Executive Officers of the Company
As of February 23, 2015,20, 2018, our executive officers are:
| Name | Age | Position | |
| Richard D. Fain | Chairman, Chief Executive Officer and Director | ||
| Jason T. Liberty | 42 | Executive Vice President, Chief Financial Officer | |
| Adam M. Goldstein | President and Chief Operating Officer | ||
| Michael W. Bayley | President and Chief Executive Officer, Royal Caribbean International | ||
| Lisa Lutoff-Perlo | President and Chief Executive Officer, Celebrity Cruises | ||
| Lawrence Pimentel | President and Chief Executive Officer, Azamara Club Cruises | ||
| Harri U. Kulovaara | Executive Vice President, Maritime | ||
| Bradley H. Stein | Senior Vice President, General Counsel, Chief Compliance Officer | ||
| Henry L. Pujol | Senior Vice President, Chief Accounting Officer | ||
Richard D. Fain has served as a director since 19791981 and as our Chairman and Chief Executive Officer since 1988. Mr. Fain is a recognized industry leader, having participated in shipping for over 40 years and having held a number of prominent industry positions, such as Chairman of the Cruise Lines International Association (CLIA), the largest cruise industry trade association. He currently serves as Chairman of the University of Miami Board of Trustees as well as on the National Board of the Posse Foundation. He is also former chairman of the Miami Business Forum, the Greater Miami Convention and Visitors Bureau, and the United Way of Miami-Dade.
Jason T. Liberty has been involved inemployed by the shipping industry for approximately 40 years.Company since 2005 and has served as Chief Financial Officer since May 2013. Mr. Liberty previously served as Senior Vice President, Strategy and Finance from September 2012 through May 2013, overseeing the Company’s Corporate and Strategic Planning, Treasury, Investor Relations and Deployment functions. Prior to this, Mr. Liberty served, from 2010 through 2012, as Vice President of Corporate and Revenue Planning and, from 2008 to 2010, as Vice President of Corporate and Strategic Planning. Before joining Royal Caribbean, Mr. Liberty was a Senior Manager at the international public accounting firm of KPMG LLP.
Adam M. Goldstein has served as President and Chief Operating Officer since April 2014. Prior to this, he served as President of Royal Caribbean International since February 2005 and as its President and Chief Executive Officer since September 2007. Mr. Goldstein has been employed with Royal Caribbean since 1988 in a variety of positions, including Executive Vice President, Brand Operations of Royal Caribbean International, Senior Vice President, Total Guest Satisfaction and Senior Vice President, Marketing. Mr. Goldstein served as National Chair of the United States Travel Association (formerly, Travel Industry Association of America) in 2001. In November 2014, the Board2001 and as Chairman of Directors of Cruise Lines International Association ("CLIA") electedCLIA in 2015 and 2016. Mr. Goldstein to servebegan a two-year term as Chairman of CLIA beginningthe Florida-Caribbean Cruise Association (FCCA) in January 1, 2015.2017.
Michael W. Bayley has served as President and Chief Executive Officer of Royal Caribbean International since December 2014. Prior to this, he served as President and Chief Executive Officer of Celebrity Cruises since August 2012. Mr. Bayley has been employed by Royal Caribbean for over 30 years, having started as an Assistant Purser onboard one of the Company’s ships. He has served in a number of roles including as Executive Vice President, Operations from February 2012 until August 2012. Other positions Mr. Bayley has held include Executive Vice President, International from May 2010 until February 2012; Senior Vice President, International from December 2007 to May 2010; Senior Vice President, Hotel Operations for Royal Caribbean International; and Chairman and Managing Director of Island Cruises.
Lisa Lutoff-Perlo has served as President and Chief Executive Officer of Celebrity Cruises since December 2014. Prior to this, she served as Executive Vice President, Operations for Royal Caribbean International sincefrom September 2012.2012 to December 2014, where she was responsible for all of Royal Caribbean International's hotel, marine and port operations. Ms. Lutoff-Perlo has been employed with the Company since 1985 in a variety of positions within both
Celebrity Cruises and Royal Caribbean International. She started at Royal Caribbean International as District Sales Manager for New England and from August 2008 to August 2012 she was responsible for Celebrity Cruises’ entire hotel operation. In her role as Executive Vice President of Operations, Ms. Lutoff-Perlo was responsible for all of Royal Caribbean International's hotel, marine and port operations.
Lawrence Pimentel has served as President and Chief Executive Officer of Azamara Club Cruises since July 2009. From 2001 until January 2009, Mr. Pimentel was President, Chief Executive Officer, Director and co-owner of SeaDream Yacht Club, a privately held luxury cruise line located in Miami, Florida with two yacht-style ships that sailed primarily in the Caribbean and Mediterranean. From April 1991 to February 2001, Mr. Pimentel was President and Chief Executive Officer of Carnival Corp.’s Seabourn Cruise Line and from May 1998 to February 2001, he was President and Chief Executive Officer of Carnival Corp.’s Cunard Line.
Harri U. Kulovaara has served as Executive Vice President, Maritime since January 2005. Mr. Kulovaara is responsible for fleet design and newbuild operations. Mr. Kulovaara also chairs our Maritime Safety Advisory Board. Mr. Kulovaara has been employed with Royal Caribbean since 1995 in a variety of positions, including Senior Vice President, Marine Operations, and Senior Vice President, Quality Assurance. Mr. Kulovaara is a naval architect and engineer.
Bradley H. Stein has served as General Counsel and Corporate Secretary of the Company since 2006. He has also served as Senior Vice President and Chief Compliance Officer of the Company since February 2009 and February 2011, respectively. Mr. Stein has been with Royal Caribbean since 1992. Before joining Royal Caribbean, Mr. Stein worked in private practice in New York and Miami.
Henry L. Pujol has served as Senior Vice President, Chief Accounting Officer of the Company since May 2013. Mr. Pujol originally joined Royal Caribbean in 2004 as Assistant Controller and was promoted to Corporate Controller in May 2007. Before joining Royal Caribbean, Mr. Pujol was a Senior Manager at the international public accounting firm of KPMG LLP.
Item 1A. Risk Factors
The risk factors set forth below and elsewhere in this Annual Report on Form 10-K are important factors that could cause actual results to differ from expected or historical results. It is not possible to predict or identify all such risks. The risks described below are only those known risks relating to our operations and financial condition that we consider material. There may be additional risks that we consider not to be material, or which are not known, and any of these risks could have the effects set forth below. The ordering of the risk factors set forth below is not intended to reflect any Company indication of priority or likelihood. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a cautionary note regarding forward-looking statements.
Adverse worldwide economic geopolitical or other conditions could reduce the demand for cruises and passenger spending, adversely impactimpacting our operating results, cash flows and financial condition including potentially impairing the value of our ships goodwill and other assets.
The demand for cruises is affected by international, national and local economic and geopolitical conditions. In recent years, we have been faced with very challenging globalWeak or uncertain economic conditions which have adversely affected vacationers’impact consumer confidence and pose a risk as vacationers may postpone or reduce discretionary income and consumer confidence.spending. This, in turn, resultedmay result in cruise booking slowdowns, decreased cruise prices and lower onboard revenues for usrevenues. Given the global nature of our business, we are exposed to many different economies and for othersour business could be hurt by challenging conditions in the cruise industry as compared to more robust economic times. Although the cruise industry continued to recover in 2014, ongoing economic challenges continue in certain key markets, including Europe. In addition, we cannot predict with any certainty whether demand for cruises will continue to improve in countries that have experienced improved economic conditions or the strength of such improvement.our markets. Any significant deterioration of global,international, national or local economic conditions could result in a prolonged period of booking slowdowns, depressed cruise prices and reduced onboard revenues. Demand for our cruises is also influenced by geopolitical events. Unfavorable conditions, such as cross-border conflicts, civil unrest and governmental changes, especially in regions with popular ports of call, can undermine consumer demand and/or pricing for itineraries featuring these ports.
Fears of terrorist and pirate attacks, war, and other hostilities and the spread of contagious diseases could have a negative impact on our results of operations.
Events such as terrorist and pirate attacks, war (or war-like conditions), conflicts (domestic or cross-border), civil unrest and other hostilities, including the recentan escalation of tensions in the Middle East and terrorismfrequency or severity of incidents, in Europe, and the resulting political instability, travel restrictions the spread of contagious diseasesand advisories, and concerns over safety health and security aspects of traveling or the fear of any of the foregoing have had, and could have in the future, a significant adverse impact on demand and pricing in the travel and vacation industry. In view of our global operations, we have becomeare susceptible to a widerwide range of adverse events. These events could also result in additional security measures taken by local authorities which may potentially impact access to ports and/or destinations.
Our operating costs could increase due to market forces and economic or geo-political factors beyond our control.
Our operating costs, including fuel, food, payroll and benefits, airfare, taxes, insurance and security costs, are all subject to increases due to market forces and economic or geo-political conditions or other factors beyond our control. Increases in these operating costs could adversely affect our profitability.
Fluctuations in foreign currency exchange rates, fuel costsprices and interest rates could affect our financial results.
We are exposed to market risk attributable to changes in foreign currency exchange rates, fuel prices and changes in interest rates. High levels of volatility with respect toSignificant changes in any of the foregoing could have a material impact on our financial results, net of the impact of our hedging activities and other natural offsets. See “Item 7A. QuantitativeOur operating results have been and Qualitative Disclosures About Market Risk” for more information.
will continue to be impacted, often significantly, by changes in each of these factors. The value of our earnings in foreign currencies is adversely impacted by a strong United States and various state and foreign government or regulatory agencies have enacted or are considering new environmental regulations or policies, such as requiring the use of low sulfur fuels, increasing fuel efficiency requirements, further restricting emissions, or other initiatives to limit greenhouse gas emissions that could increase our cost for fuel, limit the supply of compliant fuel, cause us to incurdollar. In addition, any significant expenses to purchase and/or develop
Conducting business globally may result in increased costs and other risks.
We operate our business globally. Operating internationally exposes us to a number of risks, including increased exposure to a wider range of regional and local economic conditions, volatile local political conditions, potential
changes in duties and taxes, including changing and/or uncertain interpretations of existing tax laws and regulations, required compliance with additional laws and policies affecting cruising, vacation or maritime businesses or governing the operations of foreign-based companies, currency fluctuations, interest rate movements, difficulties in operating under local business environments, port quality and availability in certain regions, U.S. and global anti-bribery laws or regulations, imposition of trade barriers and restrictions on repatriation of earnings. We have recently expanded
Our future growth strategies increasingly depend on the growth and sustained profitability of certain international markets, such as China. Some factors that will be critical to our presencesuccess in Chinadeveloping these markets may be different than those affecting our more-established North American and accordingly,European markets. In the Chinese market, in particular, our exposurefuture success depends on our ability to continue to raise awareness of our products, evolve the risks of doing business inavailable distribution channels and adapt our offerings to best suit the country.Chinese consumer. China’s economy differs from the economies of other developed countries in many respects and, as the legal and regulatory system in China continues to evolve, there may be greater uncertainty as to the interpretation and enforcement of applicable laws and regulations. In March 2017, China's National Tourism Administration issued a directive to travel agents to halt sales of holiday packages to South Korea. This travel restriction has had a direct impact on our related itineraries impacting the overall performance of our China business. It is uncertain what the ultimate scope and duration of this restriction will be, but to the extent that this or similar sanctions affecting regional travel and/or tourism continues or are put in place, it may impact local demand, available cruise itineraries and the overall financial performance of the China market.
Operating globally also exposes us to numerous and sometimes conflicting legal, regulatory and tax requirements. In many parts of the world, including countries in which we operate, practices in the local business communities might not conform to international business standards. We must adhere to policies designed to promote legal and regulatory compliance as well as applicable laws and regulations. However, we might not be successful in ensuring that our employees, agents, representatives and other third parties with whichwhom we associate throughout the world properly adhere to them. Failure by us, our employees or any of these third parties to adhere to our policies or applicable laws or regulations could result in penalties, sanctions, damage to our reputation and related costs which in turn could negatively affect our results of operations and cash flows.
We have operations in and source passengers from the United Kingdom and other member countries of the European Union. In March 2017, the United Kingdom notified the European Council of its intent to withdraw from the European Union. Since the initial referendum in June 2016, the expected withdrawal has resulted in increased volatility in the global financial markets and, in particular, in global currency exchange rates. The expected withdrawal could potentially adversely affect tax, legal and regulatory regimes to which our business in the region is subject. The expected withdrawal could also, among other potential outcomes, disrupt the free movement of goods, services and people between the United Kingdom and the European Union. Further, as the expected withdrawal approaches, continued uncertainty around these issues could lead to adverse effects on the economy of the United Kingdom, including the value of the British Pound, and the other economies in which we operate, making it more difficult to source passengers from these regions. These risks may be exacerbated if voters of other countries within the European Union similarly elect to exit the European Union in future referendums.
As a global operator, our business may be also impacted by changes in U.S. policy or priorities in areas such as trade, immigration and/or environmental or labor regulations, among others. Depending on the nature and scope of any such changes, they could impact our domestic and international business operations. Any such changes, and any international response to them, could potentially introduce new barriers to passenger or crew travel and/or cross border transactions, impact our guest experience and/or increase our operating costs.
If we are unable to address these risks adequately, our financial position and results of operations could be adversely affected, including potentially impairing the value of our ships goodwill and other assets.
Price increases for commercial airline service for our guests or major changes or reduction in commercial airline service and/or availability could adversely impact the demand for cruises and undermine our ability to provide reasonably priced vacation packages to our guests.
Many of our guests depend on scheduled commercial airline services to transport them to or from the ports where our cruises embark or disembark. Increases in the price of airfare would increase the overall price of the cruise vacation to our guests, which may adversely impact demand for our cruises. In addition, changes in the availability of commercial airline services could adversely affect our guests’ ability to obtain airfare, as well as our ability to fly our guests to or from our cruise ships, which could adversely affect our results of operations.
Incidents or adverse publicity concerning our ships and/or passengers or the cruise vacation industry in general, unusual weather conditions and other natural disasters or disruptions could affect our reputation as well as impact our sales and results of operations.
The ownership and/or operation of cruise ships, private destinations, port facilities and shore excursions involves the risk of accidents, illnesses, mechanical failures, environmental incidents and other incidents which may bring into question safety, health, security and vacation satisfaction which could negatively impact our reputation. Incidents involving cruise ships, and, in particular the safety, health and security of guests and crew and media coverage thereof have impacted and could in the future impact demand for our cruises and pricing in the industry. Our reputation and our business could also be damaged by negative publicity regarding the cruise industry in general, including publicity regarding the spread of contagious disease and the potentially adverse environmental impacts of cruising. The considerable expansion in the use of social media and digital marketing over recent years has compounded the potential scope of any negative publicity. If any such incident or news cycle occurs during a time of high seasonal demand, the effect could disproportionately impact our results of operations for the year. In addition, incidents involving cruise ships may result in additional costs to our business, increasing government or other regulatory oversight and, in the case of incidents involving our ships, potential litigation.
Our cruise ships and port facilities may also be adversely impacted by weather or natural disasters or disruptions, such as hurricanes. We are often forced to alter itineraries and occasionally cancel a cruise or a series of cruises or to redeploy our ships due to these types of events, which could have an adverse effect on our sales and profitability in the current and future periods. For example, the 2017 hurricane season was particularly impactful to our operations in the Caribbean. Increases in the frequency, severity or duration of severe weather events, including those related to climate change, could exacerbate the impact and cause further disruption to our operations. In addition, these and any other events which impact the travel industry more generally may negatively impact our ability to deliver guests or crew to our cruises and/or interrupt our ability to obtain services and goods from key vendors in our supply chain. Any of the foregoing could have an adverse impact on our results of operations and on industry performance.
An increase in capacity worldwide or excess capacity in a particular market could adversely impact our cruise sales and/or pricing.
Although our ships can be redeployed, cruise sales and/or pricing may be impacted by the introduction of new ships into the marketplace, reductions in cruise capacity, overall market growth and deployment decisions of ourselves and our competitors. As of December 31, 2017, a total of 75 new ships with approximately 184,000 berths are on order for delivery through 2022 in the cruise industry. The further net growth in capacity from these new ships and future orders, without an increase in the cruise industry’s demand and/or share of the vacation market, could depress cruise prices and impede our ability to achieve yield improvement.
In addition, to the extent that we or our competitors deploy ships to a particular itinerary and the resulting capacity in that region exceeds the demand, we may lower pricing and profitability may be lower than anticipated. This risk exists in emerging cruise markets, such as China, where capacity has grown rapidly over the past few years and in mature markets where excess capacity is typically redeployed. Any of the foregoing could have an adverse impact on our results of operations, cash flows and financial condition, including potentially impairing the value of our ships and other assets.
Unavailability of ports of call may adversely affect our results of operations.
We believe that port destinations are a major reason why guests choose to go on a particular cruise or on a cruise vacation. The availability of ports is affected by a number of factors, including existing capacity constraints, constraints related to the size of certain ships, security, environmental and health concerns, adverse weather conditions and natural disasters, financial limitations on port development, exclusivity arrangements that ports may have with our competitors, local governmental regulations and local community concerns about port development and other adverse impacts on their communities from additional tourists. In addition, fuel costs may adversely impact the destinations on certain of our itineraries. Any limitations on the availability or feasibility of our ports of call or on the availability of shore excursions and other service providers at such ports could adversely affect our results of operations.
Our reliance on shipyards, their subcontractors and our suppliers to implement our newbuild and ship upgrade programs and to repair and maintain our ships exposes us to risks which, if realized, could adversely impact our business.
We rely on shipyards, their subcontractors and our suppliers to effectively construct our new ships and to repair, maintain and upgrade our existing ships on a timely basis and in a cost effective manner.
There are a limited number of shipyards with the capability and capacity to build our new ships and, accordingly, increased demand for available new construction slots and/or continued consolidation in the cruise shipyard industry (including completion of Italian shipbuilder Fincantieri's bid for STX France) could impact our ability to construct new ships when and as planned, cause us to continue to commit to new ship orders earlier than we have historically done so and/or result in stronger bargaining power on the part of the shipyards and the export credit agencies providing financing for the project. Our inability to timely and cost-effectively procure new capacity could have a significant negative impact on our future business plans and results of operations.
Building, repairing, maintaining and/or upgrading a ship is sophisticated work that involves significant risks. In addition, the prices of labor and/or various commodities that are used in the construction of ships can be subject to volatile price changes, including the impact of fluctuations in foreign exchange rates. Shipyards, their subcontractors and/or our suppliers may encounter financial, technical or design problems when doing these jobs. If materialized, these problems could impact the timely delivery or costs of new ships or the ability of shipyards to repair and upgrade our fleet in accordance with our needs or expectations. In addition, delays or mechanical faults may result in cancellation of cruises or, in more severe situations, new ship orders, or necessitate unscheduled drydocks and repairs of ships. These events and any related adverse publicity could result in lost revenue, increased operating expenses, or both, and thus adversely affect our results of operations.
We may lose business to competitors throughout the vacation market.
We operate in the vacation market and cruising is one of many alternatives for people choosing a vacation. We therefore risk losing business not only to other cruise lines, but also to other vacation operators, which provide other leisure options including hotels, resorts, internet-based alternative lodging sites and package holidays and tours.
We face significant competition from other cruise lines on the basis of cruise pricing, travel agent preference and also in terms of the nature of ships and services we offer to guests. Our principal competitors within the cruise vacation industry include Carnival Corporation & plc, which owns, among others, Aida Cruises, Carnival Cruise Line, Costa Cruises, Cunard Line, Holland America Line, P&O Cruises, Princess Cruises and Seabourn; Disney Cruise Line; MSC Cruises; and Norwegian Cruise Line Holdings Ltd, which owns Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. Our revenues are sensitive to the actions of other cruise lines in many areas including pricing, scheduling, capacity and promotions, which can have a substantial adverse impact not only on our revenues, but on overall industry revenues.
In the event that we do not effectively market or differentiate our cruise brands from our competitors or otherwise compete effectively with other vacation alternatives and new or existing cruise companies, our results of operations and financial position could be adversely affected.
We may not be able to obtain sufficient financing or capital for our needs or may not be able to do so on terms that are acceptable or consistent with our expectations.
To fund our capital expenditures (including new ship orders), operations and scheduled debt payments, we have historically relied on a combination of cash flows provided by operations, drawdowns under available credit facilities, the incurrence of additional indebtedness and the sale of equity or debt securities in private or public securities markets. Any circumstance or event which leads to a decrease in consumer cruise spending, such as worsening global economic conditions or significant incidents impacting the cruise industry, could negatively affect our operating cash flows. See “-Adverse worldwide economic, geopolitical or other conditions…” and “-Incidents or adverse publicity concerning our ships and/or passengers or the cruise vacation industry…” for more information.
Although we believe we can access sufficient liquidity to fund our operations, investments and obligations as expected, there can be no assurances to that effect. Our ability to access additional funding as and when needed, our ability to timely refinance and/or replace our outstanding debt securities and credit facilities on acceptable terms and our cost of funding will depend upon numerous factors including, but not limited to, the vibrancy of the financial markets, our financial performance, the performance of our industry in general and the size, scope and timing of our financial needs. In addition, even where financing commitments have been secured, significant disruptions in the capital and credit markets could cause our banking and other counterparties to breach their contractual obligations to us. This could include failures of banks or other financial service companies to fund required borrowings under our loan agreements or to pay us amounts that may become due or return collateral that is refundable under our derivative contracts for hedging of fuel prices, interest rates and foreign currencies or other agreements. If any of the foregoing occurs it may have a negative impact on our cash flows, including our ability to meet our obligations, our results of operations and our financial condition.
Our liquidity could be adversely impacted if we are unable to satisfy the covenants required by our credit facilities.
Our debt agreements contain covenants, including covenants restricting our ability to take certain actions and financial covenants. Our ability to maintain our credit facilities may also be impacted by changes in our ownership base. More specifically, we may be required to prepay our bank financing facilities 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. 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.
Our failure to comply with the terms of our debt facilities could result in an event of default. Generally, if an event of default under any debt agreement occurs, then pursuant to cross default acceleration clauses, our outstanding debt and derivative contract payables could become due and/or terminated. In addition, in such events, our credit card processors could hold back payments to create a reserve. We cannot provide assurances that we would have sufficient liquidity to repay, or the ability to refinance the debt if such amounts were accelerated upon an event of default.
If we are unable to appropriately balance our cost management and capital allocation strategies with our goal of satisfying guest expectations, it may adversely impact our business success.
Our goals call for us to provide high quality products and deliver high quality services. There can be no assurance that we can successfully balance these goals with our cost management and capital allocation strategies. Our business also requires us to make capital allocation decisions, such as ordering new ships and/or upgrading our existing fleet, based on expected market preferences and projected demand. There can be no assurance that our strategies will be successful, which could adversely impact our business, financial condition and results of operations. Investments in older tonnage, in particular, run the risk of not meeting expected returns and diluting related asset values.
Our attempts to expand our business into new markets and new ventures may not be successful.
We opportunistically seek to grow our business through, among other things, expansion into new destination or source markets and establishment of new ventures complementary to our current offerings. These attempts to expand our business increase the complexity of our business, require significant levels of investment and can strain our management, personnel, operations and systems. There can be no assurance that these business expansion efforts will develop as anticipated or that we will succeed, and if we do not, we may be unable to recover our investment, which could adversely impact our business, financial condition and results of operations.
Our reliance on travel agencies to sell and market our cruises exposes us to certain risks which, if realized, could adversely impact our business.
We rely on travel agencies to generate the majority of bookings for our ships,ships. Accordingly, we must ensure that our commission rates and incentive structures remain competitive. If we fail to offer competitive compensation packages, these agencies may be incentivized to sell cruises offered by our competitors to our detriment, which could adversely impact our operating results. Our reliance on third-party sellers is particularly pronounced in certain markets, such as China, where we have a large number of travel agent charter and group sales and less retail agency and direct booking. In addition, the travel agent industry is sensitive to economic conditions that impact discretionary income. Significant disruptions, especially disruptions impacting those agencies that sell a high volume of our business, or contractions in the industry could reduce the number of travel agencies available for us to market and sell our cruises, which could have an adverse impact on our financial condition and results of operations.
Disruptions in our shoreside or shipboard operations or our information systems may adversely affect our results of operations.
Our principal executive office and principal shoreside operations are located at the Port of Miami,in Florida, and we have shoreside offices throughout the world. Actual or threatened natural disasters (e.g., hurricanes,hurricanes/typhoons, earthquakes, tornadoes, fires or floods) or similar events in these locations may have a material impact on our business continuity, reputation and results of operations. In addition, substantial or repeated information systems failures, computer viruses or cyber-attacks impacting our shoreside or shipboard operations could adversely impact our business. We do not generally carry business interruption insurance for our shoreside or shipboard operations or our information systems. As such, any losses or damages incurred by us could have an adverse impact on our results of operations.
The loss of key personnel, our inability to recruit or retain qualified personnel, or disruptions among our shipboard personnel due to strained employee relations could adversely affect our results of operations.
Our success depends, in large part, on the skills and contributions of key executives and other employees, and on our ability to recruit, develop and retain high quality personnel. As demand for qualified personnel in key markets. Wethe industry grows, we must continue to sufficientlyeffectively recruit, retain, train, motivate and motivateretain our employees, both shoreside and on our ships, in order to effectively compete in our industry, maintain our current business and support our projected global growth. Furthermore, as
As of December 31, 2014, 86%2017, 85% of our shipboard employees were covered by collective bargaining agreements. A dispute under our collective bargaining agreements could result in a work stoppage of those employees covered by the agreements. AWe may not be able to satisfactorily renegotiate these collective bargaining agreements when they expire. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage on our ships. We may also be subject to or affected by work stoppages unrelated to our business or collective bargaining agreements. Any such work stoppages or potential work stoppages could have a material adverse effect on our financial results, as could a loss of key employees, our inability to recruit or retain qualified personnel or disruptions among our personnel could adversely affect our results of operations.personnel.
Business activities that involve our co-investment with third parties may subject us to additional risks.
Partnerships, joint ventures and other business structures involving our co-investment with third parties such as our joint venture to operate TUI Cruises, our new partnership to operate SkySea Cruises, our investment in Grand Bahama Shipyard and our minority ownership investments in various port development and other projects, generally include some form of shared control over the operations of the business and create additional risks, including the possibility that other investors in such ventures could become bankrupt or otherwise lack the financial resources to
meet their obligations, or could have or develop business interests, policies or objectives that are inconsistent with ours. With the sale of 51% of our interest in Pullmantur Holdings in July 2016, we continue to expand the breadth of our co-investment activities, which also include TUI Cruises, SkySea Cruises, Grand Bahama Shipyard and minority ownership investments in various port development and other projects. In addition actions by another investorto financial risks, our co-investment activities may also present additionalmanagerial and operational risks of operational difficulties orand expose us to reputational or legal concerns. These or other issues related to our co-investment with third parties could adversely impact our operations.
We rely on supply chain vendors and third-party service providers of various serviceswho are integral to the operations of our businesses. These third partiesvendors and service providers may be unable or unwilling to deliver on their commitments or may act in ways that could harm our business.
We rely on supply chain vendors to deliver key products to the operations of our businesses around the world. Any event impacting a vendor’s ability to deliver goods of the required quality at the location and time needed could negatively impact our ability to deliver our cruise experience. Events impacting our supply chain could be caused by factors beyond the control of our suppliers or us, including inclement weather, natural disasters, increased demand, problems in production or distribution and/or disruptions in third-party logistics or transportation systems. Interruptions to our supply chain could increase costs and could limit the availability of products critical to our operations.
In order to achieve cost and operational efficiencies, we outsource to third-party vendors certain services that are integral to the operations of our global businesses, such as our onboard concessionaires, certain of our call center operations and operation of a large part of our information technology systems. We are subject to the risk that certain decisions are subject to the control of our third-party service providers and that these decisions may adversely affect our activities. A failure to adequately monitor a third-party service provider’s compliance with a service level agreement or regulatory or legal requirements could result in significant economic and reputational harm to us. There is also a risk the confidentiality, privacy and/or security of data held by third parties or communicated over third-party networks or platforms could become compromised.
A failure to keep pace with developments in technology or technological obsolescence could impair our operations or competitive position.
Our business continues to demand the use of sophisticated technology and systems. These technologies and systems require significant investment and must be proven, refined, updated, and/or replaced with more advanced systems in order to continue to meet our customers’ demands and expectations. If we are unable to do so in a timely manner or within reasonable cost parameters or if we are unable to appropriately and timely train our employees to operate any of these new systems, our business could suffer. We also may not achieve the benefits that we anticipate from any new technology or system, and a failure to do so could result in higher than anticipated costs or could impair our operating results.
We may be exposed to the threat of cyber attacks and/or data breaches, including the risks and costs associated with cyber security, including protecting theour key operating systems and maintaining integrity and security of our guests’business information, as well as personal data of our guests, employees and employees’ personal information.business partners.
Cyber attacks can vary in scope and intent from economically driven attacks to malicious attacks targeting our key operating systems with the intent to disrupt, disable or otherwise cripple our maritime and /or shoreside operations. This can include any combination of phishing attacks, malware and/or viruses targeted at our key systems. The breadth and scope of this threat has grown over time, and the techniques and sophistication used to conduct cyber attacks, as well as the sources and targets of the attacks, change frequently. While we invest time, effort and capital resources to secure our key systems and networks, our security measures cannot provide absolute assurance that we will be successful in preventing or responding to all such attacks.
A successful cyber attack may target us directly, or may be the result of a third party vendor's inadequate care. In either scenario, the Company may suffer damage to its key systems and/or data that could interrupt our operations, adversely impact our reputation and brand and expose us to increased risks of governmental investigation, litigation
and other liability, any of which could adversely affect our business. Furthermore, responding to such an attack and mitigating the risk of future attacks could result in additional operating and capital costs in systems technology, personnel, monitoring and other investments.
In addition to malicious cyber attacks, we are also subject to various risks associated with the collection, handling, storage and transmission of sensitive information, including risks related to compliance with applicable laws and other contractual obligations, as well as the risk that our systems collecting such information could be compromised.information. In the course of doing business, we collect large volumes of internal, customer and customerother third-party data, including personally identifiable information and individual credit data, for various business purposes. We are subject to federal, state and international laws (including the European Union General Data Protection Regulation which will take effect in May 2018), as well as industry standards, relating to the collection, use, retention, security and transfer of personally identifiable information and individual credit data. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between the Company and its subsidiaries, and among the Company, its subsidiaries and other parties with which the Company has commercial relations. Several jurisdictions have passed laws in this area, and other jurisdictions are considering imposing additional restrictions. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing international requirements has caused, and may cause us to incur substantial costs or require us to change our business practices. If we fail to comply with the various applicable data collection and privacy laws, we could be exposed to fines, penalties, restrictions, litigation or other expenses, and our business could be adversely impacted.
Even if we are fully compliant with legal and/or industry standards and any relevant contractual requirements, we still may not be able to prevent security breaches involving sensitive data.data and/or critical systems. Any breach, theft, loss, or fraudulent use of guest, employee, third-party or company data, could adversely impact our reputation and brand and our ability to retain or attract new customers, and expose us to risks of data loss, business disruption, governmental investigation, litigation and other liability, any of which could adversely affect our business. Significant capital investments and other expenditures could be required to remedy the problem and prevent future breaches, including costs associated with additional security technologies, personnel, experts and credit monitoring services for those whose data has been breached. Additionally,Further, if we or our vendors experience significant data security breaches or fail to detect and appropriately respond to significant data security breaches, we could be exposed to government enforcement actions and private litigation.
The potential unavailability of insurance coverage or an inability to obtain insurance coverage at commercially reasonable rates may adversely affect our financial condition or results of operations.
We seek to maintain appropriate insurance coverage at commercially reasonable rates. We normally insure based on the techniquescost of an asset rather than replacement value and sophistication usedwe also elect to conduct cyber-attacksself-insure, co-insure, or use deductibles in certain circumstances for certain risks such as loss of use of a ship or a cyber-security breach. The limits of insurance coverage we purchase are based on the availability of the coverage, evaluation of our risk profile and breachescost of information technology systems, as wellcoverage. Accordingly, we are not protected against all risks which could result in an unexpected decrease in our revenue and results of operations in the event of an incident.
