UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-11884
ROYAL CARIBBEAN CRUISES LTD.
(Exact name of registrant as specified in its charter)
Republic of Liberia | 98-0081645 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1050 Caribbean Way, Miami, Florida 33132 | ||
(Address of principal executive offices) (zip code) |
(305) 539-6000
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There were 213,918,139 shares of common stock outstanding as of October 26, 2009.
TABLE OF CONTENTS
Page | ||||
PART I. FINANCIAL INFORMATION | ||||
Item 1. |
Financial Statements | 1 | ||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 23 | ||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 42 | ||
Item 4. |
Controls and Procedures | 42 | ||
PART II. OTHER INFORMATION | ||||
Item 1. |
Legal Proceedings | 43 | ||
Item 6. |
Exhibits | 45 | ||
SIGNATURES | 46 |
PART I. FINANCIAL INFORMATION
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
Quarter Ended September 30, |
||||||||
2009 | 2008 | |||||||
Passenger ticket revenues |
$ | 1,270,610 | $ | 1,498,221 | ||||
Onboard and other revenues |
492,932 | 565,168 | ||||||
Total revenues |
1,763,542 | 2,063,389 | ||||||
Cruise operating expenses: |
||||||||
Commissions, transportation and other |
303,969 | 375,638 | ||||||
Onboard and other |
152,579 | 168,145 | ||||||
Payroll and related |
171,164 | 170,269 | ||||||
Food |
88,394 | 90,432 | ||||||
Fuel |
146,254 | 207,274 | ||||||
Other operating |
253,726 | 263,903 | ||||||
Total cruise operating expenses |
1,116,086 | 1,275,661 | ||||||
Marketing, selling and administrative expenses |
196,594 | 191,115 | ||||||
Depreciation and amortization expenses |
144,021 | 134,706 | ||||||
Operating Income |
306,841 | 461,907 | ||||||
Other income (expense): |
||||||||
Interest income |
2,225 | 5,620 | ||||||
Interest expense, net of interest capitalized |
(73,912 | ) | (80,560 | ) | ||||
Other (expense) income |
(4,762 | ) | 24,920 | |||||
(76,449 | ) | (50,020 | ) | |||||
Net Income |
$ | 230,392 | $ | 411,887 | ||||
Earnings per Share: |
||||||||
Basic |
$ | 1.08 | $ | 1.93 | ||||
Diluted |
$ | 1.07 | $ | 1.92 | ||||
Weighted-Average Shares Outstanding: |
||||||||
Basic |
213,839 | 213,524 | ||||||
Diluted |
215,669 | 214,172 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
Nine Months Ended September 30, |
||||||||
2009 | 2008 | |||||||
Passenger ticket revenues |
$ | 3,176,473 | $ | 3,676,201 | ||||
Onboard and other revenues |
1,261,686 | 1,400,047 | ||||||
Total revenues |
4,438,159 | 5,076,248 | ||||||
Cruise operating expenses: |
||||||||
Commissions, transportation and other |
772,350 | 918,313 | ||||||
Onboard and other |
348,336 | 363,980 | ||||||
Payroll and related |
505,376 | 487,851 | ||||||
Food |
254,710 | 255,530 | ||||||
Fuel |
437,617 | 539,807 | ||||||
Other operating |
715,468 | 763,365 | ||||||
Total cruise operating expenses |
3,033,857 | 3,328,846 | ||||||
Marketing, selling and administrative expenses |
576,344 | 592,604 | ||||||
Depreciation and amortization expenses |
421,802 | 386,373 | ||||||
Operating Income |
406,156 | 768,425 | ||||||
Other income (expense): |
||||||||
Interest income |
5,114 | 11,143 | ||||||
Interest expense, net of interest capitalized |
(221,701 | ) | (239,594 | ) | ||||
Other (expense) income |
(30,501 | ) | 32,269 | |||||
(247,088 | ) | (196,182 | ) | |||||
Net Income |
$ | 159,068 | $ | 572,243 | ||||
Earnings per Share: |
||||||||
Basic |
$ | 0.74 | $ | 2.68 | ||||
Diluted |
$ | 0.74 | $ | 2.67 | ||||
Weighted-Average Shares Outstanding: |
||||||||
Basic |
213,769 | 213,445 | ||||||
Diluted |
214,773 | 214,334 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
As of | ||||||||
September 30, 2009 |
December 31, 2008 |
|||||||
(unaudited) | ||||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 285,863 | $ | 402,878 | ||||
Trade and other receivables, net |
334,666 | 271,287 | ||||||
Inventories |
109,663 | 96,077 | ||||||
Prepaid expenses and other assets |
185,360 | 125,160 | ||||||
Derivative financial instruments |
105,084 | 81,935 | ||||||
Total current assets |
1,020,636 | 977,337 | ||||||
Property and equipment, net |
14,203,910 | 13,878,998 | ||||||
Goodwill |
803,189 | 779,246 | ||||||
