994
)
 
$

 
$




The following table shows the market adjustments recorded during the six months ended June 30, 2012 and 2011:
 
Gain in Other
Comprehensive
Income
 
(Loss) Reclassified
from Accumulated
OCI into
Interest Expense
(Effective Portion)
 
Gain/(Loss) Recognized
in Income (Ineffective Portion and the Amount Excluded
from Effectiveness
Testing)
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
(in thousands)
 
 
 
 
Interest rate swaps
$
192

 
$
1,909

 
$
(343
)
 
$
(2,215
)
 
$

 
$


The amount of loss recorded in accumulated other comprehensive income at June 30, 2012 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is approximately $0.4 million after-tax.

Foreign Currency Hedges

We enter into foreign currency contracts to manage our exposure to changes in the foreign currency associated with foreign currency receivables, payables, intercompany transactions and borrowings, if any, under the Revolver. We primarily hedge our foreign currency exposure to the Pound sterling, Australian dollar and Euro. As of June 30, 2012, we had foreign currency contracts outstanding with a total net notional amount of $295.2 million, almost all of which matured in July 2012. The foreign currency contracts do not qualify for hedge accounting treatment; accordingly, changes in the fair value of the foreign currency contracts are reflected in net income as a component of selling, general and administrative expense in our condensed consolidated statements of operations.

The following table shows the fair value of our foreign currency hedges:
 
 
 
Fair Value Measurements as of
 
Balance Sheet Location
 
June 30, 2012
 
December 31, 2011
 
 
 
(in thousands)
Asset Derivatives:
 
 
 

 
 

Foreign currency hedges
Other current assets
 
$

 
$
991

Liability Derivatives:
 
 
 

 
 

Foreign currency hedges
Other current liabilities
 
$
7,566

 
$
495



The following table shows the changes in the fair value of our foreign currency contracts which were recorded as a gain/(loss) in selling, general and administrative expense:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
Foreign currency hedges (a)
$
544

 
$
(488
)
 
$
(4,870
)
 
$
(2,567
)

(a)
We recorded transaction losses associated with the re-measurement and settlement of our foreign denominated assets and liabilities of $1.7 million and $0.8 million for the three months ended June 30, 2012 and 2011, respectively, and gains of $2.6 million and $0.1 million for the six months ended June 30, 2012 and 2011, respectively. These transaction gains and losses were included in selling, general and administrative expense in our condensed

15

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ORBITZ WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

consolidated statements of operations. The net impact of these transaction gains and losses, together with the gains and losses incurred on our foreign currency hedges, were losses of $1.2 million and $1.3 million for the three months ended June 30, 2012 and 2011, respectively, and $2.3 million and $2.5 million for the six months ended June 30, 2012 and 2011, respectively.


10.
Net Income/(Loss) per Share

We calculate basic net income/(loss) per share by dividing the net income/(loss) for the period by the weighted-average number of shares outstanding during the period. The weighted-average number of shares includes common shares outstanding and deferred stock units, which are immediately vested and non-forfeitable. Diluted net income/(loss) per share is calculated by dividing the net income/(loss) for the period by the weighted-average number of common shares outstanding and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares are determined by the application of the treasury stock method.

The following table presents the weighted-average shares outstanding used in the calculation of net income/(loss) per share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Weighted-Average Shares Outstanding
2012
 
2011
 
2012
 
2011
Basic
105,150,691

 
103,717,099

 
104,981,607

 
103,526,844

Diluted effect of:
 
 
 
 
 
 
 
Restricted stock units
1,796,306

 
1,356,143

 

 

Stock options
264

 

 

 

Performance-based restricted stock units
486,770

 
56,474

 

 

Diluted
107,434,031

 
105,129,716

 
104,981,607

 
103,526,844


The following equity awards were not included in the diluted net income/loss per share calculation because they would have had an antidilutive effect:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Antidilutive Equity Awards
2012
 
2011
 
2012
 
2011
Restricted stock units
897,887

 
1,427,436

 
4,357,369

 
5,194,324

Stock options
3,163,574

 
3,835,319

 
3,215,835

 
3,835,319

Performance-based restricted stock units
451,027

 
1,095,250

 
1,165,294

 
1,095,250

Total
4,512,488

 
6,358,005

 
8,738,498

 
10,124,893



11.
Related Party Transactions

Related Party Transactions with Travelport and its Subsidiaries

We had amounts due from Travelport of $17.2 million and $3.9 million at June 30, 2012 and December 31, 2011, respectively. Amounts due to or from Travelport are generally settled on a net basis.

The following table summarizes the related party transactions with Travelport and its subsidiaries, reflected in our condensed consolidated statements of operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
Net revenue (a)
$
27,322

 
$
29,816

 
$
56,220

 
$
60,820

Cost of revenue
$
1

 
$
174

 
$
141

 
$
393

Selling, general and administrative expense
$
64

 
$
101

 
$
135

 
$
701

Interest expense
$
1,575

 
$
1,282

 
$
3,276

 
$
2,628


16

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ORBITZ WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(a)
Net revenue for the three and six months ended June 30, 2011 included incremental GDS incentive revenue recognized through June 1, 2011 under the February 2011 Letter Agreement with Travelport. The Letter Agreement provided for increased segment incentives payable from Travelport during the temporary absence of ticketing authority by American Airlines on our websites, which was reinstated on June 1, 2011.

Letters of Credit

Travelport is obligated to issue letters of credit on our behalf in an aggregate amount not to exceed $75.0 million (denominated in U.S. dollars) so long as Travelport and its affiliates (as defined in the Separation Agreement) own at least 50% of our voting stock. See Note 7 - Commitments and Contingencies.

Related Party Transactions with Other Affiliates of Blackstone

In the course of conducting business, we have entered into various agreements with other affiliates of Blackstone. For example, we have agreements with certain hotel management companies that are affiliates of Blackstone and that provide us with access to their inventory. We also purchase services from certain Blackstone affiliates such as telecommunications and advertising. In addition, various Blackstone affiliates utilize our partner marketing programs and corporate travel services. We believe that these agreements have been executed on terms comparable to those available from unrelated third parties.