We are members of three Protection and Indemnity ("P&I") clubs, which are part of a worldwide group of 13 P&I clubs, known as the sourcesInternational Group of P&I Clubs (the “IG”). P&I coverage provided by the clubs is on a mutual basis and targetswe are subject to additional premium calls in the event of a catastrophic loss incurred by any member of the 13 P&I clubs, whereby the reinsurance limits purchased by the IG are exhausted. We are also subject to additional premium calls based on investment and underwriting shortfalls experienced by our own individual insurers.
We cannot be certain that insurance and reinsurance coverage will be available to us and at commercially reasonable rates in the future. Additionally, if we or other insureds sustain significant losses, the result may be higher insurance premiums, cancellation of coverage, or the inability to obtain coverage. Such events could adversely affect our financial condition or results of operations.
Environmental, labor, health and safety, financial responsibility and other maritime regulations could affect operations and increase operating costs.
The United States and various state and foreign government or regulatory agencies have enacted or may enact environmental regulations or policies, such as requiring the use of low sulfur fuels, that could increase our direct cost to operate in certain markets, increase our cost for fuel, limit the supply of compliant fuel, cause us to incur significant expenses to purchase and/or develop new equipment and adversely impact the cruise vacation industry. While we have taken and expect to continue to take a number of actions to mitigate the potential impact of certain of these attacks, change frequently and are often not recognized until such attacks are launched or have been in place for a period of time. Our security measures cannot provide assuranceregulations, there can be no assurances that wethese efforts will be successful or completed on a timely basis.
There is increasing global regulatory focus on climate change and greenhouse gas (GHG) emissions. These regulatory efforts, both internationally and in preventingthe United States are still developing, and we cannot yet determine what the final regulatory programs or their impact will be in any jurisdiction where we do business. However, such breaches.climate change-related regulatory activity in the future may adversely affect our business and financial results by requiring us to reduce our emissions, purchase allowances or otherwise pay for our emissions. Such activity may also impact us by increasing our operating costs, including fuel costs.
Some environmental groups have also lobbied for more stringent regulation of cruise ships and have generated negative publicity about the cruise vacation industry and its environmental impact. See Item 1. Business-Regulation-Environmental Regulations.
In addition, we are subject to various international, national, state and local laws, regulations and treaties that govern, among other things, discharge from our ships, safety standards applicable to our ships, treatment of disabled persons, health and sanitary standards applicable to our guests, security standards on board our ships and at the ship/port interface areas, and financial responsibilities to our guests. These issues are, and we believe will continue to be, an area of focus by the relevant authorities throughout the world. This could result in the enactment of more stringent regulation of cruise ships that could subject us to increasing compliance costs in the future.
A change in our tax status under the United States Internal Revenue Code, or other jurisdictions, may have adverse effects on our income.
We and a number of our subsidiaries are foreign corporations that derive income from a United StatesU.S. trade or business and/or from sources within the United States. Drinker Biddle & Reath LLP, our United StatesU.S. tax counsel, has delivered to us an opinion, based on certain representations and assumptions set forth in it, to the effect that this income, to the extent derived from or incidental to the international operation of a ship or ships, is exemptexcluded from United Statesgross income for U.S. federal income tax purposes pursuant to Section 883 of the Internal Revenue Code. We believe that most of our income (including that of our subsidiaries) is derived from or incidental to the international operation of a ship or ships.
Our ability to rely on Section 883 could be challenged or could change in the future. Provisions of the Internal Revenue Code, including Section 883, are subject to legislative change at any time. Moreover, changes could occur in the future with respect to the identity, residence or holdings of our direct or indirect shareholders, trading volume or trading frequency of our shares, or relevant foreign tax laws of Liberia or Malta such that theyit no longer qualifyqualifies as an equivalent exemption jurisdictions,jurisdiction, that could affect our eligibility for the Section 883 exemption. Accordingly, there can be no assurance that we will continue to be exempt from United StatesU.S. income tax on United StatesU.S. source shipping income in the future. If we were not entitled to the benefit of Section 883, we and our subsidiaries would be subject to United StatesU.S. taxation on a portion of the income derived from or incidental to the international operation of our ships, which would reduce our net income.
Additionally, portions of our business are operated by companies that are within the United Kingdom tonnage tax regimes of the U.K. and Malta.regime. Further, some of theour operations of these companies are conducted in jurisdictions where we rely on tax
treaties to provide exemption from taxation. To the extent the United Kingdom tonnage tax laws of these countries change or we do not continue to meet the applicable qualification requirements or if tax treaties are changed or revoked, we may be required to pay higher income tax in these jurisdictions, adversely impacting our results of operations.
As budgetary constraints continue to adversely impact the jurisdictions in which we operate, increases in income tax regulations, tax audits or tax reform affecting our operations may be imposed.
Litigation, enforcement actions, fines or penalties could adversely impact our financial condition or results of operations and/or damage our reputation.
Our business is subject to various United States and international laws and regulations that could lead to enforcement actions, fines, civil or criminal penalties or the assertion of litigation claims and damages. In addition, improper conduct by our employees, agents or joint venture partners could damage our reputation and/or lead to litigation or legal proceedings that could result in civil or criminal penalties, including substantial monetary fines. In certain circumstances it may not be economical to defend against such matters and/or a legal strategy may not ultimately result in us prevailing in a matter. Such events could lead to an adverse impact on our financial condition or results of operations.
We are not a United States corporation and our shareholders may be subject to the uncertainties of a foreign legal system in protecting their interests.
Our corporate affairs are governed by our Articles of Incorporation and By-Laws and by the Business Corporation Act of Liberia. The provisions of the Business Corporation Act of Liberia resemble provisions of the corporation laws of a number of states in the United States. However, while most states have a fairly well developed body of case law interpreting their respective corporate statutes, there are very few judicial cases in Liberia interpreting the Business Corporation Act of Liberia. As such, the rights and fiduciary responsibilities of directors under Liberian law are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in certain United States jurisdictions. For example, the right of shareholders to bring a derivative action in Liberian courts may be more limited than in United States jurisdictions. There may also be practical difficulties for shareholders attempting to bring suit in Liberia and Liberian courts may or may not recognize and enforce foreign judgments. Thus, our public shareholders may have more difficulty in protecting their interests with respect to actions by management, directors or controlling shareholders than would shareholders of a corporation incorporated in a United States jurisdiction.
Provisions of our Articles of Incorporation, By-Laws and Liberian law could inhibit others from acquiring us, prevent a change of control, and may prevent efforts by our shareholders to change our management.
Certain provisions of our Articles of Incorporation and By-Laws and Liberian law may inhibit third parties from effectuating a change of control of the Company without Board approval which could result in the entrenchment of current management. These include provisions in our Articles of Incorporation that prevent third parties, other than A. Wilhelmsen AS. and Cruise Associates, from acquiring beneficial ownership of more than 4.9% of our outstanding shares without the consent of our Board of Directors.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Information about our cruise ships, including their size and primary areas of operation, may be found within the Operating Strategies - Fleet upgrade, maintenance and expansion section and the Operations - Cruise Ships and Itineraries sectionsections in Item 1. Business. Information regarding our cruise ships under construction, estimated expenditures and financing may be found within the Future Capital Commitments and Funding Needs and Sources sections of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our principal executive office and principal shoreside operations are located in leased office buildings at the Port of Miami, Florida where we lease three office buildings totaling approximately 361,800 square feet from Miami-Dade County, Florida, under long-term leases with current terms expiring in 2021. These leases may be extended for an additional ten years under two five year options. We lease one office building in the United Kingdom totaling approximately 24,000 square feet used to conduct our operations in the United Kingdom.Florida. We also lease a number of internationalother offices in the US and throughout Europe, Asia, Mexico, South America and Australia to administer our brand operations globally.
We believe that our facilities are adequate for our current needs and that we are capable of obtaining additional facilities as necessary.
We also operate two private destinations which we utilize as a port-of-callports-of-call on certain of our itineraries: (i) an island we own in the Bahamas which we call CocoCay; and (ii) Labadee, a secluded peninsula we lease on the north coast of Haiti.
Item 3. Legal Proceedings
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.
Item 4. Mine Safety Disclosures
None.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the New York Stock Exchange ("NYSE") and the Oslo Stock Exchange ("OSE") under the symbol "RCL"."RCL." The table below sets forth the high and low sales prices of our common stock as reported by the NYSE and the OSE for the two most recent years by quarter:
NYSE Common Stock | OSE Common Stock(1) | NYSE Common Stock | ||||||||
| High | Low | High | Low | High | Low | |||||
| 2014 | ||||||||||
| 2017 | ||||||||||
| Fourth Quarter | $83.90 | $52.32 | 638.00 | 347.00 | $133.75 | $117.55 | ||||
| Third Quarter | $69.31 | $53.66 | 439.60 | 332.00 | $125.00 | $107.79 | ||||
| Second Quarter | $57.38 | $49.65 | 349.00 | 300.00 | $115.63 | $93.86 | ||||
| First Quarter | $54.93 | $45.95 | 332.60 | 284.20 | $101.11 | $82.72 | ||||
| 2013 | ||||||||||
| 2016 | ||||||||||
| Fourth Quarter | $47.66 | $35.97 | 292.60 | 216.10 | $86.84 | $67.53 | ||||
| Third Quarter | $40.71 | $33.31 | 241.80 | 201.40 | $75.72 | $65.10 | ||||
| Second Quarter | $38.62 | $31.35 | 224.90 | 178.00 | $84.56 | $64.95 | ||||
| First Quarter | $38.56 | $31.72 | 213.50 | 184.10 | $99.81 | $64.21 | ||||
Holders
As of February 12, 20152018, there were 9611,529 record holders of our common stock. Since certain of our shares are held by brokers and other institutions on behalf of shareholders, the foregoing number is not representative of the number of beneficial owners.
Dividends
In 2013,2016, we declared cash dividends on our common stock of $0.12$0.375 per share during the first and second quarters of 2013.2016. We increased the dividend amount to $0.25$0.48 per share for the dividends declared in the third and fourth quarters of 20132016 and the first and second quarters of 2014.2017. The dividend amount was increased to $0.30$0.60 per share for the dividends declared in the third and fourth quarters of 2014.2017.
Holders of our common stock have an equal right to share in our profits in the form of dividends when and if declared by our Board of Directors out of funds legally available. Holders of our common stock have no rights to any sinking fund.
There are no exchange control restrictions on remittances of dividends on our common stock since (1) we are and intend to maintain our status as a nonresident Liberian entity under the Liberia Revenue Code of 2000 as Amended and the regulations thereunder, and (2) our ship-owning subsidiaries are not now engaged, and are not in the future expected to engage, in any business in Liberia, including voyages exclusively within the territorial waters of the Republic of Liberia. Under current Liberian law, no Liberian taxes or withholding will be imposed on payments to holders of our securities other than to a holder that is a resident Liberian entity or a resident individual or an individual or entity subject to taxation in Liberia as a result of having a permanent establishment within the meaning of the Liberia Revenue Code of 2000 as Amended in Liberia.
The declaration of dividends shall at all times be subject to the final determination of our Board of Directors that a dividend is prudent at that time in consideration of the needs of the business.
The following table presents the total number of shares of our common stock that we repurchased during the quarter ended December 31, 2014:2017:
| Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs | |||
November 1, 2014-November 30, 2014 (1) | 3,500,000 | $67.45 | — | — | |||
| Total this quarter | 3,500,000 | $67.45 | — | — | |||
| Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs(1) | Approximate dollar value of shares that may yet be purchased under the plans or programs | |||
| October 1, 2017 - October 31, 2017 | — | — | — | $375,000,000 | |||
| November 1, 2017 - November 30, 2017 | 275,647 | $124.05 | 275,647 | $341,000,000 | |||
| December 1, 2017 - December 31, 2017 | 526,470 | $124.96 | 526,470 | $275,000,000 | |||
| Total | 802,117 | 802,117 | |||||
(1) | On April 28, 2017, we announced that our board of directors authorized a 12-month common stock repurchase program for up to $500 million. The timing and number of shares to be repurchased will depend on a variety of factors including price and market conditions. During the fourth quarter of 2017, we repurchased 0.8 million shares of our common stock for a total of $100 million in open market transactions that were recorded within Treasury stock in our consolidated balance sheet. Repurchases under the program may be made at management's discretion from time to time on the open market or through privately negotiated transactions. |
Performance Graph
The following graph compares the total return, assuming reinvestment of dividends, on an investment in the Company, based on performance of the Company's common stock, with the total return of the Standard & Poor's 500 Composite Stock Index and the Dow Jones United States Travel and Leisure Index for a five year period by measuring the changes in common stock prices from December 31, 20092012 to December 31, 2014.2017.
| 12/09 | 12/10 | 12/11 | 12/12 | 12/13 | 12/14 | 12/12 | 12/13 | 12/14 | 12/15 | 12/16 | 12/17 | |||||||||||
Royal Caribbean Cruises Ltd. | 100.00 | 185.92 | 98.79 | 137.68 | 195.65 | 346.17 | 100.00 | 142.11 | 251.44 | 313.65 | 260.04 | 385.47 | ||||||||||
| S&P 500 | 100.00 | 115.06 | 117.49 | 136.30 | 180.44 | 205.14 | 100.00 | 132.39 | 150.51 | 152.59 | 170.84 | 208.14 | ||||||||||
| Dow Jones US Travel & Leisure | 100.00 | 141.39 | 150.84 | 170.95 | 248.70 | 289.40 | 100.00 | 145.48 | 169.28 | 179.27 | 192.85 | 238.77 |
The stock performance graph assumes for comparison that the value of the Company's common stock and of each index was $100 on December 31, 20092012 and that all dividends were reinvested. Past performance is not necessarily an indicator of future results.
Item 6. Selected Financial Data
The selected consolidated financial data presented below for the years 20102013 through 20142017 and as of the end of each such year, except for Adjusted Net Income amounts, are derived from our audited consolidated financial statements and should be read in conjunction with those financial statements and the related notes as well as in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||||||
| (in thousands, except per share data) | (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||||
| Operating Data: | ||||||||||||||||||||||||||||||||||||||
| Total revenues | $ | 8,073,855 | $ | 7,959,894 | $ | 7,688,024 | $ | 7,537,263 | $ | 6,752,504 | $ | 8,777,845 | $ | 8,496,401 | $ | 8,299,074 | $ | 8,073,855 | $ | 7,959,894 | ||||||||||||||||||
Operating income | $ | 941,859 | $ | 798,148 | $ | 403,110 | $ | 931,628 | $ | 802,633 | $ | 1,744,056 | $ | 1,477,205 | $ | 874,902 | $ | 941,859 | $ | 798,148 | ||||||||||||||||||
Net income | $ | 764,146 | $ | 473,692 | $ | 18,287 | $ | 607,421 | $ | 515,653 | $ | 1,625,133 | $ | 1,283,388 | $ | 665,783 | $ | 764,146 | $ | 473,692 | ||||||||||||||||||
Adjusted Net Income(1) (2) (3) (4) | $ | 1,625,133 | $ | 1,314,689 | $ | 1,065,066 | $ | 755,729 | $ | 539,224 | ||||||||||||||||||||||||||||
| Per Share Data—Basic: | ||||||||||||||||||||||||||||||||||||||
| Net income | $ | 3.45 | $ | 2.16 | $ | 0.08 | $ | 2.80 | $ | 2.40 | $ | 7.57 | $ | 5.96 | $ | 3.03 | $ | 3.45 | $ | 2.16 | ||||||||||||||||||
| Adjusted Net Income | $ | 7.57 | $ | 6.10 | $ | 4.85 | $ | 3.41 | $ | 2.46 | ||||||||||||||||||||||||||||
| Weighted-average shares | 221,658 | 219,638 | 217,930 | 216,983 | 215,026 | 214,617 | 215,393 | 219,537 | 221,658 | 219,638 | ||||||||||||||||||||||||||||
| Per Share Data—Diluted: | ||||||||||||||||||||||||||||||||||||||
| Net income | $ | 3.43 | $ | 2.14 | $ | 0.08 | $ | 2.77 | $ | 2.37 | $ | 7.53 | $ | 5.93 | $ | 3.02 | $ | 3.43 | $ | 2.14 | ||||||||||||||||||
| Adjusted Net Income | $ | 7.53 | $ | 6.08 | $ | 4.83 | $ | 3.39 | $ | 2.44 | ||||||||||||||||||||||||||||
| Weighted-average shares and potentially dilutive shares | 223,044 | 220,941 | 219,457 | 219,229 | 217,711 | 215,694 | 216,316 | 220,689 | 223,044 | 220,941 | ||||||||||||||||||||||||||||
| Dividends declared per common share | $ | 1.10 | $ | 0.74 | $ | 0.44 | $ | 0.20 | $ | — | $ | 2.16 | $ | 1.71 | $ | 1.35 | $ | 1.10 | $ | 0.74 | ||||||||||||||||||
| Balance Sheet Data: | ||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 20,713,190 | $ | 20,072,947 | $ | 19,827,930 | $ | 19,804,405 | $ | 19,653,829 | $ | 22,296,317 | $ | 22,310,324 | $ | 20,782,043 | $ | 20,524,060 | $ | 19,915,003 | ||||||||||||||||||
| Total debt, including capital leases | $ | 8,443,948 | $ | 8,074,804 | $ | 8,489,947 | $ | 8,495,853 | $ | 9,150,116 | $ | 7,539,451 | $ | 9,387,436 | $ | 8,527,243 | $ | 8,254,818 | $ | 7,916,860 | ||||||||||||||||||
| Common stock | $ | 2,331 | $ | 2,308 | $ | 2,291 | $ | 2,276 | $ | 2,262 | $ | 2,352 | $ | 2,346 | $ | 2,339 | $ | 2,331 | $ | 2,308 | ||||||||||||||||||
| Total shareholders' equity | $ | 8,284,359 | $ | 8,808,265 | $ | 8,308,749 | $ | 8,407,823 | $ | 7,900,752 | $ | 10,702,303 | $ | 9,121,412 | $ | 8,063,039 | $ | 8,284,359 | $ | 8,808,265 | ||||||||||||||||||
| (1) |
| (2) |
| (3) |
| (4) | Amount for 2013 excludes restructuring and related impairment charges of $56.9 million and an $8.6 million loss related to the estimated impact of Pullmantur's non-core businesses that were sold in 2014. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Concerning Forward-Looking Statements
The discussion under this caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this document, including, for example, under the "Risk Factors" and "Business" captions, includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance (including our expectations for the first quarter and full year of 2015,2018 and our earnings and yield estimates for 20152018 set forth under the heading "Outlook" below and expectations regarding the timing and results of our Double-Double Program)below), business and industry prospects or future results of operations or financial position, made in this Annual Report on Form 10-K are forward-looking. Words such as "anticipate," "believe," "could," "estimate," "expect," "goal," "intend," "may," "plan," "project," "seek," "should," "will," "driving" and similar expressions are intended to further identify any of these forward-looking statements. Forward-looking statements reflect management's current expectations but they are based on judgments and are inherently uncertain. Furthermore, they are subject to risks, uncertainties and other factors that could cause our actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied in those forward-looking statements. Examples of these risks, uncertainties and other factors include, but are not limited to, those discussed in this Annual Report on Form 10-K and, in particular, the risks discussed under the caption "Risk Factors" in Part I, Item 1A of this report.
All forward-looking statements made in this Annual Report on Form 10-K speak only as of the date of this document. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
The discussion and analysis of our financial condition and results of operations have been organized to present the following:
a review of our critical accounting policies and of our financial presentation, including discussion of certain operational and financial metrics we utilize to assist us in managing our business;
a discussion of our results of operations for the year ended December 31, 20142017 compared to the same period in 20132016 and the year ended December 31, 20132016 compared to the same period in 2012;2015;
a discussion of our business outlook, including our expectations for selected financial items for the first quarter and full year of 2015;2018; and
a discussion of our liquidity and capital resources, including our future capital and contractual commitments and potential funding sources.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). (See(Refer to Note 1. General and Note 2. Summary of Significant Accounting Policies to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data). Certain of our accounting policies are deemed "critical," as they require management's highest degree of judgment, estimates and assumptions. We have discussed these accounting policies and estimates with the audit committee of our board of directors. We believe our most critical accounting policies are as follows:
Ship Accounting
Our ships represent our most significant assets and are stated at cost less accumulated depreciation and amortization. Depreciation of ships is generally computed net of a 15% projected residual value using the straight-line method over the estimated useful life of the asset, which is generally 30 years. The 30-year useful life of our newly constructed ships and 15% associated residual value are both based on the weighted-average of all major components
of a ship. Our useful life and residual value estimates take into consideration the impact of anticipated technological changes, long-term cruise and vacation market conditions and historical useful lives of similarly-built ships. In addition, we take into consideration our estimates of the weighted-average useful lives of the ships' major component systems, such as hull, superstructure, main electric, engines and cabins. Given the very large and complex nature of our ships, our accounting estimates related to ships and determinations of ship improvement costs to be capitalized require considerable judgment and are inherently uncertain. We do not have cost segregation studies performed to specifically componentize our ship systems. Therefore, we estimate the costs of component systems based principally on general and technical information known about major ship component systems and their lives and our knowledge of the cruise vacation industry. We do not identify and track depreciation by ship component systems, but instead utilize these estimates to determine the net cost basis of assets replaced or refurbished. Improvement costs that we believe add value to our ships are capitalized as additions to the ship and depreciated over the shorter of the improvements' estimated useful lives or that of the associated ship. The estimated cost and accumulated depreciation of replaced or refurbished ship components are written off and any resulting losses are recognized in cruiseCruise operating expenses.
We use the deferral method to account for drydocking costs. Under the deferral method, drydocking costs incurred are deferred and charged to expense on a straight-line basis over the period to the next scheduled drydock, which we estimate to be a period of thirty to sixty months based on the vessel's age as required by Class. Deferred drydock costs consist of the costs to drydock the vessel and other costs incurred in connection with the drydock which are necessary to maintain the vessel's Class certification. Class certification is necessary in order for our cruise ships to be flagged in a specific country, obtain liability insurance and legally operate as passenger cruise ships. The activities associated with those drydocking costs cannot be performed while the vessel is in service and, as such, are done during a drydock as a planned major maintenance activity. The significant deferred drydock costs consist of hauling and wharfage services provided by the drydock facility, hull inspection and related activities (e.g., scraping, pressure cleaning, bottom painting), maintenance to steering propulsion, thruster equipment and ballast tanks, port services such as tugs, pilotage and line handling, and freight associated with these items. We perform a detailed analysis of the various activities performed for each drydock and only defer those costs that are directly related to planned major maintenance activities necessary to maintain Class. The costs deferred are related to activities not otherwise routinely periodically performed to maintain a vessel's designed and intended operating capability. Repairs and maintenance activities are charged to expense as incurred.
We use judgment when estimating the period between drydocks, which can result in adjustments to the estimated amortization of drydock costs. If the vessel is disposed of before the next drydock, the remaining balance in deferred drydock is written-off to the gain or loss upon disposal of vessel in the period in which the sale takes place. We also use judgment when identifying costs incurred during a drydock which are necessary to maintain the vessel's Class certification as compared to those costs attributable to repairs and maintenance which are expensed as incurred.
We believe we have made reasonable estimates for ship accounting purposes. However, should certain factors or circumstances cause us to revise our estimates of ship useful lives or projected residual values, depreciation expense could be materially higher or lower. If circumstances cause us to change our assumptions in making determinations as to whether ship improvements should be capitalized, the amounts we expense each year as repairs and maintenance costs could increase, partially offset by a decrease in depreciation expense. If we had reduced our estimated average 30-year ship useful life by one year, depreciation expense for 20142017 would have increased by approximately $24.3$51.5 million. If our ships were estimated to have no residual value, depreciation expense for 20142017 would have increased by approximately $159.1$215.5 million.
Valuation of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets
We review goodwill trademarks and trade names, which are our most significant indefinite-lived intangible assets for impairment at the reporting unit level annually or, when events or circumstances dictate, more frequently. The impairment review for goodwill consists of a qualitative assessment of whether it is more-likely-than-not that a reporting unit's fair value is less than its carrying amount, and if necessary, a two-step goodwill impairment test. Factors to consider when performing the qualitative assessment include general economic conditions, limitations on accessing capital, changes in forecasted operating results, changes in fuel prices and fluctuations in foreign exchange rates. If the qualitative assessment demonstrates that it is more-likely-than-not that the estimated fair value of the reporting unit exceeds its carrying value, it is not necessary to perform the two-step goodwill impairment test. We may elect to
bypass the qualitative assessment and proceed directly to step
one, for any reporting unit, in any period. On a periodic basis, we elect to bypass the qualitative assessment and proceed to step one to corroborate the results of recent years' qualitative assessments. We can resume the qualitative assessment for any reporting unit in any subsequent period.
When performing the two-step goodwill impairment test, the fair value of the reporting unit is determined and compared to the carrying value of the net assets allocated to the reporting unit. We estimate the fair value of our reporting units using a probability-weighted discounted cash flow model. The estimation of fair value utilizing discounted expected future cash flows includes numerous uncertainties which require our significant judgment when making assumptions of expected revenues, operating costs, marketing, selling and administrative expenses, interest rates, ship additions and retirements as well as assumptions regarding the cruise vacation industry's competitive environment and general economic and business conditions, among other factors. The principal assumptions usedwe use in the discounted cash flow model are projected operating results, weighted-average cost of capital, and terminal value. The discounted cash flow model uses our 2015the most current projected operating results for the upcoming fiscal year as a base. To that base, we add future years' cash flows assuming multiple revenue and expense scenarios that reflect the impact of different global economic environments beyond 2015the base year on the reporting unit. We discount the projected cash flows using rates specific to the reporting unit based on its weighted-average cost of capital. If the fair value of the reporting unit exceeds its carrying value, no further analysis or write-down of goodwill is required. If the fair value of the reporting unit is less than the carrying value of its net assets, the implied fair value of the reporting unit is allocated to all its underlying assets and liabilities, including both recognized and unrecognized tangible and intangible assets, based on their fair value. If necessary, goodwill is then written down to its implied fair value.
The impairment review for indefinite-life intangible assets consists of a comparison of the fair value of the asset with its carrying amount. We estimate the fair value of our indefinite-life intangiblethese assets which consist of trademarks and trade names related to Pullmantur, using a discounted cash flow model and various valuation methods depending on the nature of the intangible asset, such as the relief-from-royalty method. The royalty rate used is based on comparable royalty agreements in the tourismmethod for trademarks and hospitality industry. The discount rate used is comparable to the rate used in valuing the Pullmantur reporting unit in our goodwill impairment test.tradenames. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds its carrying amount, the indefinite-life intangible asset is not considered impaired. As of December 31, 2017, the carrying amount of indefinite-life intangible assets was not material. Other intangible assets assigned finite useful lives are amortized on a straight-line basis over their estimated useful lives.
We review our ships aircraft and other long-lived assets for impairment whenever events or changes in circumstances indicate, based on estimated undiscounted future cash flows, that the carrying amount of these assets may not be fully recoverable. We evaluate asset impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The lowest level for which we maintain identifiable cash flows that are independent of the cash flows of other assets and liabilities is at the ship level for our ships and, prior to the sale of the aircraft, at the aggregated asset group level for our aircraft. If estimated future cash flows are less than the carrying value of an asset, an impairment charge is recognized to the extent its carrying value exceeds fair value.
We estimate fair value based on quoted market prices in active markets, if available. If active markets are not available we base fair value on independent appraisals, sales price negotiations and projected future cash flows discounted at a rate estimated by management to be commensurate with the business risk. Quoted market prices are often not available for individual reporting units and for indefinite-life intangible assets. Accordingly, we estimate the fair value of a reporting unit and an indefinite-life intangible asset using an expected present value technique.
Royal Caribbean International
During the fourth quarter of 2014,2017, we performed a qualitative assessment of the Royal Caribbean International reporting unit. Based on our qualitative assessment, we concluded that it was more-likely-than-not that the estimated fair value of the Royal Caribbean International reporting unit exceeded its carrying value and thus, we did not proceed to the two-step goodwill impairment test. No indicators of impairment exist primarily because the reporting unit's fair value has consistently exceeded its carrying value by a significant margin its financial performance has been solid in the face of mixed economic environments and forecasts of operating results generated by the reporting unit appear sufficient to support its carrying value. As of December 31, 2014,2017, the carrying amount of goodwill attributable to our Royal Caribbean International reporting unit was $287.0$286.9 million.
2015 Impairment of Pullmantur Related Assets
During the third quarter of 2015, we performed an interim impairment evaluation of Pullmantur’s goodwill and trademarks and trade names in connection with the preparation of our financial statements. As a result of this analysis, we determined that the carrying value of the Pullmantur reporting unit exceeded its fair value. Similarly, we determined that the carrying value of Pullmantur’s trademarks and trade names exceeded their fair value. Accordingly, upon the completion of the relevant impairment tests discussed above, we recognized impairment charges of $123.8 million and $174.3 million for goodwill and trademark and trade names, respectively, during the quarter ended September 30, 2015. These charges reflected the full carrying amounts of the goodwill and trademark and trade names leaving Pullmantur with no intangible assets on its books.
In conjunction with performing the two-step goodwill impairment test for the Pullmantur reporting unit, we identified that the estimated fair value of certain long-lived assets, consisting of two ships and three aircraft, was less than their carrying values. As a result of this determination, we evaluated these assets pursuant to our long-lived asset impairment test, resulting in an impairment charge of $113.2 million to write down these assets to their estimated fair values during the quarter ended September 30, 2015.
Derivative Instruments
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 haveuse non-derivative financial instruments designated as hedges of our net investment in our foreign operations and investments. The fuel options we entered into represent economic hedges which were not designated as hedging instruments for accounting purposes and thus, changes in their fair value were immediately recognized in earnings. 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 account for derivative financial instruments in accordance with authoritative guidance. Refer to Note 2. Summary of Significant Accounting Policies and Note 14. Fair Value Measurements and Derivative Instruments to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data for more information on related authoritative guidance, the Company's hedging programs and derivative financial instruments.
We enter into foreign currency forward contracts and collars, interest rate, cross-currency and fuel swaps and options with third-party institutions in over-the-counter markets. We estimate the fair value of our foreign currency forward contracts and interest rate and cross-currency swaps using expected future cash flows based on the instruments' contract terms and published forward prices for foreign currency exchange and interest rates. We apply present value techniques and LIBOR-basedLIBOR or EURIBOR-based discount rates to convert the expected future cash flows to the current fair value of the instruments.
We estimate the fair value of our foreign currency collars 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 prices, foreign exchange volatility levels and discount rates.
We estimate the fair value of our fuel swaps using expected future cash flows based on the swaps' contract terms and forward prices. We derive forward prices from forward fuel curves based on pricing inputs provided by third-party institutions that transact in the fuel indices we hedge. We validate these pricing inputs against actual market transactions and published price quotes for similar assets. We apply present value techniques and LIBOR-based discount rates to convert the expected future cash flows to the current fair value of the instruments. We also corroborate our fair value estimates using valuations provided by our counterparties.
We estimate the fair value for our fuel call options based on the prevailing market price for the instruments consisting of published price quotes for similar assets based on recent transactions in an active market.
We believe it is unlikely that materially different estimates for the fair value of our foreign currency forward contracts and interest rate, cross-currency and fuel swaps and options would be derived from other appropriate valuation models using similar assumptions, inputs or conditions suggested by actual historical experience.
Contingencies—Litigation
On an ongoing basis, we assess the potential liabilities related to any lawsuits or claims brought against us. While it is typically very difficult to determine the timing and ultimate outcome of such actions, we use our best judgment
to determine if it is probable that we will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. In assessing probable losses, we take into consideration estimates of the amount of insurance recoveries, if any, which are recorded as assets when recoverability is probable. We accrue a liability when we believe a loss is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties related to the eventual outcome of litigation and potential insurance recoveries, it is possible that certain matters may be resolved for amounts materially different from any provisions or disclosures that we have previously made.
