NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As used in this Quarterly Report on Form 10-Q,
the terms “Royal Caribbean,” the “Company,” “we,” “our” and “us” refer to Royal Caribbean Cruises Ltd. and, depending on the context, Royal Caribbean Cruises Ltd.’s consolidated subsidiaries and/or affiliates. The terms “Royal Caribbean International,” “Celebrity Cruises,” “Pullmantur,” “Azamara Club Cruises,” “CDF Croisières de France” and “TUI Cruises” refer to our cruise brands. However, because TUI Cruises is an unconsolidated investment, our operating results and other disclosures herein do not include TUI Cruises unless otherwise specified. In accordance with cruise vacation industry practice, the term “berths” is determined based on double occupancy per cabin even though many cabins can accommodate three or more passengers. This report should be read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2015
, including the audited consolidated financial statements and related notes included therein.
This Quarterly Report on Form 10-Q also includes trademarks, trade names and service marks of other companies. Use or display by us of other parties’ trademarks, trade names or service marks is not intended to and does not imply a relationship with, or endorsement or sponsorship of us by, these other parties other than as described herein.
Note 1. General
Description of Business
We are a global cruise company. We own Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises, CDF Croisières de France and a
50%
joint venture interest in TUI Cruises.
Basis for Preparation of Consolidated Financial Statements
The unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Estimates are required for the preparation of financial statements in accordance with these principles. Actual results could differ from these estimates. Refer to Note 2.
Summary of Significant Accounting Policies
in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended
December 31, 2015
for a discussion of our significant accounting policies.
All significant intercompany accounts and transactions are eliminated in consolidation. We consolidate entities over which we have control, usually evidenced by a direct ownership interest of greater than
50%
, and variable interest entities where we are determined to be the primary beneficiary. Refer to Note 4.
Other Assets
for further information regarding our variable interest entities. For affiliates we do not control but over which we have significant influence on financial and operating policies, usually evidenced by a direct ownership interest from
20%
to
50%
, the investment is accounted for using the equity method.
Prior to January 1, 2016, we consolidated the operating results of Pullmantur and CDF Croisières de France on a
two
-month reporting lag to allow for more timely preparation of our consolidated financial statements. Effective January 1, 2016, we eliminated the two-month reporting lag to reflect Pullmantur's and CDF Croisières de France's financial position, results of operations and cash flows concurrently and consistently with the fiscal calendar of the Company ("elimination of the Pullmantur reporting lag"). The elimination of the Pullmantur reporting lag represents a change in accounting principle which we believe to be preferable because it provides more current information to the users of our financial statements. A change in accounting principle requires retrospective application, if material. The impact of the elimination of the reporting lag was immaterial to prior periods and is expected to be immaterial for our fiscal year ended December 31, 2016. As a result, we have accounted for this change in accounting principle in our consolidated results for the first quarter of 2016. Accordingly, the results of Pullmantur and CDF Croisières de France for November and December 2015, in addition to the three months ended March 31, 2016, are included in our statement of comprehensive income (loss) for the quarter ended March 31, 2016. The effect of this change was a decrease to net income of
$21.7 million
and this amount is reported within
Other (expense) income
in our consolidated statements of comprehensive income (loss) for the quarter ended March 31, 2016.
Note 2. Summary of Significant Accounting Policies
Recent Accounting Pronouncements
In May 2014, amended GAAP guidance was issued to clarify the principles used to recognize revenue for all entities. The guidance is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not comprehensively addressed in the prior accounting guidance. Additionally, in March 2016, amended GAAP guidance was issued clarifying the implementation guidance on principal versus agent considerations. Also under the revenue recognition guidance, in April 2016, amended GAAP guidance was issued to improve the accounting of revenue from contracts with customers. The amendments clarify the guidance associated with identifying performance obligations and licensing. The revenue recognition guidance discussed above must be applied using one of two retrospective application methods and will be effective for our annual reporting period beginning after December 15, 2017, including interim periods therein. Early adoption is permitted for our annual reporting period beginning after December 15, 2016, including interim periods therein. We are currently evaluating the impact, if any, of the adoption of the revenue recognition guidance to our consolidated financial statements.
In August 2014, GAAP guidance was issued requiring management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. This guidance will be effective for our annual reporting period ending after December 15, 2016 and for annual periods and interim periods thereafter. Early adoption is permitted. The adoption of this newly issued guidance is not expected to have an impact to our consolidated financial statements.
In July 2015, amended GAAP guidance was issued to simplify the measurement of inventory for all entities. The amendments apply to all inventory that is measured using first-in, first-out or average cost. The guidance requires an entity to measure inventory at the lower of cost and net realizable value. The guidance must be applied prospectively and will be effective for our interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted as of the beginning of an interim or annual reporting period. The adoption of this newly issued guidance is not expected to have a material impact to our consolidated financial statements.
In November 2015, amended GAAP guidance was issued to simplify the presentation of deferred income taxes. The amendments require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position and eliminates the classification between current and noncurrent amounts. The guidance will be effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. An entity can elect to adopt the amendments either prospectively or retrospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. The adoption of this newly issued guidance is not expected to have a material impact to our consolidated financial statements.
In January 2016, amended GAAP guidance was issued to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The amendments primarily impact the accounting for certain equity investments, the accounting for financial liabilities subject to the fair value option and the presentation and disclosure requirements for financial instruments. The guidance will be effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted for financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance as of the beginning of the fiscal year of adoption. The adoption of this newly issued guidance is not expected to have a material impact to our consolidated financial statements.
In February 2016, amended GAAP guidance was issued to increase the transparency and comparability of lease accounting among organizations. For leases with a term greater than 12 months, the amendments require the lease rights and obligations arising from the leasing arrangements, including operating leases, to be recognized as assets and liabilities on the balance sheet. The amendments also expand the required disclosures surrounding leasing arrangements. The guidance must be applied using a retrospective application method and will be effective for financial statements issued for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted. We are currently evaluating the impact of the adoption of this newly issued guidance to our consolidated financial statements.
In March 2016, amended GAAP guidance was issued addressing the effect of derivative contract novations on existing hedge accounting relationships. The amendments clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The guidance must be applied using a prospective or modified retrospective application method and will be effective for financial statements issued for fiscal years beginning after December 15, 2016 and
interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this newly issued guidance is not expected to have a material impact to our consolidated financial statements.
In March 2016, amended GAAP guidance was issued addressing contingent put and call options in debt instruments. The amendments clarify the requirements for assessing whether contingent call and put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts, or whether the embedded call and put options should be bifurcated from the related debt instrument and accounted for separately as a derivative. The guidance must be applied using a modified retrospective approach and will be effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact, if any, of the adoption of this newly issued guidance to our consolidated financial statements.
In March 2016, amended GAAP guidance was issued to simplify the transition to the equity method of accounting. The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations and retained earnings retroactively on a step-by step basis as if the equity method had been in effect during all previous periods that the investment had been held. The guidance must be applied prospectively and will be effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact, if any, of the adoption of this newly issued guidance to our consolidated financial statements.
In March 2016, amended GAAP guidance was issued to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance will be effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of the adoption of this newly issued guidance to our consolidated financial statements.
Other
Revenues and expenses include port costs that vary with guest head counts. The amounts of such port costs included in
Passenger ticket revenues
on a gross basis were
$144.4 million
and
$127.1 million
for the
first
quarters of
2016
and
2015
, respectively.