Other assets |
1,158,560 | 827,729 | ||||||
$ | 17,186,295 | $ | 16,463,310 | |||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities |
||||||||
Current portion of long-term debt |
$ | 667,608 | $ | 471,893 | ||||
Accounts payable |
270,472 | 245,225 | ||||||
Accrued interest |
145,586 | 128,879 | ||||||
Accrued expenses and other liabilities |
513,345 | 687,369 | ||||||
Customer deposits |
1,002,488 | 968,520 | ||||||
Hedged firm commitments |
163,318 | 172,339 | ||||||
Total current liabilities |
2,762,817 | 2,674,225 | ||||||
Long-term debt |
6,628,442 | 6,539,510 | ||||||
Other long-term liabilities |
351,290 | 446,563 | ||||||
Commitments and contingencies (Note 7) |
||||||||
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; 224,213,977 and 223,899,076 shares issued, September 30, 2009 and December 31, 2008, respectively) |
2,242 | 2,239 | ||||||
Paid-in capital |
2,969,663 | 2,952,540 | ||||||
Retained earnings |
4,751,597 | 4,592,529 | ||||||
Accumulated other comprehensive income (loss) |
133,947 | (319,936 | ) | |||||
Treasury stock (10,308,683 and 11,076,701 common shares at cost, September 30, 2009 and December 31, 2008, respectively) |
(413,703 | ) | (424,360 | ) | ||||
Total shareholders equity |
7,443,746 | 6,803,012 | ||||||
$ | 17,186,295 | $ | 16,463,310 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
3
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Nine Months Ended September 30, |
||||||||
2009 | 2008 | |||||||
Operating Activities |
||||||||
Net income |
$ | 159,068 | $ | 572,243 | ||||
Adjustments: |
||||||||
Depreciation and amortization |
421,802 | 386,373 | ||||||
Changes in operating assets and liabilities: |
||||||||
Increase in trade and other receivables, net |
(18,029 | ) | (16,835 | ) | ||||
Increase in inventories |
(12,539 | ) | (18,528 | ) | ||||
Increase in prepaid expenses and other assets |
(9,433 | ) | (9,165 | ) | ||||
Increase (decrease) in accounts payable |
21,915 | (1,652 | ) | |||||
Increase in accrued interest |
16,706 | 5,682 | ||||||
Increase in accrued expenses and other liabilities |
31,623 | 61,648 | ||||||
Increase in customer deposits |
13,840 | 73,404 | ||||||
Other, net |
38,826 | (8,406 | ) | |||||
Net cash provided by operating activities |
663,779 | 1,044,764 | ||||||
Investing Activities |
||||||||
Purchases of property and equipment |
(1,153,090 | ) | (1,413,347 | ) | ||||
Cash received on settlement of derivative financial instruments |
105,964 | 256,338 | ||||||
Loans and equity contributions to unconsolidated affiliates |
(181,683 | ) | (41,429 | ) | ||||
Proceeds from the sale of Celebrity Galaxy |
290,928 | | ||||||
Other, net |
(100 | ) | (11,317 | ) | ||||
Net cash used in investing activities |
(937,981 | ) | (1,209,755 | ) | ||||
Financing Activities |
||||||||
Debt proceeds |
992,463 | 1,143,682 | ||||||
Debt issuance costs |
(35,819 | ) | (13,400 | ) | ||||
Repayments of debt |
(804,356 | ) | (762,826 | ) | ||||
Dividends paid |
| (128,045 | ) | |||||
Proceeds from exercise of common stock options |
290 | 3,656 | ||||||
Other, net |
3,827 | (4,318 | ) | |||||
Net cash provided by financing activities |
156,405 | 238,749 | ||||||
Effect of exchange rate changes on cash |
782 | (2,579 | ) | |||||
Net (decrease) increase in cash and cash equivalents |
(117,015 | ) | 71,179 | |||||
Cash and cash equivalents at beginning of period |
402,878 | 230,784 | ||||||
Cash and cash equivalents at end of period |
$ | 285,863 | $ | 301,963 | ||||
Supplemental Disclosure |
||||||||
Cash paid during the period for: |
||||||||
Interest, net of amount capitalized |
$ | 205,873 | $ | 226,172 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As used in this quarterly report on Form 10-Q, the terms Royal Caribbean, the Company, we, our and us refer to Royal Caribbean Cruises Ltd. and the terms Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Cruises and CDF Croisières de France refer to our cruise brands. In accordance with cruise vacation industry practice, the term berths is determined based on double occupancy per cabin even though many cabins can accommodate three or more passengers. This report should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2008.