Seasonality
Our revenues are seasonal based on demand for cruises. Demand is strongest for cruises during the Northern Hemisphere's summer months and holidays. In order to mitigate the impact of the winter weather in the Northern Hemisphere and to capitalize on the summer season in the Southern Hemisphere, our brands have focused on deployment to Australiathe Caribbean, Asia and Latin AmericaAustralia during that period.
Financial Presentation
Description of Certain Line Items
Revenues
Our revenues are comprised of the following:
Passenger ticket revenues, which consist of revenue recognized from the sale of passenger tickets and the sale of air transportation to and from our ships; and
Onboard and other revenues, which consist primarily of revenues from the sale of goods and/or services onboard our ships not included in passenger ticket prices, cancellation fees, sales of vacation protection insurance and pre- and post-cruise tours. Additionally, revenue related to Pullmantur's travel agency network, land-based tours and air charter business to third parties are included in onboard and other revenues through the date of the sale of Pullmantur's non-core businesses further discussed below. Onboard and other revenues includealso includes revenues we receive from independent third-party concessionaires that pay us a percentage of their revenues in exchange for the right to provide selected goods and/or services onboard our ships.ships, as well as revenues received for our bareboat charter, procurement and management related services we perform on behalf of our unconsolidated affiliates.
Cruise Operating Expenses
Our cruise operating expenses are comprised of the following:
Commissions, transportation and other expenses, which consist of those costs directly associated with passenger ticket revenues, including travel agent commissions, air and other transportation expenses, port costs that vary with passenger head counts and related credit card fees;
Onboard and other expenses, which consist of the direct costs associated with onboard and other revenues, including the costs of products sold onboard our ships, vacation protection insurance premiums, costs associated with pre- and post-cruise tours and related credit card fees as well as the minimal costs associated with concession revenues, as the costs are mostly incurred by third-party concessionaires;concessionaires and costs incurred for the procurement and management related services we perform on behalf of our unconsolidated affiliates;
Payroll and related expenses, which consist of costs for shipboard personnel (costs associated with our shoreside personnel are included in marketing,Marketing, selling and administrative expenses)expenses);
Food expenses, which include food costs for both guests and crew;
Fuel expenses, which include fuel and related delivery, storage and storageemission consumable costs includingand the financial impact of fuel swap agreements; and
Other operating expenses, which consist primarily of operating costs such as repairs and maintenance, port costs that do not vary with passenger head counts, vessel related insurance, entertainment and entertainment. Additionally, costs associated with Pullmantur's travel agency network, land-based tours and air charter businessgains and/or losses related to third parties are included in other operating expenses through the date of the sale of Pullmantur's non-core businesses further discussed below.our ships, if any.
We do not allocate payroll and related expenses, food expenses, fuel expenses or other operating expenses to the expense categories attributable to passenger ticket revenues or onboard and other revenues since they are incurred to provide the total cruise vacation experience.
Selected Operational and Financial Metrics
We utilize a variety of operational and financial metrics which are defined below to evaluate our performance and financial condition. As discussed in more detail herein, certain of these metrics are non-GAAP financial measures. These non-GAAP financial measures whichare provided along with the related GAAP financial measures as we believe they provide useful information to investors as a supplement to our consolidated financial statements, which are prepared and presented in accordance with GAAP. The presentation of non-GAAP financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.
Adjusted Earnings per Share ("Adjusted EPS") represents Adjusted Net Income divided by weighted average shares outstanding or by diluted weighted average shares outstanding, as applicable. We believe that this non-GAAP measure is meaningful when assessing our performance on a comparative basis.
Adjusted Net Income represents net income excluding certain items that we believe adjusting for is meaningful when assessing our performance on a comparative basis. For the periods presented, these items included the impairment of the Pullmantur related assets, the net loss related to the elimination of the Pullmantur reporting lag, the net gain related to the 51% sale of the Pullmantur and CDF Croisières de France ("CDF") brands, restructuring charges and related impairment charges, other initiative costs related to our profitability initiatives, the estimated impact of the divested Pullmantur non-core businesses, impairment of Pullmantur related assets, the loss recognized on the sale of Celebrity Century, the impact of the change in our voyage proration methodologyright-sizing strategy and the reversal of a deferred tax asset valuation allowance due to Spanish tax reform. The estimated impact of the divested Pullmantur non-core businesses was arrived at by adjusting the net income (loss) of these businesses for the ownership percentage we retained as well as for intercompany transactions that are no longer eliminated in our consolidated statements of comprehensive income (loss) subsequent to the sales transaction. For the full year 2014, the impact of the voyage proration change represents net income that would have been recognized in 2013 had we recognized revenues and cruise operating expenses on a pro-rata basis for all voyages.other restructuring initiatives.
Available Passenger Cruise Days ("APCD") is our measurement of capacity and represents double occupancy per cabin multiplied by the number of cruise days for the period.period, which excludes canceled cruise days and drydock days. We use this measure to perform capacity and rate analysis to identify our main non-capacity drivers that cause our cruise revenue and expenses to vary.
Double-DoubleProgram refers to the multi-year Adjusted EPS and Return on Invested Capital ("ROIC") goals we publicly announced in 2014 and sought to achieve by the end of 2017. We designed this program to help us better execute and achieve our business goals by clearly articulating longer-term financial objectives. Under the Double-Double Program, we targeted Adjusted EPS of $6.78 by the end of 2017, which was double our 2014 Adjusted EPS of $3.39. We also targeted ROIC of 10% by the end of 2017 as compared to ROIC of 5.9% in 2014.
Gross Cruise Costs represent the sum of total cruise operating expenses plus marketing, selling and administrative expenses.
Gross Yields represent total revenues per APCD.
Net Cruise Costs and Net Cruise Costs Excluding Fuel represent Gross Cruise Costs excluding commissions, transportation and other expenses and onboard and other expenses and, in the case of Net Cruise Costs Excluding Fuel, fuel expenses (each of which is described above under the Description of Certain Line Items heading). In measuring our ability to control costs in a manner that positively impacts net income, we believe changes in Net Cruise Costs and Net Cruise Costs Excluding Fuel to be the most relevant indicators of our performance. A reconciliation of historical Gross Cruise Costs to Net Cruise Costs and Net Cruise Costs Excluding Fuel is provided below under Results of Operations. We have not provided a quantitative reconciliation of projected Gross Cruise Costs to projected Net Cruise Costs and projected Net Cruise Costs Excluding Fuel due to the significant uncertainty in projecting the costs deducted to arrive at these measures. Accordingly, we do not believe that reconciling information for such projected figures would be meaningful. For the periods prior to the sale of the Pullmantur non-core businesses,presented, Net Cruise Costs excludes the estimated impactnet gain related to the 51% sale of these divested businesses. Net Cruise Costs also excludesthe Pullmantur and CDF brands, restructuring charges and other initiative costs reported within Marketing, sellingrelated to our Pullmantur right-sizing strategy and administrative expenses, as well as the loss recognized on the sale of other restructuring initiativesCelebrity Century included within Other operating expenses.
Net Revenues represent total revenues less commissions, transportation and other expenses and onboard and other expenses (each of which is described above under the Description of Certain Line Items heading). For the periods prior
Net Yields represent Net Revenues per APCD. We utilize Net Revenues and Net Yields to manage our business on a day-to-day basis as we believe that it isthey are the most relevant measuremeasures of our pricing performance because it reflectsthey reflect the cruise revenues earned by us net of our most significant variable costs, which are commissions, transportation and other expenses and onboard and other expenses. A reconciliation of historical Gross Yields to Net Yields is provided below under Results of Operations. We have not provided a quantitative reconciliation of projected Gross Yields to projected Net Yields due to the significant uncertainty in projecting the costs deducted to arrive at this measure. Accordingly, we do not believe that reconciling information for such projected figures would be meaningful. For the periods priorpresented, Net Yields excludes initiative costs related to the sale of the Pullmantur non-core businesses, Net Yields excludes the estimated impact of these divested businesses.and CDF brands.
Occupancy, in accordance with cruise vacation industry practice, is calculated by dividing Passenger Cruise Days by APCD. A percentage in excess of 100% indicates that three or more passengers occupied some cabins.
Passenger Cruise Days represent the number of passengers carried for the period multiplied by the number of days of their respective cruises.
We believe Net Yields, Net Cruise Costs and Net Cruise Costs Excluding Fuel are our most relevant non-GAAP financial measures. However, a significant portion of our revenue and expenses are denominated in currencies other than the United States dollar. Because our reporting currency is the United States dollar, the value of these revenues and expenses can be affected by changes in currency exchange rates. Although such changes in local currency prices isare just one of many elements impacting our revenues and expenses, itthey can be an important element. For this reason, we also monitor Net Yields, Net Cruise Costs and Net Cruise Costs Excluding Fuel as if the current periods' currency exchange rates had remained constant with the comparable prior periods' rates, or on a "Constant Currency" basis.
It should be emphasized that Constant Currency is primarily used for comparing short-term changes and/or projections. Over the longer term, changesChanges in guest sourcing and shifting the amount of purchases between currencies can significantly change the impact of the purely currency-based fluctuations.
The use of certain significant non-GAAP measures, such as Net Yields, Net Cruise Costs and Net Cruise Costs Excluding Fuel, allows us to perform capacity and rate analysis to separate the impact of known capacity changes from other less predictable changes which affect our business. We believe these non-GAAP measures provide expanded insight to measure revenue and cost performance in addition to the standard United States GAAP based financial measures. There are no specific rules or regulations for determining non-GAAP and Constant Currency measures, and as such, there exists the possibility that they may not be comparable to other companies within the industry.
Executive Overview
The year 2017 marked the final year of $3.39 per share represented approximatelyour Double-Double program ("Double-Double"), which was comprised of two multi-year financial targets, including doubling our 2014 Adjusted EPS to $6.78 and achieving double-digit ROIC by the end of 2017. The Double-Double program was successful in galvanizing our large workforce and drove a 40% increasereal step change in year-over-yearperformance. Our long-term commitment to grow revenue yields, manage costs and maintain steady capacity growth guided us towards the achievement of the Double-Double. We finished 2017 with Adjusted EPS of $7.53 and ROIC in excess of 10%, exceeding our Double-Double targets. During the Double-Double period, we have experienced annual Adjusted EPS growth of approximately 24%, 26% and established42% and annual ROIC growth of approximately 18%, 17% and 29%, in each of 2017, 2016 and 2015, respectively.
Additionally, Net Yields on a new record for our Company.
Net onboard revenue yield in 2017 grew by 13% in 2014 and comprised 49% of our total capacity. This considerable growth led to increased levels of promotional activity throughout the industry and depressed our pricing power. Helping offset the Caribbean was the double-digit yield improvement in Europe and China. The European season was the strongest we have seen in several years and China’s ability to absorb our capacity growth while driving higher yields continues to impress.
We remain dedicated to finding efficiencies, identifying synergies and reducing costs, while at the same time, focusing on strategic investments in areas that will boost revenue. In 2017, our Net ticket revenue yield improved 1.4% while onboard revenue yieldCruise Costs Excluding Fuel increased by 3.8%2.0% on a Constant Currency basis. Onboard revenue continuesbasis compared to be2016.
The Company remains focused on improving returns for our shareholders. In 2017, we bought back $225 million shares of common stock under our $500 million share repurchase program that was announced in April 2017. We also announced a bright spot25% increase to our common stock dividend, our fifth consecutive year with beverage packages, specialty restaurantsa dividend increase. In addition, during 2017, both Moody’s and internet packages driving strong growthS&P upgraded our senior unsecured debt rating to investment grade.
In 2018, all three of our Global Brands will each welcome a ship in the same year - a first in our history. Royal Caribbean International will welcome newbuild Symphony of the Seas in April; Azamara Club Cruises will welcome Azamara Pursuit in August; and Celebrity Cruises will welcome its newbuild Celebrity Edge in November. In 2018, we expect our capacity in the Caribbean will increase as Symphony of the Seasand Europe, while gaming and retail are fueling our growth in Asia. This, coupled with our investments in ship revitalizations and technology, has helped continue onboard’s strong growth trajectory.
North America to make way for QuantumSpectrum of the Seas’ arrival in China is approaching,early 2019, we expect our Asia/Pacific capacity will decrease year over year and we feel encouragedwill account for 17% of our total capacity in 2018. We expect Europe will represent 17% of our capacity in 2018 with growth driven by the advance demand that the ship has generated in the market. Our capacity in Asia continues to surge with 53% growth in 2015 on top of 22% growth in 2014. Investments in the region will continue to expand in order to ensure we maintain our position in the market.
In November 2017, we announced the order of Celebrity Flora, the brand’s first ship designed specifically for the Galapagos Islands, which we expect will sail beginning in 2016. These ships are materially more energy efficient than2019. In addition to investing in new hardware and our existing hardware through our fleet average,modernization programs, Royal Amplified and we expect them to generate strong consumer
After announcing our achievement of Double-Double, we thanked employees for their contribution with individual salary bonuses of five percent. Employees received equity-based awards equal to five percent of their 2017 salaries in an $80 million program called the "Thank You, Thank You Bonus." The awards, which vest over three years, went to all employees – shipboard and shoreside, full-time and part-time, domestic and overseas. Corporate officers, however, were excluded. In addition to the five percent equity-based awards, we will contribute to the Crew Welfare Fund for upgrades to crew living and recreational areas.
Results of Operations
In addition to the items discussed above under "Executive Overview," significant items for 20142017 include:
Both our net income and Adjusted Net Income for the year ended December 31, 2017 was $1.6 billion, or $7.53 per share on a diluted basis, respectively, as compared to both net income and Adjusted Net Income of $1.3 billion, or $5.93 and $6.08 per share on a diluted basis, respectively, for the year ended December 31, 2016.
The estimated negative impact resulting from the third quarter 2017 hurricane-related disruptions was approximately $0.26 per share on a diluted basis to our net income and Adjusted Net Income for the year ended December 31, 2017.
Total revenues increased 1.4% to $8.1 billion from $8.0 billion in 2013 primarily due to an increase in overall capacity and ticket prices.
Total Cruise operating expenses decreased by $119.0 million for the year ended December 31, 2014. Refer2017 compared to Note 2.the same period in 2016, primarily due to the decrease in capacity, which is further discussed below.
Other items for 2017 include:
In May 2017, TUI Cruises, our 50% joint venture, took delivery of Summary of Significant Accounting PoliciesMein Schiff 6 to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data for further information..
During the fourthsecond quarter of 2014, Spain adopted tax reform legislation that, among other things, amended the net operating loss carryforward rules. As a result, we reversed a portion of the deferred tax asset valuation allowance recorded in 2012 which resulted in a deferred tax benefit of $33.5 million. Refer to Note 12. Income Taxes to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data for further discussion on the transaction.
During the fourth quarter of 2014,2017, we repurchased from A. Wilhelmsen AS,entered into a credit agreement for the unsecured financing of a ship we have on order designed for the Galapagos Islands for our largest shareholder, 3.5 million shares of our common stock.Celebrity Cruises brand. Refer to Note 8.7. Shareholders' EquityLong-Term Debt to our consolidated financial statements for further information.
We reported total revenues, operating income, net income, Adjusted Net Income, earnings per share and Adjusted Earnings per Share as shown in the following table (in thousands, except per share data):
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
| 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | |||||||||||||||||
| Net income | $ | 1,625,133 | $ | 1,283,388 | $ | 665,783 | ||||||||||||||||
| Adjusted Net Income | $ | 755,729 | $ | 539,224 | $ | 442,873 | 1,625,133 | 1,314,689 | 1,065,066 | |||||||||||||
| Net income | 764,146 | 473,692 | 18,287 | |||||||||||||||||||
| Net Adjustments to Net Income (Decrease) Increase | $ | (8,417 | ) | $ | 65,532 | $ | 424,586 | |||||||||||||||
| Net Adjustments to Net Income - Increase | $ | — | $ | 31,301 | $ | 399,283 | ||||||||||||||||
| Adjustments to Net Income: | ||||||||||||||||||||||
Pullmantur impairment related charges (1) | $ | — | $ | — | $ | 413,932 | ||||||||||||||||
| Restructuring and related impairment charges | 4,318 | 56,946 | — | |||||||||||||||||||
Impairment of Pullmantur related assets (1) | $ | — | $ | — | $ | 399,283 | ||||||||||||||||
| Net loss related to the elimination of the Pullmantur reporting lag | — | 21,656 | — | |||||||||||||||||||
| Net gain related to the sale of the Pullmantur and CDF Croisières de France brands | — | (3,834 | ) | — | ||||||||||||||||||
| Restructuring charges | — | 8,452 | — | |||||||||||||||||||
| Other initiative costs | 21,211 | — | — | — | 5,027 | — | ||||||||||||||||
| Estimated impact of divested businesses prior to sales transaction | 11,013 | 8,586 | 10,654 | |||||||||||||||||||
| Loss on sale of ship included within other operating expenses | 17,401 | — | — | |||||||||||||||||||
Impact of voyage proration change (2) | (28,877 | ) | — | — | ||||||||||||||||||
| Reversal of a deferred tax valuation allowance | (33,483 | ) | ||||||||||||||||||||
| Net Adjustments to Net Income (Decrease) Increase | $ | (8,417 | ) | $ | 65,532 | $ | 424,586 | |||||||||||||||
| Net Adjustments to Net Income - Increase | $ | — | $ | 31,301 | $ | 399,283 | ||||||||||||||||
| Basic: | ||||||||||||||||||||||
| Earnings per Share | $ | 7.57 | $ | 5.96 | $ | 3.03 | ||||||||||||||||
| Adjusted Earnings per Share | $ | 3.41 | $ | 2.46 | $ | 2.03 | $ | 7.57 | $ | 6.10 | $ | 4.85 | ||||||||||
| Earnings per Share | $ | 3.45 | $ | 2.16 | $ | 0.08 | ||||||||||||||||
| Diluted: | ||||||||||||||||||||||
| Earnings per Share | $ | 7.53 | $ | 5.93 | $ | 3.02 | ||||||||||||||||
| Adjusted Earnings per Share | $ | 3.39 | $ | 2.44 | $ | 2.02 | $ | 7.53 | $ | 6.08 | $ | 4.83 | ||||||||||
| Earnings per Share | $ | 3.43 | $ | 2.14 | $ | 0.08 | ||||||||||||||||
| Weighted-Average Shares Outstanding: | ||||||||||||||||||||||
| Basic | 221,658 | 219,638 | 217,930 | 214,617 | 215,393 | 219,537 | ||||||||||||||||
| Diluted | 223,044 | 220,941 | 219,457 | 215,694 | 216,316 | 220,689 | ||||||||||||||||
(1) Includes $28.5 million in net deferred tax expense related to the Pullmantur impairment. | ||||||||||||||||||||||
(2) Represents the net income amount that would have been recognized in 2013 had we recognized revenues and cruise operating expenses on a pro-rata basis for all voyages. | ||||||||||||||||||||||
(1) Includes a net deferred income tax benefit of $12.0 million related to the Pullmantur impairment.
The following table presents operating results as a percentage of total revenues for the last three years:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | |||||||||||
| Passenger ticket revenues | 73.0 | % | 71.9 | % | 72.8 | % | 71.9 | % | 72.4 | % | 73.0 | % | ||||
| Onboard and other revenues | 27.0 | 28.1 | 27.2 | 28.1 | % | 27.6 | % | 27.0 | % | |||||||
| Total revenues | 100.0 | 100.0 | 100.0 | 100.0 | % | 100.0 | % | 100.0 | % | |||||||
| Cruise operating expenses: | ||||||||||||||||
| Commissions, transportation and other | 17.0 | 16.5 | 16.8 | 15.5 | % | 15.9 | % | 16.9 | % | |||||||
| Onboard and other | 7.2 | 7.1 | 6.9 | 5.6 | % | 5.8 | % | 6.7 | % | |||||||
| Payroll and related | 10.5 | 10.6 | 10.8 | 9.7 | % | 10.4 | % | 10.4 | % | |||||||
| Food | 5.9 | 5.9 | 5.8 | 5.6 | % | 5.7 | % | 5.8 | % | |||||||
| Fuel | 11.7 | 11.6 | 11.8 | 7.8 | % | 8.4 | % | 9.6 | % | |||||||
| Other operating | 13.3 | 14.9 | 15.0 | 11.5 | % | 12.8 | % | 12.1 | % | |||||||
| Total cruise operating expenses | 65.7 | 66.7 | 67.1 | 55.8 | % | 59.0 | % | 61.4 | % | |||||||
| Marketing, selling and administrative expenses | 13.0 | 13.1 | 13.2 | 13.5 | % | 13.0 | % | 13.1 | % | |||||||
| Depreciation and amortization expenses | 9.6 | 9.5 | 9.5 | 10.8 | % | 10.5 | % | 10.0 | % | |||||||
| Impairment of Pullmantur related assets | — | — | 5.0 | — | % | — | % | 5.0 | % | |||||||
| Restructuring and related impairment charges | 0.1 | 0.7 | — | |||||||||||||
| Operating income | 11.7 | 10.0 | 5.2 | 19.9 | % | 17.4 | % | 10.5 | % | |||||||
| Other expense | (2.2 | ) | (4.1 | ) | (5.0 | ) | (1.4 | )% | (2.3 | )% | (2.5 | )% | ||||
| Net income | 9.5 | % | 6.0 | % | 0.2 | % | 18.5 | % | 15.1 | % | 8.0 | % | ||||
Selected statistical information is shown in the following table:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2014 | 2013 | 2012 | 2017 | 2016 (1) | 2015 | |||||||||||
| Passengers Carried | 5,149,952 | 4,884,763 | 4,852,079 | 5,768,496 | 5,754,747 | 5,401,899 | ||||||||||
| Passenger Cruise Days | 36,710,966 | 35,561,772 | 35,197,783 | 40,033,527 | 40,250,557 | 38,523,060 | ||||||||||
| APCD | 34,773,915 | 33,974,852 | 33,705,584 | 36,930,939 | 37,844,644 | 36,646,639 | ||||||||||
| Occupancy | 105.6 | % | 104.7 | % | 104.4 | % | 108.4 | % | 106.4 | % | 105.1 | % | ||||
| (1) | Does not include November and December 2015 amounts for Pullmantur as the net Pullmantur result for those months was included within Other expense in our consolidated statements of comprehensive income (loss) for the year ended December 31, 2016, as a result of the elimination of the Pullmantur reporting lag, and did not affect Gross Yields, Net Yields, Gross Cruise Costs, Net Cruise Costs and Net Cruise Costs Excluding Fuel. Additionally, effective August 2016, we no longer include Pullmantur Holdings in these amounts. |
Gross Yields and Net Yields were calculated as follows (in thousands, except APCD and Yields):
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||
| 2014 | 2014 On a Constant Currency basis | 2013 | 2012 | 2017 | 2017 On a Constant Currency basis | 2016 | 2015 | |||||||||||||||||||||||
| Passenger ticket revenues | $ | 5,893,847 | $ | 5,956,386 | $ | 5,722,718 | $ | 5,594,595 | $ | 6,313,170 | $ | 6,302,600 | $ | 6,149,323 | $ | 6,058,821 | ||||||||||||||
| Onboard and other revenues | 2,180,008 | 2,184,683 | 2,237,176 | 2,093,429 | 2,464,675 | 2,462,531 | 2,347,078 | 2,240,253 | ||||||||||||||||||||||
| Total revenues | 8,073,855 | 8,141,069 | 7,959,894 | 7,688,024 | 8,777,845 | 8,765,131 | 8,496,401 | 8,299,074 | ||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||
| Commissions, transportation and other | 1,372,785 | 1,383,339 | 1,314,595 | 1,289,255 | 1,363,170 | 1,361,001 | 1,349,677 | 1,400,778 | ||||||||||||||||||||||
| Onboard and other | 582,750 | 585,631 | 568,615 | 529,453 | 495,552 | 493,790 | 493,558 | 553,104 | ||||||||||||||||||||||
| Net revenues including divested businesses | 6,118,320 | 6,172,099 | 6,076,684 | 5,869,316 | ||||||||||||||||||||||||||
| Net revenues including other initiative costs | 6,919,123 | 6,910,340 | 6,653,166 | 6,345,192 | ||||||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||
| Net revenues related to divested businesses prior to sales transaction | 35,656 | 34,403 | 218,350 | 189,527 | ||||||||||||||||||||||||||
| Other initiative costs included within Net Revenues | — | — | (2,230 | ) | — | |||||||||||||||||||||||||
| Net Revenues | $ | 6,082,664 | $ | 6,137,696 | $ | 5,858,334 | $ | 5,679,789 | $ | 6,919,123 | $ | 6,910,340 | $ | 6,655,396 | $ | 6,345,192 | ||||||||||||||
| APCD | 34,773,915 | 34,773,915 | 33,974,852 | 33,705,584 | 36,930,939 | 36,930,939 | 37,844,644 | 36,646,639 | ||||||||||||||||||||||
| Gross Yields | $ | 232.18 | $ | 234.11 | $ | 234.29 | $ | 228.09 | $ | 237.68 | $ | 237.34 | $ | 224.51 | $ | 226.46 | ||||||||||||||
| Net Yields | $ | 174.92 | $ | 176.50 | $ | 172.43 | $ | 168.51 | $ | 187.35 | $ | 187.12 | $ | 175.86 | $ | 173.15 | ||||||||||||||
Gross Cruise Costs, Net Cruise Costs and Net Cruise Costs Excluding Fuel were calculated as follows (in thousands, except APCD and costs per APCD):
| Year Ended December 31, | |||||||||||||||
| 2017 | 2017 On a Constant Currency basis | 2016 | 2015 | ||||||||||||
| Total cruise operating expenses | $ | 4,896,579 | $ | 4,891,324 | $ | 5,015,539 | $ | 5,099,393 | |||||||
Marketing, selling and administrative expenses (1) | 1,186,016 | 1,189,694 | 1,100,290 | 1,086,504 | |||||||||||
| Gross Cruise Costs | 6,082,595 | 6,081,018 | 6,115,829 | 6,185,897 | |||||||||||
| Less: | |||||||||||||||
| Commissions, transportation and other | 1,363,170 | 1,361,001 | 1,349,677 | 1,400,778 | |||||||||||
| Onboard and other | 495,552 | 493,790 | 493,558 | 553,104 | |||||||||||
| Net Cruise Costs including other initiative costs | 4,223,873 | 4,226,227 | 4,272,594 | 4,232,015 | |||||||||||
| Less: | |||||||||||||||
| Net gain related to the sale of Pullmantur and CDF Croisières de France brands included within other operating expenses | — | — | (3,834 | ) | — | ||||||||||
| Other initiative costs included within cruise operating expenses and marketing, selling and administrative expenses | — | — | 2,433 | — | |||||||||||
| Net Cruise Costs | 4,223,873 | 4,226,227 | 4,273,995 | 4,232,015 | |||||||||||
| Less: | |||||||||||||||
Fuel (2) | 681,118 | 681,114 | 713,252 | 795,801 | |||||||||||
| Net Cruise Costs Excluding Fuel | $ | 3,542,755 | $ | 3,545,113 | $ | 3,560,743 | $ | 3,436,214 | |||||||
| APCD | 36,930,939 | 36,930,939 | 37,844,644 | 36,646,639 | |||||||||||
| Gross Cruise Costs per APCD | $ | 164.70 | $ | 164.66 | $ | 161.60 | $ | 168.80 | |||||||
| Net Cruise Costs per APCD | $ | 114.37 | $ | 114.44 | $ | 112.94 | $ | 115.48 | |||||||
| Net Cruise Cost Excluding Fuel per APCD | $ | 95.93 | $ | 95.99 | $ | 94.09 | $ | 93.77 | |||||||
| (1) | For the year ended December 31, 2016, amount does not include restructuring charges of $8.5 million. |
| Year Ended December 31, | |||||||||||||||
| 2014 | 2014 On a Constant Currency basis | 2013 | 2012 | ||||||||||||
| Total cruise operating expenses | $ | 5,306,281 | $ | 5,329,013 | $ | 5,305,270 | $ | 5,157,434 | |||||||
| Marketing, selling and administrative expenses | 1,048,952 | 1,048,921 | 1,044,819 | 1,011,543 | |||||||||||
| Gross Cruise Costs | 6,355,233 | 6,377,934 | 6,350,089 | 6,168,977 | |||||||||||
| Less: | |||||||||||||||
| Commissions, transportation and other | 1,372,785 | 1,383,339 | 1,314,595 | 1,289,255 | |||||||||||
| Onboard and other | 582,750 | 585,631 | 568,615 | 529,453 | |||||||||||
| Net Cruise Costs including divested businesses | 4,399,698 | 4,408,964 | 4,466,879 | 4,350,269 | |||||||||||
| Less: | |||||||||||||||
| Net Cruise Costs related to divested businesses prior to sales transaction | 47,854 | 46,158 | 224,864 | 199,596 | |||||||||||
| Other initiative costs included within cruise operating expenses and marketing, selling and administrative expenses | 18,972 | 19,354 | — | — | |||||||||||
| Loss on sale of ship included within other operating expenses | 17,401 | 17,401 | — | — | |||||||||||
| Net Cruise Costs | 4,315,471 | 4,326,051 | 4,242,015 | 4,150,673 | |||||||||||
| Less: | |||||||||||||||
| Fuel | 947,391 | 950,945 | 924,414 | 909,691 | |||||||||||
| Net Cruise Costs Excluding Fuel | $ | 3,368,080 | $ | 3,375,106 | $ | 3,317,601 | $ | 3,240,982 | |||||||
| APCD | 34,773,915 | 34,773,915 | 33,974,852 | 33,705,584 | |||||||||||
| Gross Cruise Costs per APCD | $ | 182.76 | $ | 183.41 | $ | 186.91 | $ | 183.03 | |||||||
| Net Cruise Costs per APCD | $ | 124.10 | $ | 124.41 | $ | 124.86 | $ | 123.14 | |||||||
| Net Cruise Cost Excluding Fuel per APCD | $ | 96.86 | $ | 97.06 | $ | 97.65 | $ | 96.16 | |||||||
| As of December 31, | |||||||
| 2014 | 2013 | ||||||
| Long-term debt, net of current portion | $ | 7,644,318 | $ | 6,511,426 | |||
| Current portion of long-term debt | 799,630 | 1,563,378 | |||||
| Total debt | 8,443,948 | 8,074,804 | |||||
| Less: Cash and cash equivalents | 189,241 | 204,687 | |||||
| Net Debt | $ | 8,254,707 | $ | 7,870,117 | |||
| Total shareholders' equity | $ | 8,284,359 | $ | 8,808,265 | |||
| Total debt | 8,443,948 | 8,074,804 | |||||
| Total debt and shareholders' equity | $ | 16,728,307 | $ | 16,883,069 | |||
| Debt-to-Capital | 50.5 | % | 47.8 | % | |||
| Net Debt | $ | 8,254,707 | $ | 7,870,117 | |||
| Net Debt and shareholders' equity | $ | 16,539,066 | $ | 16,678,382 | |||
| Net Debt-to-Capital | 49.9 | % | 47.2 | % | |||
| (2) | For the year ended December 31, 2016, amount does not include fuel expense of $0.4 million included within other initiative costs associated with the redeployment of Pullmantur’s Empress to the Royal Caribbean International brand. |
Outlook
The company does not make predictions about fuel pricing, interest rates or currency exchange rates but does provide guidance about its future business activities. On January 29, 2015,24, 2018, we announced the following initial full year and first quarter 2018 guidance based on the then current fuel pricing, interest rates and full year 2015 guidance:currency exchange rates:
Full Year 20152018
| As Reported | Constant Currency | ||
| Net Yields | |||
| Net Cruise Costs per APCD | |||
| Net Cruise Costs per APCD, excluding Fuel | |||
| Capacity Increase | |||
| Depreciation and Amortization | $ | ||
| Interest Expense, net | $ | ||
| Fuel Consumption (metric tons) | |||
| Fuel Expenses | $ | ||
| Percent Hedged (fwd consumption) | |||
| Impact of 10% change in fuel prices | $ | ||
| 1% Change in Currency | $18 million | ||
| 1% Change in Net Yield | $75 million | ||
| 1% Change in NCC x Fuel | $38 million | ||
| 100 basis pt. Change in LIBOR | $30 million | ||
| Adjusted Earnings per Share — Diluted | $ | ||
First quarter 2015Quarter 2018
| As Reported | Constant Currency | ||
| Net Yields | Approx. | ||
| Net Cruise Costs per APCD | Approx. | ||
| Net Cruise Costs per APCD, excluding Fuel | |||
| Capacity | |||
| Depreciation and Amortization | $ | ||
| Interest Expense, net | $ | ||
| Fuel Consumption (metric tons) | |||
| Fuel Expenses | $ | ||
| Percent Hedged (fwd consumption) | |||
| Impact of 10% change in fuel prices | $ | ||
1% Change in Currency | $4 million | ||
| 1% Change in Net Yield | $16 million | ||
| 1% Change in NCC x Fuel | $10 million | ||
| 100 basis pt. Change in LIBOR | $5 million | ||
| Adjusted Earnings per Share — Diluted | |||
Since our earnings release on January 29, 2015,24, 2018, bookings have remained encouraging and consistent with our previous expectations. Accordingly, our forecast has remained essentially unchanged.