Reclassifications
On January 1, 2016, we adopted ASC 835, Presentation of Debt Issuance Costs ("ASC 835"), using the retrospective approach. Due to the adoption of ASC 835,
$139.8 million
of debt issuance costs have been reclassified in the consolidated balance sheet, as of December 31, 2015, from
Other assets
to either
Current portion of long-term debt
or
Long-term debt
in order to conform to the current year presentation.
Note 3. Earnings Per Share
A reconciliation between basic and diluted earnings per share is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
|
2016
|
|
2015
|
Net income for basic and diluted earnings per share
|
$
|
99,140
|
|
|
$
|
45,230
|
|
Weighted-average common shares outstanding
|
216,914
|
|
|
219,626
|
|
Dilutive effect of stock options, performance share awards and restricted stock awards
|
955
|
|
|
1,216
|
|
Diluted weighted-average shares outstanding
|
217,869
|
|
|
220,842
|
|
Basic earnings per share
|
$
|
0.46
|
|
|
$
|
0.21
|
|
Diluted earnings per share
|
$
|
0.46
|
|
|
$
|
0.20
|
|
There were no antidilutive shares for the
quarters ended
March 31, 2016
and
March 31, 2015
, respectively.
Note 4. Other Assets
A Variable Interest Entity (“VIE”) is an entity in which the equity investors have not provided enough equity to finance the entity’s activities or the equity investors: (1) cannot directly or indirectly make decisions about the entity’s activities through their voting rights or similar rights; (2) do not have the obligation to absorb the expected losses of the entity; (3) do not have the right to receive the expected residual returns of the entity; or (4) have voting rights that are not proportionate to their economic interests and the entity’s activities involve or are conducted on behalf of an investor with a disproportionately small voting interest.
We have determined that TUI Cruises GmbH, our
50%
-owned joint venture, which operates the brand TUI Cruises, is a VIE. As of
March 31, 2016
and
December 31, 2015
, our equity investment in TUI Cruises was approximately
$306.5 million
and
$293.8 million
, respectively. This amount was included within
Other assets
in our consolidated balance sheets. In addition, we and TUI AG, our joint venture partner, have each guaranteed the repayment of
50%
of a bank loan. As of
March 31, 2016
, the outstanding principal amount of the loan was
€132.1 million
, or approximately
$150.6 million
based on the exchange rate at
March 31, 2016
. While this loan matures May 2022, the lenders have agreed to release each shareholder's guarantee in 2018. The loan amortizes quarterly and is secured by first mortgages on the
Mein Schiff 1
and
Mein Schiff 2
vessels. Based on current facts and circumstances, we do not believe potential obligations under our guarantee of this bank loan are probable.
In April 2016, we completed the previously announced sale of
Splendour of the Seas
to TUI Cruises for
€188 million
, or
$213 million
. Concurrently with the acquisition, TUI Cruises leased the ship to Thomson Cruises, a subsidiary of TUI Group, who will operate the ship. In connection with the sale, we provided TUI Cruises with seller's financing to be repaid to us over
10 years
. The resulting term loan is
50%
guaranteed by TUI AG and is secured by a first priority mortgage on the ship. Interest accrues at the rate of
6.25%
per annum. The sale resulted in an immaterial gain.
Our investment amount, outstanding term loan and the potential obligations under the bank loan guarantee are substantially our maximum exposure to loss in connection with our investment in TUI Cruises. We have determined that we are not the primary beneficiary of TUI Cruises. We believe that the power to direct the activities that most significantly impact TUI Cruises’ economic performance are shared between ourselves and TUI AG. All the significant operating and financial decisions of TUI Cruises require the consent of both parties, which we believe creates shared power over TUI Cruises. Accordingly, we do not consolidate this entity and account for this investment under the equity method of accounting.
As of
March 31, 2016
, TUI Cruises has
four
newbuild ships on order scheduled to be delivered in each of 2016, 2017, 2018 and 2019. TUI Cruises has in place agreements for the secured financing of each of the ships on order for up to
80%
of the contract price. Finnvera, the official export credit agency of Finland, has agreed to guarantee to the lenders payment of
95%
of each financing. The remaining portion of the contract price of the ships is expected to be funded through an existing
€150.0 million
bank facility and TUI Cruises’ cash flows from operations. The various ship construction and financing agreements include certain restrictions on each of our and TUI AG’s ability to reduce our current ownership interest in TUI Cruises below
37.55%
through 2021.
We have determined that Grand Bahama Shipyard Ltd. (“Grand Bahama”), a ship repair and maintenance facility in which we have a
40%
noncontrolling interest, is a VIE. The facility serves cruise and cargo ships, oil and gas tankers and offshore units. We utilize this facility, among other ship repair facilities, for our regularly scheduled drydocks and certain emergency repairs as may be required. During the quarter ended
March 31, 2016
, we made payments of
$21.1 million
to Grand Bahama for ship repair and maintenance services. We have determined that we are not the primary beneficiary of this facility as we do not have the power to direct the activities that most significantly impact the facility’s economic performance. Accordingly, we do not consolidate this entity and we account for this investment under the equity method of accounting. As of
March 31, 2016
, the net book value of our investment in Grand Bahama was approximately
$49.0 million
, consisting of
$17.5 million
in equity and a loan of
$31.5 million
. As of
December 31, 2015
, the net book value of our investment in Grand Bahama was approximately
$51.2 million
, consisting of
$12.6 million
in equity and a loan of
$38.6 million
. These amounts represent our maximum exposure to loss related to our investment in Grand Bahama. Our debt agreement with Grand Bahama was amended during the quarter ended March 31, 2016 to extend the maturity by
10 years
and increase the applicable interest rate to the lower of (i) LIBOR plus
3.50%
and (ii)
5.5%
. Interest payable on the loan is due on a semi-annual basis. We will continue to classify the loan, as modified, as non-accrual status. The loan balance is included within
Other assets
in our consolidated balance sheets. During the quarter ended
March 31, 2016
, we received principal payments of approximately
$7.1 million
. We monitor credit risk associated with the loan through our participation on Grand Bahama’s board of directors along with our review of Grand Bahama’s financial statements and projected cash flows. Based on this review, we believe the risk of loss associated with the outstanding loan is not probable as of
March 31, 2016
.
We have determined that Skysea Holding International Ltd. ("Skysea Holding"), in which we have a
35%
noncontrolling interest, is a VIE for which we are not the primary beneficiary, as we do not have the power to direct the activities that most
significantly impact the entity's economic performance. Accordingly, we do not consolidate this entity and we account for this investment under the equity method of accounting. In December 2014, we and Ctrip.com International Ltd, which also owns
35%
of Skysea Holding, each provided a debt facility to a wholly owned subsidiary of Skysea Holding in the amount of
$80.0 million
. Interest under these facilities, which mature in January 2030, initially accrues at a rate of
3.0%
per annum with an increase of at least
0.5%
every two years through maturity. The facilities, which are pari passu to each other, are each
100%
guaranteed by Skysea Holding and are secured by first priority mortgages on the ship,
Golden Era.
As of
March 31, 2016
and
December 31, 2015
, our investment in Skysea Holding and its subsidiaries, including equity and loans, was approximately
$96.9 million
and
$99.8 million
, respectively. These amounts were included within
Other assets
in our consolidated balance sheets and represent our maximum exposure to loss related to our investment in Skysea Holding.