Note 1. General
Description of Business
We are a global cruise company. We own five cruise brands, Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Cruises, and CDF Croisières de France. In addition, we have a 50% investment in a joint venture with TUI AG which operates the brand TUI Cruises.
Basis for Preparation of Consolidated Financial Statements
The unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Estimates are required for the preparation of financial statements in accordance with these principles. Actual results could differ from these estimates.
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. For affiliates where significant influence over financial and operating policies exists, usually evidenced by a direct ownership interest from 20% to 50%, the investment is accounted for using the equity method.
We believe the accompanying unaudited consolidated financial statements contain all normal recurring accruals necessary for a fair presentation. Our revenues are seasonal and results for interim periods are not necessarily indicative of results for the entire year.
Note 2. Summary of Significant Accounting Policies
Property and Equipment - Drydock
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 vessels 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 vessels 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.
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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, stabilizers, 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 vessels designed and intended operating capability. Repairs and maintenance activities are charged to expense as incurred.
Recently Adopted Accounting Standards
On January 1, 2009, we adopted authoritative guidance which requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction whether full or partial acquisition, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, requires expensing of most transaction and restructuring costs, and requires the acquirer to disclose all information needed to evaluate and understand the nature and financial effect of the business combination. The guidance applies to all transactions or other events in which an entity obtains control of one or more businesses, including combinations achieved without the transfer of consideration, for example, by contract alone or through the lapse of minority veto rights. The adoption of these provisions did not have a material impact on our consolidated financial statements, but will have an impact on the accounting for future business combinations.
On January 1, 2009, we adopted authoritative guidance which requires reporting entities to present noncontrolling (minority) interests as equity instead of as a liability or mezzanine equity and provides guidance on the accounting for transactions between an entity and noncontrolling interests. The guidance applies prospectively as of the beginning of the fiscal year the guidance is initially applied, except for the presentation and disclosure requirements which are applied retrospectively for all periods presented subsequent to adoption. The adoption of this guidance did not have a material impact on our consolidated financial statements.
On January 1, 2009, we adopted authoritative guidance which requires enhanced disclosures about an entitys derivative and hedging activities and thereby improves the transparency of financial reporting. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under the standard and its related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. See Note 10. Fair Value Measurements and Derivative Instruments for our disclosures required under this guidance.
6
On January 1, 2008, we adopted authoritative guidance for fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value in the financial statements. In February 2008, we adopted authoritative guidance, which allowed for the delay of the effective date of the authoritative guidance for fair value measurements for one year for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. This guidance became effective for us as of January 1, 2009, and the adoption did not have a material impact on our consolidated financial statements.
On April 1, 2009, we adopted authoritative guidance which requires disclosures about fair value of financial instruments whenever summarized financial information for interim reporting periods is presented. Entities shall disclose the methods and significant assumptions used to estimate the fair value of financial instruments and shall describe changes in methods and significant assumptions, if any, during the period. See Note 10. Fair Value Measurements and Derivative Instruments for our disclosures required under this guidance.