Volatility in foreign currency exchange rates affects the United States dollar value of our earnings. Based on our highest net exposure for each quarter and the full year 2018, the top five foreign currencies are ranked below. For example, the Australian Dollar is the most impactful currency in the first and fourth quarters of 2018. Rankings are based on estimated net exposures.
| Ranking | Q1 | Q2 | Q3 | Q4 | FY 2018 | |||||
| 1 | AUD | GBP | GBP | AUD | GBP | |||||
| 2 | CAD | AUD | CNH | GBP | AUD | |||||
| 3 | GBP | CAD | EUR | CAD | CAD | |||||
| 4 | EUR | CNH | CAD | EUR | EUR | |||||
| 5 | CNH | EUR | AUD | CNH | CNH | |||||
The currency abbreviations above are defined as follows:
| Currency Abbreviation | Currency | |
| AUD | Australian Dollar | |
| CAD | Canadian Dollar | |
| CNH | Chinese Yuan | |
| EUR | Euro | |
| GBP | British Pound | |
Year Ended December 31, 20142017 Compared to Year Ended December 31, 20132016
In this section, references to 20142017 refer to the year ended December 31, 20142017 and references to 20132016 refer to the year ended December 31, 2013.2016.
Revenues
Total revenues for 20142017 increased $114.0$281.4 million, or 1.4%3.3%, to $8.1$8.8 billion from $8.0$8.5 billion in 2013.2016.
Passenger ticket revenues comprised 73.0%71.9% of our 20142017 total revenues. Passenger ticket revenues increased by $171.1$163.8 million, or 3.0%2.7% from 2016, despite the impact of canceled sailings resulting from hurricane-related disruptions during the third quarter of 2017. The increase was primarily due to:
an increase of $301.8 million in ticket prices primarily driven by the improvement in our ticket price on a per passenger basis due to the exit of the Pullmantur ships and the addition of Harmony of the Seas and Ovation of the Seas, as well as higher pricing on North America and Europe sailings. The increase in ticket prices on these itineraries was partially offset by lower pricing on Asia/Pacific sailings; and
the favorable effect of changes in foreign currency exchange rates related to our revenue transactions denominated in currencies other than the United States dollar of approximately $10.6 million.
The increase in passenger ticket revenues was partially offset by a 2.4% decrease in capacity, which decreased passenger ticket revenues by$148.5 million primarily due to the sale of our majority interest in Pullmantur Holdings during the third quarter of 2016, the sale of Splendour of the Seas in the second quarter of 2016 and the sale of Legend of the Seas in first quarter of 2017, which was partially offset by an increase in capacity due to the addition of Ovation of the Seas and Harmony of the Seas into our fleet during the second quarter of 2016.
The remaining 28.1% of 2017 total revenues was comprised of Onboard and other revenues, which increased $117.6 million, or 5.0%. The increase in Onboard and other revenues was primarily due to:
a $125.3 million increase in onboard revenue attributable to higher spending on a per passenger basis primarily due to our revenue enhancing initiatives, including beverage package, shore excursion and specialty restaurant sales and promotions and increased revenue associated with internet and other telecommunication service.
a $45.7 million increase in other revenue primarily due to charter revenue and management fees earned from Pullmantur Holdings.
The increase was partially offset by a $55.6 million decrease attributable to the 2.4% decrease in capacity noted above, including the impact of canceled sailings resulting from hurricane-related disruptions during the third quarter of 2017.
Onboard and other revenues included concession revenues of $326.5 million in 2017 and $316.9 million in 2016.
Cruise Operating Expenses
Total cruise operating expenses for 2017 decreased $119.0 million, or 2.4%, to $5.9$4.9 billion in 20142017 from $5.7$5.0 billion in 2013.2016. The decrease was primarily due to:
a $120.5 million decrease attributable to the 2.4% decrease in capacity noted above;
a $30.9 million gain resulting from the sale of Legend of the Seas in 2017 compared to an immaterial gain from the sale of Splendour of the Seas in 2016;
a $17.2 million decrease in air expense due to itinerary changes and lower ticket costs;
a $16.8 million decrease in vessel maintenance primarily due to the timing of scheduled drydocks; and
a $15.5 million decrease in fuel expense, excluding the impact of the decrease in capacity. Our cost of fuel (net of the financial impact of fuel swap agreements) for 2017 decreased 4.6% per metric ton compared to 2016.
The decrease was partially offset by:
a $33.8 million increase in commissions expense mainly due to the increase in ticket prices discussed above and changes in commission incentives;
•a $19.3 million increase in head taxes primarily due to itinerary changes; and
an $18.9 million increase in food expenses mainly due to our new culinary initiatives.
Marketing, Selling and Administrative Expenses
Marketing, selling and administrative expenses for 2017 increased $77.3 million, or 7.0%, to $1.2 billion from $1.1 billion in 2016. The increase was primarily due to an increase in payroll and benefits mostly driven by higher stock prices year over year related to our performance share awards, partially offset by a decrease in expenses due to the sale of our majority interest in Pullmantur Holdings.
Depreciation and Amortization Expenses
Depreciation and amortization expenses for 2017 increased $56.3 million, or 6.3%, to $951.2 million from $894.9 million in 2016. The increase was primarily due to the addition of Ovation of the Seas and Harmony of the Seas in the second quarter of 2016, new shipboard additions associated with our ship upgrade projects and to a lesser extent, additions related to our shoreside projects. The increase was partially offset by the decrease in depreciation associated with the sale of Legend of the Seas in the first quarter of 2017 and to a lesser extent, the sale of Splendour of the Seas in the second quarter of 2016.
Other Income (Expense)
Interest expense, net of interest capitalized, decreased $7.4 million, or 2.4%, to $300.0 million in 2017 from $307.4 million in 2016. The decrease was due to a lower average debt level in 2017 compared to 2016, partially offset by higher interest rates in 2017 compared to 2016.
Equity investment income increased $27.9 million, or 21.7%, to $156.2 million in 2017 from $128.4 million in 2016 primarily due to an increase in income from TUI Cruises, one of our equity method investments.
Other expense decreased $30.4 million, or 85.2%, to $5.3 million in 2017 from $35.7 million in 2016. The decrease was primarily due to a net loss of $21.7 million related to the elimination of the Pullmantur reporting lag in 2016 which did not recur in 2017.
Gross and Net Yields
Gross and Net Yields increased 5.9% and 6.5% in 2017, respectively, compared to 2016 primarily due to the increase in passenger ticket and onboard and other revenues discussed above.
Gross and Net Cruise Costs
Gross Cruise Costs remained consistent in 2017 compared to 2016. Net Cruise Costs decreased 1.2% in 2017 compared to 2016 primarily due to the decrease in capacity and cruise operating expenses discussed above. Gross Cruise Costs per APCD and Net Cruise Costs per APCD increased 1.9% and 1.3% in 2017, respectively, compared to 2016. The increase was mainly due to the hurricane-related disruptions during the third quarter of 2017 which reduced our capacity; however, certain operating expenses were still incurred, negatively impacting our metrics per APCD. Net Cruise Costs Excluding Fuel per APCD increased 2.0% in 2017 compared to 2016.
Other Comprehensive Income
Other comprehensive income in 2017 was $582.2 million compared to $411.9 million in 2016. The increase of $170.3 million or 41.3% was primarily due to the Gain on cash flow derivative hedges in 2017 of $570.5 million compared to $411.2 million in 2016. The increase of $159.3 million in 2017 was primarily due to an increase in foreign currency forward contract values in 2017 compared to a decrease in 2016, which was partially offset by lower amounts of fuel swap losses reclasssified to income in 2017 and a smaller increase in fuel swap instrument values in 2017 compared to 2016.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
In this section, references to 2016 refer to the year ended December 31, 2016 and references to 2015 refer to the year ended December 31, 2015.
Revenues
Total revenues for 2016 increased $197.3 million, or 2.4%, to $8.5 billion from $8.3 billion in 2015.
Passenger ticket revenues comprised 72.4% of our 2016 total revenues. Passenger ticket revenues increased by $90.5 million, or 1.5%. The increase was primarily due to:
a 2.4%3.3% increase in capacity, which increased Passengerpassenger ticket revenues by by $134.6 million. The increase in capacity was primarily due to the addition of Quantum$198.1 million, net of the Seas which entered servicecapacity decrease resulting from the sale of our majority interest in October 2014 and the transfer of Monarch of the Seas to Pullmantur in April 2013 reducing capacity in 2013 due to the two-month lag further discussed in Note 1. General to our consolidated financial statements. Passenger ticket revenues also includes the impact of the change in our voyage proration methodology;Holdings; and
an increase of $63.9 million in ticket prices primarily driven by greater demand for close-in Europeanour newest shipsas well as higher pricing on Alaska and Asian sailings, whichCaribbean sailings. The increase in ticket prices was partially offset by a decrease in ticket prices for Caribbean sailings, all of which contributed to a $99.1 million increase in Passenger ticket revenues.lower pricing on Mediterranean and Asia sailings.
The increase in passenger ticket revenues was partially offset by the unfavorable effect of changes in foreign currency exchange rates related to our revenue transactions denominated in currencies other than the United States dollar of approximately $62.5$171.5 million.
The remaining 27.0%27.6% of 20142016 total revenues was comprised of onboardOnboard and other revenues, which decreased $57.2increased $106.8 million, or 2.6%4.8%. The decreaseincrease in onboardOnboard and other revenues was primarily due to a $177.2 million decrease in revenues related to Pullmantur's non-core businesses that were sold in 2014 as noted above. The decrease was partially offset by:to:
a $45.5$70.5 million increase attributable to the 3.3% increase in capacity noted above; and
an $89.9 million increase in onboard revenue attributable to higher spending on a per passenger basis primarily due to our ship upgrade programs and other revenue enhancing initiatives, including various beverage and gaming initiatives, the addition and promotion of specialty restaurants and the increased revenue associated with internet and other telecommunication services and other onboard activities;partially offset by a decrease in port activities revenue mainly due to itinerary changes.
an approximate $16.4 million increase attributableunfavorable effect of changes in foreign currency exchange rates related to our onboard and other revenue transactions denominated in currencies other than the 2.4% increase in capacity noted above, which includes the impact of the change in our voyage proration;United States dollar; and
a $28.7$37.2 million decrease in other revenues primarily related to our travel agency business that was sold in 2015 partially offset by an increase in other revenue of which the largest driver is attributable to an out-of-period adjustment of approximately $13.9 million that was recorded in 2013 to correct the calculation of our liabilityreceived for our credit card rewards program.bareboat charter and ship management services associated with our unconsolidated affiliates. The decrease in revenues from our travel agency business sold is mostly offset by the related decrease in travel agency expenses discussed below.
Onboard and other revenues included concession revenues of $324.3$316.9 million in 20142016 and $316.3$327.1 million in 2013.2015.
Cruise Operating Expenses
Total cruise operating expenses for 2014 increased $1.0 million.2016 decreased $83.9 million, or 1.6%, to $5.0 billion in 2016 from $5.1 billion in 2015. The increasedecrease was primarily due to:
a $119.4$114.4 million increase attributable to the 2.4% increasedecrease in capacity noted above, which includesfuel expense, excluding the impact of the changeincrease in our voyage proration methodology;capacity. Our cost of fuel (net of the financial impact of fuel swap agreements) for 2016 decreased 10.3% per metric ton compared to 2015;
a $101.7$25.0 million increasedecrease in onboard revenueair expense primarily due to higher spending on a per passenger basis due to revenue enhancing initiatives as a result of our ship upgrade programsthe decrease in air transportation sales and an increase in shore excursion revenues attributable to certain deployment initiatives particularly in Australia. Onboard and other revenues included concession revenues of $316.3 million in 2013 and $288.6 million in 2012;
a $14.8$20.2 million decrease in shore excursion expense attributable to lower contractual costs incurred and the decrease in port activities revenue discussed above.
The decrease was partially offset by a $164.7 million increase attributable to the 0.8%3.3% increase in capacity noted above.
Marketing, Selling and Administrative Expenses
Marketing, selling and administrative expenses of $1.0 billion for 20132016 remained consistent with 2012.compared to 2015.
Depreciation and Amortization Expenses
Depreciation and amortization expenses for 20132016 increased $24.2$67.9 million, or 3.4%8.2%, to $754.7$894.9 million from $730.5$827.0 million in 2012.2015. The increase was primarily due to the addition of Celebrity ReflectionHarmony of the Seas which entered service and Ovation of the Seas in October 2012.the second quarter of 2016 into our fleet and the addition of Anthem of the Seas in the second quarter of 2015 and, to a lesser extent, new shipboard additions associated with our ship upgrade projects. The increase was partially offset by the favorable effectsale of changes madeSplendour of the Seas in the first quarter of 2013 to the estimated useful lives and associated residual values for five ships of approximately $11.0 million.April 2016.
During 2013, we incurred restructuring charges of approximately $23.4 million as a result of global restructuring actions and the pending sale of Pullmantur's non-core businesses. In addition,2015, we recognized an impairment charge of $33.5$411.3 million to write down the assets held for sale relatedPullmantur's goodwill to the businesses to be soldits implied fair value and to write down trademarks and trade names and certain long-lived assets, consisting of three aircraft that was then owned and operated by Pullmantur Air and two ships owned and operated by Pullmantur, to their fair value. These impairment charges were due to the Pullmantur restructuring initiative. (See Valuation of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets above for more information regarding the impairment of these assets).
Other Income (Expense)
Interest expense, net of interest capitalized, decreased $23.4$29.6 million, or 6.6%10.7%, to $332.4$307.4 million in 20132016 from $355.8$277.7 million in 2012.2015. The decreaseincrease was due to lower interest rates and a lowerhigher average debt level.level attributable to the financing of Ovation of the Seas and Harmony of the Seas, partially offset by lower pricing on debt refinanced in 2015.
Other expense decreased $41.1in 2016 was $35.7 million or 96.0%,compared to $1.7$24.4 million in 2013 compared to $42.92015. The increase in expense of $11.2 million for the same period in 2012. This change was primarily due to:
to a $29.8 decreasenet loss of $21.7 million related to the elimination of the Pullmantur reporting lag in deferred income tax2016. The increase in other expense as a result of a 100% valuation allowance recorded in connection with Pullmantur's deferred tax assets in 2012was partially offset by a reductiondecrease of $9.6 million in Pullmantur's deferred tax liability and resulting tax benefit related to a 2013 impairmentforeign exchange losses from the remeasurement of Pullmantur's long-livedmonetary assets and a 2012 impairment charge of Pullmantur's trademarks and trade names; andliabilities denominated in foreign currency.
Gross and Net Yields
Gross Yields remained consistent in 2016 compared to 2015. Net Yields increased 2.7%1.6% in 20132016 compared to 2012 primarily due to an increase in ticket prices, onboard revenue and Pullmantur’s travel agency network and air charter business noted above. Net Yields increased 3.2% in 2013 compared to 2012 on a Constant Currency basis.
Gross and air charter business, notedNet Cruise Costs
Gross Cruise Costs decreased 1.1% in 2016 compared to 2015 primarily due to the decrease in fuel. Net Cruise Costs increased 1.0% in 2016 compared to 2015 primarily due to the increase in capacity, partially offset by the decrease in fuel, which are further discussed above. Gross Cruise Costs per APCD and Net Cruise Costs per APCD increased 1.9%decreased 4.3% and 2.2%, respectively, in 20132016 compared to 2012.2015 primarily due to the decrease in fuel. Gross Cruise Costs per APCD on a Constant Currency basis decreased 3.4% in 2016 compared to 2015. Net Cruise Costs per APCD on a Constant Currency basis increaseddecreased 1.7% in 20132016 compared to 2012.
2015. Net Cruise Costs Excluding Fuel per APCD increased 2.1%remained consistent in 20132016 compared to 2012. Net Cruise Costs Excluding Fuel per APCD2015 and increased 0.9% in 2016 compared to 2015 on a Constant Currency basis increased 1.8% basis.
Other Comprehensive Income (Loss)
Other comprehensive income in 2013 2016 was $411.9 millioncompared to 2012.a loss of$431.4 million in 2015. The change of $843.4 million was primarily due to the Gain on cash flow derivative hedges in 2016 of $411.2 million compared to the Loss on cash flow derivative hedges of $406.0 million in 2015. The gain in 2016 resulted mostly from the reclassification of losses to earnings during 2016 from fuel cash flow hedges. In addition, there was an increase in the fair value of our fuel swaps in 2016 as a result of higher forward fuel prices. The loss in 2015 was primarily due to the decrease in the fair value of our fuel swaps and of our foreign currency forward contracts as a
result of decreases in fuel prices and forward currency rates, somewhat offset by the reclassification of losses to earnings during 2015 from fuel cash flow hedges.
Future Application of Accounting Standards
Refer to Note 2. Summary of Significant Accounting Policies to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data for further information on Recent Accounting Pronouncements.
Liquidity and Capital Resources
Sources and Uses of Cash
Cash flow generated from operations provides us with a significant source of liquidity. Net cash provided by operating activities increased $331.7$357.9 million to $1.7$2.9 billion for 2014in 2017 compared to $1.4$2.5 billion for 2013.in 2016. The increase in cash provided by operating activities was primarily dueattributable to an increase in proceeds from customer deposits, an increase in cash receipts from onboard spending and a decrease in interest paidfuel costs in 20142017 compared to 2013 and the timing of proceeds2016. Additionally, dividends received from accounts receivable and payments to vendors in 2014. unconsolidated affiliates increased by $33.7 million.
Net cash provided by operating activities increased $570.3 million to $2.5 billion in 2013 remained consistent2016 compared to 2012.$1.9 billion in 2015. The increase in cash provided by operating activities was primarily attributable to an increase in proceeds from customer deposits, an increase in cash receipts from onboard spending and a decrease in fuel costs in 2016 compared to 2015. Additionally, dividends received from unconsolidated affiliates increased by $42.6 million.
Net cash used in investing activities was $1.8decreased $2.5 billion for 2014to $213.6 million in 2017 compared to $824.5$2.7 billion in 2016. The decrease was primarily attributable to a decrease in capital expenditures of $1.9 billion due to ship deliveries in 2016, Ovation of the Seas and Harmony of the Seas, compared to no ship deliveries in 2017. In addition, we received $230.0 million for 2013.of proceeds from the sale of property and equipment in 2017 which did not occur in 2016. Furthermore, during 2017, we received cash of $63.2 million on settlements on our foreign currency forward contracts compared to cash paid of $213.2 million during 2016.
Net cash used in investing activities increased $981.9 million to $2.7 billion in 2016 compared to $1.7 billion in 2015. The increase was primarily attributable to an increase in capital expenditures of $1.0 billion$881.0 million in 20142016 compared to 2013the same period in 2015 primarily due to the deliverydeliveries of QuantumOvation of the Seasand the purchase of BrillianceHarmony of the Seasin 2014.2016. Additionally, there was an increase in investments in andcash repayments received on loans to our unconsolidated affiliates of $118.0 million and an increase in cash paid on the settlement of derivative financial instruments of $50.8 million. These cash outlays were partially offset by cash received of $220.0decreased $86.0 million in 2014 for the sale of Celebrity Century which did not occur in 2013 and a $52.8 million increase in cash received from repayments of a loan to an unconsolidated affiliate in 20142016 compared to 2013.the same period in 2015 mainly due to TUI Cruises repaying in 2015 the outstanding balance of the debt facility we originally provided to them in 2011.
Net cash used in investingfinancing activities was $824.5 million for 2013$2.7 billion in 2017 compared to $1.3 billion for 2012.Net cash provided in financing activities of $243.8 million in 2016. The decrease in 2013 compared to 2012 ischange was primarily dueattributable to a decrease in capital expendituresdebt proceeds of $527.7$1.5 billion, an increase in debt repayments of $1.5 billion and a higher amount of dividends paid during 2017 compared to 2016, partially offset by a decrease of stock repurchases of $75.0 million attributableduring 2017 compared to 2016. The decrease in debt proceeds was primarily due to the delivery$841.8 million unsecured term loan borrowed in April 2016 to finance Ovation of a ship, the SeaCelebrity Reflections and the €700.7 million and $226.1 million unsecured term loans borrowed in May 2016 to finance , in 2012 whichHarmony of the Seas that did not recur in 2013,2017and lower drawings on our revolving credit facilities during 2017 compared to 2016, partially offset by a$800 million in proceeds received from unsecured senior notes issued during 2017 which did not occur in 2016. The increase in repayment of debt was primarily due to higher level of ships under construction in 2013 compared to 2012. The decrease in capital expenditures was partially offset by investments of $70.6 million topayments on our unconsolidated affiliates during 2013.revolving credit facilities.
Net cash provided by financing activities was $17.5$243.8 million for 2014in 2016 compared to net cash used in financing activities of $576.6 million for 2013. This change was primarily due to a $1.7 billion increase in debt proceeds and a $40.8 million increase in the proceeds from the exercise of common stock options, partially offset by the repurchase of treasury stock of $236.1 million, an increase of $867.7 million in repayments of debt and an increase of dividends paid of $55.3 million. The increase in repayments of debt and proceeds from issuance of debt was primarily due to proceeds received from an unsecured term loan of $791.1 million due to the delivery of Quantum of the Seas in 2014, a higher level of bond maturities and higher drawings and repayments on our revolving credit facilities.
Net cash used in financing activities of $253.5 million in 2015. The change was $576.6 million for 2013primarily attributable to an increase in debt proceeds of $2.9 billion during 2016 compared to $179.62015, partially offset by an increase in repayment of debt of $2.2 billion, an increase in stock repurchases of $100.0 million for 2012. This changeand an increase in dividends paid of $66.3 million during 2016 compared to 2015. The increase in debt proceeds was primarily due to anthe $841.8 million unsecured term loan borrowed in April 2016 to finance Ovation of the Seas, the €700.7 million and $226.1 million unsecured term loans borrowed in May
2016 to finance Harmony of the Seas, the $200.0 million unsecured term loan borrowed in April 2016 and higher drawings on our revolving credit facilities during 2016 compared to the $742.1 million unsecured term loan borrowed in April 2015 to finance Anthem of the Seas. The increase of $295.2 million in repaymentsrepayment of debt and an increase of $25.9 million paid in dividends, partially offset by a decrease of $109.0 million in debt proceeds.was primarily due to higher payments on our revolving credit facilities.
Future Capital Commitments
Our future capital commitments consist primarily of new ship orders. As of December 31, 2014,2017, we hadhave two Quantum-class ships, and two Oasis-class ships and two ships of a new generation, known as our Icon-class, on order for our Royal Caribbean International brand with an aggregate capacity of approximately 19,20030,500 berths. Additionally, we have two "Project Edge"four ships of a new generation, known as our Edge-class, and a ship designed for the Galapagos Islands on order for our Celebrity Cruises brand with an aggregate capacity of approximately 5,800 berths,11,700 berths. For each of these orders, we have committed unsecured financing arrangements in place covering 80% of the cost of the ship, almost all of which areinclude sovereign financing guarantees. Furthermore, during 2017, we entered into an agreement to purchase a ship for our Azamara Club Cruises brand that is scheduled to be delivered in March 2018 and expected to become effective inenter service during the secondthird quarter of 2015.2018.
As of December 31, 2014,2017, the aggregate cost of our ships on order, not including the "Project Edge"TUI Cruises' ships on order, was approximately $5.0$13.3 billion, of which we had deposited $394.4$465.7 million as of such date. Approximately 28.8%54.0% of the aggregate cost was exposed to fluctuations in the Euro exchange rate at December 31, 2014. (See2017. (Refer to Note 14. Fair Value Measurements and Derivative Instruments and Note 15. Commitments and Contingencies to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data).
As of December 31, 2014,2017, anticipated overall capital expenditures, based on our existing ships on order, are approximately $1.6$3.4 billion for 2015, $2.32018, $2.1 billion for 2016, $0.42019, $2.5 billion for 20172020 and $2.2$2.5 billion for 2018.2021.
Contractual Obligations
As of December 31, 2014,2017, our contractual obligations were as follows (in thousands):
| Payments due by period | Payments due by period | |||||||||||||||||||||||||||||||||||||
| Less than | 1-3 | 3-5 | More than | Less than | 1-3 | 3-5 | More than | |||||||||||||||||||||||||||||||
| Total | 1 year | years | years | 5 years | Total | 1 year | years | years | 5 years | |||||||||||||||||||||||||||||
| Operating Activities: | ||||||||||||||||||||||||||||||||||||||
Operating lease obligations(1) | $ | 189,519 | $ | 18,154 | $ | 28,750 | $ | 17,618 | $ | 124,997 | $ | 241,468 | $ | 29,420 | $ | 44,191 | $ | 22,644 | $ | 145,213 | ||||||||||||||||||
Interest on long-term debt(2) | 1,150,946 | 245,162 | 344,430 | 214,598 | 346,756 | 1,275,346 | 250,600 | 415,000 | 292,665 | 317,081 | ||||||||||||||||||||||||||||
Other(3) | 843,262 | 214,817 | 303,590 | 197,012 | 127,843 | 879,206 | 214,444 | 282,570 | 150,003 | 232,189 | ||||||||||||||||||||||||||||
| Investing Activities: | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Ship purchase obligations(4) | 3,673,286 | 946,752 | 1,770,213 | 956,321 | — | 10,888,494 | 2,368,806 | 3,063,165 | 4,089,153 | 1,367,370 | ||||||||||||||||||||||||||||
Other(5) | 58,811 | 58,811 | — | — | — | |||||||||||||||||||||||||||||||||
| Financing Activities: | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Long-term debt obligations(6) | 8,391,302 | 790,920 | 2,765,464 | 2,307,677 | 2,527,241 | |||||||||||||||||||||||||||||||||
Capital lease obligations(7) | 52,646 | 8,710 | 11,525 | 6,603 | 25,808 | |||||||||||||||||||||||||||||||||
Other(8) | 88,610 | 25,652 | 37,375 | 19,099 | 6,484 | |||||||||||||||||||||||||||||||||
Long-term debt obligations(5) | 7,506,312 | 1,185,038 | 2,047,882 | 2,012,922 | 2,260,470 | |||||||||||||||||||||||||||||||||
Capital lease obligations(6) | 33,139 | 3,476 | 7,210 | 8,395 | 14,058 | |||||||||||||||||||||||||||||||||
Other(7) | 21,552 | 8,868 | 11,217 | 1,467 | — | |||||||||||||||||||||||||||||||||
| Total | $ | 14,448,382 | $ | 2,308,978 | $ | 5,261,347 | $ | 3,718,928 | $ | 3,159,129 | $ | 20,845,517 | $ | 4,060,652 | $ | 5,871,235 | $ | 6,577,249 | $ | 4,336,381 | ||||||||||||||||||
(1) We are obligated under noncancelable operating leases primarily for offices, warehouses and motor vehicles. Amounts represent contractual obligations with initial terms in excess of one year.
(2) Long-term debt obligations mature at various dates through fiscal year 20272028 and bear interest at fixed and variable rates. Interest on variable-rate debt is calculated based on forecasted debt balances, including the impact of interest swappedrate swap agreements, using the applicable rate at December 31, 2014.2017. Debt denominated in other currencies is calculated based on the applicable exchange rate at December 31, 2014.2017.
(3) Amounts primarily represent future commitments with remaining terms in excess of one year to pay for our usage of certain port facilities, marine consumables, services and maintenance contracts. Amounts do not include the PortMiami lease further discussed below under Off-Balance Sheet Arrangements.
(4) Amounts do not include potential obligations which remain subject to cancellation at our sole discretion.
(5) Amount represents unused commitment on loan to unconsolidated affiliate.
Please refer to Funding Needs and Sources for discussion on the planned funding of the above contractual obligations.
As a normal part of our business, depending on market conditions, pricing and our overall growth strategy, we continuously consider opportunities to enter into contracts for the building of additional ships. We may also consider the sale of ships or the purchase of existing ships. We continuously consider potential acquisitions and strategic alliances. If any of these were to occur, they would be financed through the incurrence of additional indebtedness, the issuance of additional shares of equity securities or through cash flows from operations.
Off-Balance Sheet Arrangements
TUI Cruises has entered into various ship construction and credit agreements with Meyer Turku shipyard that includesinclude certain restrictions on each of our and TUI AG's ability to reduce our current ownership interest in TUI Cruises below 37.5%37.55% through 2019.2021.
In July 2016, we executed an agreement with Miami Dade County (“MDC”), which was simultaneously assigned to Sumitomo Banking Corporation (“SMBC”), to lease land from MDC and construct a new cruise terminal at PortMiami in Miami, Florida. The terminal is expected to be approximately 170,000 square feet and will serve as a homeport. During the construction period, SMBC will fund the costs of the terminal’s construction and land lease. Upon completion of the terminal's construction, we will operate and lease the terminal from SMBC for a five-year term. We determined that the lease arrangement between SMBC and us should be accounted for as an operating lease upon completion of the terminal.
Some of the contracts that we enter into include indemnification provisions that obligate us to make payments to the counterparty if certain events occur. These contingencies generally relate to changes in taxes, increased lender capital costs and other similar costs. The indemnification clauses are often standard contractual terms and are entered into in the normal course of business. There are no stated or notional amounts included in the indemnification clauses and we are not able to estimate the maximum potential amount of future payments, if any, under these indemnification clauses. We have not been required to make any payments under such indemnification clauses in the past and, under current circumstances, we do not believe an indemnification obligation is probable.
Funding Needs and Sources
We have significant contractual obligations of which our debt service obligations and the capital expenditures associated with our ship purchases represent our largest funding needs. As of December 31, 2014,2017, we havehad approximately $2.3$4.1 billion in contractual obligations due through December 31, 20152018 of which approximately $790.9 million$1.2 billion relates to debt maturities, $946.8 million relates to the acquisition of Anthem of the Seas along with progress payments on our other ship purchases and $245.2 million$0.3 billion relates to interest on long-term debt.debt and $2.4 billion relates to ship purchase payments, including the final installments payable due upon the deliveries of Symphony of the Seas and Celebrity Edge in the
first and fourth quarters of 2018, respectively. We have historically relied on a combination of cash flows provided by operations, drawdowns under our available credit facilities, the incurrence of additional debt and/or the refinancing of our existing debt and the issuance of additional shares of equity securities to fund these obligations.
We had a working capital deficit of $3.0$3.9 billion and $3.7 billion as of December 31, 2014 as compared to a working capital deficit of $3.3 billion as of 2017 and December 31, 2013.2016, respectively. Included within our working capital deficit is $799.6 million$1.2 billion and $1.6$1.3 billion of current portion of long-term debt, including capital leases, as of December 31, 20142017 and December 31, 2013,2016, respectively. The decrease in working capital deficit was primarily due to the decrease in current maturities of long-term debt. Similar to others in our industry, we operate with a substantial working capital deficit. This deficit is mainly attributable to the fact that, under our business model, a vast majority of our passenger ticket receipts are collected in advance of the applicable sailing date. These advance passenger receipts remain a current liability until the sailing date. The cash generated from these advance receipts is used interchangeably with cash on hand from other sources, such as our revolving credit facilities and other cash from operations. The cash received as advanced receipts can be used to fund operating expenses for the applicable future sailing or otherwise, pay down our revolving credit facilities, invest in long term investments or any other use of cash. In addition, we have a relatively low-level of accounts receivable and rapid turnover results in a limited investment in inventories. We generate substantial cash flows from operations and our business model, along with our unsecured revolving credit facilities, has historically allowed us to
maintain this working capital deficit and still meet our operating, investing and financing needs. We expect that we will continue to have working capital deficits in the future.