Our share of income from investments accounted for under the equity method of accounting, including the entities discussed above, was
$21.0 million
and
$9.2 million
for the quarters ended
March 31, 2016
and
March 31, 2015
, respectively, and was recorded within
Other (expense) income
. We received
$0.8 million
and
$1.2 million
of dividends from our equity method investees for the quarters ended
March 31, 2016
and
March 31, 2015
, respectively. We also provide ship management and procurement services to TUI Cruises GmbH and Skysea Holding and recorded
$4.4 million
and
$5.7 million
in revenues and
$3.5 million
and
$3.2 million
in expenses for these services during the quarters ended
March 31, 2016
and
March 31, 2015
, respectively. These amounts were recorded within
Onboard and other revenues
and
Other operating expenses
, respectively.
.
Note 5. Long-Term Debt
In February 2016, we amended our unsecured term loans for
Oasis of the Seas
and
Allure of the Seas
to reduce the margins on those facilities and incorporate certain covenant improvements included in our more recent credit facilities. The interest rate on both the
$420.0 million
floating rate tranche of the
Oasis of the Seas
term loan and the
$1.1 billion
Allure of the Seas
term loan was reduced from LIBOR plus
1.85%
to LIBOR plus
1.65%
. These amendments did not result in the extinguishment of debt.
In February 2016, we agreed with the lenders on our
€365.0 million
unsecured term loan due 2017 to convert
€247.5 million
, or
$273.2 million
, of the outstanding principal balance from Euro to US dollars. Interest on the new US dollar tranche accrues at a floating rate based on LIBOR plus the applicable margin. The balance of the facility of
€117.5 million
will remain outstanding in Euro and will continue to accrue interest at a floating rate based on EURIBOR plus the applicable margin. The applicable margin varies with our debt rating and was
1.75%
as of March 31, 2016. The amendment did not result in the extinguishment of debt.
In April 2016, we took delivery of
Ovation of the Seas
. To finance the purchase, we borrowed
$841.8 million
under a previously committed unsecured term loan which is
95%
guaranteed by Euler Hermes Deutschland AG ("Hermes"), the official export credit agency of Germany. The loan amortizes semi-annually over
12 years
and bears interest at LIBOR plus a margin of
1.00%
, currently totaling
1.91%
. During 2015, we entered into forward-starting interest rate swap agreements which effectively converted
$830.0 million
of the loan from the floating rate available to us per the credit agreement to a fixed rate, including the applicable margin, of
3.16%
effective from April 2016 through the term of the loan. See Note 9.
Fair Value Measurements and Derivative Instruments
for further information regarding these agreements.
In April 2016, we entered into and drew in full on a credit agreement which provides an unsecured term loan in the amount of
$200 million
. The loan is due and payable at maturity in April 2017. Interest on the loan accrues at a floating rate based on LIBOR plus a margin of
1.30%
, currently totaling
1.74%
. The proceeds from this loan were used to repay amounts outstanding under our unsecured revolving credit facilities.
Note 6. Commitments and Contingencies
As of
March 31, 2016
, the aggregate cost of our ships on order, not including the TUI Cruises' ships on order, was approximately
$8.0 billion
, of which we had deposited
$554.1 million
as of such date. Approximately
58.0%
of the aggregate cost was exposed to fluctuations in the Euro exchange rate at
March 31, 2016
. Refer to Note 9.
Fair Value Measurements and Derivative Instruments
for further information.
Litigation
A class action complaint was filed in June 2011 against Royal Caribbean Cruises Ltd. in the United States District Court for the Southern District of Florida on behalf of a purported class of stateroom attendants employed onboard Royal Caribbean International cruise vessels. The complaint alleged that the stateroom attendants were required to pay other crew members to help with their duties and that certain stateroom attendants were required to work back of house assignments without the ability to earn gratuities, in each case in violation of the U.S. Seaman’s Wage Act. In May 2012, the district court granted our motion to dismiss
the complaint on the basis that the applicable collective bargaining agreement requires any such claims to be arbitrated. The United States Court of Appeals, 11th Circuit, affirmed the district court’s dismissal and denied the plaintiffs’ petition for re-hearing and re-hearing en banc. In October 2014, the United States Supreme Court denied the plaintiffs’ request to review the order compelling arbitration. Subsequently, approximately
575
crew members submitted demands for arbitration. The demands make substantially the same allegations as in the federal court complaint and are similarly seeking damages, wage penalties and interest in an indeterminate amount. Unlike the federal court complaint, the demands for arbitration are being brought individually by each of the crew members and not on behalf of a purported class of stateroom attendants. In February 2016, we settled this matter as to all demanding crew members in exchange for our payment in the aggregate of an immaterial amount.
In April 2015, the Alaska Department of Environmental Conservation issued Notices of Violation to Royal Caribbean International and Celebrity Cruises seeking monetary penalties for alleged violations of the Alaska Marine Visible Emission Standards that occurred over the past five years on certain of our vessels. We believe we have meritorious defenses to the allegations and we are cooperating with the state of Alaska. We do not believe that the ultimate outcome of these claims will have a material adverse impact on our financial condition or results of operations and cash flows.
We are routinely involved in other claims typical within the cruise vacation industry. The majority of these claims are covered by insurance. We believe the outcome of such claims, net of expected insurance recoveries, will not have a material adverse impact on our financial condition or results of operations and cash flows.
Other
If any person acquires ownership of more than
50%
of our common stock or, subject to certain exceptions, during any
24
-month period, a majority of the Board is no longer comprised of individuals who were members of the Board on the first day of such period, we may be obligated to prepay indebtedness outstanding under our credit facilities, which we may be unable to replace on similar terms. Our public debt securities also contain change of control provisions that would be triggered by a third-party acquisition of greater than
50%
of our common stock coupled with a ratings downgrade. If this were to occur, it would have an adverse impact on our liquidity and operations.
Note 7. Shareholders’ Equity
During the first quarter of 2016, we declared and paid a cash dividend on our common stock of
$0.375
per share. During the first quarter of 2016, we also paid a cash dividend on our common stock of
$0.375
per share which was declared during the fourth quarter of 2015.
During the first quarter of 2015, we declared and paid a cash dividend on our common stock of
$0.30
per share. During the first quarter of 2015, we also paid a cash dividend on our common stock of
$0.30
per share which was declared during the fourth quarter of 2014.
In October 2015, our board of directors authorized a common stock repurchase program for up to
$500 million
. The timing and number of shares purchased depend on a variety of factors including price and market conditions. During the first quarter of 2016, we purchased
2.8 million
shares for a total of
$200.0 million
in open market transactions that were recorded within
Treasury stock
in our consolidated balance sheet. During April 2016, we purchased an additional
0.6 million
shares for a total of
$50.0 million
in open market transactions. Following these repurchases, as well as the
$200.0 million
repurchase in the fourth quarter of 2015, we have
$50 million
that remains available for future stock repurchase transactions under our Board approved program. Future stock repurchase transactions could include open market purchases or accelerated share repurchases. We expect to complete the program by the end of 2016.