The following table summarizes the related party balances with other affiliates of Blackstone, reflected in our condensed consolidated balance sheets:
 
June 30, 2012
 
December 31, 2011
 
(in thousands)
Accounts receivable
$
462

 
$
374

Accounts payable
$
833

 
$
4,647

Accrued merchant payable
$
2,454

 
$
6,022

Accrued expenses
$
50

 
$


The following table summarizes the related party transactions with other affiliates of Blackstone, reflected in our condensed consolidated statements of operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
Net revenue
$
3,670

 
$
6,009

 
$
8,812

 
$
11,224

Cost of revenue
$

 
$
7,456

 
$

 
$
15,144

Selling, general and administrative expense
$
187

 
$
1,097

 
$
387

 
$
2,020

Marketing
$

 
$
37

 
$

 
$
70




17

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ORBITZ WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

12.
Fair Value Measurements

The following table shows the fair value of our assets and liabilities that are required to be measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011, which are classified as cash and cash equivalents, other current assets, other current liabilities and other non-current liabilities in our condensed consolidated balance sheets.
 
Fair Value Measurements as of
 
June 30, 2012
 
December 31, 2011
 
Total
 
Quoted prices in
active markets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant unobservable
inputs
(Level 3)
 
Total
 
Quoted prices in
active markets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets:
(in thousands)
Money market funds
$
66,013

 
$
66,013

 
$

 
$

 
$
36,002

 
$
36,002

 
$

 
$

Foreign currency hedge assets
$

 
$

 
$

 
$

 
$
991

 
$
991

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency hedge liabilities
$
7,566

 
$
7,566

 
$

 
$

 
$
495

 
$
495

 
$

 
$

Interest rate swap liabilities
$
395

 
$

 
$
395

 
$

 
$
586

 
$

 
$
586

 
$


We value our foreign currency hedges based on the difference between the foreign currency contract rate and widely available foreign currency rates as of the measurement date. Our foreign currency hedges are short-term in nature, generally maturing within 30 days. We value our interest rate swaps using valuations that are calibrated to the initial trade prices. Using a market-based approach, subsequent valuations are based on observable inputs to the valuation model including interest rates, credit spreads and volatilities.

Fair Value of Financial Instruments

For certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued merchant payable and accrued expenses, the carrying value approximates or equals fair value due to their short-term nature.

The carrying value of the Term Loan was $440.0 million at June 30, 2012, compared with a fair value of $405.9 million. At December 31, 2011, the carrying value of the Term Loan was $472.2 million, compared with a fair value of $415.5 million. The fair values were determined based on quoted market ask prices, which is classified as a Level 2 measurement.


13.
Income Taxes

We have established a liability for unrecognized tax benefits of $3.7 million and $3.4 million at June 30, 2012 and December 31, 2011, respectively, that management believes to be adequate. The total amount of unrecognized benefits that, if recognized, would affect our effective tax rate was $0.9 million and $0.7 million at June 30, 2012 and December 31, 2011. During the next twelve months, we anticipate a reduction to this liability due to the lapsing of statutes of limitations of approximately $0.3 million, all of which would affect our effective tax rate.

In computing the tax provision for the three and six months ended June 30, 2012, we recognized an income tax provision in tax jurisdictions in which we had pre-tax income for the period and are expecting to generate pre-tax book income during the remainder of fiscal year 2012. We recognized an income tax benefit in tax jurisdictions in which we incurred pre-tax losses for the three and six months ended June 30, 2012 and are expecting to be able to realize the benefits associated with these losses during the remainder of fiscal year 2012 or are expecting to recognize a deferred tax asset related to such losses at December 31, 2012. We recognized no income tax benefit in tax jurisdictions in which we incurred pre-tax losses for the three and six months ended June 30, 2012 and are neither expecting to be able to realize the benefits associated with these losses during the remainder of fiscal year 2012 nor expecting to recognize a deferred tax asset related to such losses at December 31, 2012.


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Table of Contents

Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our condensed consolidated financial statements included elsewhere in this report and our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2012.

EXECUTIVE OVERVIEW

General

We are a leading global online travel company (“OTC”) that uses innovative technology to enable leisure and business travelers to search for and book a broad range of travel products and services. Our brand portfolio includes Orbitz, CheapTickets, The Away Network and Orbitz for Business in the United States; ebookers in Europe; and HotelClub and RatesToGo (collectively referred to as “HotelClub”) based in Australia, which have operations globally. We provide customers with the ability to book a wide array of travel products and services from suppliers worldwide, including air travel, hotels, vacation packages, car rentals, cruises, travel insurance and destination services such as ground transportation, event tickets and tours. Our mission is to unlock the joy of travel by becoming the travel expert for the world, where our customers easily find and book personalized travel options.
Industry Trends
The online travel industry is highly competitive, and our position in the industry is affected by the industry-wide trends discussed below, as well as a number of factors specific to our global operations and supplier relationships. In addition, the presence of high unemployment rates and related pressure on consumer spending, as well as perceived uncertainty about the state of the global economy, particularly in Europe, cause uncertainty and volatility in the travel market.
Over the past few years, fundamentals in the global hotel industry have strengthened. However, while we have generally seen growth in average daily rates for hotels, during the second quarter of 2012 we saw deceleration of these growth rates on a global basis, driven in part by macroeconomic conditions in Europe.
Demand in the air travel industry has also strengthened over the past year, driven largely by increased corporate travel, resulting in higher airfares. Higher ticket prices year-over-year have put pressure on leisure travel demand, which represents the majority of air bookings through OTCs. In the near term, higher fuel costs and further consolidation in the airline industry could continue to put upward pressure on airfares. In the second half of 2011, air capacity for major air suppliers was up slightly, but we saw a slight decline in the first half of 2012.
Airlines continue to look for ways to decrease their overall costs, including the cost of distributing airline tickets through OTCs and global distribution systems (“GDSs”), and to increase their control over distribution, such as limiting forward distribution of their fares through meta-search websites. These actions could significantly reduce the net revenue OTCs earn from air travel and other ancillary travel products. In addition, we have encountered, and expect to continue to encounter, pressure on air economics as certain supply agreements renew and as airlines and GDSs renegotiate their agreements. As a result, the net revenue we and other OTCs earn in the form of incentive payments from GDSs or in the form of commissions from airlines will be impacted over the long term.
We believe the domestic online travel market has matured. However, internationally, the online travel industry continues to benefit from increasing internet usage rates and growing acceptance of online booking. As a result, international growth rates for the online travel industry have outpaced, and we expect will continue to outpace, domestic growth rates for online travel.
Intense competition in the travel industry has historically led OTCs and travel suppliers to aggressively spend on online marketing. Competition for search engine key words continues to be intense as certain OTCs and travel suppliers increase their marketing spending. In addition, as meta-search engines enter the online travel market, competition will intensify and could increase costs to acquire traffic. In addition, last year Google launched Google Flights, which directs consumers to the websites of suppliers for potential booking of travel and to OTCs' sites only on a limited basis; if this search-engine site gains popularity, costs to acquire traffic could increase.