On April 1, 2009, we adopted authoritative guidance which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The adoption of this guidance did not have a material impact on our consolidated financial statements. See Note 11. Subsequent Events for our disclosures required under this guidance.
Recent Accounting Pronouncements
In June 2009, the FASB issued authoritative guidance which eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferors interest in transferred financial assets. This guidance will be effective for our fiscal year 2010 interim and annual consolidated financial statements. We are currently evaluating the impact of the adoption of this authoritative guidance. We do not expect the adoption will have a material impact on our consolidated financial statements.
In June 2009, the FASB issued authoritative guidance which eliminates exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. This guidance also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entitys status as a variable interest entity, a companys power over a variable interest entity, or a companys obligation to absorb losses or its right to receive benefits of an entity must be disregarded. The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. This guidance will be effective for our fiscal year 2010 interim and annual consolidated financial statements. The adoption of this authoritative guidance will not have a material impact on our consolidated financial statements.
7
Note 3. Earnings Per Share
A reconciliation between basic and diluted earnings per share is as follows (in thousands, except per share data):
Quarter Ended September 30, |
Nine Months Ended September 30, | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Net income for basic and diluted earnings per share |
$ | 230,392 | $ | 411,887 | $ | 159,068 | $ | 572,243 | ||||
Weighted-average common shares outstanding |
213,839 | 213,524 | 213,769 | 213,445 | ||||||||
Dilutive effect of stock options and restricted stock awards |
1,830 | 648 | 1,004 | 889 | ||||||||
Diluted weighted-average shares outstanding |
215,669 | 214,172 | 214,773 | 214,334 | ||||||||
Basic earnings per share |
$ | 1.08 | $ | 1.93 | $ | 0.74 | $ | 2.68 | ||||
Diluted earnings per share |
$ | 1.07 | $ | 1.92 | $ | 0.74 | $ | 2.67 |
Diluted earnings per share did not include options to purchase 5.1 million and 5.7 million shares for the third quarters of 2009 and 2008, respectively, and 5.1 million and 4.2 million shares for the first nine months of 2009 and 2008, respectively, because the effect of including them would have been antidilutive.
Note 4. Long-Term Debt
In February 2009, we entered into a credit agreement based on terms originally agreed in June 2007 providing financing for our fourth Solstice-class ship, which is scheduled for delivery in the third quarter of 2011. The credit agreement provides for an unsecured term loan for up to 80% of the purchase price of the vessel which will be 95% guaranteed by Hermes, the official export credit agency of Germany. The loan will have a 12-year life with semi-annual amortization, and will bear interest at a fixed rate of 5.82% (inclusive of the applicable margin).
In July 2009, we issued $300.0 million of 11.875% senior unsecured notes due 2015 at a price of 97.399% of par. The net proceeds from the offering were used to repay $285.0 million outstanding under our unsecured revolving credit facility.
In July 2009, we took delivery of Celebrity Equinox, the second Solstice-class ship for Celebrity Cruises. To finance the purchase, we drew in full $524.5 million of an unsecured term loan which has a 12-year life with semi-annual amortization, and bears interest at LIBOR plus a margin of 50 basis points, currently approximately 1.465%.
In October 2009, we took delivery of Oasis of the Seas. To finance the purchase, we drew in full $840.0 million and 159.4 million of an unsecured term loan. The loan amortizes over 12 years. With respect to 60% of the financing, the lenders have the ability to opt-out after six years. Approximately $420.0 million of the facility is at a fixed interest rate of approximately 5.41% (inclusive of the applicable margin); approximately $420.0 million of the facility is at a floating interest rate of LIBOR plus 3.00% currently 3.58%; and approximately 159.4 million of the facility is at a floating rate of EURIBOR plus 2.25% currently 3.27%.
8
Our financing agreements contain covenants that require us, among other things, to maintain minimum net worth and a fixed charge coverage ratio and limit our net debt-to-capital ratio. Our minimum net worth and maximum net debt-to-capital calculations exclude the impact of accumulated other comprehensive income (loss) on total shareholders equity. 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 (fixed charges). We are currently in compliance with all debt covenants. As of September 30, 2009, our net worth was $7.3 billion compared with a minimum requirement of $5.2 billion, our net-debt-to-capital was 49.0% compared to a maximum limit of 62.5% and our fixed charge coverage ratio exceeded the minimum requirement of 1.25x as our fixed charges for the period were $0.00.