As of December 31, 2014,2017, we had liquidity of $1.0$2.2 billion, consisting of approximately $189.2 million$0.1 billion in cash and cash equivalents and $800.9 million$2.1 billion available under our unsecured revolving credit facilities. We anticipate that our cash flows from operations and our current financing arrangements, as described above, will be adequate to meet our capital expenditures and debt repayments over the next twelve-month period.
On April 28, 2017, we announced that our Board of Directors authorized a twelve-month common stock repurchase program with initiatives aimedfor up to $500 million. As of December 31, 2017, we have $275.0 million that remains available for future common stock repurchase transactions under this Board approved program. Future repurchases may be made at improvingmanagement's discretion from time to time on the open market or through privately negotiated transactions. Repurchases under the program are expected to be funded from available cash or borrowings under our returns on invested capital. One of those initiatives, commenced in the third quarter of 2013, relatesrevolving credit facilities. Refer to realizing economies of scale and improving service deliveryNote 8. Shareholders' Equity to our travel partners and guests by restructuring and consolidating our global sales, marketing and general and administrative structure. A second initiative, commenced in the fourth quarter of 2013, relates to Pullmantur’s focus on its cruise business and expansion in Latin America. During 2014, we incurred approximately $30 million in cash outlays to implement these initiatives and we do not expect anyconsolidated financial statements for further cash outlays to be significant.
If (i) any person other than A. Wilhelmsen AS. and Cruise Associates and their respective affiliates (the “Applicable Group”) acquires ownership of more than 33%50% of our common stock and the Applicable Group owns less of our common stock than such person, or, (ii) 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 the majority of our credit facilities, which we may be unable to replace on similar terms. Certain of our outstandingOur public debt securities also contain change of control provisions that would be triggered by thea third-party acquisition of greater than 50% of our common stock by a person other than a member of the Applicable Group coupled with a ratings downgrade. If this were to occur, it would have an adverse impact on our liquidity and operations.
Debt Covenants
Certain of our financing agreements contain financial covenants that require us, among other things, to maintain minimum net worth of at least $6.2$8.0 billion, a fixed charge coverage ratio of at least 1.25x and limit our net debt-to-capital ratio to no more than 62.5%. The fixed charge coverage ratio is calculated by dividing net cash from operations for the past four quarters by the sum of dividend payments plus scheduled principal debt payments in excess of any new financings for the past four quarters. Our minimum net worth and maximum net debt-to-capital calculations
exclude the impact of Accumulated other comprehensive (loss) incomeloss on Total shareholders' equity. We arewere well in excess of all financialdebt covenant requirements as of December 31, 2014.2017. The specific covenants and related definitions can be found in the applicable debt agreements, the majority of which have been previously filed with the Securities and Exchange Commission.
Dividends
In December 2014,2017, we declared a cash dividend on our common stock of $0.30$0.60 per share which was paid in the first quarter of 2015.2018. We declared a cash dividend on our common stock of $0.30$0.60 per share during the third quarter of 20142017 which was paid in the fourth quarter of 2014.2017. During the first and second quarters of 2014,2017, we declared and paid a cash dividend on our common stock of $0.25$0.48 per share.share which was paid in the second and third quarters of 2017, respectively. During the first quarter of 2014,2017, we also paid a cash dividend on our common stock of $0.25$0.48 per share which was declared during the fourth quarter of 2013.2016.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Instruments and Other
General
We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We managetry to mitigate 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 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 doour objective is not to 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. (See(Refer to Note 14. Fair Value Measurements and Derivative Instruments to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data.)
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 December 31, 2014,2017, approximately 28.5%57.4% of our long-term debt was effectively fixed as compared to 34.6%40.5% as of December 31, 2013.2016. 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-ratefixed 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 December 31, 20142017 and December 31, 2013,2016, we maintained interest rate swap agreements on the $420.0 millionfollowing 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 Seasdebt effectively changed the interest rate on the balance of the unsecured term loan, which was $245.0 million as of December 31, 2014, from a fixed rate of 5.41% to a LIBOR-based floating rate equal to LIBOR plus 3.87%, currently approximately 4.20%. 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 3.86%. instruments:
| Debt Instrument | Swap Notional as of December 31, 2017 (In thousands) | Maturity | Debt Fixed Rate | Swap Floating Rate: LIBOR plus | All-in Swap Floating Rate as of December 31, 2017 | ||
Oasis of the Seas term loan | $ | 140,000 | October 2021 | 5.41% | 3.87% | 5.44% | |
| Unsecured senior notes | 650,000 | November 2022 | 5.25% | 3.63% | 5.05% | ||
| $ | 790,000 | ||||||
These interest rate swap agreements are accounted for as fair value hedges.
The estimated fair value of our long-term fixed-rate debt at December 31, 20142017 was $2.1$2.4 billion, using quoted market prices, where available, or using the present value of expected future cash flows which incorporates risk profile. The fair value of our fixed to floating interest rate swap agreements was estimated to be a liability of $22.3$19.8 million as of December 31, 2014,2017, based on the present value of expected future cash flows. A hypothetical one percentage point decrease in interest rates at December 31, 20142017 would increase the fair value of our hedged and unhedged long-term fixed-rate debt by approximately $96.4$127.4 million and would increase the fair value of our fixed to floating interest rate swap agreements by $55.5approximately $31.8 million.
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. A hypothetical one percentage point increase in interest rates would increase our forecasted 20152018 interest expense by approximately $48.4$30.1 million, assuming no change in foreign currency exchange rates.
At December 31, 20142017 and December 31, 2013,2016, we maintained forward-starting interest rate swap agreements that hedgeon the anticipated unsecured amortizing term loan that will finance our purchase of Anthem of the Seas. Forward-startingfollowing floating-rate debt instruments:
| Debt Instrument | Swap Notional as of December 31, 2017 (In thousands) | Maturity | Debt Floating Rate | All-in Swap Fixed Rate | |||
Celebrity Reflection term loan | $ | 381,792 | October 2024 | LIBOR plus | 0.40% | 2.85% | |
Quantum of the Seas term loan | 551,250 | October 2026 | LIBOR plus | 1.30% | 3.74% | ||
Anthem of the Seas term loan | 573,958 | April 2027 | LIBOR plus | 1.30% | 3.86% | ||
Ovation of the Seas term loan | 726,250 | April 2028 | LIBOR plus | 1.00% | 3.16% | ||
Harmony of the Seas term loan (1) | 728,373 | May 2028 | EURIBOR plus | 1.15% | 2.26% | ||
| $ | 2,961,623 | ||||||
| (1) | Interest rate swap agreements hedging the Euro-denominated term loan for Harmony of the Seas include EURIBOR zero-floors matching the hedged debt EURIBOR zero-floor. Amount presented is based on the exchange rate as of December 31, 2017. |
These interest rate swaps hedging the Anthem of the Seas loan will effectively convert the interest rateswap agreements are accounted for $725.0 million of the anticipated loan balance from LIBOR plus 1.30% to a fixed rate of 3.86% (inclusive of margin) beginningas cash flow hedges.
Foreign Currency Exchange Rate Risk
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.
The estimated fair value, as of December 31, 2014,2017, of our Euro-denominated forward contracts associated with our ship construction contracts was a liabilityan asset of $182.2$235.9 million, based on the present value of expected future cash flows. As of December 31, 2014,2017, the aggregate cost of our ships on order, not including the TUI Cruises' ships on order, was approximately $5.0$13.3 billion, of which we had deposited $394.4$465.7 million as of such date. Approximately 28.8%54.0% and 36.3%66.7% of the aggregate cost of the ships under construction was exposed to fluctuations in the Euro exchange rate at December 31, 20142017 and December 31, 2013,2016, respectively. A hypothetical 10% strengthening of the Euro as of December 31, 2014,2017, assuming no changes in comparative interest rates, would result in a $188.4$716.0 million increase in the United States dollar cost of the foreign currency denominated ship construction contracts 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.
Our international business operations subject us to foreign currency exchange risk. We transact business in many different foreign currencies and maintain investments in foreign operations which may expose us to financial market risk resulting from fluctuations in foreign currency exchange rates. Movements in foreign currency exchange rates may affect the translated value of our earnings in foreign currencies and cash flows. We manage most of this exposure on a consolidated basis, which allows us to take advantage of any natural offsets. Therefore, weakness in one particular currency might be offset by strengths in other currencies over time.
The extent to which one currency is effective as a natural offset of another currency fluctuates over time. In addition, some foreign currency exposures have little to no mitigating natural offsets available.
We consider our investments in our foreign operations to be denominated in relatively stable currencies and of a long-term nature. As of December 31, 2017, we maintained foreign currency forward contracts and designated them as hedges of a portion of our net investment in TUI cruises of €101.0 million, or approximately $121.3 million based on the exchange rate at December 31, 2017. These forward currency contracts mature in October 2021.
We partially mitigatealso address the exposure of our investments in foreign operations by denominating a portion of our debt in our subsidiaries’subsidiaries' and investments’investments' functional currencies and designating it as a hedge of these subsidiaries and investments. We had designated debt as a hedge of our net investments in Pullmantur and TUI Cruises of approximately €139.4 million and €544.9€246.0 million, or approximately $168.7 million and $750.8$295.3 million, through December 31, 2014 and2017. As of December 31, 2013, respectively. A hypothetical 10% increase or decrease in the December 31, 2014 Euro exchange rate would increase or decrease the fair value of our assigned2016, we had designated debt by $16.9 million, which would be offset byas a corresponding decrease or increase in the United States dollar value of our net investment. Furthermore, during 2014, we entered into foreign currency forward contracts and designated them as hedges of a portionhedge of our net investments in Pullmantur and TUI Cruises of €415.6approximately €295.0 million, or approximately $502.9 million, based on the exchange rate at December 31, 2014. These forward currency contracts mature in April 2016 and their estimated fair value was an asset of $64.0 million as of December 31, 2014. Accordingly, we$311.2 million.
We have included approximately $45.0$68.5 million and
Lastly, on a regular basis, we enter into foreign currency forward contracts and, from time to time, we have utilizedutilize 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 2014,2017, we maintained an average of approximately $474.0$739.4 million of these foreign currency forward contracts. These instruments are not designated as hedging instruments. In 2014, 20132017, 2016 and 20122015 changes in the fair value of the foreign currency forward contracts were (losses) gainsresulted in a gain (loss) of approximately ($48.6)$62.0 million ($19.3), $(51.1) million and $7.7$(55.5) million, respectively, which offset (losses) gains (losses) arising from the remeasurement of monetary assets and liabilities denominated in foreign currencies in those same years of $49.5$(75.6) million $13.4, $39.8 million and ($11.8)$34.6 million, respectively. These changes were recognized in earnings within Other income (expense)expense in our consolidated statements of comprehensive income (loss).
Fuel Price Risk
Our exposure to market risk for changes in fuel prices relates primarily to the consumption of fuel on our ships. Fuel cost (net of the financial impact of fuel swap agreements), as a percentage of our total revenues, was approximately 11.7%7.8% in 2014, 11.6%2017, 8.4% in 20132016 and 11.8%9.6% in 2012.2015. We use fuel swap agreements to mitigate the financial impact of fluctuations in fuel prices.
As of December 31, 2014,2017, we had fuel swap agreements to pay fixed prices for fuel with an aggregate notional amount of approximately $1.4 billion,$828.5 million, maturing through 2018.2021. The fuel swap agreements represented 58%50% of our projected 20152018 fuel requirements, 55%46% of our projected 20162019 fuel requirements, 35%36% of our projected 20172020 fuel requirements and 15%14% of our projected 20182021 fuel requirements. These fuel swap agreements are generally accounted for as cash flow hedges. The estimated fair value of these contracts at December 31, 20142017 was estimated to be a liabilityan asset of $497.8$14.3 million. We estimate that a hypothetical 10% increase in our weighted-average fuel price from that experienced during the year ended December 31, 20142017 would increase our forecasted 20152018 fuel cost by approximately $22.7$38.0 million, net of the impact of fuel swap agreements.
Item 8. Financial Statements and Supplementary Data
Our Consolidated Financial Statements and Quarterly Selected Financial Data are included beginning on page F-1 of this report.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chairman and Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based upon such evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer concluded that those controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chairman and Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our management, with the participation of our Chairman and Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2014.2017. The effectiveness of our internal control over financial reporting as of December 31, 20142017 has been audited by PricewaterhouseCoopers LLP, the independent registered certified public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, as stated in its report, which is included herein on page F-2.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-1513a-15(d) during the quarter ended December 31, 20142017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
Item 9B. Other Information
None.
PART III
Items 10, 11, 12, 13 and 14. Directors, Executive Officers and Corporate Governance,Governance; Executive Compensation,Compensation; Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,Matters; Certain Relationships and Related Transactions,Transactions; and Director Independence and Principal Accountant Fees and Services.
Except for information concerning executive officers (called for by Item 401(b) of Regulation S-K), which is included in Part I of this Annual Report on Form 10-K, the information required by Items 10, 11, 12, 13 and 14 is incorporated herein by reference to the Royal Caribbean Cruises Ltd. definitive proxy statementDefinitive Proxy Statement relating to our 2018 Annual Meeting of Shareholders (the "Proxy Statement") to be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year. Please refer to the following sections in the Proxy Statement for more information regarding our corporate governance: "Corporate Governance"; "Proposal 1—Election of Directors"; and "Certain Relationships and Related Party TransactionsPerson Transactions.". Copies of the Proxy Statement will become available when filed through our Investor Relations website at www.rclinvestor.comwww.rclcorporate.com (please see "Financial Reports" under "Financial Information"); by contacting our Investor Relations department at 1050 Caribbean Way, Miami, Florida 33132—telephone (305) 982-2625; or by visiting the SEC's website at www.sec.gov.
We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, including our executive officers, and our directors. This documentA copy of the Code of Business Conduct and Ethics is posted in the corporate governance section of our website at www.rclcorporate.com and is available in print, without charge, to shareholders upon written request to our Corporate Secretary at Royal Caribbean Cruises, Ltd., 1050 Caribbean Way, Miami, Florida 33132. Any amendments to the code or any waivers from any provisions of the code granted to executive officers or directors will be promptly disclosed to investors by posting on our website at www.rclinvestor.com.www.rclcorporate.com. None of the websites referenced in this Annual Report on Form 10-K or the information contained therein is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
Our Consolidated Financial Statements have been prepared in accordance with Item 8. Financial Statements and Supplementary Data and are included beginning on page F-1 of this report.
| (2) | Financial Statement Schedules |
None.
| (3) | Exhibits |
INDEX TO EXHIBITS
Exhibits are filed10.22 through 10.50 represent management compensatory plans or incorporated by reference as part of thisarrangements.
| Incorporated By Reference | ||||||||
| Exhibit Number | Exhibit Description | Form | Exhibit | Filing Date/ Period End Date | ||||
| 3.1 | S-3 | 3.1 | 3/23/2009 | |||||
| 3.2 | 8-K | 3.1 | 9/11/2013 | |||||
| 4.1 | Indenture dated as of July 15, 1994, by and between the Company, as issuer, and The Bank of New York Trust Company, N.A., successor to NationsBank of Georgia, National Association, as Trustee | 20-F | 2.4 | 12/31/1994 | ||||
| 4.2 | Sixth Supplemental Indenture dated as of October 14, 1997, to the Indenture, dated as of July 15, 1994, by and between the Company, as issuer, and The Bank of New York Trust Company, N.A., as Trustee | 20-F | 2.11 | 12/31/1997 | ||||
| 4.3 | Eighth Supplemental Indenture dated as of March 16, 1998, to the Indenture, dated as of July 15, 1994, by and between the Company, as issuer, and The Bank of New York Trust Company, N.A., as Trustee | 20-F | 2.13 | 12/31/1997 | ||||
| 4.4 | S-3 | 4.1 | 7/31/2006 | |||||
| 4.5 | 8-K | 4.1 | 11/7/2012 | |||||
| 4.6 | 8-K | 4.1 | 11/28/2017 | |||||
| 10.1 | Amended and Restated Registration Rights Agreement dated as of July 30, 1997, by and among the Company, A. Wilhelmsen AS., Cruise Associates, Monument Capital Corporation, Archinav Holdings, Ltd. and Overseas Cruiseship, Inc. | 20-F | 2.20 | 12/31/1997 | ||||
| 10.2 | 8-K | 10.1 | 6/19/2015 | |||||
| 10.3 | 8-K | 10.1 | 12/7/2017 | |||||
| 10.4 | 8-K | 10.1 | 8/26/2013 | |||||
| 10.5 | 10-Q | 10.2 | 6/30/2015 | |||||
| 10.6 | 8-K | 10.3 | 10/17/2017 | |||||
| 10.7 | 10-K | 10.7 | 12/31/2015 | |||||
| 10.8 | 10-K | 10.8 | 12/31/2015 | |||||
| Incorporated By Reference | ||||||||
| Exhibit Number | Exhibit Description | Form | Exhibit | Filing Date/ Period End Date | ||||
| 10.9 | 10-Q | 10.1 | 3/31/2016 | |||||
| 10.10 | 10-K | 10.10 | 12/31/2015 | |||||
| 10.11 | 8-K | 10.1 | 2/5/2015 | |||||
| 10.12 | 10-K | 10.10 | 12/31/2016 | |||||
| 10.13 | 8-K | 10.1 | 11/19/2015 | |||||
| 10.14 | 8-K | 10.2 | 11/19/2015 | |||||
| 10.15 | 8-K | 10.1 | 6/28/2016 | |||||
| 10.16 | 8-K | 10.2 | 6/28/2016 | |||||
| 10.17 | 8-K | 10.1 | 7/28/2017 | |||||
| 10.18 | 8-K | 10.2 | 7/28/2017 | |||||
| 10.19 | 8-K | 10.3 | 7/28/2017 | |||||
| 10.20 | 8-K | 10.1 | 10/17/2017 | |||||
| Incorporated By Reference | ||||||||
| Exhibit Number | Exhibit Description | Form | Exhibit | Filing Date/ Period End Date | ||||
| 10.21 | 8-K | 10.2 | 10/17/2017 | |||||
| 10.22 | 8-K | 10.1 | 12/8/2005 | |||||
| 10.23 | 8-K | 10.1 | 9/22/2006 | |||||
| 10.24 | 10-K | 10.17 | 12/31/2016 | |||||
| 10.25 | 10-Q | 10.3 | 9/30/2008 | |||||
| 10.26 | 10-Q | 10.4 | 9/30/2008 | |||||
| 10.27 | 10-K | 10.23 | 12/31/2013 | |||||
| 10.28 | 10-Q | 10.7 | 9/30/2017 | |||||
| 10.29 | 10-K | 10.31 | 12/31/2010 | |||||
| 10.30 | 10-K | 10.27 | 12/31/2014 | |||||
| 10.31 | 10-K | 10.26 | 12/31/2015 | |||||
| 10.32 | 10-K | 10.22 | 12/31/2012 | |||||
| 10.33 | 10-K | 10.23 | 12/31/2012 | |||||
| 10.34 | 10-Q | 10.2 | 6/30/2013 | |||||
| 10.35 | 10-Q | 10.3 | 6/30/2015 | |||||
| 10.36 | 10-K | 10.33 | 12/31/2014 | |||||
| 10.37 | 10-K | 10.31 | 12/31/2016 | |||||
| 10.38 | 10-Q | 10.4 | 6/30/2015 | |||||
| 10.39 | 8-K | 10.2 | 12/8/2005 | |||||
| 10.40 | 10-K | 10.29 | 12/31/2006 | |||||
| 10.41 | 10-K | 10.28 | 12/31/2007 | |||||
| 10.42 | 10-K | 10.36 | 12/31/2008 | |||||
| 10.43 | 8-K | 10.3 | 12/8/2005 | |||||
| 10.44 | 10-K | 10.31 | 12/31/2006 | |||||
| 10.45 | 10-K | 10.31 | 12/31/2007 | |||||
| 10.46 | 10-Q | 10.1 | 9/30/2008 | |||||
| 10.47 | 10-K | 10.38 | 12/31/2008 | |||||
| Incorporated By Reference | ||||||||
| Exhibit Number | Exhibit Description | Form | Exhibit | Filing Date/ Period End Date | ||||
| 10.48 | 10-K | 10.35 | 12/31/2013 | |||||
| 12.1 | ||||||||
| 21.1 | ||||||||
| 23.1 | ||||||||
| 23.2 | ||||||||
| 24.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| * | Filed herewith |
| ** | Furnished herewith |
Interactive Data File
| 101 | —The following financial statements from Royal Caribbean Cruises Ltd.'s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 20, 2018, formatted in XBRL, as follows: | |
| (i) | the Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015; | |
| (ii) | the Consolidated Balance Sheets at December 31, 2017 and 2016; | |
| (iii) | the Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015; | |
| (iv) | the Consolidated Statements of Shareholders' Equity for the years ended December 31, 2017, 2016 and 2015; and | |
| (v) | the Notes to the Consolidated Financial Statements, tagged in summary and detail. | |
Item 16. Form 10-K and such Index to Exhibits is hereby incorporated herein by reference.Summary
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROYAL CARIBBEAN CRUISES LTD. (Registrant) | |
| By: | /s/ JASON T. LIBERTY |
Jason T. Liberty Executive Vice President, Chief Financial Officer (Principal Financial Officer and duly authorized signatory) | |
February 23, 201520, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 23, 2015.
20, 2018.
| /s/ RICHARD D. FAIN |
Richard D. Fain Director, Chairman and Chief Executive Officer (Principal Executive Officer) |
| /s/ JASON T. LIBERTY |
Jason T. Liberty Executive Vice President, Chief Financial Officer (Principal Financial Officer) |
| /s/ HENRY L. PUJOL |
Henry L. Pujol Senior Vice President, Chief Accounting Officer (Principal Accounting Officer) |
| * |
John F. Brock Director |
| * |
William L. Kimsey Director |
| * |
Maritza G. Montiel Director |
| * |
Ann S. Moore Director |
| * |
Eyal M. Ofer Director |
| * |
Thomas J. Pritzker Director |
| * |
William K. Reilly Director |
| * |
Bernt Reitan Director |
| * |
Vagn O. Sørensen Director |
| * |
Donald Thompson Director |
| * |
Arne Alexander Wilhelmsen Director |
| *By: | /s/ JASON T. LIBERTY |
Jason T. Liberty, as Attorney-in-Fact | |
ROYAL CARIBBEAN CRUISES LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |
Report of Independent Registered Certified Public Accounting Firm
To the Board of Directors and Shareholders
of Royal Caribbean Cruises Ltd.