Note 8. Changes in Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in accumulated other comprehensive income (loss) by component for the quarters ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss) for the Quarter Ended March 31, 2016
|
|
Accumulated Other Comprehensive Income (Loss) for the Quarter Ended March 31, 2015
|
|
Changes
related to
cash flow
derivative
hedges
|
|
Changes in
defined
benefit plans
|
|
Foreign
currency
translation
adjustments
|
|
Accumulated other
comprehensive loss
|
|
Changes
related to
cash flow
derivative
hedges
|
|
Changes in
defined
benefit plans
|
|
Foreign
currency
translation
adjustments
|
|
Accumulated other
comprehensive loss
|
Accumulated comprehensive loss at beginning of the year
|
$
|
(1,232,073
|
)
|
|
$
|
(26,447
|
)
|
|
$
|
(69,913
|
)
|
|
$
|
(1,328,433
|
)
|
|
$
|
(826,026
|
)
|
|
$
|
(31,207
|
)
|
|
$
|
(39,761
|
)
|
|
$
|
(896,994
|
)
|
Other comprehensive (loss) income before reclassifications
|
(99,659
|
)
|
|
(3,797
|
)
|
|
6,648
|
|
|
(96,808
|
)
|
|
(322,383
|
)
|
|
(2,056
|
)
|
|
(31,544
|
)
|
|
(355,983
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
102,396
|
|
|
285
|
|
|
—
|
|
|
102,681
|
|
|
61,434
|
|
|
563
|
|
|
—
|
|
|
61,997
|
|
Net current-period other comprehensive income (loss)
|
2,737
|
|
|
(3,512
|
)
|
|
6,648
|
|
|
5,873
|
|
|
(260,949
|
)
|
|
(1,493
|
)
|
|
(31,544
|
)
|
|
(293,986
|
)
|
Ending balance
|
$
|
(1,229,336
|
)
|
|
$
|
(29,959
|
)
|
|
$
|
(63,265
|
)
|
|
$
|
(1,322,560
|
)
|
|
$
|
(1,086,975
|
)
|
|
$
|
(32,700
|
)
|
|
$
|
(71,305
|
)
|
|
$
|
(1,190,980
|
)
|
The following table presents reclassifications out of accumulated other comprehensive income (loss) for the quarters ended
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
|
|
|
Details About Accumulated Other
Comprehensive Income (Loss) Components
|
|
Quarter Ended March 31, 2016
|
|
Quarter Ended March 31, 2015
|
|
Affected Line Item in Statements of
Comprehensive Income (Loss)
|
Loss on cash flow derivative hedges:
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(9,128
|
)
|
|
$
|
(6,786
|
)
|
|
Interest expense, net of interest capitalized
|
Foreign currency forward contracts
|
|
(718
|
)
|
|
(718
|
)
|
|
Depreciation and amortization expenses
|
Foreign currency forward contracts
|
|
6,087
|
|
|
(238
|
)
|
|
Other (expense) income
|
Foreign currency collar options
|
|
(602
|
)
|
|
—
|
|
|
Depreciation and amortization expenses
|
Fuel swaps
|
|
(7,335
|
)
|
|
—
|
|
|
Other (expense) income
|
Fuel swaps
|
|
(90,700
|
)
|
|
(53,692
|
)
|
|
Fuel
|
|
|
(102,396
|
)
|
|
(61,434
|
)
|
|
|
Amortization of defined benefit plans:
|
|
|
|
|
|
|
|
Actuarial loss
|
|
(285
|
)
|
|
(354
|
)
|
|
Payroll and related
|
Prior service costs
|
|
—
|
|
|
(209
|
)
|
|
Payroll and related
|
|
|
(285
|
)
|
|
(563
|
)
|
|
|
Total reclassifications for the period
|
|
$
|
(102,681
|
)
|
|
$
|
(61,997
|
)
|
|
|
Note 9. Fair Value Measurements and Derivative Instruments
Fair Value Measurements
The estimated fair value of our financial instruments that are not measured at fair value, categorized based upon the fair value hierarchy, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2016 Using
|
|
Fair Value Measurements at December 31, 2015 Using
|
Description
|
|
Total Carrying Amount
|
|
Total Fair Value
|
|
Level 1
(1)
|
|
Level 2
(2)
|
|
Level 3
(3)
|
|
Total Carrying Amount
|
|
Total Fair Value
|
|
Level 1
(1)
|
|
Level 2
(2)
|
|
Level 3
(3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(4)
|
|
$
|
117,360
|
|
|
$
|
117,360
|
|
|
$
|
117,360
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
121,565
|
|
|
$
|
121,565
|
|
|
$
|
121,565
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total Assets
|
|
$
|
117,360
|
|
|
$
|
117,360
|
|
|
$
|
117,360
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
121,565
|
|
|
$
|
121,565
|
|
|
$
|
121,565
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (including current portion of long-term debt)
(5)
|
|
$
|
8,655,603
|
|
|
$
|
9,039,755
|
|
|
$
|
1,546,938
|
|
|
$
|
7,492,817
|
|
|
$
|
—
|
|
|
$
|
8,478,473
|
|
|
$
|
8,895,009
|
|
|
$
|
1,536,629
|
|
|
$
|
7,358,380
|
|
|
$
|
—
|
|
Total Liabilities
|
|
$
|
8,655,603
|
|
|
$
|
9,039,755
|
|
|
$
|
1,546,938
|
|
|
$
|
7,492,817
|
|
|
$
|
—
|
|
|
$
|
8,478,473
|
|
|
$
|
8,895,009
|
|
|
$
|
1,536,629
|
|
|
$
|
7,358,380
|
|
|
$
|
—
|
|
(1) Inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Valuation of these items does not entail a significant amount of judgment.
(2) Inputs other than quoted prices included within Level 1 that are observable for the liability, either directly or indirectly. For unsecured revolving credit facilities and unsecured term loans, fair value is determined utilizing the income valuation approach. This valuation model takes into account the contract terms of our debt such as the debt maturity and the interest rate on the debt. The valuation model also takes into account the creditworthiness of the Company.
(3) Inputs that are unobservable. The Company did not use any Level 3 inputs as of
March 31, 2016
and
December 31, 2015
.
(4) Consists of cash and marketable securities with original maturities of less than
90
days.
(5) Consists of unsecured revolving credit facilities, senior notes, senior debentures and term loans. Does not include our capital lease obligations.
Other Financial Instruments
The carrying amounts of accounts receivable, accounts payable, accrued interest and accrued expenses approximate fair value at
March 31, 2016
and
December 31, 2015
.
Assets and liabilities that are recorded at fair value have been categorized based upon the fair value hierarchy. The following table presents information about the Company’s financial instruments recorded at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2016 Using
|
|
Fair Value Measurements at December 31, 2015 Using
|
Description
|
|
Total
|
|
Level 1
(1)
|
|
Level 2
(2)
|
|
Level 3
(3)
|
|
Total
|
|
Level 1
(1)
|
|
Level 2
(2)
|
|
Level 3
(3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
(4)
|
|
$
|
137,463
|
|
|
$
|
—
|
|
|
$
|
137,463
|
|
|
$
|
—
|
|
|
$
|
134,574
|
|
|
$
|
—
|
|
|
$
|
134,574
|
|
|
$
|
—
|
|
Investments
(5)
|
|
$
|
3,804
|
|
|
3,804
|
|
|
—
|
|
|
—
|
|
|
$
|
3,965
|
|
|
3,965
|
|
|
—
|
|
|
—
|
|
Total Assets
|
|
$
|
141,267
|
|
|
$
|
3,804
|
|
|
$
|
137,463
|
|
|
$
|
—
|
|
|
$
|
138,539
|
|
|
$
|
3,965
|
|
|
$
|
134,574
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
(6)
|
|
$
|
1,017,967
|
|
|
$
|
—
|
|
|
$
|
1,017,967
|
|
|
$
|
—
|
|
|
$
|
1,044,292
|
|
|
$
|
—
|
|
|
$
|
1,044,292
|
|
|
$
|
—
|
|
Total Liabilities
|
|
$
|
1,017,967
|
|
|
$
|
—
|
|
|
$
|
1,017,967
|
|
|
$
|
—
|
|
|
$
|
1,044,292
|
|
|
$
|
—
|
|
|
$
|
1,044,292
|
|
|
$
|
—
|
|
(1) Inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Valuation of these items does not entail a significant amount of judgment.
