Impairment of Long-Lived Assets Income Taxes Drydocking Costs The company reviews long-lived assets for impairment whenever events occur or changes in circumstances  indicate that the carrying amount of an asset group may not be recoverable. In such evaluation, the  estimated future undiscounted cash flows generated by an asset group are compared with the carrying  amount of the asset group to determine if a write-down may be required. The company estimates cash  flows based upon historical data adjusted for the company’s best estimate of future market performance that  is based on industry trends. If impairment exists, the carrying value of the asset group is reduced to its  estimated fair value. Vessels with similar operating and marketing characteristics are grouped for asset  impairment testing. Although the company believes its assumptions and estimates are reasonable, deviations from the  assumptions and estimates could produce materially different results. Management estimates may vary  considerably from actual outcomes due to future adverse market conditions or poor operating results that  could result in the inability to recover the current carrying value of an asset group, thereby possibly requiring  an impairment charge in the future. As the company’s fleet continues to age, management closely monitors  the estimates and assumptions used in the impairment analysis to properly identify evolving trends and  changes in market conditions that could impact the results of the impairment evaluation. In addition to the periodic review of long-lived assets for impairment when circumstances warrant, the  company also performs a review of its stacked vessels and vessels withdrawn from service every six  months. This review considers items such as the vessel’s age, length of time stacked and likelihood of a  return to active service, among others. The company records an impairment charge when the carrying value  of a vessel withdrawn from service or stacked vessel that is unlikely to return to service exceeds its  estimated fair value. The company recorded $3.1 million and $1.4 million impairment during fiscal 2010 and  2009, respectively, which was included in gain on disposition of assets, net. No impairment was recorded in  fiscal 2008.  The company determines its effective tax rate by estimating its permanent differences resulting from  differing treatment of items for tax and accounting purposes. The company is periodically audited by taxing  authorities in the United States and by the respective tax agencies in the countries in which it operates  internationally. The tax audits generally include questions regarding the calculation of taxable income. Audit  adjustments affecting permanent differences could have an impact on the company’s effective tax rate. The carrying value of the company’s net deferred tax assets is based on the company’s present belief that it  is more likely than not that it will be able to generate sufficient future taxable income in certain tax  jurisdictions to utilize such deferred tax assets, based on estimates and assumptions. If these estimates and  related assumptions change in the future, the company may be required to record or adjust valuation  allowances against its deferred tax assets resulting in additional income tax expense in the company’s  consolidated statement of operations. Management evaluates the realizability of the deferred tax assets and  assesses the need for changes to valuation allowances on a quarterly basis. While the company has  considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the  present need for a valuation allowance, in the event the company were to determine that it would be able to  realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the  valuation allowance would increase income in the period such determination was made. Should the  company determine that it would not be able to realize all or part of its net deferred tax asset in the future,  an adjustment to the deferred tax asset would be charged to income in the period such determination was  made. The company expenses maintenance and repair costs as incurred during the asset’s original estimated  useful life (its original depreciable life). Major repair costs incurred after the original depreciable life that also  have the effect of extending the useful life of the asset are capitalized and amortized over 30 months. Major  vessel modifications are capitalized and amortized over the remaining life of the equipment. Vessel  modifications that are performed for a specific customer contract are capitalized and amortized over the firm  contract term. The majority of the company’s vessels require a drydocking inspection twice in each five year  -58- 