19

Table of Contents

RESULTS OF OPERATIONS
 
Three Months Ended June 30,
 
Increase/ (Decrease)
 
Six Months Ended June 30,
 
Increase/ (Decrease)
 
2012
 
2011
 
$
 
%
 
2012
 
2011
 
$
 
%
 
(in thousands)
 
 
 
(in thousands)
 
 
Net revenue
$
200,977

 
$
201,826

 
$
(849
)
 
 %
 
$
390,756

 
$
386,749

 
$
4,007

 
1
 %
Cost and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
35,385

 
35,496

 
(111
)
 
 %
 
71,501

 
71,811

 
(310
)
 
 %
Selling, general and administrative
67,312

 
67,892

 
(580
)
 
(1
)%
 
137,625

 
136,501

 
1,124

 
1
 %
Marketing
69,136

 
63,159

 
5,977

 
9
 %
 
134,664

 
128,516

 
6,148

 
5
 %
Depreciation and amortization
14,272

 
15,442

 
(1,170
)
 
(8
)%
 
28,150

 
30,716

 
(2,566
)
 
(8
)%
Total operating expenses
186,105

 
181,989

 
4,116

 
2
 %
 
371,940

 
367,544

 
4,396

 
1
 %
Operating income
14,872

 
19,837

 
(4,965
)
 
(25
)%
 
18,816

 
19,205

 
(389
)
 
(2
)%
Other income/(expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest expense
(9,284
)
 
(9,741
)
 
457

 
(5
)%
 
(19,239
)
 
(20,306
)
 
1,067

 
(5
)%
Other income/(expense)

 
(22
)
 
22

 
(100
)%
 
(44
)
 
368

 
(412
)
 
**

Total other expense
(9,284
)
 
(9,763
)
 
479

 
(5
)%
 
(19,283
)
 
(19,938
)
 
655

 
(3
)%
Income/(loss) before income taxes
5,588

 
10,074

 
(4,486
)
 
(45
)%
 
(467
)
 
(733
)
 
266

 
(36
)%
Provision for income taxes
1,004

 
1,186

 
(182
)
 
(15
)%
 
1,460

 
1,272

 
188

 
15
 %
Net income/(loss)
$
4,584

 
$
8,888

 
$
(4,304
)
 
(48
)%
 
$
(1,927
)
 
$
(2,005
)
 
$
78

 
(4
)%

** Not meaningful.

Overall Financial Results
In February 2012, we completed our global technology platform migration, a multi-year initiative to bring all of our consumer brands onto a common technology platform, with the successful migration of the remaining air, car and dynamic packages paths of Orbitz.com. With the investment in this migration project behind us, we have increased our focus on innovation and growth. The completion of this migration effort has created opportunities for us to enhance efficiency, site performance and the consumer experience in 2012 and beyond.

During the second quarter of 2012, we reported net income of $4.6 million, compared with $8.9 million in the second quarter of 2011. The $4.3 million decrease in net income from the second quarter of 2011 was driven primarily by an increase in marketing expense, partially offset by lower depreciation and other operating expenses.

Room nights and hotel and vacation package transaction volumes for our domestic leisure brands, Orbitz.com and CheapTickets.com, continued to grow in the second quarter. With respect to air revenue, we saw demand soften during the quarter, consistent with OTC industry trends, and transactions continue to be negatively impacted by changes we made with respect to certain revenue management strategies in the third quarter of 2011.

Internationally, we continue to see growth in our ebookers brand in both room nights and transaction volumes; however, revenue performance was affected by unfavorable foreign currency fluctuations and worsening macroeconomic conditions in Europe. In addition, HotelClub continues to face challenges; the executive leadership for our international brands, which we reorganized in 2011, continues to execute a strategy to focus on key markets and site optimization to improve HotelClub's performance.


20

Table of Contents

Net Revenue

The table below shows our gross bookings, net revenue, transaction growth and hotel room night growth for the three and six months ended June 30, 2012 and 2011. Gross bookings, transactions and hotel room nights not only impact our net revenue trends, but these metrics also provide insight into changes in overall travel demand, both industry-wide and on our websites. Air gross bookings are comprised of stand-alone air gross bookings, while non-air gross bookings include gross bookings from hotels, car rentals, vacation packages, cruises, destination services and travel insurance.
 