(2) Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. For foreign currency forward contracts, interest rate swaps, cross currency swaps and fuel swaps, fair value is derived using valuation models that utilize the income valuation approach. These valuation models take into account the contract terms, such as maturity, as well as other inputs, such as foreign exchange rates and curves, fuel types, fuel curves and interest rate yield curves. Fair value for foreign currency collar options is determined by using standard option pricing models with inputs based on the options’ contract terms, such as exercise price and maturity, and readily available public market data, such as foreign exchange curves, foreign exchange volatility levels and discount rates. All derivative instrument fair values take into account the creditworthiness of the counterparty and the Company.
(3) Inputs that are unobservable. The Company did not use any Level 3 inputs as of
March 31, 2016
and
December 31, 2015
.
(4) Consists of foreign currency forward contracts, interest rate swaps and fuel swaps. Please refer to the “Fair Value of Derivative Instruments” table for breakdown by instrument type.
(5) Consists of exchange-traded equity securities and mutual funds reported within
Other assets
in our consolidated balance sheets.
(6) Consists of foreign currency forward contracts, interest rate swaps and fuel swaps. Please refer to the “Fair Value of Derivative Instruments” table for breakdown by instrument type.
The reported fair values are based on a variety of factors and assumptions. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of
March 31, 2016
or
December 31, 2015
, or that will be realized in the future, and do not include expenses that could be incurred in an actual sale or settlement.
We have master International Swaps and Derivatives Association (“ISDA”) agreements in place with our derivative instrument counterparties. These ISDA agreements provide for final close out netting with our counterparties for all positions in the case of default or termination of the ISDA agreement. We have determined that our ISDA agreements provide us with rights of setoff on the fair value of derivative instruments in a gain position and those in a loss position with the same counterparty. We have elected not to offset such derivative instrument fair values in our consolidated balance sheets.
As of
March 31, 2016
and
December 31, 2015
, no cash collateral was received or pledged under our ISDA agreements. See
Credit Related Contingent Features
for further discussion on contingent collateral requirements for our derivative instruments.
The following table presents information about the Company’s offsetting of financial assets under master netting agreements with derivative counterparties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
|
|
|
As of March 31, 2016
|
|
As of December 31, 2015
|
|
|
Gross Amount of Derivative Assets Presented in the Consolidated Balance Sheet
|
|
Gross Amount of Eligible Offsetting
Recognized
Derivative Liabilities
|
|
Cash Collateral
Received
|
|
Net Amount of
Derivative Assets
|
|
Gross Amount of Derivative Assets Presented in the Consolidated Balance Sheet
|
|
Gross Amount of Eligible Offsetting
Recognized
Derivative Assets
|
|
Cash Collateral
Received
|
|
Net Amount of
Derivative Assets
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives subject to master netting agreements
|
|
$
|
137,463
|
|
|
$
|
(137,463
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
134,574
|
|
|
$
|
(129,815
|
)
|
|
$
|
—
|
|
|
$
|
4,759
|
|
Total
|
|
$
|
137,463
|
|
|
$
|
(137,463
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
134,574
|
|
|
$
|
(129,815
|
)
|
|
$
|
—
|
|
|
$
|
4,759
|
|
The following table presents information about the Company’s offsetting of financial liabilities under master netting agreements with derivative counterparties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
|
|
|
As of March 31, 2016
|
|
As of December 31, 2015
|
|
|
Gross Amount of Derivative Liabilities Presented in the Consolidated Balance Sheet
|
|
Gross Amount of Eligible Offsetting
Recognized
Derivative Assets
|
|
Cash Collateral
Pledged
|
|
Net Amount of
Derivative Liabilities
|
|
Gross Amount of Derivative Liabilities Presented in the Consolidated Balance Sheet
|
|
Gross Amount of Eligible Offsetting
Recognized
Derivative Liabilities
|
|
Cash Collateral
Pledged
|
|
Net Amount of
Derivative Liabilities
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives subject to master netting agreements
|
|
$
|
(1,017,967
|
)
|
|
$
|
137,463
|
|
|
$
|
—
|
|
|
$
|
(880,504
|
)
|
|
$
|
(1,044,292
|
)
|
|
$
|
129,815
|
|
|
$
|
—
|
|
|
$
|
(914,477
|
)
|
Total
|
|
$
|
(1,017,967
|
)
|
|
$
|
137,463
|
|
|
$
|
—
|
|
|
$
|
(880,504
|
)
|
|
$
|
(1,044,292
|
)
|
|
$
|
129,815
|
|
|
$
|
—
|
|
|
$
|
(914,477
|
)
|
Concentrations of Credit Risk
We monitor our credit risk associated with financial and other institutions with which we conduct significant business and, to minimize these risks, we select counterparties with credit risks acceptable to us and we seek to limit our exposure to an individual counterparty. Credit risk, including but not limited to counterparty nonperformance under derivative instruments, our credit facilities and new ship progress payment guarantees, is not considered significant, as we primarily conduct business with large, well-established financial institutions, insurance companies and export credit agencies many of which we have long-term relationships with and which have credit risks acceptable to us or where the credit risk is spread out among a large number of counterparties. As of
March 31, 2016
, we did not have any exposure under our derivative instruments. As of
December 31, 2015
, we had counterparty credit risk exposure under our derivative instruments of approximately
$4.8 million
, which was limited to the cost of replacing the contracts in the event of non-performance by the counterparties to the contracts, all of which are currently our lending banks. We do not anticipate nonperformance by any of our significant counterparties. In addition, we have established guidelines we follow regarding credit ratings and instrument maturities to maintain safety and liquidity. We do not normally require collateral or other security to support credit relationships; however, in certain circumstances this option is available to us.
Derivative Instruments
We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We manage these risks through a combination of our normal operating and financing activities and through the use of derivative financial instruments pursuant to our hedging practices and policies. The financial impact of these hedging instruments is primarily offset by corresponding changes in the underlying exposures being hedged. We achieve this by closely matching the notional amount, term and conditions of the derivative instrument with the underlying risk being hedged. Although certain of our derivative financial instruments do not qualify or are not accounted for under hedge accounting, we do not hold or issue derivative financial instruments for trading or other speculative purposes. We monitor our derivative positions using techniques including market valuations and sensitivity analyses.
We enter into various forward, swap and option contracts to manage our interest rate exposure and to limit our exposure to fluctuations in foreign currency exchange rates and fuel prices. These instruments are recorded on the balance sheet at their fair value and the vast majority are designated as hedges. We also use non-derivative financial instruments designated as hedges of our net investment in our foreign operations and investments.