Note 5. Property and Equipment
In April 2009, we sold Oceanic for $14.5 million. The sale resulted in an immaterial gain.
In August 2009, we entered into an agreement to sell the Atlantic Star. We have classified the ship as held for sale and transferred the net book value of $50.7 million to prepaid expenses and other assets within our consolidated balance sheet. We anticipate that the sale will be completed during the fourth quarter of 2009. We recognized a charge of $7.1 million during the third quarter of 2009 to reduce the carrying value of the ship to its fair value less cost to sell. This amount is recorded within other operating expenses in our consolidated statements of operations.
Note 6. Other Assets and Liabilities
We review goodwill for impairment whenever events or circumstances indicate but at least annually. We performed an interim test for impairment of goodwill during the third quarter of 2009. We continue to believe that the fair value of our two reporting units which include goodwill, Royal Caribbean International and Pullmantur, exceeded their carrying values. We will perform our annual review for goodwill impairment in the fourth quarter of 2009 based on the then current facts and circumstances.
We have determined that our 50% interest in the TUI Cruises GmbH joint venture with TUI AG, which operates the brand TUI Cruises, is a variable interest entity. In March 2009, we sold Celebrity Galaxy to TUI Cruises for 224.4 million to serve as its first ship. The ship was renamed Mein Schiff and began sailing in May 2009. Concurrently with entering into the agreement to sell Celebrity Galaxy, we executed certain forward exchange contracts to lock in the sales price at approximately $315.0 million. We deferred the entire gain on the sale of $35.9 million and will recognize this amount over the remaining life of the ship estimated to be 23 years. We and TUI AG each invested 112.2 million in the joint venture to fund the ships purchase. As of September 30, 2009, our investment in this entity which is substantially our maximum exposure to loss, was approximately $209.2 million and was included within other assets in the consolidated balance sheet. We have determined that we are not the primary beneficiary of this joint venture as we would not absorb the majority of TUI Cruises expected losses nor receive a majority of TUI Cruises residual returns. Accordingly, we do not consolidate this entity and account for this investment under the equity method of accounting.
During the third quarter of 2009, we recorded an out of period adjustment of approximately $12.3 million to correct an error in the calculation of our deferred tax liability. We reduced the deferred tax liability to reflect a change in the enacted Spanish statutory tax rate used to calculate the liability in 2006 which was identified during the third quarter of 2009. Because the adjustment, both
9
individually and in the aggregate, was not material to any of the prior years financial statements, and the impact of correcting the adjustment in the current year is not expected to be material to the full year 2009 financial statements, we recorded the correction of this adjustment in the financial statements in the third quarter of 2009. This amount was recognized within other income (expense) in our consolidated statements of operations.
Note 7. Commitments and Contingencies
Capital Expenditures. As of September 30, 2009, the expected dates our ships on order will enter service and their approximate berths are as follows:
Ship |
Expected to Enter Service |
Approximate Berths | ||
Royal Caribbean International: |
||||
Oasis-class: |
||||
Oasis of the Seas1 |
4th Quarter 2009 | 5,400 | ||
Allure of the Seas |
4th Quarter 2010 | 5,400 | ||
Celebrity Cruises: |
||||
Solstice-class: |
||||
Celebrity Eclipse |
2nd Quarter 2010 | 2,850 | ||
Unnamed |
3rd Quarter 2011 | 2,850 | ||
Unnamed |
4th Quarter 2012 | 2,850 | ||
Total Berths |
19,350 | |||
1. | We took delivery of Oasis of the Seas in October 2009. |
The anticipated aggregate cost of these ships is approximately $5.8 billion, of which we have deposited $678.7 million as of September 30, 2009. Approximately 14.6% of the aggregate cost was exposed to fluctuations in the euro exchange rate at September 30, 2009. As of September 30, 2009, we anticipated overall capital expenditures, including the five ships on order, would be approximately $2.1 billion for 2009, $2.2 billion for 2010, $1.0 billion for 2011, and $1.0 billion for 2012.