 
Three Months Ended June 30,
 
Increase/
(Decrease)
 
Six Months Ended June 30,
 
Increase/
(Decrease)
 
 
2012
 
2011
 
$
 
%
 
2012
 
2011
 
$
 
%
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Gross bookings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Air (a)
 
$
1,791,674

 
$
1,834,354

 
$
(42,680
)
 
(2
)%
 
$
3,602,177

 
$
3,578,884

 
$
23,293

 
1
 %
Non-air (b)
 
607,738

 
579,707

 
$
28,031

 
5
 %
 
1,289,799

 
1,211,781

 
78,018

 
6
 %
Total domestic gross bookings
 
2,399,412

 
2,414,061

 
(14,649
)
 
(1
)%
 
4,891,976

 
4,790,665

 
101,311

 
2
 %
International:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Air
 
363,975

 
367,506

 
(3,531
)
 
(1
)%
 
756,010

 
742,910

 
13,100

 
2
 %
Non-air
 
206,802

 
215,640

 
(8,838
)
 
(4
)%
 
465,234

 
438,782

 
26,452

 
6
 %
Total international gross bookings (c)
 
570,777

 
583,146

 
(12,369
)
 
(2
)%
 
1,221,244

 
1,181,692

 
39,552

 
3
 %
Total gross bookings
 
$
2,970,189

 
$
2,997,207

 
$
(27,018
)
 
(1
)%
 
$
6,113,220

 
$
5,972,357

 
$
140,863

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenue:
 
 
 
 
 
 

 
 

 
 
 
 
 
 

 
 

Air
 
$
67,313

 
$
69,522

 
$
(2,209
)
 
(3
)%
 
$
139,557

 
$
142,022

 
$
(2,465
)
 
(2
)%
Hotel
 
55,895

 
55,196

 
699

 
1
 %
 
105,360

 
100,385

 
4,975

 
5
 %
Vacation package
 
36,388

 
33,479

 
2,909

 
9
 %
 
66,642

 
59,337

 
7,305

 
12
 %
Advertising and media
 
15,261

 
13,632

 
1,629

 
12
 %
 
26,730

 
26,314

 
416

 
2
 %
Other
 
26,120

 
29,997

 
(3,877
)
 
(13
)%
 
52,467

 
58,691

 
(6,224
)
 
(11
)%
Total net revenue (d)
 
$
200,977

 
$
201,826

 
$
(849
)
 
 %
 
$
390,756

 
$
386,749

 
$
4,007

 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenue:
 
 
 
 
 
 

 
 

 
 
 
 
 
 

 
 

Domestic
 
$
145,073

 
$
142,026

 
$
3,047

 
2
 %
 
$
282,416

 
$
276,359

 
$
6,057

 
2
 %
International
 
55,904

 
59,800

 
(3,896
)
 
(7
)%
 
108,340

 
110,390

 
(2,050
)
 
(2
)%
Total net revenue (d)
 
$
200,977

 
$
201,826

 
$
(849
)
 
 %
 
$
390,756

 
$
386,749

 
$
4,007

 
1
 %
Transaction and hotel room night growth/(decline):
 
 
 
 
 
 
 
 
 
 
 
 
Transactions
 
(4
)%
 
(9
)%
 
 
 
 
 
(1
)%
 
(8
)%
 
 
 
 
Hotel room nights
 
3
 %
 
(1
)%
 
 
 
 
 
3
 %
 
(1
)%
 
 
 
 

(a)
The decrease in domestic air gross bookings for the three months ended June 30, 2012 was driven primarily by lower transaction volume, partially offset by higher air fares. The increase in domestic air gross bookings for the six months ended June 30, 2012 was driven primarily by higher air fares, partially offset by lower transaction volume.
(b)
The increase in domestic non-air gross bookings was due primarily to higher hotel and vacation package volume.
(c)
For the three and six months ended June 30, 2012, international gross bookings were impacted by unfavorable foreign currency fluctuations in the European market as compared to the prior year periods. In addition, international gross bookings decreased for the three months ended June 30, 2012 due to lower overall transaction volume for our HotelClub brand, partially offset by higher transaction volume for our ebookers brand and higher air fares. International gross bookings for the six months ended June 30, 2012 increased due to higher overall transaction volume for our ebookers brand, partially offset by lower transaction volume for our HotelClub brand.
(d)
For the three months ended June 30, 2012 and 2011, $30.2 million and $32.9 million of our total net revenue, respectively, was from incentive payments earned for air, car and hotel segments processed through GDSs. For the six months ended June 30, 2012 and 2011, $62.5 million and $67.3 million of our total net revenue, respectively, was from incentive payments earned for air, car and hotel segments processed through GDSs.


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Table of Contents

Net revenue decreased $0.8 million for the three months ended June 30, 2012 compared with the three months ended June 30, 2011, and increased $4.0 million, or 1%, for the six months ended June 30, 2012 as compared with the six months ended June 30, 2011. Excluding unfavorable foreign exchange fluctuations, revenue increased by $3.4 million and $8.5 million for the three and six months ended June 30, 2012.

Air.  Net revenue from air bookings decreased $2.2 million and $2.5 million for the three and six months ended June 30, 2012, respectively, as compared with the three and six months ended June 30, 2011. Excluding the impact of foreign currency fluctuations, net revenue from air bookings remained relatively flat for the three and six months ended June 30, 2012, from the comparable prior year periods.

Domestic air net revenue decreased $0.9 million and $1.2 million for the three and six months ended June 30, 2012, respectively, as compared with the three and six months ended June 30, 2011. These decreases were due primarily to lower transaction volume and the absence in 2012 of the incremental incentive revenue earned per segment processed through Travelport GDSs from December 2010 through June 1, 2011. The lower domestic transaction volume for the three and six months ended June 30, 2012 was driven primarily by changes we made with respect to certain revenue management strategies. These decreases were partially offset by increased net revenue per airline ticket, also resulting from these revenue management strategies.

International air net revenue decreased by $1.3 million for the three months ended June 30, 2012 as compared with the three months ended June 30, 2011 (an increase of $0.4 million excluding the impact of foreign currency fluctuations). International air net revenue decreased by $1.3 million for the six months ended June 30, 2012 as compared with the six months ended June 30, 2011 (an increase of $1.0 million, excluding the impact of foreign currency fluctuations). On a constant currency basis, the increases in international air net revenue year-over-year were due primarily to higher transaction volume. The increase in transaction volume for the six months ended June 30, 2012 was partially offset by lower average revenue per ticket, which was due primarily to a shift in mix from negotiated rates to published fares and a shift in mix from long-haul to short-haul flights.