At inception of the hedge relationship, a derivative instrument that hedges the exposure to changes in the fair value of a firm commitment or a recognized asset or liability is designated as a fair value hedge. A derivative instrument that hedges a forecasted transaction or the variability of cash flows related to a recognized asset or liability is designated as a cash flow hedge.
Changes in the fair value of derivatives that are designated as fair value hedges are offset against changes in the fair value of the underlying hedged assets, liabilities or firm commitments. Gains and losses on derivatives that are designated as cash flow hedges are recorded as a component of
Accumulated other comprehensive loss
until the underlying hedged transactions are recognized in earnings. The foreign currency transaction gain or loss of our non-derivative financial instruments and the changes in the fair value of derivatives designated as hedges of our net investment in foreign operations and investments are recognized as a component of
Accumulated other comprehensive loss
along with the associated foreign currency translation adjustment of the foreign operation.
On an ongoing basis, we assess whether derivatives used in hedging transactions are “highly effective” in offsetting changes in the fair value or cash flow of hedged items. We use the long-haul method to assess hedge effectiveness using regression analysis for each hedge relationship
under our interest rate, foreign currency and fuel hedging programs. We apply the same methodology on a consistent basis for assessing hedge effectiveness to all hedges within each hedging program (i.e. interest rate, foreign currency and fuel). We perform regression analyses over an observation period of up to
three
years, utilizing market data relevant to the hedge horizon of each hedge relationship. High effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the changes in the fair values of the derivative instrument and the hedged item. The determination of ineffectiveness is based on the amount of dollar offset between the change in fair value of the derivative instrument and the change in fair value of the hedged item at the end of the reporting period. If it is determined that a derivative is not highly effective as a hedge or hedge accounting is discontinued, any change in fair value of the derivative since the last date at which it was determined to be effective is recognized in earnings. In addition, the ineffective portion of our highly effective hedges is immediately recognized in earnings and reported in
Other (expense) income
in our consolidated statements of comprehensive income (loss).
Cash flows from derivative instruments that are designated as fair value or cash flow hedges are classified in the same category as the cash flows from the underlying hedged items. In the event that hedge accounting is discontinued, cash flows subsequent to the date of discontinuance are classified within investing activities. Cash flows from derivative instruments not designated as hedging instruments are classified as investing activities.
We consider the classification of the underlying hedged item’s cash flows in determining the classification for the designated derivative instrument’s cash flows. We classify derivative instrument cash flows from hedges of benchmark interest rate or hedges of fuel expense as operating activities due to the nature of the hedged item. Likewise, we classify derivative instrument cash flows from hedges of foreign currency risk on our newbuild ship payments as investing activities and derivative instrument cash flows from hedges of foreign currency risk on debt payments as financing activities.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates to our long-term debt obligations including future interest payments. At
March 31, 2016
and
December 31, 2015
, approximately
31%
of our long-term debt was effectively fixed. We use interest rate swap agreements to modify our exposure to interest rate movements and to manage our interest expense.
Market risk associated with our long-term fixed rate debt is the potential increase in fair value resulting from a decrease in interest rates. We use interest rate swap agreements that effectively convert a portion of our fixed-rate debt to a floating-rate basis to manage this risk. At
March 31, 2016
and
December 31, 2015
, we maintained interest rate swap agreements on the
$420.0 million
fixed rate portion of our
Oasis of the Seas
unsecured amortizing term loan and on the
$650.0 million
unsecured senior notes due 2022. The interest rate swap agreements on
Oasis of the Seas
debt effectively changed the interest rate on the balance of the unsecured term loan, which was
$210.0 million
as of
March 31, 2016
, from a fixed rate of
5.41%
to a LIBOR-based floating rate equal to LIBOR plus
3.87%
, currently approximately
4.40%
. The interest rate swap agreements on the
$650.0 million
unsecured senior notes effectively changed the interest rate of the unsecured senior notes from a fixed rate of
5.25%
to a LIBOR-based floating rate equal to LIBOR plus
3.63%
, currently approximately
4.25%
. These interest rate swap agreements are accounted for as fair value hedges.
Market risk associated with our long-term floating rate debt is the potential increase in interest expense from an increase in interest rates. We use interest rate swap agreements that effectively convert a portion of our floating-rate debt to a fixed-rate basis to manage this risk. At
March 31, 2016
and
December 31, 2015
, we maintained forward-starting interest rate swap agreements that hedge the anticipated unsecured Euro amortizing term loan that will finance a portion of our purchase of
Harmony of the Seas
. Forward-starting interest rate swaps hedging the
Harmony of the Seas
loan will effectively convert the interest rate for
€693.4 million
, or approximately
$790.1 million
based on the exchange rate at
March 31, 2016
, of the anticipated loan balance from EURIBOR plus
1.15%
to a fixed rate of
2.26%
(inclusive of margin) beginning in May 2016. In addition, at
March 31, 2016
and
December 31, 2015
, we maintained forward-starting interest rate swap agreements that hedge the anticipated unsecured amortizing term loan that will finance our purchase of
Ovation of the Seas
. Forward-starting interest rate swaps hedging the
Ovation of the Seas
loan will effectively convert the interest rate for
$830.0 million
of the anticipated loan balance from LIBOR plus
1.00%
to a fixed rate of
3.16%
(inclusive of margin) beginning in April 2016. These interest rate swap agreements are accounted for as cash flow hedges.
In addition, at
March 31, 2016
and
December 31, 2015
, we maintained interest rate swap agreements on our
Celebrity Reflection
term loan. Our interest rate swap agreements effectively converted the interest rate on a portion of the
Celebrity Reflection
unsecured amortizing term loan balance of approximately
$490.9 million
from LIBOR plus
0.40%
to a fixed rate (including applicable margin) of
2.85%
through the term of the loan. Additionally, at
March 31, 2016
and
December 31, 2015
, we maintained interest rate swap agreements on our
Quantum of the Seas
term loan. Our interest rate swap agreements effectively converted the interest rate on a portion of the
Quantum of the Seas
unsecured amortizing term loan balance of approximately
$673.8 million
from LIBOR plus
1.30%
to a fixed rate of
3.74%
(inclusive of margin) through the term of the loan. Furthermore, at
March 31, 2016
and
December 31, 2015
, we maintained interest rate swap agreements on our
Anthem of the Seas
term loan. Our interest rate swap agreements effectively converted the interest rate on a portion of the
Anthem of the Seas
unsecured amortizing term loan balance of approximately
$694.8 million
from LIBOR plus
1.30%
to a fixed rate of
3.86%
(inclusive of margin) through the term of the loan. These interest rate swap agreements are accounted for as cash flow hedges.
The notional amount of interest rate swap agreements related to outstanding debt and on our current unfunded financing arrangements as of
March 31, 2016
and
December 31, 2015
was
$4.3 billion
.
Foreign Currency Exchange Rate Risk
Derivative Instruments
Our primary exposure to foreign currency exchange rate risk relates to our ship construction contracts denominated in Euros, our foreign currency denominated debt and our international business operations. We enter into foreign currency forward contracts, collar options and cross currency swap agreements to manage portions of the exposure to movements in foreign currency exchange rates. As of
March 31, 2016
, the aggregate cost of our ships on order, not including the TUI Cruises' ships on order, was approximately
$8.0 billion
, of which we had deposited
$554.1 million
as of such date. At
March 31, 2016
and
December 31, 2015
, approximately
58%
of the aggregate cost of the ships under construction was exposed to fluctuations in the Euro exchange rate. The majority of our foreign currency forward contracts, collar options and cross currency swap agreements are accounted for as cash flow, fair value or net investment hedges depending on the designation of the related hedge.