Litigation.
In January 2006, a purported class action lawsuit was filed in the United States District Court for the Southern District of New York alleging that we and certain other named cruise lines infringed rights in copyrighted works and other intellectual property by presenting performances on our cruise ships without securing the necessary licenses. In March 2009, the Court dismissed the complaint for failure to state a claim with sufficient particularity but granted leave to re-file. In April 2009 plaintiffs filed an amended complaint with substantially the same allegations as the original complaint except that it no longer seeks class action treatment and confines its allegations of infringement to plaintiffs copyrights of the theatrical production of Grease. The suit seeks payment of damages against all named defendants in an undetermined amount of not less than $10.0 million, as well as disgorgement of profits, a permanent injunction against future infringement and punitive and treble damages. We have filed a motion to dismiss the amended complaint or, alternatively, to sever and transfer the case to the United States District Court for the Southern District of Florida. We believe we have meritorious defenses to these claims which we will continue to vigorously pursue.
We have a lawsuit pending in the Circuit Court for Miami-Dade County, Florida against Rolls Royce, co-producer of the Mermaid pod-propulsion system on Millennium-class ships, for the recurring Mermaid pod failures. Alstom Power Conversion, the
10
other co-producer of the pod-propulsion system, settled out of this suit in January 2006 for $38.0 million. In December 2008, Rolls Royce filed its answer to our lawsuit denying the allegations and asserting various affirmative defenses. Rolls Royce also counterclaimed that we engaged in a civil conspiracy with Alstom Power Conversion and its related parties (Alstom), that we tortiously interfered with Rolls Royces joint venture agreement with Alstom and that we caused Alstom to breach its fiduciary obligations owing to Rolls Royce under the joint venture agreement. Rolls Royce alleges damages against us in excess of $100.0 million for these claims. The case is set for trial in January 2010. We believe we have meritorious claims against Rolls Royce and meritorious defenses to the counterclaims, both of which we intend to vigorously pursue.
In July 2006, a purported class action lawsuit was filed in the United States District Court for the Central District of California alleging that we failed to timely pay crew wages and failed to pay proper crew overtime. The suit seeks payment of damages in an undetermined amount, including penalty wages under the United States Seamans Wage Act and equitable relief damages under the California Unfair Competition Law. In December 2006, the District Court granted our motion to dismiss the claim and held that it should be arbitrated pursuant to the arbitration provision in Royal Caribbeans collective bargaining agreement. In November 2008, the United States Ninth Circuit Court of Appeals affirmed the District Courts finding and plaintiffs subsequent request for rehearing and rehearing en banc was denied. In June 2009, the United States Supreme Court denied plaintiffs petition for writ of certiorari. We believe we have meritorious defenses to these claims which we will continue to vigorously pursue.
The Miami District Office of the United States Equal Employment Opportunity Commission (EEOC) has alleged that certain of our shipboard employment practices do not comply with United States employment laws. In June 2007, the EEOC proposed payment of monetary sanctions of approximately $27.0 million and certain remedial actions. Following discussions with the EEOC regarding this matter, the EEOC informed us in April 2008 that they transferred the matter to its legal unit for litigation review. To date, no legal proceedings have been initiated. We believe we have meritorious defenses to these claims and, if proceedings are initiated, we intend to vigorously pursue them.
The Florida Attorney Generals office is investigating whether there is or has been a violation of state or federal anti-trust laws in connection with the setting by us and other cruise line operators of fuel supplements in 2007. We are cooperating with the Florida Attorney Generals office in connection with this investigation and to date the Florida Attorney Generals office has not initiated any proceedings against us.