Hotel.  Net revenue from hotel bookings increased $0.7 million or 1%, and $5.0 million or 5%, for the three and six months ended June 30, 2012, respectively, compared with the three and six months ended June 30, 2011. Excluding the impact of foreign currency fluctuations, net revenue from hotel bookings increased $1.8 million and $5.6 million for the three and six months ended June 30, 2011.

For the three and six months ended June 30, 2012, domestic hotel net revenue increased $2.7 million and $7.2 million as compared with the three and six months ended June 30, 2011, respectively. These increases were due primarily to higher transaction volume.

International hotel net revenue decreased $2.0 million and $2.2 million for the three and six months ended June 30, 2012, respectively, as compared with the three and six months ended June 30, 2011 (a decrease of $0.9 million and $1.6 million, respectively, excluding the impact of foreign currency fluctuations). These decreases on a constant currency basis were due primarily to lower volume for HotelClub, offset by higher transaction volume for ebookers.

Vacation package.  As compared with the three and six months ended June 30, 2011, net revenue from vacation package bookings increased $2.9 million or 9%, and $7.3 million or 12%, for the three and six months ended June 30, 2012, respectively. Excluding the impact of foreign currency fluctuations, net revenue from vacation package bookings increased $3.6 million and $8.1 million for the three and six months ended June 30, 2012, as compared with the three and six months ended June 30, 2011.

Domestic vacation package net revenue increased by $1.3 million and $4.4 million for the three and six months ended June 30, 2012, respectively, as compared with the three and six months ended June 30, 2011, driven primarily by increased transaction volume, partially offset by a shift in package mix to lower margin packages.

International vacation package net revenue increased $1.6 million and $2.9 million for the three and six months ended June 30, 2012, respectively, as compared with the three and six months ended June 30, 2011 (an increase of $2.3 million and $3.7 million, respectively, excluding the impact of foreign currency fluctuations). These increases were due primarily to higher transaction volume for ebookers.
 
Advertising and media.  Advertising and media net revenue increased $1.6 million or 12%, and $0.4 million or 2%, for the three and six months ended June 30, 2012, respectively, compared with the three and six months ended June 30, 2011. These increases were driven primarily by higher display advertising.

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Table of Contents

Other.  Other net revenue is comprised primarily of net revenue from travel insurance, car bookings, cruise bookings, and destination services. Other net revenue decreased $3.9 million, or 13%, for the three months ended June 30, 2012 compared with the three months ended June 30, 2011 (a decrease of $3.3 million excluding the impact of foreign currency), and $6.2 million or 11%, for the six months ended June 30, 2012 compared with the six months ended June 30, 2011 (a decrease of $5.5 million excluding the impact of foreign currency). The decreases were primarily driven by lower insurance and hosting services revenue. Insurance revenue decreased year-over-year due to a new regulation issued by the Department of Transportation effective in January 2012 that no longer allows for the travel insurance option to be pre-selected, which reduced the attachment rate for insurance products. Hosting services revenue decreased from the prior year periods due to the termination of our last hosting agreement in July 2011.

Costs and Expenses

Cost of Revenue

Our cost of revenue is comprised of costs to operate our customer service call centers, credit card processing fees and other costs, which include customer refunds and charge-backs, hosting costs and connectivity and other processing costs.
 
 
Three Months Ended June 30,
 
Increase/
(Decrease)
 
Six Months Ended June 30,
 
Increase/
(Decrease)
 
 
2012
 
2011
 
$
 
%
 
2012
 
2011
 
$
 
%
Cost of revenue:
 
(in thousands)
 
 
 
(in thousands)
 
 
Customer service costs
 
$
14,011

 
$
13,683

 
$
328

 
2
 %
 
$
26,812

 
$
27,931

 
$
(1,119
)
 
(4
)%
Credit card processing fees
 
11,413

 
11,964

 
(551
)
 
(5
)%
 
24,208

 
24,393

 
(185
)
 
(1
)%
Other
 
9,961

 
9,849

 
112

 
1
 %
 
20,481

 
19,487

 
994

 
5
 %
Total cost of revenue
 
$
35,385

 
$
35,496

 
$
(111
)
 
 %
 
$
71,501

 
$
71,811

 
$
(310
)
 
 %

Cost of revenue decreased $0.1 million (a $0.7 million increase excluding the impact of foreign currency fluctuations) for the three months ended June 30, 2012 compared with the three months ended June 30, 2011, due primarily to a $0.7 million decrease in connectivity and processing charges and a $0.6 million decrease in credit card processing fees, partially offset by a $0.4 million increase in customer refunds and charge-backs and a $0.3 million increase in customer services costs. As a percentage of revenue, cost of revenue remained constant at 17.6% for the three months ended June 30, 2012 and June 30, 2011 (both reported and excluding the impact of foreign currency fluctuations).

Cost of revenue decreased $0.3 million (a $0.6 million increase excluding the impact of foreign currency fluctuations) for the six months ended June 30, 2012 compared with the six months ended June 30, 2011, due primarily to a $1.1 million decrease in customer services costs, driven by lower staffing levels, a $0.6 million decrease in connectivity and processing charges, and a $0.2 million decrease in credit card processing fees, partially offset by a $0.9 million increase in customer refunds and charge-backs. As a percent of revenue, cost of revenue was 18.3% for six months ended June 30, 2011 and 18.6% for the six months ended June 30, 2011 (both reported and excluding the impact of foreign currency fluctuations).

Selling, General and Administrative

Our selling, general and administrative expense is comprised of wages and benefits, contract labor costs, network communications, systems maintenance and equipment costs and other costs, which include legal, foreign currency transaction and hedging and other administrative costs.
 