Opinions on the Financial Statements and Internal Control over Financial Reporting
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Royal Caribbean Cruises Ltd. and its subsidiaries atthe Company as of December 31, 20142017 and 2013,2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20142017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Overover Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
February 23, 201520, 2018
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
| 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | |||||||||||||||||
| (in thousands, except per share data) | (in thousands, except per share data) | |||||||||||||||||||||
| Passenger ticket revenues | $ | 5,893,847 | $ | 5,722,718 | $ | 5,594,595 | $ | 6,313,170 | $ | 6,149,323 | $ | 6,058,821 | ||||||||||
| Onboard and other revenues | 2,180,008 | 2,237,176 | 2,093,429 | 2,464,675 | 2,347,078 | 2,240,253 | ||||||||||||||||
| Total revenues | 8,073,855 | 7,959,894 | 7,688,024 | 8,777,845 | 8,496,401 | 8,299,074 | ||||||||||||||||
| Cruise operating expenses: | ||||||||||||||||||||||
| Commissions, transportation and other | 1,372,785 | 1,314,595 | 1,289,255 | 1,363,170 | 1,349,677 | 1,400,778 | ||||||||||||||||
| Onboard and other | 582,750 | 568,615 | 529,453 | 495,552 | 493,558 | 553,104 | ||||||||||||||||
| Payroll and related | 847,641 | 841,737 | 828,198 | 852,990 | 882,891 | 861,775 | ||||||||||||||||
| Food | 478,130 | 469,653 | 449,649 | 492,857 | 485,673 | 480,009 | ||||||||||||||||
| Fuel | 947,391 | 924,414 | 909,691 | 681,118 | 713,676 | 795,801 | ||||||||||||||||
| Other operating | 1,077,584 | 1,186,256 | 1,151,188 | 1,010,892 | 1,090,064 | 1,007,926 | ||||||||||||||||
| Total cruise operating expenses | 5,306,281 | 5,305,270 | 5,157,434 | 4,896,579 | 5,015,539 | 5,099,393 | ||||||||||||||||
| Marketing, selling and administrative expenses | 1,048,952 | 1,044,819 | 1,011,543 | 1,186,016 | 1,108,742 | 1,086,504 | ||||||||||||||||
| Depreciation and amortization expenses | 772,445 | 754,711 | 730,493 | 951,194 | 894,915 | 827,008 | ||||||||||||||||
| Impairment of Pullmantur related assets | — | — | 385,444 | — | — | 411,267 | ||||||||||||||||
| Restructuring and related impairment charges | 4,318 | 56,946 | — | |||||||||||||||||||
| 7,131,996 | 7,161,746 | 7,284,914 | 7,033,789 | 7,019,196 | 7,424,172 | |||||||||||||||||
| Operating Income | 941,859 | 798,148 | 403,110 | 1,744,056 | 1,477,205 | 874,902 | ||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||
| Interest income | 10,344 | 13,898 | 21,331 | 30,101 | 20,856 | 12,025 | ||||||||||||||||
| Interest expense, net of interest capitalized | (258,299 | ) | (332,422 | ) | (355,785 | ) | (299,982 | ) | (307,370 | ) | (277,725 | ) | ||||||||||
| Extinguishment of unsecured senior notes | — | (4,206 | ) | (7,501 | ) | |||||||||||||||||
| Other income (expense) (including $33.5 million deferred tax benefit related to the reversal of a valuation allowance in 2014 and ($28.5) million net deferred tax expense related to impairments in 2012) | 70,242 | (1,726 | ) | (42,868 | ) | |||||||||||||||||
| Equity investment income | 156,247 | 128,350 | 81,026 | |||||||||||||||||||
Other expense(1) | (5,289 | ) | (35,653 | ) | (24,445 | ) | ||||||||||||||||
| (177,713 | ) | (324,456 | ) | (384,823 | ) | (118,923 | ) | (193,817 | ) | (209,119 | ) | |||||||||||
| Net Income | $ | 764,146 | $ | 473,692 | $ | 18,287 | $ | 1,625,133 | $ | 1,283,388 | $ | 665,783 | ||||||||||
| Basic Earnings per Share: | ||||||||||||||||||||||
| Net income | $ | 3.45 | $ | 2.16 | $ | 0.08 | $ | 7.57 | $ | 5.96 | $ | 3.03 | ||||||||||
| Diluted Earnings per Share: | ||||||||||||||||||||||
| Net income | $ | 3.43 | $ | 2.14 | $ | 0.08 | $ | 7.53 | $ | 5.93 | $ | 3.02 | ||||||||||
| Comprehensive (Loss) Income | ||||||||||||||||||||||
| Comprehensive Income (Loss) | ||||||||||||||||||||||
| Net Income | $ | 764,146 | $ | 473,692 | $ | 18,287 | $ | 1,625,133 | $ | 1,283,388 | $ | 665,783 | ||||||||||
| Other comprehensive (loss) income: | ||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||
| Foreign currency translation adjustments | (26,102 | ) | 1,529 | (2,764 | ) | 17,307 | 2,362 | (30,152 | ) | |||||||||||||
| Change in defined benefit plans | (7,213 | ) | 10,829 | (4,567 | ) | (5,583 | ) | (1,636 | ) | 4,760 | ||||||||||||
| (Loss) gain on cash flow derivative hedges | (869,350 | ) | 127,829 | (51,247 | ) | |||||||||||||||||
| Total other comprehensive (loss) income | (902,665 | ) | 140,187 | (58,578 | ) | |||||||||||||||||
| Comprehensive (Loss) Income | $ | (138,519 | ) | $ | 613,879 | $ | (40,291 | ) | ||||||||||||||
| Gain (loss) on cash flow derivative hedges | 570,495 | 411,223 | (406,047 | ) | ||||||||||||||||||
| Total other comprehensive income (loss) | 582,219 | 411,949 | (431,439 | ) | ||||||||||||||||||
| Comprehensive Income | $ | 2,207,352 | $ | 1,695,337 | $ | 234,344 | ||||||||||||||||
| (1) | Including a $21.7 million loss related to the 2016 elimination of the Pullmantur reporting lag and a net deferred tax benefit of $12.0 million related to the 2015 Pullmantur impairment. |
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED BALANCE SHEETS
| As of December 31, | |||||||
| 2014 | 2013 | ||||||
| (in thousands, except share data) | |||||||
| Assets | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 189,241 | $ | 204,687 | |||
| Trade and other receivables, net | 261,392 | 259,746 | |||||
| Inventories | 123,490 | 151,244 | |||||
| Prepaid expenses and other assets | 226,960 | 252,852 | |||||
| Derivative financial instruments | — | 87,845 | |||||
| Total current assets | 801,083 | 956,374 | |||||
| Property and equipment, net | 18,235,568 | 17,517,752 | |||||
| Goodwill | 420,542 | 439,231 | |||||
| Other assets | 1,255,997 | 1,159,590 | |||||
| $ | 20,713,190 | $ | 20,072,947 | ||||
| Liabilities and Shareholders' Equity | |||||||
| Current liabilities | |||||||
| Current portion of long-term debt | $ | 799,630 | $ | 1,563,378 | |||
| Accounts payable | 331,505 | 372,226 | |||||
| Accrued interest | 49,074 | 103,025 | |||||
| Accrued expenses and other liabilities | 635,138 | 539,414 | |||||
| Derivative financial instruments | 266,986 | 24,288 | |||||
| Customer deposits | 1,766,914 | 1,664,679 | |||||
| Total current liabilities | 3,849,247 | 4,267,010 | |||||
| Long-term debt | 7,644,318 | 6,511,426 | |||||
| Other long-term liabilities | 935,266 | 486,246 | |||||
| Commitments and contingencies (Note 15) | |||||||
| Shareholders' equity | |||||||
| Preferred stock ($0.01 par value; 20,000,000 shares authorized; none outstanding) | — | — | |||||
| Common stock ($0.01 par value; 500,000,000 shares authorized; 233,106,019 and 230,782,315 shares issued, December 31, 2014 and December 31, 2013, respectively) | 2,331 | 2,308 | |||||
| Paid-in capital | 3,253,552 | 3,159,038 | |||||
| Retained earnings | 6,575,248 | 6,054,952 | |||||
| Accumulated other comprehensive (loss) income | (896,994 | ) | 5,671 | ||||
| Treasury stock (13,808,683 and 10,308,683 common shares at cost, December 31, 2014 and December 31, 2013, respectively) | (649,778 | ) | (413,704 | ) | |||
| Total shareholders' equity | 8,284,359 | 8,808,265 | |||||
| $ | 20,713,190 | $ | 20,072,947 | ||||
| As of December 31, | |||||||
| 2017 | 2016 | ||||||
| (in thousands, except share data) | |||||||
| Assets | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 120,112 | $ | 132,603 | |||
| Trade and other receivables, net | 318,641 | 291,899 | |||||
| Inventories | 111,393 | 114,087 | |||||
| Prepaid expenses and other assets | 193,562 | 209,716 | |||||
| Derivative financial instruments | 99,320 | — | |||||
| Total current assets | 843,028 | 748,305 | |||||
| Property and equipment, net | 19,735,180 | 20,161,427 | |||||
| Goodwill | 288,512 | 288,386 | |||||
| Other assets | 1,429,597 | 1,112,206 | |||||
| $ | 22,296,317 | $ | 22,310,324 | ||||
| Liabilities and Shareholders' Equity | |||||||
| Current liabilities | |||||||
| Current portion of long-term debt | $ | 1,188,514 | $ | 1,285,735 | |||
| Accounts payable | 360,113 | 305,313 | |||||
| Accrued interest | 47,469 | 46,166 | |||||
| Accrued expenses and other liabilities | 903,022 | 692,322 | |||||
| Derivative financial instruments | 47,464 | 146,592 | |||||
| Customer deposits | 2,243,682 | 1,965,473 | |||||
| Total current liabilities | 4,790,264 | 4,441,601 | |||||
| Long-term debt | 6,350,937 | 8,101,701 | |||||
| Other long-term liabilities | 452,813 | 645,610 | |||||
| Commitments and contingencies (Note 15) | |||||||
| Shareholders' equity | |||||||
| Preferred stock ($0.01 par value; 20,000,000 shares authorized; none outstanding) | — | — | |||||
| Common stock ($0.01 par value; 500,000,000 shares authorized; 235,198,901 and 234,613,486 shares issued, December 31, 2017 and December 31, 2016, respectively) | 2,352 | 2,346 | |||||
| Paid-in capital | 3,390,117 | 3,328,517 | |||||
| Retained earnings | 9,022,405 | 7,860,341 | |||||
| Accumulated other comprehensive loss | (334,265 | ) | (916,484 | ) | |||
| Treasury stock (21,861,308 and 20,019,237 common shares at cost, December 31, 2017 and December 31, 2016, respectively) | (1,378,306 | ) | (1,153,308 | ) | |||
| Total shareholders' equity | 10,702,303 | 9,121,412 | |||||
| $ | 22,296,317 | $ | 22,310,324 | ||||
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | |||||||||||
| 2014 | 2013 | 2012 | |||||||||
| (in thousands) | |||||||||||
| Operating Activities | |||||||||||
| Net income | $ | 764,146 | $ | 473,692 | $ | 18,287 | |||||
| Adjustments: | |||||||||||
| Depreciation and amortization | 772,445 | 754,711 | 730,493 | ||||||||
| Impairment of Pullmantur related assets | — | — | 385,444 | ||||||||
| Restructuring related impairments | — | 33,514 | — | ||||||||
| Net deferred income tax (benefit) expense | (44,437 | ) | (1,842 | ) | 28,939 | ||||||
| Loss on sale of ship | 17,401 | — | — | ||||||||
| Loss (gain) on derivative instruments not designated as hedges | 48,637 | 19,287 | (2,014 | ) | |||||||
| Loss on extinguishment of unsecured senior notes | — | 4,206 | 7,501 | ||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Decrease in trade and other receivables, net | 100,095 | 95,401 | 8,026 | ||||||||
| Decrease (increase) in inventories | 26,254 | (4,321 | ) | (1,645 | ) | ||||||
| Decrease (increase) in prepaid expenses and other assets | 41,077 | (22,657 | ) | (1,614 | ) | ||||||
| (Decrease) increase in accounts payable | (40,651 | ) | 18,957 | 36,602 | |||||||
| Decrease in accrued interest | (53,951 | ) | (3,341 | ) | (15,786 | ) | |||||
| Increase (decrease) in accrued expenses and other liabilities | 70,565 | (6,714 | ) | 33,060 | |||||||
| Increase in customer deposits | 14,885 | 37,077 | 103,733 | ||||||||
| Cash received on settlement of derivative financial instruments | — | — | 69,684 | ||||||||
| Dividends received from unconsolidated affiliates | 5,814 | 5,093 | — | ||||||||
| Other, net | 21,479 | 9,005 | (18,976 | ) | |||||||
| Net cash provided by operating activities | 1,743,759 | 1,412,068 | 1,381,734 | ||||||||
| Investing Activities | |||||||||||
| Purchases of property and equipment | (1,811,398 | ) | (763,777 | ) | (1,291,499 | ) | |||||
| Cash paid on settlement of derivative financial instruments | (68,098 | ) | (17,338 | ) | (10,886 | ) | |||||
| Investments in and loans to unconsolidated affiliates | (188,595 | ) | (70,626 | ) | — | ||||||
| Cash received on loan to unconsolidated affiliate | 76,167 | 23,372 | 23,512 | ||||||||
| Proceeds from sale of ships | 220,000 | — | 9,811 | ||||||||
| Other, net | 1,546 | 3,831 | 5,739 | ||||||||
| Net cash used in investing activities | (1,770,378 | ) | (824,538 | ) | (1,263,323 | ) | |||||
| Financing Activities | |||||||||||
| Debt proceeds | 4,153,958 | 2,449,464 | 2,558,474 | ||||||||
| Debt issuance costs | (72,974 | ) | (57,622 | ) | (75,839 | ) | |||||
| Repayments of debt | (3,724,218 | ) | (2,856,481 | ) | (2,561,290 | ) | |||||
| Purchase of treasury stock | (236,074 | ) | — | — | |||||||
| Dividends paid | (198,952 | ) | (143,629 | ) | (117,707 | ) | |||||
| Proceeds from exercise of common stock options | 70,879 | 30,125 | 15,146 | ||||||||
| Cash received on settlement of derivative financial instruments | 22,835 | — | — | ||||||||
| Other, net | 2,026 | 1,517 | 1,599 | ||||||||
| Net cash provided by (used in) financing activities | 17,480 | (576,626 | ) | (179,617 | ) | ||||||
| Effect of exchange rate changes on cash | (6,307 | ) | (1,072 | ) | (6,125 | ) | |||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in thousands) | |||||||||||
| Operating Activities | |||||||||||
| Net income | $ | 1,625,133 | $ | 1,283,388 | $ | 665,783 | |||||
| Adjustments: | |||||||||||
| Depreciation and amortization | 951,194 | 894,915 | 827,008 | ||||||||
| Impairment of Pullmantur related assets | — | — | 411,267 | ||||||||
| Net deferred income tax expense (benefit) | 1,730 | 2,608 | (10,001 | ) | |||||||
| Share-based compensation expense | 69,459 | 32,659 | 36,073 | ||||||||
| Equity investment income | (156,247 | ) | (128,350 | ) | (81,026 | ) | |||||
| Amortization of debt issuance costs | 45,943 | 52,795 | 52,153 | ||||||||
| Gain on sale of property and equipment | (30,902 | ) | — | — | |||||||
| (Gain) loss on derivative instruments not designated as hedges | (61,704 | ) | 45,670 | 59,162 | |||||||
| Changes in operating assets and liabilities: | |||||||||||
| (Increase) decrease in trade and other receivables, net | (32,043 | ) | 4,759 | 63,102 | |||||||
| Decrease (increase) in inventories | 2,424 | (1,679 | ) | 1,197 | |||||||
| Decrease (increase) in prepaid expenses and other assets | 20,859 | 11,519 | (2,262 | ) | |||||||
| Increase (decrease) in accounts payable | 36,780 | 29,564 | (25,278 | ) | |||||||
| Increase (decrease) in accrued interest | 1,303 | 7,841 | (10,749 | ) | |||||||
| Increase in accrued expenses and other liabilities | 34,215 | 20,718 | 33,859 | ||||||||
| Increase (decrease) in customer deposits | 274,705 | 188,632 | (92,849 | ) | |||||||
| Dividends received from unconsolidated affiliates | 109,677 | 75,942 | 33,338 | ||||||||
| Other, net | (17,960 | ) | (4,291 | ) | (14,411 | ) | |||||
| Net cash provided by operating activities | 2,874,566 | 2,516,690 | 1,946,366 | ||||||||
| Investing Activities | |||||||||||
| Purchases of property and equipment | (564,138 | ) | (2,494,363 | ) | (1,613,340 | ) | |||||
| Cash received (paid) on settlement of derivative financial instruments | 63,224 | (213,202 | ) | (178,597 | ) | ||||||
| Investments in and loans to unconsolidated affiliates | (10,396 | ) | (9,155 | ) | (56,163 | ) | |||||
| Cash received on loans to unconsolidated affiliates | 62,303 | 38,213 | 124,253 | ||||||||
| Proceeds from sale of property and equipment | 230,000 | — | — | ||||||||
Other, net (1) | 5,415 | (46,385 | ) | (19,128 | ) | ||||||
| Net cash used in investing activities | (213,592 | ) | (2,724,892 | ) | (1,742,975 | ) | |||||
| Financing Activities | |||||||||||
| Debt proceeds | 5,866,966 | 7,338,560 | 4,399,501 | ||||||||
| Debt issuance costs | (51,590 | ) | (88,241 | ) | (68,020 | ) | |||||
| Repayments of debt | (7,835,087 | ) | (6,365,570 | ) | (4,118,553 | ) | |||||
| Purchase of treasury stock | (224,998 | ) | (299,960 | ) | (200,000 | ) | |||||
| Dividends paid | (437,455 | ) | (346,487 | ) | (280,212 | ) | |||||
| Proceeds from exercise of common stock options | 2,525 | 2,258 | 11,252 | ||||||||
| Other, net | 3,843 | 3,249 | 2,520 | ||||||||
| Net cash (used in) provided by financing activities | (2,675,796 | ) | 243,809 | (253,512 | ) | ||||||
| Effect of exchange rate changes on cash | 2,331 | (24,569 | ) | (17,555 | ) | ||||||
| Net (decrease) increase in cash and cash equivalents | (12,491 | ) | 11,038 | (67,676 | ) | ||||||
| Net (decrease) increase in cash and cash equivalents | (15,446 | ) | 9,832 | (67,331 | ) | |||||||||||||||||
| Cash and cash equivalents at beginning of year | 204,687 | 194,855 | 262,186 | 132,603 | 121,565 | 189,241 | ||||||||||||||||
| Cash and cash equivalents at end of year | $ | 189,241 | $ | 204,687 | $ | 194,855 | $ | 120,112 | $ | 132,603 | $ | 121,565 | ||||||||||
| Supplemental Disclosures | ||||||||||||||||||||||
| Cash paid during the year for: | ||||||||||||||||||||||
| Interest, net of amount capitalized | $ | 276,933 | $ | 319,476 | $ | 341,047 | $ | 249,615 | $ | 256,775 | $ | 248,611 | ||||||||||
| Non-Cash Investing Activities | ||||||||||||||||||||||
| Purchase of property and equipment through asset trade-in | $ | — | $ | 46,375 | $ | — | ||||||||||||||||
| Purchases of property and equipment included in accounts payable and accrued expenses and other liabilities | $ | 139,644 | $ | — | $ | — | ||||||||||||||||
| Notes receivable issued upon sale of property and equipment | $ | 20,409 | $ | 213,042 | $ | — | ||||||||||||||||
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
| Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholders' Equity | Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholders' Equity | |||||||||||||||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||
| Balances at January 1, 2012 | $ | 2,276 | $ | 3,071,759 | $ | 5,823,430 | $ | (75,938 | ) | $ | (413,704 | ) | $ | 8,407,823 | ||||||||||||||||||||||||||||||||
| Balances at January 1, 2015 | $ | 2,331 | $ | 3,253,552 | $ | 6,575,248 | $ | (896,994 | ) | $ | (649,778 | ) | $ | 8,284,359 | ||||||||||||||||||||||||||||||||
| Issuance under employee related plans | 15 | 38,128 | — | — | — | 38,143 | 8 | 40,497 | — | — | — | 40,505 | ||||||||||||||||||||||||||||||||||
| Common Stock dividends | — | — | (95,979 | ) | — | — | (95,979 | ) | — | — | (296,169 | ) | — | — | (296,169 | ) | ||||||||||||||||||||||||||||||
Dividends declared by Pullmantur Air, S.A.(1) | — | — | (947 | ) | — | — | (947 | ) | ||||||||||||||||||||||||||||||||||||||
| Changes related to cash flow derivative hedges | — | — | — | (51,247 | ) | — | (51,247 | ) | — | — | — | (406,047 | ) | — | (406,047 | ) | ||||||||||||||||||||||||||||||
| Change in defined benefit plans | — | — | — | (4,567 | ) | — | (4,567 | ) | — | — | — | 4,760 | — | 4,760 | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | (2,764 | ) | — | (2,764 | ) | — | — | — | (30,152 | ) | — | (30,152 | ) | ||||||||||||||||||||||||||||||
| Purchase of Treasury Stock | — | 3,570 | — | — | (203,570 | ) | (200,000 | ) | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 18,287 | — | — | 18,287 | — | — | 665,783 | — | — | 665,783 | ||||||||||||||||||||||||||||||||||
| Balances at December 31, 2012 | 2,291 | 3,109,887 | 5,744,791 | (134,516 | ) | (413,704 | ) | 8,308,749 | ||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2015 | 2,339 | 3,297,619 | 6,944,862 | (1,328,433 | ) | (853,348 | ) | 8,063,039 | ||||||||||||||||||||||||||||||||||||||
| Issuance under employee related plans | 17 | 49,151 | — | — | — | 49,168 | 7 | 30,898 | — | — | — | 30,905 | ||||||||||||||||||||||||||||||||||
| Common Stock dividends | — | — | (162,727 | ) | — | — | (162,727 | ) | — | — | (367,909 | ) | — | — | (367,909 | ) | ||||||||||||||||||||||||||||||
Dividends declared by Pullmantur Air, S.A.(1) | — | — | (804 | ) | — | — | (804 | ) | ||||||||||||||||||||||||||||||||||||||
| Changes related to cash flow derivative hedges | — | — | — | 127,829 | — | 127,829 | ||||||||||||||||||||||||||||||||||||||||
| Change in defined benefit plans | — | — | — | 10,829 | — | 10,829 | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 1,529 | — | 1,529 | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 473,692 | — | — | 473,692 | ||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2013 | 2,308 | 3,159,038 | 6,054,952 | 5,671 | (413,704 | ) | 8,808,265 | |||||||||||||||||||||||||||||||||||||||
| Issuance under employee related plans | 23 | 94,514 | — | — | — | 94,537 | ||||||||||||||||||||||||||||||||||||||||
| Common Stock dividends | — | — | (243,550 | ) | — | — | (243,550 | ) | ||||||||||||||||||||||||||||||||||||||
Dividends declared by non-controlling interest (2) | — | — | (300 | ) | — | — | (300 | ) | ||||||||||||||||||||||||||||||||||||||
| Changes related to cash flow derivative hedges | — | — | — | (869,350 | ) | — | (869,350 | ) | — | — | — | 411,223 | — | 411,223 | ||||||||||||||||||||||||||||||||
| Change in defined benefit plans | — | — | — | (7,213 | ) | — | (7,213 | ) | — | — | — | (1,636 | ) | — | (1,636 | ) | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | (26,102 | ) | — | (26,102 | ) | — | — | — | 2,362 | — | 2,362 | ||||||||||||||||||||||||||||||||
| Purchases of Treasury Stock | — | — | — | — | (236,074 | ) | (236,074 | ) | — | — | — | — | (299,960 | ) | (299,960 | ) | ||||||||||||||||||||||||||||||
| Net income | — | — | 764,146 | — | — | 764,146 | — | — | 1,283,388 | — | — | 1,283,388 | ||||||||||||||||||||||||||||||||||
| Balances at December 31, 2014 | $ | 2,331 | $ | 3,253,552 | $ | 6,575,248 | $ | (896,994 | ) | $ | (649,778 | ) | $ | 8,284,359 | ||||||||||||||||||||||||||||||||
| Balances at December 31, 2016 | 2,346 | 3,328,517 | 7,860,341 | (916,484 | ) | (1,153,308 | ) | 9,121,412 | ||||||||||||||||||||||||||||||||||||||
| Issuance under employee related plans | 6 | 61,600 | — | — | — | 61,606 | ||||||||||||||||||||||||||||||||||||||||
| Common Stock dividends | — | — | (463,069 | ) | — | — | (463,069 | ) | ||||||||||||||||||||||||||||||||||||||
| Changes related to cash flow derivative hedges | — | — | — | 570,495 | — | 570,495 | ||||||||||||||||||||||||||||||||||||||||
| Change in defined benefit plans | — | — | — | (5,583 | ) | — | (5,583 | ) | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 17,307 | — | 17,307 | ||||||||||||||||||||||||||||||||||||||||
| Purchases of Treasury Stock | — | — | — | — | (224,998 | ) | (224,998 | ) | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 1,625,133 | — | — | 1,625,133 | ||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2017 | $ | 2,352 | $ | 3,390,117 | $ | 9,022,405 | $ | (334,265 | ) | $ | (1,378,306 | ) | $ | 10,702,303 | ||||||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||
| 2014 | 2013 | 2012 | |||||||||
| Accumulated net gain (loss) on cash flow derivative hedges at beginning of year | $ | 43,324 | $ | (84,505 | ) | $ | (33,258 | ) | |||
| Net (loss) gain on cash flow derivative hedges | (903,830 | ) | 197,428 | 58,138 | |||||||
| Net loss (gain) reclassified into earnings | 34,480 | (69,599 | ) | (109,385 | ) | ||||||
| Accumulated net (loss) gain on cash flow derivative hedges at end of year | $ | (826,026 | ) | $ | 43,324 | $ | (84,505 | ) | |||
ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. General
Description of Business
We are a global cruise company. We own and operate three global cruise brands: Royal Caribbean International, Celebrity Cruises Pullmantur,and Azamara Club Cruises, CDF Croisières de France andCruises. We also own a 50% joint venture interest in the German brand TUI Cruises.Cruises, a 49% interest in the Spanish brand Pullmantur and have a 36% interest in the Chinese brand SkySea Cruises (collectively, our "Partner Brands"). We account for our investments in our Partner Brands under the equity method of accounting. Together, these six brandsour Global Brands and our Partner Brands operate a combined 4349 ships as of December 31, 2014.2017. Our ships operate on a selection of worldwide itineraries that call on approximately 480540 destinations on all seven continents.
Effective July 31, 2016, we sold 51% of our interest in Pullmantur Holdings (formerly known as Royal Caribbean Holdings de España S.L. or "RCHE"), the parent company of the Pullmantur brand. We retain a 49% interest in Pullmantur Holdings as well as full ownership of the four vessels currently operated by the Pullmantur brand under bareboat charter arrangements. We account for the bareboat charters of the vessels to Pullmantur Holdings as operating leases. We also provide certain ship management services to Pullmantur Holdings. We recognized an immaterial gain on the sale of our majority interest in Pullmantur Holdings. We had also retained full ownership of the aircraft which we subsequently sold during 2017. Effective August 2016, we no longer consolidate Pullmantur Holdings in our consolidated financial statements and our investment in the company is accounted for under the equity method of accounting. Refer to Note 6. Other Assets for further information on our retained interest in Pullmantur Holdings and Note 5. Property and Equipment for further information on the sale of the aircraft. The sale did not represent a strategic shift that will have a major effect on our operations and financial results, as we continue to provide similar itineraries to and source passengers from the markets served by the Pullmantur business. Therefore, the sale of Pullmantur Holdings did not meet the criteria for discontinued operations reporting.
Basis for Preparation of Consolidated Financial Statements
The 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. SeeRefer to Note 2. Summary of Significant Accounting Policies 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. SeeRefer to Note 6. 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. We consolidate
Prior to January 1, 2016, we consolidated the operating results of Pullmantur and CDF Croisières de FranceHoldings on a two-monthtwo-month reporting lag to allow for more timely preparation of our consolidated financial statements. On March 31, 2014,Effective January 1, 2016, we eliminated the two-month reporting lag to reflect Pullmantur soldHoldings' financial position, results of operations and cash flows concurrently and consistently with the majorityfiscal calendar of its interest in its non-core businesses. These non-core businesses included Pullmantur’s land-based tour operations, travel agency and 49% interest in its air business. See Note 16. Restructuring Charges and Related Impairment Charges for further discussion onthe Company ("elimination of the Pullmantur sales transaction. No material events or transactions affectingreporting lag"). The elimination of the Pullmantur or CDF Croisières de Francereporting lag represented a change in accounting principle which we believed to be preferable because it provided 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 was immaterial for our fiscal year ended December 31, 2016. As a result, we have occurred duringaccounted for this change in accounting principle in our consolidated results for the two-month lag periodyear ended December 31, 2016. Accordingly, the results of Pullmantur Holdings for November and December 2014 that would require disclosure or adjustment2015 were included in our statement of comprehensive income (loss) for the year ended December 31, 2016. The effect of this change was
F-9
ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
a decrease to net income of $21.7 million, which has been reported within Other expense in our consolidated financial statements as of comprehensive income (loss) for the year ended December 31, 2014.2016.
Note 2. Summary of Significant Accounting Policies
Revenues and Expenses
Deposits received on sales of passenger cruises are initially recorded as customer deposit liabilities on our balance sheet. Customer deposits are subsequently recognized as passenger ticket revenues, together with revenues from onboard and other goods and services and all associated cruise operating expenses of a voyage.
Revenues and expenses include port costs that vary with guest head counts. The amounts of such port costs charged to our guests and included inwithin Passenger ticket revenues on a gross basis were $546.6$569.5 million, $494.2$570.3 million and $459.8$561.1 million for the years 2014, 20132017, 2016 and 2012,2015, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash and marketable securities with original maturities of less than 90 days.
Inventories
Inventories consist of provisions, supplies and fuel carried at the lower of cost (weighted-average) or market.net realizable value.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. We capitalize interest as part of the cost of acquiring certain assets. Improvement costs that we believe add value to our ships are capitalized as additions to the ship and depreciated over the shorter of the improvements' estimated useful lives or that of the associated ship. The estimated cost and accumulated depreciation of replaced or refurbished ship components are written off and any resulting losses are recognized in Cruise operating expenses. Liquidated damages received from shipyards as a result of the late delivery of a new ship are recorded as reductions to the cost basis of the ship.
Depreciation of property and equipment is computed using the straight-line method over the estimated useful life of the asset. The useful lives of our ships are generally 30 years, net of a 15% projected residual value. The 30-year useful life of our newly constructed ships and 15% associated residual value are both based on the weighted-average of all major components of a ship. Our useful life and residual value estimates take into consideration the impact of anticipated technological changes, long-term cruise and vacation market conditions and historical useful lives of similarly-built ships. In addition, we take into consideration our estimates of the weighted-average useful lives of the ships' major component systems, such as hull, superstructure, main electric, engines and cabins. Depreciation for assets under capital leases is computed using the shorter of the lease term or related asset life.
Depreciation of property and equipment is computed utilizing the following useful lives:
| Years | |
| Ships | generally 30 |
| Ship improvements | 3-20 |
| Buildings and improvements | 10-40 |
| Computer hardware and software | |
| Transportation equipment and other | 3-30 |
| Leasehold improvements | Shorter of remaining lease term or useful life 3-30 |
We review long-lived assets for impairment whenever events or changes in circumstances indicate, based on estimated undiscounted future cash flows, that the carrying amount of these assets may not be fully recoverable. For purposes of recognition and measurement of an impairment loss, long-lived assets are grouped with other assets and
F-10
ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The lowest level for which we maintain identifiable cash flows that are independent of the cash flows of other assets and liabilities is at the ship level for our ships and, prior to the sale of the aircraft, at the aggregated asset group level for our aircraft. If estimated future cash flows are less than the carrying value of an asset, an impairment charge is recognized to the extent its carrying value exceeds fair value.
We use the deferral method to account for drydocking costs. Under the deferral method, drydocking costs incurred are deferred and charged to expense on a straight-line basis over the period to the next scheduled drydock, which we estimate to be a period of thirty to sixty months based on the vessel's age as required by Class. Deferred drydock costs consist of the costs to drydock the vessel and other costs incurred in connection with the drydock which are necessary to maintain the vessel's Class certification. Class certification is necessary in order for our cruise ships to be flagged in a specific country, obtain liability insurance and legally operate as passenger cruise ships. The activities associated with those drydocking costs cannot be performed while the vessel is in service and, as such, are done during a drydock as a planned major maintenance activity. The significant deferred drydock costs consist of hauling and wharfage services provided by the drydock facility, hull inspection and related activities (e.g., scraping, pressure cleaning, bottom painting), maintenance to steering propulsion, thruster equipment and ballast tanks, port services such as tugs, pilotage and line handling, and freight associated with these items. We perform a detailed analysis of the various activities performed for each drydock and only defer those costs that are directly related to planned major maintenance activities necessary to maintain Class. The costs deferred are not otherwise routinely periodically performed to maintain a vessel's designed and intended operating capability. Repairs and maintenance activities are charged to expense as incurred.
Goodwill
Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets acquired. We review goodwill for impairment at the reporting unit level annually or, when events or circumstances dictate, more frequently. The impairment review for goodwill consists of a qualitative assessment of whether it is more-likely-than-not that a reporting unit's fair value is less than its carrying amount, and if necessary, a two-step goodwill impairment test. Factors to consider when performing the qualitative assessment include general economic conditions, limitations on accessing capital, changes in forecasted operating results, changes in fuel prices and fluctuations in foreign exchange rates. If the qualitative assessment demonstrates that it is more-likely-than-not that the estimated fair value of the reporting unit exceeds its carrying value, it is not necessary to perform the two-step goodwill impairment test. We may elect to bypass the qualitative assessment and proceed directly to step one, for any reporting unit, in any period. On a periodic basis, we elect to bypass the qualitative assessment and proceed to step one to corroborate the results of recent years' qualitative assessments. We can resume the qualitative assessment for any reporting unit in any subsequent period. When performing the two-step goodwill impairment test, the fair value of the reporting unit is determined and compared to the carrying value of the net assets allocated to the reporting unit. If the fair value of the reporting unit exceeds its carrying value, no further analysis or write-down of goodwill is required. If the fair value of the reporting unit is less than the carrying value of its net assets, the implied fair value of the reporting unit is allocated to all its underlying assets and liabilities, including both recognized and unrecognized tangible and intangible assets, based on their fair value. If necessary, goodwill is then written down to its implied fair value.
Intangible Assets
In connection with our acquisitions, we have acquired certain intangible assets to which value has been assigned based on our estimates. Intangible assets that are deemed to have an indefinite life are not amortized, but are subject to an annual impairment test, or when events or circumstances dictate, more frequently. The indefinite-life intangible asset impairment test consists of a comparison of the fair value of the indefinite-life intangible asset with its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds its carrying amount, the indefinite-life intangible asset is not considered impaired.
Other intangible assets assigned finite useful lives are amortized on a straight-line basis over their estimated useful lives.
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Contingencies —Litigation— Litigation
On an ongoing basis, we assess the potential liabilities related to any lawsuits or claims brought against us. While it is typically very difficult to determine the timing and ultimate outcome of such actions, we use our best judgment to determine if it is probable that we will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. In assessing probable losses, we take into consideration estimates of the amount of insurance recoveries, if any, which are recorded as assets when recoverability is probable. We accrue a liability when we believe a loss is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties related to the eventual outcome of litigation and potential insurance recoveries, it is possible that certain matters may be resolved for amounts materially different from any provisions or disclosures that we have previously made.
Advertising Costs
Advertising costs are expensed as incurred except those costs which result in tangible assets, such as brochures, which are treated as prepaid expenses and charged to expense as consumed. Advertising costs consist of media advertising as well as brochure, production and direct mail costs.
Media advertising was $205.2$233.5 million, $205.8$240.3 million and $200.9$242.8 million, and brochure, production and direct mail costs were $136.7$126.7 million, $137.1$120.8 million and $130.4$127.1 million for the years 2014, 20132017, 2016 and 2012,2015, respectively.
Derivative Instruments
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 haveuse non-derivative financial instruments designated as hedges of our net investment in our foreign operations and investments. 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.
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) incomeloss until the underlying hedged transactions are recognized in earnings. The foreign currency transaction gain or loss of our non-derivative financial instruments designated as hedges of our net investment in foreign operations and investments are recognized as a component of Accumulated other comprehensive (loss) incomeloss 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
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 income (expense)expense 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.
Foreign Currency Translations and Transactions
We translate assets and liabilities of our foreign subsidiaries whose functional currency is the local currency, at exchange rates in effect at the balance sheet date. We translate revenues and expenses at weighted-average exchange rates for the period. Equity is translated at historical rates and the resulting foreign currency translation adjustments are included as a component of Accumulated other comprehensive (loss) incomeloss, which is reflected as a separate component of Shareholders' equity. Exchange gains or losses arising from the remeasurement of monetary assets and liabilities denominated in a currency other than the functional currency of the entity involved are immediately included in our earnings, except for certain liabilities that have been designated to act as a hedge of a net investment in a foreign operation or investment. Exchange (losses) gains (losses) were $49.5$(75.6) million, $13.4$39.8 million and $(11.8)$34.6 million for the years 2014, 20132017, 2016 and 2012,2015, respectively, and were recorded within Other income (expense)expense. The majority of our transactions are settled in United States dollars. Gains or losses resulting from transactions denominated in other currencies are recognized in income at each balance sheet date.
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 December 31, 2014, we did not have any counterparty credit risk exposure under our derivative instruments. As of December 31, 2013,2017, we had counterparty credit risk exposure under our derivative instruments of approximately $92.5$212.8 million, which was limited to the cost of replacing the contracts in the event of non-performance by the counterparties to the contracts, allthe majority of which are currently our lending banks. As of December 31, 2016, we did not have any exposure under our derivative instruments. 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.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share incorporates the incremental shares issuable upon the assumed exercise of stock options and conversion of potentially dilutive securities.
Stock-Based Employee Compensation
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We measure and recognize compensation expense at the estimated fair value of employee stock awards. Compensation expense for awards and the related tax effects are recognized as they vest. We use the estimated amount of expected forfeitures to calculate compensation costs for all outstanding awards.
Segment Reporting
We own and operate five wholly-ownedthree global cruise brands, Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises, Pullmantur and CDF Croisières de France. In addition, we haveCruises. We also own a 50% investment in a joint venture interest with TUI AG which operates the brand TUI Cruises, a 49% interest in the Spanish brand Pullmantur and have a 36% interest in the Chinese brand SkySea Cruises. We believe our global brands possess the versatility to enter multiple cruise market segments within the cruise vacation industry. Although each of ourthese brands hashave its own marketing style as well as ships and crews of various sizes, the nature of the products sold and services delivered by ourthese brands share a common base (i.e., the sale and provision of cruise vacations). Our brands also have similar itineraries as well as similar cost and revenue components. In addition, our brands source passengers from similar markets around the world and operate in similar economic environments with a significant degree of commercial overlap. As a result, our brands (including TUI Cruises) have been aggregated as a single reportable segment based on the similarity of their economic characteristics, types of consumers, regulatory environment, maintenance requirements, supporting systems and processes as well as products and services provided. Our Chairman and Chief Executive Officer has been identified as the chief operating decision-maker and all significant operating decisions including the allocation of resources are based upon the analyses of the Company as one segment.
Information by geographic area is shown in the table below. Passenger ticket revenues are attributed to geographic areas based on where the reservation originates.
| 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | |||||
| Passenger ticket revenues: | ||||||||||
| United States | 53% | 52% | 51% | 59% | 55% | 55% | ||||
| All other countries | 47% | 48% | 49% | 41% | 45% | 45% |
Recent Accounting Pronouncements
Contracts with Customers
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
We have elected the modified retrospective method which will involve applying the guidance retrospectively only to the most current period presented in the consolidated financial statements and recognizing the cumulative effect of initially applying the guidance as an adjustment to the January 1, 2018 opening balance of retained earnings, if any. We have completed our evaluation of potential changes to our core revenues using the five-step model supported by the new revenue standard, including our accounting for customer loyalty programs and promotional offerings. Based on our assessment, the adoption of this newly issued guidance is not expected to have a material impact to the timing of recognition of our core revenues, but will require us to enhance our disclosures with respect to our revenue recognition policies.
Leases
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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 not permitted. We are currently evaluating the impact of the adoption of this newly issued guidance to our consolidated financial statements.
Classification of Certain Cash Receipts and Cash Payments
In August 2014,2016, amended GAAP guidance was issued requiring management to evaluate,clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are aimed at reducing the existing diversity in practice. The guidance should be applied using a retrospective transition method to each annualperiod presented 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 endingperiods beginning after December 15, 2016, and for annual periods2017 and interim periods thereafter.within those annual periods. Early adoption is permitted.permitted, including adoption in an interim period. We intend to adopt the guidance on the date of initial application, January 1, 2018. The adoption of this newly issued guidance is not expected to have ana material impact to our consolidated financial statements.