On a regular basis, we enter into foreign currency forward contracts and, from time to time, we utilize cross-currency swap agreements to minimize the volatility resulting from the remeasurement of net monetary assets and liabilities denominated in a currency other than our functional currency or the functional currencies of our foreign subsidiaries. During the
first
quarter of
2016
, we maintained an average of approximately
$516.2 million
of these foreign currency forward contracts. These instruments are not designated as hedging instruments. Changes in the fair value of the foreign currency forward contracts resulted in a gain (loss), of approximately
$15.4 million
and
$(28.1) million
during the quarters ended
March 31, 2016
and
March 31, 2015
, respectively, that were recognized in earnings within
Other (expense) income
in our consolidated statements of comprehensive income (loss).
We consider our investments in our foreign operations to be denominated in relatively stable currencies and of a long-term nature. As of
March 31, 2016
, we maintained foreign currency forward contracts and designated them as hedges of a portion of our net investment in TUI cruises of
€272.0 million
, or approximately
$309.9 million
based on the exchange rate at
March 31, 2016
. These forward currency contracts mature in April 2016.
The notional amount of outstanding foreign exchange contracts including our forward contracts as of
March 31, 2016
and
December 31, 2015
was
$3.6 billion
and
$2.4 billion
, respectively.
Fuel Price Risk
Our exposure to market risk for changes in fuel prices relates primarily to the consumption of fuel on our ships. We use fuel swap agreements to mitigate the financial impact of fluctuations in fuel prices.
Our fuel swap agreements are accounted for as cash flow hedges. At
March 31, 2016
, we have hedged the variability in future cash flows for certain forecasted fuel transactions occurring through
2020
. As of
March 31, 2016
and
December 31, 2015
, we had the following outstanding fuel swap agreements:
|
|
|
|
|
|
|
|
Fuel Swap Agreements
|
|
As of March 31, 2016
|
|
As of December 31, 2015
|
|
(metric tons)
|
2016
|
692,000
|
|
|
930,000
|
|
2017
|
854,000
|
|
|
854,000
|
|
2018
|
583,000
|
|
|
583,000
|
|
2019
|
308,000
|
|
|
231,000
|
|
2020
|
79,000
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Fuel Swap Agreements
|
|
As of March 31, 2016
|
|
As of December 31, 2015
|
|
(% hedged)
|
Projected fuel purchases:
|
|
|
|
|
|
2016
|
65
|
%
|
|
65
|
%
|
2017
|
60
|
%
|
|
59
|
%
|
2018
|
40
|
%
|
|
40
|
%
|
2019
|
20
|
%
|
|
15
|
%
|
2020
|
5
|
%
|
|
—
|
|
At
March 31, 2016
and
December 31, 2015
,
$294.7 million
and
$321.0 million
, respectively, of estimated unrealized net loss associated with our cash flow hedges pertaining to fuel swap agreements were expected to be reclassified to earnings from
Accumulated other comprehensive loss
within the next twelve months. Reclassification is expected to occur as the result of fuel consumption associated with our hedged forecasted fuel purchases.
The fair value and line item caption of derivative instruments recorded within our consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
Balance Sheet Location
|
|
As of March 31, 2016
|
|
As of December 31, 2015
|
|
Balance Sheet Location
|
|
As of March 31, 2016
|
|
As of December 31, 2015
|
|
|
|
Fair Value
|
|
Fair Value
|
|
|
Fair Value
|
|
Fair Value
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments under ASC 815-20
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other assets
|
|
$
|
13,046
|
|
|
$
|
—
|
|
|
Other long-term liabilities
|
|
$
|
139,805
|
|
|
$
|
67,371
|
|
Foreign currency forward contracts
|
|
Derivative financial instruments
|
|
78,179
|
|
|
93,996
|
|
|
Derivative financial instruments
|
|
139,456
|
|
|
320,873
|
|
Fuel swaps
|
|
Derivative financial instruments
|
|
—
|
|
|
—
|
|
|
Derivative financial instruments
|
|
284,336
|
|
|
307,475
|
|
Fuel swaps
|
|
Other assets
|
|
3,893
|
|
|
—
|
|
|
Other long-term liabilities
|
|
300,669
|
|
|
325,055
|
|
Total derivatives designated as hedging instruments under 815-20
|
|
|
|
95,118
|
|
|
93,996
|
|
|
|
|
864,266
|
|
|
1,020,774
|
|
Derivatives not designated as hedging instruments under ASC 815-20
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Derivative financial instruments
|
|
$
|
33,779
|
|
|
$
|
32,339
|
|
|
Derivative financial instruments
|
|
$
|
129,817
|
|
|
$
|
—
|
|
Fuel swaps
|
|
Derivative financial instruments
|
|
8,566
|
|
|
8,239
|
|
|
Derivative financial instruments
|
|
23,884
|
|
|
23,518
|
|
Total derivatives not designated as hedging instruments under 815-20
|
|
|
|
42,345
|
|
|
40,578
|
|
|
|
|
153,701
|
|
|
23,518
|
|
Total derivatives
|
|
|
|
$
|
137,463
|
|
|
$
|
134,574
|
|
|
|
|
$
|
1,017,967
|
|
|
$
|
1,044,292
|
|
(1)
Accounting Standard Codification 815-20 “
Derivatives and Hedging.”
As of March 31, 2016 and December 31, 2015, there were no non-derivative instruments designated as hedging instruments recorded within our consolidated balance sheets.