 
Three Months Ended June 30,
 
Increase/
(Decrease)
 
Six Months Ended June 30,
 
Increase/
(Decrease)
 
 
2012
 
2011
 
$
 
%
 
2012
 
2011
 
$
 
%
Selling, general and
     administrative:
 
(in thousands)
 
 
 
(in thousands)
 
 
Wages and benefits (a)
 
$
37,522

 
$
39,153

 
$
(1,631
)
 
(4
)%
 
$
75,792

 
$
77,893

 
$
(2,101
)
 
(3
)%
Contract labor (a)
 
6,223

 
6,650

 
(427
)
 
(6
)%
 
13,638

 
12,678

 
960

 
8
 %
Network communications, systems
     maintenance and equipment
 
6,653

 
6,010

 
643

 
11
 %
 
13,776

 
12,693

 
1,083

 
9
 %
Other
 
16,914

 
16,079

 
835

 
5
 %
 
34,419

 
33,237

 
1,182

 
4
 %
Total selling, general, and
     administrative
 
$
67,312

 
$
67,892

 
$
(580
)
 
(1
)%
 
$
137,625

 
$
136,501

 
$
1,124

 
1
 %


23

Table of Contents

(a)
The amounts presented above for wages and benefits and contract labor are net of amounts capitalized related to software development.

Selling, general and administrative expense decreased $0.6 million (a $1.1 million increase excluding the impact of foreign currency fluctuations) for the three months ended June 30, 2012 compared with the three months ended June 30, 2011, driven primarily by a $1.6 million decrease in wages and benefits, a $0.4 million decrease in contract labor costs and a $0.4 million decrease in travel-related expenses, partially offset by a $1.6 million increase in professional fees and a $0.6 million increase in network communications, systems maintenance and equipment costs. Wages and benefits and contract labor costs decreased due primarily to cost savings achieved from the centralization of the ebookers finance function and a lower level of severance expenses incurred in the second quarter of 2012 as compared with 2011. The increase in professional fees was due to higher legal expenses.

Selling, general and administrative expense increased $1.1 million ($2.7 million excluding the impact of foreign currency fluctuations) for the six months ended June 30, 2012 compared with the six months ended June 30, 2011. The increase in expense was primarily driven by a $1.2 million increase in professional fees, a $1.1 million increase in network communications, systems maintenance and equipment costs, and a $1.0 million increase in contract labor costs, partially offset by a $2.1 million decrease in wages and benefits and a $0.6 million decrease in travel-related expenses. The drivers of the fluctuations in expenses were consistent with those for the three months ended June 30, 2012, except for the increase in contract labor costs, which was due to a higher level of expenses incurred to support strategic initiatives in the first quarter of 2012 as compared to the prior year.

Marketing

Our marketing expense is primarily comprised of online marketing costs, such as search and banner advertising and affiliate commissions, and offline marketing costs, such as television, radio and print advertising. Our online marketing spending is significantly greater than our offline marketing spending. Marketing expense increased $6.0 million ($7.7 million excluding the impact of foreign currency fluctuations) for the three months ended June 30, 2012 compared with the three months ended June 30, 2011, and $6.1 million ($8.0 million excluding the impact of foreign currency fluctuations) for the six months ended June 30, 2012 compared with the six months ended June 30, 2011. The increases in marketing expense year-over-year were due primarily to higher global online marketing spend and growth of our private label distribution channel.

Depreciation and Amortization

Depreciation and amortization expense decreased $1.2 million ($1.1 million excluding the impact of foreign currency fluctuations) for the three months ended June 30, 2012 compared with the three months ended June 30, 2011. Depreciation and amortization expense decreased $2.6 million, both reported and excluding the impact of foreign currency fluctuations, for the six months ended June 30, 2012 compared with the six months ended June 30, 2011. The decreases in depreciation and amortization expense were due primarily to certain fixed and other assets that became fully depreciated and amortized in 2011.

Net Interest Expense

Net interest expense decreased $0.5 million for the three months ended June 30, 2012 compared with the three months ended June 30, 2011, and $1.1 million for the six months ended June 30, 2012 compared with the six months ended June 30, 2011. The decreases in net interest expense were due primarily to a lower effective interest rates on the Term Loan (including related interest rate hedges) and, to a lesser extent, lower average debt outstanding during 2012. These decreases were partially offset by higher letter of credit fees.

Provision for Income Taxes

We recorded a tax provision of $1.0 million and $1.2 million for the three months ended June 30, 2012 and 2011, respectively, and $1.5 million and $1.3 million for the six months ended June 30, 2012 and 2011, respectively. The tax provisions were due primarily to taxes on the income of certain European-based subsidiaries and U.S. state and local income taxes. The decrease in tax expense for the three months ended June 30, 2012 compared with the three months ended June 30, 2011 was due to a decrease in pretax earnings in certain foreign jurisdictions. The increase in tax expense for the six months ended June 30, 2012 compared with the six months ended June 30, 2011 was driven by an increase in pretax earnings in certain foreign jurisdictions.


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Table of Contents

As of June 30, 2012, the valuation allowance for our deferred tax assets was $299.5 million, of which $191.2 million relates to U.S. jurisdictions. We have maintained full valuation allowances in all jurisdictions that had previously established a valuation allowance. We will continue to assess the level of the 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.

Related Party Transactions

For a discussion of certain relationships and related party transactions, see Note 11 - Related Party Transactions of the Notes to Condensed Consolidated Financial Statements.

Seasonality

Our businesses experience seasonal fluctuations in the demand for the products and services we offer. The majority of our customers book leisure travel rather than business travel. Gross bookings for leisure travel are generally highest in the first half of the year as customers plan and book their spring and summer vacations. Cash is received upon booking for the majority of transactions booked on our websites, and net revenue for non-stand-alone air transactions is generally recognized when the travel takes place and typically lags bookings by several weeks or longer. As a result, our cash receipts are generally highest in the first half of the year and our net revenue is typically highest in the second and third quarters. Our seasonality may also be affected by fluctuations in the travel products our suppliers make available to us for booking, the growth of our international operations or a change in our product mix.