Intra-Entity Transfers of Assets Other Than Inventory
In January 2015,October 2016, amended GAAP guidance was issued changing the requirements for reporting extraordinary and unusual items inthat requires the income statement.tax consequences of an intra-entity transfer of an asset, other than inventory, to be recognized at the time that the transfer occurs, rather than when the asset is sold to an outside party. The update eliminates the concept of extraordinary items. The presentation and disclosurenew guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. A reporting entity may apply the amendments prospectively or retrospectively to all periods presented in the financial statements. The guidance will beis effective for fiscal years,annual and interim reporting periods within those fiscal years, beginning after December 15, 2015.2017. Early adoption is permitted provided thatas of the beginning of an annual period for which financial statements have not been issued. The guidance is applied fromrequired to be adopted retrospectively by recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.adoption period. The adoption of this newly issued guidance is not expected to have ana material impact to our consolidated financial statements.
Service Concession Arrangements
In February 2015,May 2017, amended GAAP guidance was issued affecting current consolidation guidance.to clarify who should be viewed as the customer under service concession arrangements. A service concession arrangement is an arrangement under which a public sector entity (“grantor”), such as a Port Authority, grants a private entity (“operator”), such as the Company, the right to operate the grantor's infrastructure for a specified period of time. The amended guidance changeswill require the analysisCompany to evaluate the relationship with the grantor and identify the multiple performance obligations that may exist under these concession arrangements, including consideration of construction services that may be performed, operational services, and any other maintenance or ancillary services performed under the service concession. In addition, the amended guidance will require that all revenue streams identified under such arrangements be evaluated with the grantor as the customer, irrespective of whether some of the revenues are paid by third-party users of the infrastructure under concession. The clarification will enable a more consistent application of the new Revenue from Contracts with Customers guidance, which along with this clarification guidance, will be effective for our annual reporting entity must perform to determine whether it should consolidate certain types of legal entities.period beginning after December 15, 2017, including interim periods therein. This guidance must be applied using one of two retrospective application methods and will be effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in any interim period. We are currently evaluating the impact, if any, of themethods. The adoption of this newly issued guidance is not expected to have a material impact to our consolidated financial statements.
In August 2017, amended GAAP guidance was issued to simplify and improve the financial reporting of December 31, 2013, $24.3 million has been reclassifiedhedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. In addition to changes in designation and measurement for qualifying hedge relationships, the guidance requires an entity to report the earnings effect of the hedging instrument in the consolidated balance sheet from Accrued expenses and other liabilities to Derivative financial instruments within Total current liabilitiessame income statement line item in order to conform towhich the current year presentation.earnings effect of the hedged item is reported. As a result, hedge ineffectiveness will no longer be separately measured or reported. This guidance will be effective for our annual reporting period beginning after December 15, 2018, including interim periods therein. Early adoption is permitted in any interim period after issuance of this guidance. All transition
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
requirements and elections should be applied to hedging relationships existing on the date of adoption. The effect of the adoption should be reflected as of the beginning of the fiscal year of adoption. We plan to early adopt this guidance in the first quarter of 2018. The adoption for this newly issued guidance is not expected to have a material impact on our consolidated financial statements.
Reclassifications
For the year ended December 31, 2016, restructuring charges of $8.5 million have been reclassified from Restructuring charges into Marketing, selling and administrative expenses in the consolidated statements of comprehensive income (loss) in order to conform to the current year presentation.
Note 3. Goodwill
The carrying amount of goodwill attributable to our Royal Caribbean International and PullmanturCelebrity Cruises reporting units wasand the changes in such balances during the years ended December 31, 2017 and December 31, 2016 were as follows (in thousands):
| Royal Caribbean International | Pullmantur | Total | |||||||||
| Balance at December 31, 2012 | $ | 287,436 | $ | 145,539 | $ | 432,975 | |||||
| Foreign currency translation adjustment | (312 | ) | 6,568 | 6,256 | |||||||
| Balance at December 31, 2013 | $ | 287,124 | $ | 152,107 | $ | 439,231 | |||||
| Foreign currency translation adjustment | (166 | ) | (18,523 | ) | (18,689 | ) | |||||
| Balance at December 31, 2014 | $ | 286,958 | $ | 133,584 | $ | 420,542 | |||||
| Royal Caribbean International | Celebrity Cruises | Total | |||||||
| Balance at December 31, 2015 | $ | 286,764 | $ | — | $ | 286,764 | |||
Goodwill attributable to purchase of Ocean Adventures(1) | — | 1,600 | 1,600 | ||||||
| Foreign currency translation adjustment | (10 | ) | 32 | 22 | |||||
| Balance at December 31, 2016 | 286,754 | 1,632 | 288,386 | ||||||
| Foreign currency translation adjustment | 126 | — | 126 | ||||||
| Balance at December 31, 2017 | $ | 286,880 | $ | 1,632 | $ | 288,512 | |||
| (1) | In 2016, we purchased Ocean Adventures. The acquisition was accounted for as a business purchase combination using the purchase method of accounting which requires the use of fair value measurements. The business combination, including purchase transaction and assets acquired, was immaterial to our consolidated financial statements. |
During the fourth quarter of 2014,2017, we performed a qualitative assessment of whether it was more-likely-than-not that our Royal Caribbean International reporting unit's fair value was less than its carrying amount before applying the two-step goodwill impairment test. The qualitative analysis included assessing the impact of certain factors such as general economic conditions, limitations on accessing capital, changes in forecasted operating results, changes in fuel prices and fluctuations in foreign exchange rates. Based on our qualitative assessment, we concluded that it was more-likely-than-not that the estimated fair value of the Royal Caribbean International reporting unit exceeded its carrying value and thus, we did not proceed to the two-step goodwill impairment test. No indicators of impairment exist primarily because the reporting unit's fair value has consistently exceeded its carrying value by a significant margin its financial performance has been solid in the face of mixed economic environments and forecasts of operating results generated by the reporting unit appear sufficient to support its carrying value. As a result of our assessment, we did not record an impairment of goodwill for the year ended December 31, 2017.
For the year ended December 31, 2016, we did not record an impairment of goodwill for our reporting units.
During the fourth quarter of 2015, we performed our annual impairment review of goodwill for Pullmantur'sthe Royal Caribbean International reporting unit duringunit. We elected to bypass the fourth quarter of 2014. We did not perform a qualitative assessment but insteadand proceeded directly to step one of the two-step goodwill impairment test. We estimatedtest to corroborate the fair valueresults of prior years' qualitative assessments. As a result of the Pullmantur reporting unit using a probability-weighted discounted cash flow model. The principal assumptions used in the discounted cash flow model are projected operating results, weighted-average cost of capital, and terminal value. Significantly impacting these assumptions are the transfer of vessels from our other cruise brands to Pullmantur. The discounted cash flow model used our 2015 projected operating results as a base. To that base, we added future years' cash flows assuming multiple revenue and expense scenarios that reflect the impact of different global economic environments beyond 2015 on Pullmantur's reporting unit. We assigned a probability to each revenue and expense scenario.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Intangible Assets
Intangible assets are reported in Other assets in our consolidated balance sheetssheets. The carrying amount of indefinite-life intangible assets was not material for the years ended December 31, 2017 and consist of the following (in thousands):December 31, 2016.
| 2014 | 2013 | ||||||
| Indefinite-life intangible asset—Pullmantur trademarks and trade names | $ | 214,112 | $ | 204,866 | |||
| Foreign currency translation adjustment | (26,074 | ) | 9,246 | ||||
| Total | $ | 188,038 | $ | 214,112 | |||
During the fourththird quarter of 2014, 2013 and 2012,2015, we performed the annualan interim impairment reviewevaluation of Pullmantur's trademarks and trade names using a discounted cash flow model and the relief-from-royalty method to compare the fair value of these indefinite-lived intangible assets to its carrying value. The royalty rate used is based on comparable royalty agreements in the tourism and hospitality industry. We used a discount rate comparable to the rate used in valuing the Pullmantur reporting unit in our goodwill impairment test. Based on the results of our testing, we did not record an impairment of Pullmantur's tradenames and trademarks for the year ended December 31, 2014 and December 31, 2013, but for the year ended December 31, 2012, we recorded an impairment of $17.4 million. During our 2014 annual impairment review,cash flow projections, we determined that the fair value of thePullmantur’s trademarks and trade names no longer exceeded itstheir carrying value by approximately 4% resulting in no impairment to Pullmantur's trademarks and tradenames.
Finite-life intangible assets had a gross carrying amount and related accumulated amortization areamount of $11.6 million and $3.7 million, respectively, as of December 31, 2017, consisting of operating licenses to operate in the Galapagos Islands. As of December 31, 2017, the remaining weighted average remaining life of these licenses were approximately 26.6 years. Amortization expense for finite-life intangible assets was immaterial to our 2014, 2013, and 2012 consolidated financial statements.
Note 5. Property and Equipment
Property and equipment consists of the following (in thousands):
| 2014 | 2013 | 2017 | 2016 | |||||||||||
| Ships | $ | 21,620,336 | $ | 20,858,553 | $ | 23,714,745 | $ | 23,978,822 | ||||||
| Ship improvements | 1,904,524 | 1,683,644 | 2,410,525 | 2,359,639 | ||||||||||
| Ships under construction | 561,779 | 563,676 | 642,235 | 354,425 | ||||||||||
| Land, buildings and improvements, including leasehold improvements and port facilities | 349,339 | 394,120 | 250,079 | 341,605 | ||||||||||
| Computer hardware and software, transportation equipment and other | 889,579 | 771,304 | 762,512 | 1,108,301 | ||||||||||
| Total property and equipment | 25,325,557 | 24,271,297 | 27,780,096 | 28,142,792 | ||||||||||
| Less—accumulated depreciation and amortization | (7,089,989 | ) | (6,753,545 | ) | (8,044,916 | ) | (7,981,365 | ) | ||||||
| $ | 18,235,568 | $ | 17,517,752 | $ | 19,735,180 | $ | 20,161,427 | |||||||
Ships under construction include progress payments for the construction of new ships as well as planning, design, interest and other associated costs. We capitalized interest costs of $28.8$24.2 million, $17.9$25.3 million and $13.3$26.5 million for the years 2014, 20132017, 2016 and 2012,2015, respectively.
During 2017, we sold our three aircraft and 6% of our ownership stake in Wamos Air, S.A. (formerly known as Pullmantur Air, S.A.) to Wamos Air, S.A. In 2014, our conditional agreementconnection with STX Francethe sale transaction, we extended two loans to buildWamos Air, S.A. totaling €17.3 million, or approximately $20.8 million based on the fourth Oasis-class ship for Royal Caribbean International became effective. Referexchange rate at December 31, 2017. The loans accrue interest at rates ranging from 4.78% to Note 15. Commitments5.35% per annum, amortize through maturity of October 2019 and Contingencies for further information.July 2021, respectively, and are secured by first priority security interests over the aircraft engines and shares sold
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in connection with the transaction. The sale resulted in an immaterial gain that was recognized in earnings during the fourth quarter of 2017. Post-sale, we retain a 13% interest in Wamos Air, S.A.
During 2017, we entered into agreements with Meyer Turku to build two Icon-class ships for our Royal Caribbean International brand and no longer exist aswe entered into an agreement to purchase a ship for our Azamara Club Cruises brand. Refer to Note 15. Commitments and Contingencies for further information.
In March 2017, we sold Legend of the Seas to an affiliate of TUI AG, our joint venture partner in TUI Cruises. The sale resulted in a gain of $30.9 million and is reported within Other operating within Cruise operating expenses in our consolidated statements of comprehensive income (loss) for the year ended December 31, 2014. See Note 14. Fair Value Measurements and Derivative Instruments and Note 16. Restructuring and Related Impairment Charges for further discussion.2017.
During 2016, we sold our 51% interest in Pullmantur Holdings. For further information on the sale transaction, refer to Note 1. General. Due to this sale and the resulting change in the nature of the cash flows generated by the vessels that are owned by us and operated by Pullmantur Holdings, we reviewed these vessels for impairment and determined that the undiscounted future cash flows of the vessels exceeded their carrying value; therefore, no impairment was required at the time of the sale.
In April 2016, we sold Splendour of the Seas to TUI Cruises. Concurrent with the acquisition, TUI Cruises leased the ship to an affiliate of TUI AG, our joint venture partner in TUI Cruises, which now operates the ship. The gain recognized did not have a material effect to our consolidated financial statements.
During 2015, in conjunction with performing the two-step goodwill impairment test for the Pullmantur reporting unit, we identified that the estimated fair value of certain long-lived assets, consisting of two ships and three aircraft were less than their carrying values. As a result of this determination, we evaluated these assets pursuant to our long-lived asset impairment test, resulting in an impairment charge of $113.2 million to write down these assets to their estimated fair values. This impairment charge was recognized in earnings during the third quarter of 2015 and is reported within Impairment of Pullmantur related assets within our consolidated statements of comprehensive income (loss).
During 2015, Pullmantur sold Ocean Dream to an unrelated third-party for $34.6 million. The purchase price was paid via a secured promissory note, payable over a nine-year period. The buyer's obligations under this loan accrue interest at the rate of 6.0% per annum and are secured by a first priority mortgage on the ship. The sale resulted in an immaterial gain that was deferred and is expected to be recognized at the end of the nine-year term.
Note 6. 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 December 31, 2017, the net book value of our investment in TUI Cruises was approximately $624.5 million, primarily consisting of $422.8 million in equity and a loan of €166.5 million, or approximately $199.8 million based on the exchange rate at December 31, 2017. As of December 31, 2016, the net book value of our investment in TUI Cruises was approximately $517.0 million, primarily consisting of $323.5 million in equity and a loan of €182.3 million, or approximately $192.4 million based on the exchange rate at December 31, 2016. The loan, which was made in connection with the sale of Splendour of the Seas in April 2016, accrues interest at a rate of 6.25% per annum and is payable over 10 years. This loan is 50% guaranteed by TUI AG, our joint venture partner in TUI Cruises, and is secured by a first priority mortgage on the ship. Refer to Note 5. Property and Equipment for further information. The majority of these amounts were included within Other assets in our consolidated balance sheets.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition, we and TUI AG have each guaranteed the repayment by TUI Cruises of 50% of a bank loan. As of December 31, 2017, the outstanding principal amount of the loan was €95.1 million, or approximately $114.2 million based on the exchange rate at December 31, 2017. While this loan matures in May 2022, the lenders have agreed to release each shareholder's guarantee if certain conditions are met by April 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.
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.
TUI Cruises has two newbuild ships on order scheduled to be delivered in each of 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. The remaining portion of the contract price of the ships is expected to be funded through an existing €150.0 million, or approximately $180.1 million based on the exchange rate at December 31, 2017, 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 Pullmantur Holdings, in which we have a 49% 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, following the sale of our 51% interest in Pullmantur Holdings to Springwater Capital LLC ("Springwater") in 2016, we do not consolidate this entity and we account for this investment under the equity method of accounting. As of December 31, 2017, our maximum exposure to loss in Pullmantur Holdings was approximately $53.7 million consisting of loans and other receivables. As of December 31, 2016, our maximum exposure to loss in Pullmantur Holdings was approximately $43.7 million consisting of loans and other receivables. These amounts were included within Trade and other receivables, net and Other assets in our consolidated balance sheets.
In conjunction with the sale of our 51% interest in Pullmantur Holdings, we agreed to provide a non-revolving working capital facility to a Pullmantur Holdings subsidiary in the amount of up to €15.0 million or approximately $18.0 million based on the exchange rate at December 31, 2017. Proceeds of the facility, which may be drawn through July 2018, will bear interest at the rate of 6.5% per annum and are payable through 2022. Springwater has guaranteed repayment of 51% of the outstanding amounts under the facility. As of December 31, 2017, no amounts had been drawn on this facility. See Note 1. General for further discussion on the sales transaction.
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. TheThis 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 year ended December 31, 2017 and 2016, we made payments of $16.0 million and $39.8 million, respectively, 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 December 31, 20142017, the net book value of our investment in Grand Bahama was approximately $53.8$49.4 million, consisting of $7.7$32.4 million in equity and $46.1 million in loans.a loan of $17.0 million. As of December 31, 20132016, the net book value of our investment in Grand Bahama was approximately $56.1$47.0 million, consisting of $6.4$23.2 million in equity and $49.7 million in loans.a loan of $23.8 million. These amounts represent our maximum exposure to loss as we are not contractually requiredrelated to provide any financial or other supportour investment in Grand Bahama. During the first quarter of 2016, our debt agreement with Grand Bahama was amended to extend the maturity by 10 years and increase the applicable interest rate to the facility.lower
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of (i) LIBOR plus 3.50% and (ii) 5.50%. Interest payable on the loan is due on a semi-annual basis. We have experienced strong payment performance on the loan since its amendment, and as a result completed an evaluation and review of the loan resulting in a reclassification of the loan to accrual status as of October 2017. During the year ended December 31, 2017, we received principal and interest payments of approximately $15.7 million. During the year ended December 31, 2016, we received payments of approximately $14.8 million. The majority of our loans to Grand Bahama are in non-accrual status and the majority of this amount wasloan balance is included within Other assets in our consolidated balance sheets. We received approximately $3.6 million and $6.2 millionThe loan is currently accruing interest under the effective yield method, which includes the recognition of previously unrecognized interest that accumulated while the loan was in principal and interest payments related to loans that are in accrual status from Grand Bahama in 2014 and 2013, respectively, and recorded income associated with our investment in Grand Bahama. non-accrual status.
We monitor credit risk associated with these loansthe 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, webelieve the risk of loss associated with these loans wasthe outstanding loan is not probable as of December 31, 2014.2017.
We have determined that TUI Cruises GmbH, our 50%-owned joint ventureSkysea Holding International Ltd. ("Skysea Holding"), in which operates the brand TUI Cruises,we have a 36% noncontrolling interest, is a VIE. AsDuring the second quarter of December 31, 2014 and December 31, 2013,2017, we made an equity contribution of $7.1 million which increased our investmentequity interest from 35% to 36%. The contribution was made pursuant to a funding arrangement in TUI Cruises, includingwhich the entity's three largest investors agreed to contribute a total of $30.0 million in proportion to their equity and loans, was approximately $370.1 million and $354.3 million, respectively. The majorityinterest in a series of 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 €180.0 million bank loan provided to TUI Cruises due in 2016. Our investment amount and the potential obligations under this guarantee are substantially our maximum exposure to loss.installments. 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 December 31, 2014, TUI Cruises' bank loan that is guaranteed by the shareholders had a remaining balance of €117.0 million, or approximately $141.6 million based on the exchange rate at December 31, 2014. This bank loan amortizes quarterly and is secured by first mortgages on both Mein Schiff 1 and Mein Schiff 2. Based on current facts and circumstances, we do not believe potential obligations under our guarantee of this bank loan are probable.
The following tables set forth information regarding our investments accounted for under the equity method of accounting, including the entities discussed above, was $51.6 million, $32.0 million and $23.8 million for the years ended December 31, 2014, 2013 and 2012, respectively, and was recorded within Other income (expense).
| 2014 | 2013 | ||||||
| $1.1 billion unsecured revolving credit facility, LIBOR plus 1.75%, currently 1.92% and a facility fee of 0.37%, due 2016 | $ | 713,000 | $ | 435,000 | |||
| $1.2 billion unsecured revolving credit facility, LIBOR plus 1.75%, currently 1.91% and a facility fee of 0.37%, due 2018 | 778,000 | 295,000 | |||||
| Unsecured senior notes and senior debentures, 5.25% to 11.88%, due 2015, 2016, 2018, 2022 and 2027 | 1,721,190 | 1,703,040 | |||||
| €745 million unsecured senior notes, 5.63%, due 2014 | — | 1,028,126 | |||||
| $589 million unsecured term loan, 4.47%, due through 2014 | — | 42,071 | |||||
| $530 million unsecured term loan, LIBOR plus 0.51%, currently 0.83%, due through 2015 | 37,857 | 113,571 | |||||
| $519 million unsecured term loan, LIBOR plus 0.45%, currently 0.77%, due through 2020 | 259,573 | 302,835 | |||||
| $420 million unsecured term loan, 5.41%, due through 2021 | 241,827 | 274,974 | |||||
| $420 million unsecured term loan, LIBOR plus 1.85%, currently 2.17%, due through 2021 | 245,000 | 280,000 | |||||
| €159.4 million unsecured term loan, EURIBOR plus 1.58%, currently 1.77%, due through 2021 | 112,540 | 146,452 | |||||
| $524.5 million unsecured term loan, LIBOR plus 0.50%, currently 0.83%, due through 2021 | 305,958 | 349,667 | |||||
| $566.1 million unsecured term loan, LIBOR plus 0.37%, currently 0.69%, due through 2022 | 353,793 | 400,966 | |||||
| $1.1 billion unsecured term loan, LIBOR plus 1.85%, currently 2.17%, due through 2022 | 614,203 | 690,978 | |||||
| $632.0 million unsecured term loan, LIBOR plus 0.40%, currently 0.73%, due through 2023 | 473,969 | 526,632 | |||||
| $673.5 million unsecured term loan, LIBOR plus 0.40%, currently 0.73%, due through 2024 | 561,228 | 617,351 | |||||
| $65.0 million unsecured term loan, LIBOR plus 2.12%, currently 2.29%, due through 2019 | 51,100 | — | |||||
| $1.0 million unsecured term loan, 3.00%, due through 2015 | 750 | — | |||||
| $380.0 million unsecured term loan, LIBOR plus 2.12%, currently 2.29%, due through 2018 | 380,000 | — | |||||
| $791.1 million unsecured term loan, LIBOR plus 1.30%, currently 1.62%, due through 2026 | 791,108 | — | |||||
| $290.0 million unsecured term loan, LIBOR plus 2.5%, currently 2.67%, due 2016 | 290,000 | 290,000 | |||||
| €365 million unsecured term loan, EURIBOR plus 2.30%, currently 2.32%, due 2017 | 441,687 | 502,934 | |||||
| $7.3 million unsecured term loan, LIBOR plus 2.5%, currently 2.82%, due through 2023 | 4,915 | 5,391 | |||||
| $30.3 million unsecured term loan, LIBOR plus 3.75%, currently 3.99%, due through 2021 | 13,603 | 15,073 | |||||
| Capital lease obligations | 52,647 | 54,743 | |||||
| 8,443,948 | 8,074,804 | ||||||
| Less—current portion | (799,630 | ) | (1,563,378 | ) | |||
| Long-term portion | $ | 7,644,318 | $ | 6,511,426 | |||
| For the period ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Share of equity income from investments | $ | 156,247 | $ | 128,350 | $ | 81,026 | ||||||
| Dividends received | $ | 109,677 | $ | 75,942 | $ | 33,338 | ||||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Total notes receivable due from equity investments | $ | 314,323 | $ | 323,636 | ||||
Less-current portion(1) | 38,658 | 40,742 | ||||||
Long-term portion(2) | $ | 275,665 | $ | 282,894 | ||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) Included within Trade and other receivables, net in our consolidated balance sheets.
(2)Included within Other assets in our consolidated balance sheets.
We also provide ship management services to TUI Cruises GmbH, Pullmantur Holdings and Skysea Holding. Additionally, we bareboat charter to Pullmantur Holdings the vessels currently operated by its brands, which were retained by us following the sale of our 51% interest in Pullmantur Holdings. We recorded the following as it relates to these services in our operating results within our consolidated statements of comprehensive income (loss) (in thousands):
| For the period ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Revenues | $ | 53,532 | $ | 30,517 | $ | 20,217 | ||||||
| Expenses | $ | 15,176 | $ | 12,795 | $ | 15,669 | ||||||
Summarized financial information for our affiliates accounted for under the equity method of accounting was as follows (in thousands):
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Current assets | $ | 532,330 | $ | 492,707 | ||||
| Non-current assets | 3,673,613 | 2,942,580 | ||||||
| Total assets | $ | 4,205,943 | $ | 3,435,287 | ||||
| Current liabilities | $ | 1,152,193 | $ | 887,175 | ||||
| Non- current liabilities | 1,974,166 | 1,704,495 | ||||||
| Total liabilities | $ | 3,126,359 | $ | 2,591,670 | ||||
| Equity attributable to: | ||||||||
| Noncontrolling interest | $ | 1,753 | $ | 1,544 | ||||
| For the period ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Total revenues | $ | 1,994,014 | $ | 1,340,662 | $ | 990,172 | ||||||
| Total expenses | (1,684,276 | ) | (1,078,470 | ) | (830,898 | ) | ||||||
| Net income | $ | 309,738 | $ | 262,192 | $ | 159,274 | ||||||
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ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7.Long-Term Debt
Long-term debt consists of the following (in thousands):
| 2017 | 2016 | ||||||
| $1.4 billion unsecured revolving credit facility, LIBOR plus 1.175%, currently 2.64% and a facility fee of 0.20%, due 2020 | $ | 300,000 | $ | 925,000 | |||
| $1.2 billion unsecured revolving credit facility, LIBOR plus 1.175%, currently 2.58% and a facility fee of 0.20%, due 2022 | 280,000 | 805,000 | |||||
| Unsecured senior notes and senior debentures, 2.65% to 7.50%, due 2018, 2020, 2022, 2027 and 2028 | 1,866,359 | 1,073,261 | |||||
| $200 million unsecured term loan, LIBOR plus 1.30% | — | 200,000 | |||||
| $841.8 million unsecured term loan, LIBOR plus 1.00%, currently 2.52% due through 2028 | 736,604 | 806,756 | |||||
| $226.1 million unsecured term loan, 2.53%, due through 2028 | 197,837 | 216,677 | |||||
| €700.7 million unsecured term loan, EURIBOR plus 1.15% currently 1.15%, due through 2028 | 736,020 | 708,417 | |||||
| $742.1 million unsecured term loan, LIBOR plus 1.30%, currently 2.81%, due through 2027 | 587,497 | 649,338 | |||||
| $273.2 million unsecured term loan, LIBOR plus 1.75% | — | 273,166 | |||||
| $519 million unsecured term loan, LIBOR plus 0.45%, currently 2.00%, due through 2020 | 129,786 | 173,049 | |||||
| $420 million unsecured term loan, 5.41%, due through 2021 | 135,514 | 171,444 | |||||
| $420 million unsecured term loan, LIBOR plus 1.65%, currently 3.21%, due through 2021 | 140,000 | 175,000 | |||||
| €159.4 million unsecured term loan, EURIBOR plus 1.58%, currently 1.58%, due through 2021 | 63,798 | 70,082 | |||||
| $524.5 million unsecured term loan, LIBOR plus 0.50%, currently 1.96%, due through 2021 | 174,833 | 218,542 | |||||
| $566.1 million unsecured term loan, LIBOR plus 0.37%, currently 1.90%, due through 2022 | 212,276 | 259,448 | |||||
| $1.1 billion unsecured term loan, LIBOR plus 1.65%, currently 3.21%, due through 2022 | 345,877 | 460,652 | |||||
| $632.0 million unsecured term loan, LIBOR plus 0.40%, currently 1.86%, due through 2023 | 315,979 | 368,643 | |||||
| $673.5 million unsecured term loan, LIBOR plus 0.40%, currently 1.92%, due through 2024 | 392,860 | 448,983 | |||||
| $65.0 million unsecured term loan, LIBOR plus 1.45%, currently 3.02%, due through 2019 | 65,227 | 67,027 | |||||
| $380.0 million unsecured term loan, LIBOR plus 1.45%, currently 3.02%, due 2018 | 380,000 | 380,000 | |||||
| $791.1 million unsecured term loan, LIBOR plus 1.30%, currently 2.85%, due through 2026 | 593,331 | 659,256 | |||||
| $290.0 million unsecured term loan, LIBOR plus 1.75% | — | 290,000 | |||||
| €365 million unsecured term loan, EURIBOR plus 1.75% | — | 123,963 | |||||
| $7.3 million unsecured term loan, LIBOR plus 2.5% | — | 3,964 | |||||
| $30.3 million unsecured term loan, LIBOR plus 3.75%, currently 5.29%, due through 2021 | 5,400 | 6,597 | |||||
| €80.0 million unsecured term loan, EURIBOR plus 1.32% currently 1.32%, due through 2024 | 14,267 | — | |||||
| Capital lease obligations | 33,139 | 40,385 | |||||
| Total debt | 7,706,604 | 9,574,650 | |||||
| Less: unamortized debt issuance costs | (167,153 | ) | (187,214 | ) | |||
| Total debt, net of unamortized debt issuance costs | 7,539,451 | 9,387,436 | |||||
| Less: current portion | (1,188,514 | ) | (1,285,735 | ) | |||
| Long-term portion | $ | 6,350,937 | $ | 8,101,701 | |||
In October 2017, we amended and restated our $1.2 billion unsecured revolving credit facility due August 2018. The amendment reduced the applicable margin and extended the termination date to October 2022. The applicable margin and facility fee vary with our debt rating and are currently 1.175% and 0.20%, respectively. In December 2017, we also amended and restated our $1.4 billion unsecured revolving credit facility due June 2020 to reduce pricing in line with the amended pricing of the $1.2 billion unsecured revolving credit facility. These amendments did not result
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ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in the extinguishment of debt. Accordingly, as of December 31, 2017, we have an aggregate revolving borrowing capacity of $2.6 billion.
In November 2017, we issued $300 million of 2.65% and $500 million of 3.70% unsecured senior notes due 2020 and 2028, respectively, at 99.977% and 99.623% of par, respectively. Amounts from the issuance of these notes were used for general corporate purposes, such as repayment and refinancing of debt.
In November 2017, we entered into a credit agreement which provides an unsecured term loan facility in an amount up to €80.0 million, or approximately $96.0 million based on the exchange rate at December 31, 2017, for the purchase of a ship we have on order designed for the Galapagos Islands. We may draw up to five times under the facility through the earlier of the delivery of the ship and June 30, 2019. As of December 31, 2017, we have drawn €11.9 million, or approximately $14.3 million based on the exchange rate at December 31, 2017, on this facility. The loan is due and payable at maturity in November 2024. Interest on the loan accrues at a floating rate based on EURIBOR plus the applicable margin. The applicable margin varies with our debt rating and was 2.12%1.32% as of December 31, 2014. The proceeds2017. In addition, we are subject to a commitment fee of this loan were used to repay our €745.0 million 5.625% unsecured senior notes due January 2014.
undrawn amount.
Under certain of our agreements, the contractual interest rate, facility fee and/or export credit agency fee vary with our debt rating.
The unsecured senior notes and senior debentures are not redeemable prior to maturity, except that certain series may be redeemed upon the payment of a make-whole premium.
Following is a schedule of annual maturities on long-term debt including capital leases as of December 31, 20142017 for each of the next five years (in thousands):
| Year | ||||||
| 2015 | $ | 799,630 | ||||
| 2016 | 1,856,302 | |||||
| 2017 | 920,687 | |||||
| 2018 | 1,785,083 | $ | 1,188,514 | |||
| 2019 | 529,197 | 762,614 | ||||
| 2020 | 1,292,478 | |||||
| 2021 | 640,734 | |||||
| 2022 | 1,380,583 | |||||
| Thereafter | 2,553,049 | 2,274,528 | ||||
| $ | 8,443,948 | $ | 7,539,451 | |||
Note 8. Shareholders' Equity
During the fourth quarterand third quarters of 2014, we repurchased from A. Wilhelmsen AS, our largest shareholder, 3.5 million shares of our common stock directly from them in a private transaction at $67.45 per share, which was equal to the price paid by a third-party financial institution for the simultaneous purchase of an additional 3.5 million shares from A. Wilhelmsen AS. Total consideration paid to repurchase such shares was approximately $236.1 million and was recorded in shareholders' equity as a component of treasury stock.
During the fourth and third quarters of 2016, we declared a cash dividend on our common stock of $0.48 per share which was paid in the first quarter of 2017 and fourth quarter of 2014.2016, respectively. We also declared and paid a cash dividend on our common stock of $0.25$0.375 per share during each of the first and second quarters of 2014.2016. During
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ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the first quarter of 2014. We declared a cash dividend on our common stock of $0.25 per share during the third quarter of 2013 which was paid in the fourth quarter of 2013. We declared and paid a cash dividend on our common stock of $0.12 per share during the first and second quarters of 2013. During the first quarter of 2013,2016, we also paid a cash dividend on our common stock of $0.12$0.375 per share which was declared during the fourth quarter of 2012.2015.