The effect of derivative instruments qualifying and designated as hedging instruments and the related hedged items in fair value hedges on the consolidated statements of comprehensive income (loss) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and Related Hedged Items under ASC 815-20 Fair Value Hedging Relationships
|
|
Location of Gain (Loss) Recognized in Income on Derivative and Hedged Item
|
|
Amount of Gain (Loss)
Recognized in
Income on Derivative
|
|
Amount of Gain (Loss)
Recognized in
Income on Hedged Item
|
Quarter Ended March 31, 2016
|
|
Quarter Ended March 31, 2015
|
|
Quarter Ended March 31, 2016
|
|
Quarter Ended March 31, 2015
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Interest expense, net of interest capitalized
|
|
$
|
2,362
|
|
|
$
|
2,976
|
|
|
$
|
3,925
|
|
|
$
|
3,882
|
|
Interest rate swaps
|
|
Other (expense) income
|
|
26,268
|
|
|
15,152
|
|
|
(23,700
|
)
|
|
(12,341
|
)
|
|
|
|
|
$
|
28,630
|
|
|
$
|
18,128
|
|
|
$
|
(19,775
|
)
|
|
$
|
(8,459
|
)
|
The effect of derivative instruments qualifying and designated as cash flow hedging instruments on the consolidated financial statements was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
under ASC 815-20 Cash Flow Hedging Relationships
|
|
Amount of Gain (Loss) Recognized in
Accumulated Other
Comprehensive Income (Loss) on Derivative
(Effective Portion)
|
|
Location of
Gain (Loss)
Reclassified
from
Accumulated
Other Comprehensive
Loss into Income
(Effective
Portion)
|
|
Amount of Gain (Loss) Reclassified from
Accumulated Other Comprehensive Income (Loss) into Income (Effective Portion)
|
Quarter Ended March 31, 2016
|
|
Quarter Ended March 31, 2015
|
|
|
Quarter Ended March 31, 2016
|
|
Quarter Ended March 31, 2015
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(97,371
|
)
|
|
$
|
(35,815
|
)
|
|
Interest expense, net of interest capitalized
|
|
$
|
(9,128
|
)
|
|
$
|
(6,786
|
)
|
Interest rate swaps
|
|
—
|
|
|
—
|
|
|
Other (expense) income
|
|
—
|
|
|
—
|
|
Foreign currency forward contracts
|
|
46,049
|
|
|
(172,822
|
)
|
|
Depreciation and amortization expenses
|
|
(718
|
)
|
|
(718
|
)
|
Foreign currency forward contracts
|
|
—
|
|
|
—
|
|
|
Other (expense) income
|
|
6,087
|
|
|
(238
|
)
|
Foreign currency collar options
|
|
—
|
|
|
(64,833
|
)
|
|
Depreciation and amortization expenses
|
|
(602
|
)
|
|
—
|
|
Fuel swaps
|
|
—
|
|
|
—
|
|
|
Other (expense) income
|
|
(7,335
|
)
|
|
—
|
|
Fuel swaps
|
|
(48,337
|
)
|
|
(48,913
|
)
|
|
Fuel
|
|
(90,700
|
)
|
|
(53,692
|
)
|
|
|
$
|
(99,659
|
)
|
|
$
|
(322,383
|
)
|
|
|
|
$
|
(102,396
|
)
|
|
$
|
(61,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives under
ASC 815-20
Cash Flow Hedging
Relationships
|
|
Location of Gain (Loss)
Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
|
|
Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
|
Quarter Ended March 31, 2016
|
|
Quarter Ended March 31, 2015
|
(In thousands)
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other (expense) income
|
|
(900
|
)
|
|
—
|
|
Interest rate swaps
|
|
Other (expense) income
|
|
—
|
|
|
38
|
|
Fuel swaps
|
|
Other (expense) income
|
|
(16
|
)
|
|
182
|
|
|
|
|
|
$
|
(916
|
)
|
|
$
|
220
|
|
The effect of non-derivative instruments qualifying and designated as net investment hedging instruments on the consolidated financial statements was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)
|
Non-derivative instruments under ASC 815-20 Net
Investment Hedging Relationships
|
|
Quarter Ended March 31, 2016
|
|
Quarter Ended March 31, 2015
|
(In thousands)
|
|
|
|
|
|
|
Foreign Currency Debt
|
|
$
|
—
|
|
|
$
|
12,137
|
|
|
|
$
|
—
|
|
|
$
|
12,137
|
|
There was no amount recognized in income (ineffective portion and amount excluded from effectiveness testing) for the
quarters ended
March 31, 2016
and
March 31, 2015
, respectively.
The effect of derivatives not designated as hedging instruments on the consolidated financial statements was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in Income on Derivatives
|
Derivatives Not
Designated as Hedging
Instruments under ASC
815-20
|
|
Location of
Gain (Loss) Recognized in
Income on Derivatives
|
|
Quarter Ended March 31, 2016
|
|
Quarter Ended March 31, 2015
|
(In thousands)
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Other (expense) income
|
|
$
|
14,455
|
|
|
$
|
(28,083
|
)
|
Fuel swaps
|
|
Other (expense) income
|
|
22
|
|
|
(129
|
)
|
|
|
|
|
$
|
14,477
|
|
|
$
|
(28,212
|
)
|
Credit Related Contingent Features
Our current interest rate derivative instruments may require us to post collateral if our Standard & Poor’s and Moody’s credit ratings remain below specified levels. Specifically, if on the fifth anniversary of entering into a derivative transaction or on any succeeding fifth-year anniversary our credit ratings for our senior unsecured debt were to be rated below
BBB-
by Standard & Poor’s and
Baa3
by Moody’s, then each counterparty to such derivative transaction with whom we are in a net liability position that exceeds the applicable minimum call amount may demand that we post collateral in an amount equal to the net liability position. The amount of collateral required to be posted following such event will change each time our net liability position increases or decreases by more than the applicable minimum call amount. If our credit rating for our senior unsecured debt is subsequently equal to or above BBB- by Standard & Poor’s or Baa3 by Moody’s, then any collateral posted at such time will be released to us and we will no longer be required to post collateral unless we meet the collateral trigger requirement at the next fifth-year anniversary. Currently, our senior unsecured debt credit rating is
BB+
with a stable outlook by Standard & Poor’s and
Ba1
with a stable outlook by Moody’s. We currently have
seven
interest rate derivative hedges that have a term of at least
five
years. The aggregate fair values of all derivative instruments with such credit-related contingent features in net liability positions as of
March 31, 2016
and
December 31, 2015
were
$139.8 million
and
$67.4 million
, respectively, which do not include the impact of any such derivatives in net asset positions. The earliest that any of the
seven
interest rate derivative hedges will reach their fifth anniversary is November 2016. Therefore, as of
March 31, 2016
, we were not required to post collateral for any of our derivative transactions.
Note 10. Restructuring Charges
Pullmantur's strategy over the last several years had focused both on its core cruise market in Spain and on expansion throughout Latin America, especially Brazil. However, due to significant and increased challenges facing Pullmantur's Latin American operations, in 2015, we decided to significantly change our strategy from growing the brand through vessel transfers to a right-sizing strategy. This right-sizing strategy includes reducing our exposure to Latin America, refocusing on the brand’s core market of Spain and, consequently, reducing the size of Pullmantur’s fleet.
During the first quarter of 2016, we moved forward with activities related to this right-sizing strategy. The activities included the closing of Pullmantur's regional head office in Brazil and the redeployment of Pullmantur’s
Empress
to the Royal Caribbean International brand. The closure of the Brazil office resulted in the recognition of a liability for one-time termination benefits during the first quarter of 2016. We also incurred contract termination costs related to this activity.
As a result of these actions, we incurred restructuring exit costs of
$0.3 million
for the quarter ended March 31, 2016, which are reported within
Restructuring charges
in our consolidated statements of comprehensive income (loss). We expect to incur additional restructuring exit costs of approximately
$2.3 million
, through the end of 2016, to implement our right-sizing strategy.
The following table summarizes our restructuring exit costs related to the above strategy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
January 1, 2016
|
|
Accruals
|
|
Payments
|
|
Ending Balance March 31, 2016
|
|
Cumulative
Charges
Incurred
|
Termination benefits
|
|
$
|
—
|
|
|
$
|
237
|
|
|
$
|
—
|
|
|
$
|
237
|
|
|
$
|
237
|
|
Contract termination costs
|
|
|
—
|
|
|
|
68
|
|
|
|
—
|
|
|
|
68
|
|
|
|
68
|
|
Other related costs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
305
|
|
|
$
|
—
|
|
|
$
|
305
|
|
|
$
|
305
|
|
In connection with this strategy, we incurred approximately
$2.9 million
of other costs during the quarter ended March 31, 2016 that primarily consisted of costs associated with the redeployment of Pullmantur's
Empress
to the Royal Caribbean International brand that were reported within
Cruise operating expenses
and
Depreciation and amortization expenses
in our consolidated statements of comprehensive income (loss). We expect to incur additional other costs of
$1.9 million
, through the end of 2016, to implement our right-sizing strategy.