LIQUIDITY AND CAPITAL RESOURCES
Liquidity

Our principal sources of liquidity are our cash flows from operations, cash and cash equivalents and availability under the senior secured credit agreement which includes a $72.5 million revolving credit facility (the “Revolver”). See Note 4 - Term Loan and Revolving Credit Facility of the Notes to Condensed Consolidated Financial Statements. At June 30, 2012 and December 31, 2011, our cash and cash equivalents balances were $170.4 million and $136.2 million, respectively. Due to the letters of credit issued under the Revolver, we had $57.3 million and $61.7 million of availability at June 30, 2012 and December 31, 2011, respectively. Total available liquidity from cash and cash equivalents and the Revolver was $227.7 million and $197.9 million at June 30, 2012 and December 31, 2011, respectively.

We require letters of credit to support certain suppliers, commercial agreements, leases and non-U.S. regulatory and governmental agencies. The majority of these letters of credit have been issued by Travelport on our behalf. At June 30, 2012 and December 31, 2011, there were $73.4 million and $74.2 million of outstanding letters of credit issued by Travelport on our behalf. In addition, at June 30, 2012 and December 31, 2011, there were the equivalent of $15.2 million and $10.8 million of outstanding letters of credit issued under the Revolver, respectively, the majority of which were denominated in Pounds sterling. The amount of letters of credit issued under the Revolver reduces the amount available for borrowings.

Under our merchant model, customers generally pay us for reservations at the time of booking, and we pay our suppliers at a later date, which is generally when the customer uses the reservation, except in the case of payment for merchant air which generally occurs prior to the consumption date. Initially, we record these customer receipts as accrued merchant payables and either deferred income or net revenue, depending upon the travel product. The timing difference between when cash is collected from our customers and when payments are made to our suppliers improves our operating cash flow and represents a source of liquidity for us.

Seasonal fluctuations in our business also affect the timing of our cash flows. Gross bookings are generally highest in the first half of the year as customers plan and purchase their spring and summer vacations. As a result, our cash receipts are generally highest in the first half of the year. We generally have net cash outflows during the second half of the year since cash payments to suppliers typically exceed the cash inflows from new merchant reservations. While we expect this seasonal cash flow pattern to continue, changes in our business model could affect the timing or seasonal nature of our cash flows.

As of June 30, 2012, we had a working capital deficit of $252.4 million compared with a deficit of $233.0 million as of December 31, 2011. Over time, we expect to decrease this deficit through growth in our business, in particular our global hotel business, and thereby generating positive cash flow from operations.


25

Table of Contents

We generated positive cash flow from operations for the years ended December 31, 2008 through December 31, 2011 and for the six months ended June 30, 2012 despite experiencing net losses in all of these periods, and we expect annual cash flow from operations to remain positive in the foreseeable future. We generally use this cash flow to fund our operations, make principal and interest payments on our debt, finance capital expenditures and meet our other cash operating needs. For the year ending December 31, 2012, we expect our capital expenditures to be between $48 million and $52 million, a portion of which is discretionary in nature. We do not intend to declare or pay any cash dividends on our common stock in the foreseeable future.

With respect to both our short- and long-term liquidity needs, we currently believe that cash flow generated from operations, cash on hand and borrowing availability under the Revolver through its maturity in July 2013 will provide sufficient liquidity to fund our operating activities, capital expenditures and other obligations. In the future, if we require more liquidity than is available to us from our available cash and under the Revolver, if we are unable to refinance or extend the Revolver beyond its July 2013 maturity date, or if we are unable to refinance or repay the Term Loan by its July 2014 maturity date, we may need to raise additional funds through debt or equity offerings, which may not be available to us on favorable terms or at all.

Our liquidity could be reduced as a result of the termination of a major airline's participation on our websites or a change in their distribution strategy; a decline in merchant gross bookings resulting from changes in our merchant business model; changes to payment terms or other requirements imposed by vendors, suppliers or regulatory agencies, such as requiring us to provide letters of credit, cash reserves, or other forms of financial security or increases in such requirements; lower than anticipated operating cash flows; or other unanticipated events, such as unfavorable outcomes in our legal proceedings, including in the case of hotel occupancy tax proceedings, certain jurisdictions' requirements that we provide financial security or pay an assessment to the municipality in order to challenge the assessment in court, or our inability to recover defense costs. If as a result of these requirements we require additional letters of credit, or if Travelport is no longer required or able to issue letters of credit on our behalf, we would be required to issue these letters of credit under the Revolver or to establish cash reserves/collateral, which would reduce our liquidity and cash available to grow our business.

Cash Flows

Our net cash flows from operating, investing and financing activities were as follows:
 
 
Six Months Ended June 30,
 
 
2012
 
2011
 
 
(in thousands)
Beginning cash and cash equivalents
 
$
136,171

 
$
97,222

Cash provided by/(used in):
 
 

 
 

Operating activities
 
104,129

 
102,529

Investing activities
 
(24,420
)
 
(28,002
)
Financing activities
 
(44,575
)
 
(28,091
)
Effect of changes in exchange rates on cash and cash equivalents
 
(869
)
 
2,299

Net increase in cash and cash equivalents
 
34,265

 
48,735

Ending cash and cash equivalents
 
$
170,436

 
$
145,957


Operating Activities

Cash provided by operating activities consists of our net income or loss, adjusted for non-cash items such as depreciation, amortization and stock-based compensation, and changes in various working capital accounts, principally accounts receivable, deferred income, accrued merchant payables, accounts payable and accrued expenses.