In July 2009, three purported class actions were filed in United States District Court for the Eastern District of Michigan against Park West Galleries, Inc., doing business as Park West Gallery, PWG Florida, Inc., Fine Art Sales, Inc., Vista Fine Art LLC, doing business as Park West At Sea (together, Park West), other named and unnamed parties and Royal Caribbean Cruises Ltd. In two of the actions, other cruise line companies are also named as additional defendants, including in one of them, Celebrity Cruises Inc. The actions are being brought on behalf of purchasers of artwork at shipboard art auctions conducted by Park West on the named cruise lines. In August 2009, one of the actions was transferred to the United States District Court for the Western District of Washington and orders transferring the other two actions have been entered pending showings by defendants why they should not be transferred. The substance of the claims in all three actions is virtually the same. The suits allege that the artwork Park West sells is not what it represents to its customers and that Royal Caribbean Cruises Ltd., Celebrity Cruises Inc. and other named cruise lines are fraudulently
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concealing the activities of Park West, are being enriched unjustly from the sale of the artwork and are engaged in a conspiracy with Park West in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). The actions seek from the named defendants refund and restitution of all monies acquired from the sale of artwork at shipboard auctions, recovery for the amount of payments for the purchased artwork, damages on the RICO claims in an indeterminate amount, permitted statutory damages and unspecified equitable or injunctive relief. The suits also seek from certain non-Royal Caribbean parties additional statutory, breach of contract and breach of warranty damages in unspecified amounts. The suits are at their very early stages of litigation; however, we believe we have meritorious defenses to the claims against us and we intend to vigorously pursue them.
In September 2009, demands for arbitration were made under our collective bargaining agreement covering Celebrity Cruises crewmembers on behalf of twenty current and/or former Celebrity Cruises cabin stewards and others similarly situated (the September 2009 Demands). These demands contend that between 2001 and 2005 Celebrity Cruises improperly required the named cabin stewards to share guest gratuities with assistant cabin stewards. The demands seek payment of damages, including penalty wages, under the U.S. Seamans Wage Act of approximately $0.6 million for the named crewmembers and estimates damages in excess of $200.0 million, for the entire class of other similarly situated crewmembers. The September 2009 Demands are in addition to identical arbitration demands brought by the same counsel in April 2009 (the April 2009 Demands) on behalf of ten current and former Celebrity Cruises cabin stewards for themselves and others similarly situated. In October 2009, this same counsel brought on behalf of these same ten crew members and others similarly situated a purported class action in the United States District Court, Southern District of Florida, alleging that Celebrity Cruises waived its right to arbitrate the April 2009 demands (the October 2009 Action). The October 2009 Action makes the same allegations of improper sharing of gratuities as are made in the April 2009 Demands and seeks an indeterminate amount of damages, including penalty wages. The underlying allegations in the September 2009 Demands, the April 2009 Demands and the October 2009 Action are identical to those that were brought by this same counsel in a previously reported purported class action that had been filed against Celebrity Cruises in April 2005 in the United States District Court, Southern District of Florida (the April 2005 Action). The April 2005 Action was eventually dismissed and the matter was directed to arbitration. The arbitrator subsequently rejected plaintiffs request to bring the claim as a class arbitration, and we settled with the individual plaintiff. Consistent with the outcome of the April 2005 Action, we believe that class arbitration will be rejected in the September 2009 Arbitration Demand and the April 2009 Arbitration Demand. We also believe there is no basis on which to claim we waived our right to arbitrate the April 2009 Action. We also believe we have meritorious defenses to the underlying claims in these matters which we intend to vigorously pursue.
Because of the inherent uncertainty as to the outcome of the proceedings and investigation described above, we are unable at this time to estimate the possible impact of these matters on us.
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.
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Other
Under the Brilliance of the Seas operating lease, we have agreed to indemnify the lessor to the extent its after-tax return is negatively impacted by unfavorable changes in corporate tax rates, capital allowance deductions and certain unfavorable determinations which may be made by United Kingdom tax authorities. These indemnifications could result in an increase in our lease payments. We are unable to estimate the maximum potential increase in our lease payments due to the various circumstances, timing or a combination of events that could trigger such indemnifications. We have been advised by the lessor that the United Kingdom tax authorities are disputing the lessors accounting treatment of the lease and that the parties are in discussions on the matter. If the characterization of the lease is ultimately determined to be incorrect, we could be required to indemnify the lessor under certain circumstances. The lessor has advised us that they believe their characterization of the lease is correct. Based on the foregoing and our review of available information, we do not believe an indemnification is probable. However, if the lessor loses its dispute and we are required to indemnify the lessor, we cannot at this time predict the impact that such an occurrence would have on our financial condition and results of operations.