In April 2017, our board of directors authorized a 12-month common stock repurchase program for up to $500 million. The timing and number of shares to be repurchased will depend on a variety of factors including price and market conditions. Repurchases under the program may be made at management's discretion from time to time on the open market or through privately negotiated transactions. During the year ended December 31, 2017, we repurchased 1.8 million shares of our common stock for a total of $225.0 million in open market transactions that were recorded within Treasury stock in our consolidated balance sheets. As of December 31, 2017, we have $275.0 million that remain available for future stock repurchase transactions under our Board approved program.
During February 2018, we repurchased an additional 1.5 million shares for a total of $186.4 million in open market transactions.
During the fourth quarter of 2015, our board of directors authorized a common stock repurchase program for up to $500 million that was completed in August 2016. During 2016, we purchased 4.1 million shares for a total of $300.0 million in open market transactions. These transactions were recorded within Treasury stock in our consolidated balance sheet. Our repurchases under this program, including the 2.1 million shares repurchased for $200.0 million during the fourth quarter of 2015, totaled $500.0 million.
Note 9. Stock-Based Employee Compensation
We currently have awards outstanding under two stock-based compensation plans, which provide for awards to our officers, directors and key employees. The plans consist of a 2000 Stock Award Plan and a 2008 Equity Plan. Our ability to issue new awards under the 2000 Stock Award Plan terminated in accordance with the terms of the plan in September 2009. The 2008 Equity Plan, as amended, provides for the issuance of up to 11,000,00014,000,000 shares of our common stock pursuant to grants of (i) incentive and non-qualified stock options, (ii) stock appreciation rights, (iii) restricted stock awards (including time-based and/or performance-based stock awards) and (iv) restricted stock units (including time-based and (v) performance shares.performance-based restricted stock units). During any calendar year, no one individual shall(other than non-employee members of our Board of Directors) may be granted awards of more than 500,000 shares.shares and no non-employee member of our Board of Directors may be granted awards with a value in excess of $500,000 at the grant date. Options and restricted stock units outstanding as of December 31, 20142017 generally vest in equal installments over four years from the date of grant. In addition, performance shares and performance share units generally vest in three years. With certain limited exceptions, options, restricted stock units and performance sharesawards are forfeited if the recipient ceases to be a director oran employee before the shares vest. Options are granted at a price not less than the fair value of the shares on the date of grant and expire not later than ten years after the date of grant.
Prior to 2012, our officers received a combination of stock options and restricted stock units. Beginning in 2012, our officers instead receive their long-term incentive awards through a combination of performance sharesshare units and restricted stock units. Each performance share unit award is expressed as a target number of performance sharesshare units based upon the fair market value of our common stock on the date the award is issued. The actual number of shares underlying each award (not to exceed 200% of the target number of performance shares)share units) will be determined based upon the Company's achievement of a specified performance target range. In 2017, we issued a target number of 140,542 performance share units, which will vest approximately three years following the award issue date. The performance payout of these grants will be based on return on our invested capital ("ROIC") and earnings per share (“EPS”) for the year ended December 31, 2019, as may be adjusted by the Talent and Compensation Committee of our Board of Directors in early 2020 for events that are outside of management's control. In 2014, we also issued a one-time performance-based equity award to our Chairman & Chief Executive Officer in a target amount of 63,771 performance share units. In February 2016, the Compensation Committee set the payout level for this grant at 165% of target based on our 2015 ROIC performance. As of December 2017, the award is no longer subject to restrictions on transfer.
Beginning in 2016, our senior officers meeting certain minimum age and service criteria receive their long-term incentive awards through a combination of restricted stock awards and restricted stock units. The restricted stock awards are subject to both performance and time-based vesting criteria while the restricted stock units are subject only to time-
ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
based vesting criteria. Each restricted stock award is issued in an amount equal to 200% of the target number of shares underlying the award based upon the fair market value of our common stock on the date the award is issued. Dividends accrue (but do not get paid) on the restricted stock awards during the vesting period, with the accrued amounts to be paid out following vesting only on the number of shares underlying the award which actually vest based on satisfaction of the performance criteria. The actual number of shares that vest (not to exceed 200% of the shares) will be determined based upon the Company's achievement of a specified performance target range. ForIn 2017, we issued 137,948 restricted stock awards, representing 200% of the grants awarded in 2014,target number of shares underlying the award, all of which are considered issued and outstanding from the date of issuance, however; grantees will only retain those shares earned as the result of the Company achieving the performance target is returngoals during the measurement period. The performance payout of the 2017 awards will be based on invested capital ("ROIC")ROIC and EPS for the year ended December 31, 2014,2019, as may be adjusted by the Talent and Compensation Committee of our Board of Directors in early 2020 for events that are outside of management's control. In 2014, we issued a target number of 233,831 performance shares which will vest on the third anniversary of the award issue date. In February 2015, the Compensation Committee of our Board of Directors set the actual payout level at 119% of target for the performance shares issued in 2014.
We also provide an Employee Stock Purchase Plan ("ESPP") to facilitate the purchase by employees of up to 1,300,000 shares of common stock in the aggregate. Offerings to employees are made on a quarterly basis. Subject to certain limitations, the purchase price for each share of common stock is equal to 85.0%85% of the average of the market prices of the common stock as reported on the New York Stock Exchange on the first business day of the purchase period and the last business day of each month of the purchase period. During 2014, 20132017, 2016 and 2012, 26,921, 27,0362015, 51,989, 42,347 and 35,92728,724 shares of our common stock were issuedpurchased under the ESPP at a weighted-average price of $52.08, $33.16$93.15, $65.48 and $25.58,$72.52, respectively.
Total compensation expense recognized for employee stock-based compensation for the years ended December 31, 2014, 20132017, 2016 and 20122015 was as follows:
| Employee Stock-Based Compensation | Employee Stock-Based Compensation | |||||||||||||||||||||
| Classification of expense | 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||||
| Marketing, selling and administrative expenses | $ | 26,116 | $ | 21,178 | $ | 24,153 | $ | 69,459 | $ | 32,659 | $ | 36,073 | ||||||||||
| Total compensation expense | $ | 26,116 | $ | 21,178 | $ | 24,153 | $ | 69,459 | $ | 32,659 | $ | 36,073 | ||||||||||
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The estimated fair value of stock options, less estimated forfeitures, is amortized over the vesting period using the graded-vesting method. We did not issue any stock options in 2014during the years ended December 31, 2017, 2016 and 2013. The assumptions used in the Black-Scholes option-pricing model are as follows:2015.
Stock option activity and information about stock options outstanding are summarized in the following table:
| Stock Option Activity | Number of Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value(1) | Number of Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value(1) | ||||||||||||||||||
| (years) | (in thousands) | (years) | (in thousands) | |||||||||||||||||||||||
| Outstanding at January 1, 2014 | 2,694,872 | $ | 36.30 | 3.83 | $ | 30,080 | ||||||||||||||||||||
| Outstanding at January 1, 2017 | 346,310 | $ | 32.82 | 2.39 | $ | 17,221 | ||||||||||||||||||||
| Granted | — | $ | — | — | — | — | — | — | — | |||||||||||||||||
| Exercised | (1,941,365 | ) | $ | 36.22 | — | — | (72,000 | ) | $ | 35.07 | — | — | ||||||||||||||
| Canceled | (47,456 | ) | $ | 43.02 | — | — | (1,586 | ) | $ | 46.18 | — | — | ||||||||||||||
| Outstanding at December 31, 2014 | 706,051 | $ | 36.03 | 3.64 | $ | 33,182 | ||||||||||||||||||||
| Vested and expected to vest at December 31, 2014 | 704,796 | $ | 36.02 | 3.63 | $ | 33,130 | ||||||||||||||||||||
| Options Exercisable at December 31, 2014 | 622,168 | $ | 34.85 | 3.31 | $ | 29,970 | ||||||||||||||||||||
| Outstanding at December 31, 2017 | 272,724 | $ | 32.15 | 1.41 | $ | 24,053 | ||||||||||||||||||||
| Vested at December 31, 2017 | 272,724 | $ | 32.15 | 1.41 | $ | 24,053 | ||||||||||||||||||||
| Options Exercisable at December 31, 2017 | 272,724 | $ | 32.15 | 1.41 | $ | 24,053 | ||||||||||||||||||||
| (1) | The intrinsic value represents the amount by which the fair value of stock exceeds the option exercise |
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ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The total intrinsic value of stock options exercised during the years ended December 31, 2014, 20132017, 2016 and 20122015 was $35.9$4.5 million, $17.5$2.3 million and $15.3$13.8 million, respectively. As of December 31, 2014,2017, there was approximately $0.1 million of totalno unrecognized compensation cost, net of estimated forfeitures, related to stock options granted under our stock incentive plans which is expected to be recognized over a weighted-average period of 0.14 years.plan.
Restricted stock units are converted into shares of common stock upon vesting or, if applicable, settleare settled on a one-for-one basis. The cost of these awards is determined using the fair value of our common stock on the date of the grant, and compensation expense is recognized over the vesting period. Restricted stock activity is summarized in the following table:
| Restricted Stock Activity | Number of Awards | Weighted- Average Grant Date Fair Value | ||||||||||
| Non-vested share units at January 1, 2014 | 989,005 | $ | 9.26 | |||||||||
| Restricted Stock Units Activity | Number of Awards | Weighted- Average Grant Date Fair Value | ||||||||||
| Non-vested share units at January 1, 2017 | 748,516 | $ | 61.95 | |||||||||
| Granted | 472,150 | $ | 54.60 | 425,170 | $ | 99.03 | ||||||
| Vested | (405,001 | ) | $ | 51.24 | (376,992 | ) | $ | 59.62 | ||||
| Canceled | (74,601 | ) | $ | 55.30 | (58,795 | ) | $ | 71.47 | ||||
| Non-vested share units expected to vest as of December 31, 2014 | 981,553 | $ | 10.25 | |||||||||
| Non-vested share units expected to vest as of December 31, 2017 | 737,899 | $ | 83.78 | |||||||||
The weighted-average estimated fair value of restricted stock units granted during the year ended December 31, 2013,2016 and 2012 were $36.072015 was $64.51 and $30.03,$73.98, respectively. The total fair value of shares released on the vesting of restricted stock units during the years ended December 31, 2014, 20132017, 2016 and 20122015 was $20.7$38.7 million, $19.2$23.2 million and $18.8$27.6 million, respectively. As of December 31, 2014,2017, we had $14.6$24.2 million of total unrecognized compensation expense, net of estimated forfeitures, related to restricted stock unit grants, which will be recognized over the weighted-average period of 1.271.73 years.
Performance share awardsunits are converted into shares of common stock upon vesting on a one-for-one basis. We estimate the fair value of each performance share when the grant is authorized and the related service period has commenced. We remeasure the fair value of our performance shares in each subsequent reporting period until the grant date has occurred, which is the date when the performance conditions are satisfied. We recognize compensation cost over the vesting period based on the probability of the service and performance conditions being achieved adjusted for each subsequent fair value measurement until the grant date. If the specified service and performance conditions
are not met, compensation expense will not be recognized and any previously recognized compensation expense will be reversed. Performance stockshare units activity is summarized in the following table:
| Performance Stock Activity | Number of Awards | Weighted- Average Grant Date Fair Value | ||||||||||
| Non-vested share units at January 1, 2014 | 459,929 | $ | 32.36 | |||||||||
| Performance Share Units Activity | Number of Awards | Weighted- Average Grant Date Fair Value | ||||||||||
| Non-vested share units at January 1, 2017 | 342,152 | $ | 61.78 | |||||||||
| Granted | 233,831 | $ | 56.72 | 140,542 | $ | 84.16 | ||||||
| Vested | (7,301 | ) | $ | 53.81 | (105,615 | ) | $ | 45.62 | ||||
| Canceled | (27,573 | ) | $ | 54.11 | (23,929 | ) | $ | 71.37 | ||||
| Non-vested share units expected to vest as of December 31, 2014 | 658,886 | $ | 39.86 | |||||||||
| Non-vested share units expected to vest as of December 31, 2017 | 353,150 | $ | 74.87 | |||||||||
The weighted-average estimated fair value of performance share units granted during the year ended 2016 and 2015 was $65.83 and $71.36, respectively. The total fair value of shares released on the vesting of performance share units during the years ended December 31, 2017, 2016 and 2015 was $10.0 million, $16.9 million and $18.3 million, respectively. As of December 31, 2014,2017, we had $12.9$11.9 million of total unrecognized compensation expense, net of estimated forfeitures, related to performance share unit grants, which will be recognized over the weighted-average period of 0.891.08 years.
F-26
ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The shares underlying our restricted stock awards to age and service eligible senior officers are issued as of the grant date in an amount equal to 200% of the target number of shares. Following the vesting date, the restrictions will lift with respect to the number of shares for which the performance criteria was met and any excess shares will be canceled. Dividends will accrue on the issued restricted shares during the vesting period, but will not be paid to the recipient until the awards vest and the final number of shares underlying the award is determined, at which point, the dividends will be paid in cash only on the earned shares. We estimate the fair value of each restricted stock award when the grant is authorized and the related service period has commenced. We remeasure the fair value of these restricted stock awards in each subsequent reporting period until the grant date has occurred, which is the date when the performance conditions are satisfied. We recognize compensation cost over the vesting period based on the probability of the service and performance conditions being achieved adjusted for each subsequent fair value measurement until the grant date. If the specified service and performance conditions are not met, compensation expense will not be recognized, any previously recognized compensation expense will be reversed, and any unearned shares will be returned to the Company. Restricted stock awards activity is summarized in the following table:
| Restricted Stock Awards Activity | Number of Awards | Weighted- Average Grant Date Fair Value | ||||
| Non-vested share units at January 1, 2017 | 132,228 | $ | 66.93 | |||
| Granted | 137,948 | $ | 95.04 | |||
| Vested | — | $ | — | |||
| Canceled | — | $ | — | |||
| Non-vested share units expected to vest as of December 31, 2017 | 270,176 | $ | 81.28 | |||
The weighted-average estimated fair value of restricted stock awards granted during the year ended 2016 was $66.93. As of December 31, 2017, we had $2.0 million of total unrecognized compensation expense, net of estimated forfeitures, related to restricted stock award grants, which will be recognized over the weighted-average period of 1.62 years.
Note 10. Earnings Per Share
A reconciliation between basic and diluted earnings per share is as follows (in thousands, except per share data):
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
| 2014 | 2013 | 2012 | 2017 | 2016 | 2015 | |||||||||||||||||
| Net income for basic and diluted earnings per share | $ | 764,146 | $ | 473,692 | $ | 18,287 | $ | 1,625,133 | $ | 1,283,388 | $ | 665,783 | ||||||||||
| Weighted-average common shares outstanding | 221,658 | 219,638 | 217,930 | 214,617 | 215,393 | 219,537 | ||||||||||||||||
| Dilutive effect of stock options, performance share awards and restricted stock awards | 1,386 | 1,303 | 1,527 | |||||||||||||||||||
| Dilutive effect of stock-based awards | 1,077 | 923 | 1,152 | |||||||||||||||||||
| Diluted weighted-average shares outstanding | 223,044 | 220,941 | 219,457 | 215,694 | 216,316 | 220,689 | ||||||||||||||||
| Basic earnings per share: | ||||||||||||||||||||||
| Net income | $ | 3.45 | $ | 2.16 | $ | 0.08 | $ | 7.57 | $ | 5.96 | $ | 3.03 | ||||||||||
| Diluted earnings per share: | ||||||||||||||||||||||
| Net income | $ | 3.43 | $ | 2.14 | $ | 0.08 | $ | 7.53 | $ | 5.93 | $ | 3.02 | ||||||||||
Note 11. Retirement Plan
We maintain a defined contribution pension plan covering full-time shoreside employees who have completedemployees. Effective January 1, 2016, we commenced annual, non-elective contributions to the minimum periodplan on behalf of continuous service. Annualall eligible participants equal to 3% of participants' eligible
F-27
ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
earnings. Remaining annual contributions to the plan are discretionary and are based on fixed percentages of participants' salaries and years of service, not to exceed certain maximums. PensionContribution expenses were $15.4$17.4 million, $13.0$16.7 million and $15.2$16.8 million for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively.
Note 12. Income Taxes
We are subject to corporate income taxes in countries where we have operations or subsidiaries. We and the majority of our ship-operating and vessel-owning subsidiaries are currently exempt from United StatesU.S. corporate tax on United StatesU.S. source income from the international operation of ships pursuant to Section 883 of the Internal Revenue Code. Regulations under Section 883 have limited the activities that are considered the international operation of a
ship or incidental thereto. Accordingly, our provision for United StatesU.S. federal and state income taxes includes taxes on certain activities not considered incidental to the international operation of our ships.
Additionally, some of our ship-operating subsidiaries are subject to income tax under the tonnage tax regimes of Malta or the United Kingdom. Under these regimes, income from qualifying activities is not subject to corporate income tax. Instead, these subsidiaries are subject to a tonnage tax, but the tax is computed by reference to the tonnage of the ship or ships registered under the relevant provisions of the tax regimes.regimes (the "relevant shipping profits"), which replaces the regular taxable income base. Income from activities not considered qualifying activities, which we do not consider significant, remains subject to Maltese or United KingdomU.K. corporate income tax.
Income tax (benefit) expense for items not qualifying under Section 883, tonnage taxes and income taxes for the remainder of our subsidiaries was approximately $(20.9)$18.3 million, $24.9$20.1 million and $55.5$11.1 million and was recorded within Other income (expense)expense for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively. In addition, all interest expense and penalties related to income tax liabilities are classified as income tax expense within Other income (expense)expense.
As of December 31, 2017, the Company had Net Operating Losses (“NOLs”) in foreign jurisdictions of $7.5 million. If not utilized, $5.0 million of the NOLs are subject to expiration between 2018 and 2024. The Company has not recognized any benefits related to these NOLs, as all NOLs have full valuation allowances.
Net deferred tax assets and deferred tax liabilities and corresponding valuation allowances related to our operations were not material as of December 31, 20142017 and 2013.2016.
We regularly review deferred tax assets for recoverability based on our history of earnings, expectations of future earnings, and tax planning strategies. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income to support the amount of deferred taxes. A valuation allowance is recorded in those circumstances in which we conclude it is not more-likely-than-not we will recover the deferred tax assets prior to their expiration.
During 2012, we determined thatthe third quarter of 2015, the Pullmantur trademark and trade names were impaired. As a 100% valuation allowance of our deferred tax assets was required resulting in a deferred income tax expense of $33.7 million. In addition, Pullmantur has a deferred tax liability that was recorded at the time of acquisition. This liability represents the tax effectresult of the basisimpairment, there was no longer a difference between the book and tax and book valuesbasis of the trademarkstrademark and trade names that were acquired atnames. During the timethird quarter of the acquisition. Due to the impairment charge related to these intangible assets,2015, we reducedreversed the deferred tax liability of $43.4 million and recorded aincreased the deferred tax asset valuation allowance by $31.4 million, or to 100% of the deferred tax asset balance. The resulting net $12.0 million deferred tax benefit was recorded as part of $5.2 million. The net $28.5 million impact of these adjustments was recognized in earnings during the fourth quarter of 2012our income tax provision and was reported within Other income (expense)expense in our consolidated statements of comprehensive income (loss) for the year ended December 31, 2015. Effective July 31, 2016, we sold 51% of our interest in Pullmantur Holdings. For further information on the sale transaction, refer to Note 1. General.
ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13. Changes in Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in accumulated other comprehensive income (loss)loss by component for the years ended December 31, 20142017 and 20132016 (in thousands):
| Changes related to cash flow derivative hedges | Changes in defined benefit plans | Foreign currency translation adjustments | Accumulated other comprehensive (loss) income | ||||||||||||
| Accumulated comprehensive loss at January 1, 2013 | $ | (84,505 | ) | $ | (34,823 | ) | $ | (15,188 | ) | $ | (134,516 | ) | |||
| Other comprehensive income before reclassifications | 197,428 | 8,240 | 1,529 | 207,197 | |||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | (69,599 | ) | 2,589 | — | (67,010 | ) | |||||||||
| Net current-period other comprehensive income | 127,829 | 10,829 | 1,529 | 140,187 | |||||||||||
| Accumulated comprehensive income (loss) at January 1, 2014 | 43,324 | (23,994 | ) | (13,659 | ) | 5,671 | |||||||||
| Other comprehensive loss before reclassifications | (903,830 | ) | (8,937 | ) | (28,099 | ) | (940,866 | ) | |||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | 34,480 | 1,724 | 1,997 | 38,201 | |||||||||||
| Net current-period other comprehensive loss | (869,350 | ) | (7,213 | ) | (26,102 | ) | (902,665 | ) | |||||||
| Accumulated comprehensive loss at December 31, 2014 | $ | (826,026 | ) | $ | (31,207 | ) | $ | (39,761 | ) | $ | (896,994 | ) | |||
| Changes related to cash flow derivative hedges | Changes in defined benefit plans | Foreign currency translation adjustments | Accumulated other comprehensive income (loss) | |||||||||||||
| Accumulated comprehensive loss at January 1, 2015 | $ | (826,026 | ) | $ | (31,207 | ) | $ | (39,761 | ) | $ | (896,994 | ) | ||||
| Other comprehensive (loss) income before reclassifications | (697,671 | ) | 3,053 | (25,952 | ) | (720,570 | ) | |||||||||
| Amounts reclassified from accumulated other comprehensive loss | 291,624 | 1,707 | (4,200 | ) | 289,131 | |||||||||||
| Net current-period other comprehensive (loss) income | (406,047 | ) | 4,760 | (30,152 | ) | (431,439 | ) | |||||||||
| Accumulated comprehensive loss at January 1, 2016 | (1,232,073 | ) | (26,447 | ) | (69,913 | ) | (1,328,433 | ) | ||||||||
| Other comprehensive income (loss) before reclassifications | 73,973 | (2,777 | ) | 2,362 | 73,558 | |||||||||||
| Amounts reclassified from accumulated other comprehensive loss | 337,250 | 1,141 | — | 338,391 | ||||||||||||
| Net current-period other comprehensive income (loss) | 411,223 | (1,636 | ) | 2,362 | 411,949 | |||||||||||
| Accumulated comprehensive loss at January 1, 2017 | (820,850 | ) | (28,083 | ) | (67,551 | ) | (916,484 | ) | ||||||||
| Other comprehensive income (loss) before reclassifications | 381,865 | (6,755 | ) | 17,307 | 392,417 | |||||||||||
| Amounts reclassified from accumulated other comprehensive loss | 188,630 | 1,172 | — | 189,802 | ||||||||||||
| Net current-period other comprehensive income (loss) | 570,495 | (5,583 | ) | 17,307 | 582,219 | |||||||||||
| Accumulated comprehensive loss at December 31, 2017 | $ | (250,355 | ) | $ | (33,666 | ) | $ | (50,244 | ) | $ | (334,265 | ) | ||||
The following table presents reclassifications out of accumulated other comprehensive (loss) incomeloss for the years ended December 31, 20142017 and 20132016 (in thousands):
| Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive (Loss) Income into Income | ||||||||||
| Details about Accumulated Other Comprehensive Income (Loss) Components | Year Ended December 31, 2014 | Year Ended December 31, 2013 | Affected Line Item in Statements of Comprehensive Income (Loss) | |||||||
| Gain (loss) on cash flow derivative hedges: | ||||||||||
| Cross currency swaps | $ | (261 | ) | $ | (3,531 | ) | Interest expense, net of interest capitalized | |||
| Foreign currency forward contracts | (1,887 | ) | (1,797 | ) | Depreciation and amortization expenses | |||||
| Foreign currency forward contracts | (4,291 | ) | 27,423 | Other (expense) income | ||||||
| Foreign currency forward contracts | (57 | ) | (440 | ) | Interest expense, net of interest capitalized | |||||
| Fuel swaps | (27,984 | ) | 47,944 | Fuel | ||||||
| (34,480 | ) | 69,599 | ||||||||
| Amortization of defined benefit plans: | ||||||||||
| Actuarial loss | (888 | ) | (1,753 | ) | Payroll and related | |||||
| Prior service costs | (836 | ) | (836 | ) | Payroll and related | |||||
| (1,724 | ) | (2,589 | ) | |||||||
| Release of foreign cumulative translation due to sale of Pullmantur's non-core businesses: | ||||||||||
| Foreign cumulative translation | (1,997 | ) | — | Other operating | ||||||
| Total reclassifications for the period | $ | (38,201 | ) | $ | 67,010 | |||||
ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Amount of Loss Reclassified from Accumulated Other Comprehensive Income (Loss) into Income | ||||||||||||||
| Details about Accumulated Other Comprehensive Income (Loss) Components | Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | Affected Line Item in Statements of Comprehensive Income (Loss) | ||||||||||
| Loss on cash flow derivative hedges: | ||||||||||||||
| Interest rate swaps | (31,603 | ) | (41,480 | ) | (36,401 | ) | Interest expense, net of interest capitalized | |||||||
| Foreign currency forward contracts | (10,840 | ) | (8,114 | ) | (2,871 | ) | Depreciation and amortization expenses | |||||||
| Foreign currency forward contracts | (9,472 | ) | (14,342 | ) | 7,580 | Other expense | ||||||||
| Foreign currency forward contracts | — | (207 | ) | — | Other indirect operating expenses | |||||||||
| Foreign currency collar options | (2,408 | ) | (2,408 | ) | (1,605 | ) | Depreciation and amortization expenses | |||||||
| Fuel swaps | 7,382 | 13,685 | (9,583 | ) | Other expense | |||||||||
| Fuel swaps | (141,689 | ) | (284,384 | ) | (248,744 | ) | Fuel | |||||||
| (188,630 | ) | (337,250 | ) | (291,624 | ) | |||||||||
| Amortization of defined benefit plans: | ||||||||||||||
| Actuarial loss | (1,172 | ) | (1,141 | ) | (1,414 | ) | Payroll and related | |||||||
| Prior service costs | — | — | (293 | ) | Payroll and related | |||||||||
| (1,172 | ) | (1,141 | ) | (1,707 | ) | |||||||||
| Release of foreign cumulative translation due to sale or liquidation of businesses: | ||||||||||||||
| Foreign cumulative translation | — | — | 4,200 | Other operating | ||||||||||
| Total reclassifications for the period | $ | (189,802 | ) | $ | (338,391 | ) | $ | (289,131 | ) | |||||
Note 14.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 December 31, 2014 Using | Fair Value Measurements at December 31, 2013 Using | Fair Value Measurements at December 31, 2017 Using | Fair Value Measurements at December 31, 2016 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) | 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) | $ | 189,241 | $ | 189,241 | $ | 189,241 | $ | — | $ | — | $ | 204,687 | $ | 204,687 | $ | 204,687 | $ | — | $ | — | $ | 120,112 | $ | 120,112 | $ | 120,112 | $ | — | $ | — | $ | 132,603 | $ | 132,603 | $ | 132,603 | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||
| Total Assets | $ | 189,241 | $ | 189,241 | $ | 189,241 | $ | — | $ | — | $ | 204,687 | $ | 204,687 | $ | 204,687 | $ | — | $ | — | $ | 120,112 | $ | 120,112 | $ | 120,112 | $ | — | $ | — | $ | 132,603 | $ | 132,603 | $ | 132,603 | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-term debt (including current portion of long-term debt)(5) | $ | 8,391,301 | $ | 8,761,414 | $ | 1,859,361 | $ | 6,902,053 | $ | — | $ | 8,020,061 | $ | 8,431,220 | $ | 2,888,255 | $ | 5,542,965 | $ | — | $ | 7,506,312 | $ | 8,038,092 | $ | — | $ | 8,038,092 | $ | — | $ | 9,347,051 | $ | 9,859,266 | $ | — | $ | 9,859,266 | $ | — | ||||||||||||||||||||||||||||||||||||||
| Total Liabilities | $ | 8,391,301 | $ | 8,761,414 | $ | 1,859,361 | $ | 6,902,053 | $ | — | $ | 8,020,061 | $ | 8,431,220 | $ | 2,888,255 | $ | 5,542,965 | $ | — | $ | 7,506,312 | $ | 8,038,092 | $ | — | $ | 8,038,092 | $ | — | $ | 9,347,051 | $ | 9,859,266 | $ | — | $ | 9,859,266 | $ | — | ||||||||||||||||||||||||||||||||||||||
| (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 |
F-30
ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 December 31, |
| (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. |
Other Financial Instruments
The carrying amounts of accounts receivable, accounts payable, accrued interest and accrued expenses approximate fair value at December 31, 20142017 and December 31, 2013.2016.
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 December 31, 2014 Using | Fair Value Measurements at December 31, 2013 Using | Fair Value Measurements at December 31, 2017 Using | Fair Value Measurements at December 31, 2016 Using | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Total Fair Value | Level 1(1) | Level 2(2) | Level 3(3) | Total Fair Value | Level 1(1) | Level 2(2) | Level 3(3) | Total Fair Value | Level 1(1) | Level 2(2) | Level 3(3) | Total Fair Value | Level 1(1) | Level 2(2) | Level 3(3) | ||||||||||||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments(4) | $ | 63,981 | $ | — | $ | 63,981 | $ | — | $ | 188,576 | $ | — | $ | 188,576 | $ | — | $ | 320,385 | $ | — | $ | 320,385 | $ | — | $ | 19,397 | $ | — | $ | 19,397 | $ | — | ||||||||||||||||||||||||||||||
Investments(5) | $ | 5,531 | 5,531 | — | — | $ | 6,044 | 6,044 | — | — | 3,340 | 3,340 | — | — | 3,576 | 3,576 | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total Assets | $ | 69,512 | $ | 5,531 | $ | 63,981 | $ | — | $ | 194,620 | $ | 6,044 | $ | 188,576 | $ | — | $ | 323,725 | $ | 3,340 | $ | 320,385 | $ | — | $ | 22,973 | $ | 3,576 | $ | 19,397 | $ | — | ||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments(6) | $ | 767,635 | $ | — | $ | 767,635 | $ | — | $ | 100,260 | $ | — | $ | 100,260 | $ | — | $ | 115,961 | $ | — | $ | 115,961 | $ | — | $ | 373,497 | $ | — | $ | 373,497 | $ | — | ||||||||||||||||||||||||||||||
| Total Liabilities | $ | 767,635 | $ | — | $ | 767,635 | $ | — | $ | 100,260 | $ | — | $ | 100,260 | $ | — | $ | 115,961 | $ | — | $ | 115,961 | $ | — | $ | 373,497 | $ | — | $ | 373,497 | $ | — | ||||||||||||||||||||||||||||||
| (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. |
| (3) | Inputs that are unobservable. The Company did not use any Level 3 inputs as of December 31, |
| (4) | Consists of foreign currency forward contracts, |
| (5) | Consists of exchange-traded equity securities and mutual |
| (6) | Consists of |
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 December 31, 20142017 or December 31, 2013,2016, or that will be realized in the future, and do not include expenses that could be incurred in an actual sale or settlement.
| Fair Value Measurements at December 31, 2013 Using | |||||||||||||||
| Description | Total Carrying Amount | Total Fair Value | Level 3 | Total Impairment | |||||||||||
Long-lived assets — Pullmantur aircraft(1) | $ | 49,507 | $ | 49,507 | $ | 49,507 | $ | 13,529 | |||||||
Assets held for sale(2) | $ | — | $ | — | $ | — | $ | 19,985 | |||||||
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.
F-31
ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 | Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2014 | As of December 31, 2013 | As of December 31, 2017 | As of December 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | 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 of dollars) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives subject to master netting agreements | $ | 63,981 | $ | (63,981 | ) | $ | — | $ | — | $ | 188,576 | $ | (91,627 | ) | $ | — | $ | 96,949 | $ | 320,385 | $ | (104,751 | ) | $ | — | $ | 215,634 | $ | 19,397 | $ | (19,397 | ) | $ | — | $ | — | ||||||||||||||||||||||||||||
| Total | $ | 63,981 | $ | (63,981 | ) | $ | — | $ | — | $ | 188,576 | $ | (91,627 | ) | $ | — | $ | 96,949 | $ | 320,385 | $ | (104,751 | ) | $ | — | $ | 215,634 | $ | 19,397 | $ | (19,397 | ) | $ | — | $ | — | ||||||||||||||||||||||||||||