We generated cash flow from operations of $104.1 million for the six months ended June 30, 2012 compared with $102.5 million for the six months ended June 30, 2011. The increase in operating cash flow was due mainly to an increase in our working capital accounts of $5.5 million, partially offset by a $3.9 million decrease in cash inflows from the reduction of our net loss as adjusted for non-cash items described above. The net increase in working capital accounts was driven primarily by changes in accounts payable and other current liabilities, merchant payable and deferred income balances, partially offset by the timing of payments from Travelport and a higher accounts receivable balance. The $3.9 million decrease in cash flows related to higher marketing expenses, partially offset by higher revenues, during the first half of 2012 as compared with the first half of 2011.


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Investing Activities

Cash flow used in investing activities decreased to $24.4 million for the six months ended June 30, 2012 from $28.0 million for the six months ended June 30, 2011. This decrease from the prior year was due primarily to establishing higher levels of restricted cash balances in the six months ended June 30, 2011 as compared with the current period.

Financing Activities

Cash flow used in financing activities increased to $44.6 million for the six months ended June 30, 2012 from $28.1 million for the six months ended June 30, 2011. The increase was due to a higher excess cash flow payment made on the Term Loan and higher payments on the tax sharing liability during the six months ended June 30, 2012, as compared with the prior-year period.
Financing Arrangements
On July 25, 2007, we entered into a $685.0 million senior secured credit agreement (the “Credit Agreement”) consisting of a seven-year $600.0 million term loan facility (the “Term Loan”) and a six-year $85.0 million revolving credit facility, which was effectively reduced to the $72.5 million Revolver. The Term Loan and the Revolver bear interest at variable rates, at our option, of LIBOR or an alternative base rate plus a margin. At June 30, 2012 and December 31, 2011, $440.0 million and $472.2 million of borrowings were outstanding on the Term Loan, respectively. At June 30, 2012 and December 31, 2011, there were no outstanding borrowings under the Revolver. In addition, at June 30, 2012 and December 31, 2011, there were the equivalent of $15.2 million and $10.8 million of outstanding letters of credit issued under the Revolver, respectively, the majority of which were denominated in Pounds sterling. The amount of letters of credit issued under the Revolver reduces the amount available to us for borrowings. The Credit Agreement requires us to maintain a minimum fixed charge coverage ratio and not exceed a maximum total leverage ratio, each as defined in the Credit Agreement. We are required to maintain a minimum fixed charge coverage ratio of 1 to 1 and not exceed a maximum total leverage ratio of 3.0 to 1 for the remainder of the Credit Agreement. As of June 30, 2012, we were in compliance with all covenants and conditions of the Credit Agreement.

In addition, we are required to make an annual prepayment on the Term Loan in the first quarter of each fiscal year in an amount up to 50% of the prior year’s excess cash flow, as defined in the Credit Agreement. Based on our excess cash flow for the year ended December 31, 2011, we made a $32.2 million prepayment on the Term Loan in the first quarter of 2012. Prepayments from excess cash flow are applied, in order of maturity, to the scheduled quarterly Term Loan principal payments. Due to the total excess cash flow payments that we have made, we are not required to make any scheduled principal payments on the Term Loan for the remainder of its term. Based on our current financial projections for the year ended December 31, 2012, we estimate that we will be required to make a $25.8 million prepayment from excess cash flow in the first quarter of 2013. The amount of prepayment required is subject to change based on actual financial results, which could differ materially from our financial projections as of June 30, 2012. The potential amount of prepayment from excess cash flow that will be required beyond the first quarter of 2013 is not reasonably estimable as of June 30, 2012.

When we were a wholly-owned subsidiary of Travelport, Travelport provided guarantees, letters of credit and surety bonds on our behalf under our commercial agreements and leases and for the benefit of regulatory agencies. Under the Separation Agreement, entered into in connection with the July 2007 initial public offering (the “IPO”), we are required to use commercially reasonable efforts to have Travelport released from any then outstanding guarantees and surety bonds. Travelport no longer provides surety bonds on our behalf or guarantees in connection with commercial agreements or leases entered into or replaced by us subsequent to the IPO. At June 30, 2012 and December 31, 2011, there were $73.4 million and $74.2 million of outstanding letters of credit issued by Travelport on our behalf, respectively. Travelport has agreed to issue U.S. dollar denominated letters of credit on our behalf in an aggregate amount not to exceed $75.0 million so long as Travelport and its affiliates (as defined in the Separation Agreement) own at least 50% of our voting stock.

Travelport charges us fees for issuing, renewing or extending letters of credit on our behalf. The expenses related to these fees are included in interest expense in our consolidated statements of operations.


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Financial Obligations

Commitments and Contingencies

We are party to various cases brought by consumers and municipalities and other U.S. governmental entities involving hotel occupancy taxes and our merchant hotel business model. We believe that we have meritorious defenses, and we are vigorously defending against these claims, proceedings and inquiries (see Note 7 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements).

Litigation is inherently unpredictable and, although we believe we have valid defenses in these matters, unfavorable resolutions could occur. We cannot estimate our range of loss, except to the extent taxing authorities have issued assessments against us. Although we believe it is unlikely that a materially adverse outcome will result from these proceedings, an adverse outcome could be material to us with respect to earnings or cash flows in any given reporting period.
Contractual Obligations
Our contractual obligations as of June 30, 2012 did not materially change from the amounts set forth in our 2011 Annual Report on Form 10-K, except for the timing of payments on the Term Loan (see Note 4 - Term Loan and Revolving Credit Facility of the Notes to Condensed Consolidated Financial Statements).


CRITICAL ACCOUNTING POLICIES

The preparation of our condensed consolidated financial statements and related notes in conformity with generally accepted accounting principles requires us to make judgments, estimates and assumptions that affect the amounts reported therein. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our 2011 Annual Report on Form 10-K for a discussion of these judgments, estimates and assumptions. There were no significant changes to our critical accounting policies during the six months ended June 30, 2012 from the 2011 Annual Report on Form 10-K.


Item 3.
Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our market risk since December 31, 2011. For a discussion of our market risk as of December 31, 2011, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our 2011 Annual Report on Form 10-K.


Item 4.
Controls and Procedures

Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures designed to provide reasonable assurance that information required