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.
If any person other than A. Wilhelmsen AS. and Cruise Associates, our two principal shareholders, acquires ownership of more than 30% of our common stock and our two principal shareholders, in the aggregate, own less of our common stock than such person and do not collectively have the right to elect, or to designate for election, at least a majority of the board of directors, 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. If this were to occur, it could have an adverse impact on our liquidity and operations.
Note 8. Shareholders Equity
We declared cash dividends on our common stock of $0.15 per share during the first, second and third quarters of 2008. Commencing in the fourth quarter 2008, our board of directors discontinued the quarterly dividends.
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Note 9. Comprehensive Income
Comprehensive income includes net income, foreign currency translation adjustments and changes in the fair value of derivative instruments that qualify as cash flow hedges. The cumulative changes in fair value of the derivatives are deferred and recorded as a component of accumulated other comprehensive income until the hedged transactions are realized and recognized in earnings.
Comprehensive income was as follows (in thousands):
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||
Net income |
$ | 230,392 | $ | 411,887 | $ | 159,068 | $ | 572,243 | ||||||
Changes related to cash flow derivative hedges |
112,327 | (398,464 | ) | 397,362 | (200,312 | ) | ||||||||
Foreign currency translation adjustments |
45,137 | (12,867 | ) | 56,521 | (16,931 | ) | ||||||||
Total comprehensive income |
$ | 387,856 | $ | 556 | $ | 612,951 | $ | 355,000 | ||||||
Note 10. Fair Value Measurements and Derivative Instruments
Fair Value Measurements
The Company uses quoted prices in active markets when available to determine the fair value of its financial instruments. The estimated fair value of our financial instruments that are not measured at fair value on a recurring basis are as follows (in thousands):
At September 30, 2009 |
At December 31, 2008 | |||||
Long-term debt (including current portion of long-term debt) |
$ | 6,558,015 | $ | 5,132,547 |
Long-Term Debt
The fair values of our senior notes and senior debentures were estimated by obtaining quoted market prices. The fair values of all other debt were estimated using the present value of expected future cash flows.
Other Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued interest and accrued expenses approximate fair value at September 30, 2009 and December 31, 2008.
In addition, assets and liabilities that are recorded at fair value have been categorized based upon the fair value hierarchy described in Note 2. Summary of Significant Accounting Policies in our annual report on Form 10-K for the year ended December 31, 2008.
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The following table presents information about the Companys financial instruments recorded at fair value on a recurring basis (in thousands):
Description |
Fair Value Measurements at September 30, 2009 Using |
Fair Value Measurements at December 31, 2008 Using | ||||||||||||||||||||||
Total |
Level 11 | Level 22 | Level 33 | Total | Level 11 | Level 22 | Level 33 | |||||||||||||||||
Assets: |
||||||||||||||||||||||||
Derivative financial instruments4 |
$ | 400,221 | | 400,221 | | $ | 284,175 | | 284,175 | | ||||||||||||||
Investments5 |
$ | 8,877 | 8,877 | | | $ | 14,238 | 14,238 | | | ||||||||||||||
Total Assets |
$ | 409,098 | $ | 8,877 | $ | 400,221 | $ | | $ | 298,413 | $ | 14,238 | $ | 284,175 | $ | | ||||||||
Liabilities: |
||||||||||||||||||||||||
Derivative financial instruments6 |
$ | 101,863 | | 101,863 | | $ | 360,941 | | 360,941 | | ||||||||||||||
Total Liabilities |
$ | 101,863 | $ | | $ | 101,863 | $ | | $ | 360,941 | $ | | $ | 360,941 | $ | | ||||||||
The following table presents information about the Companys financial instruments recorded at fair value on a nonrecurring basis (in thousands):
Fair Value Measurements at September 30, 2009 Using |
||||||||||||||
Description |
Total | Level 11 | Level 27 | Level 33 | Total Gains (Losses) |
|||||||||
Long-lived assets held for sale8 |
$ | 53,390 | | $ | 53,390 | | $ | (7,124 | ) |
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. 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 exchange rates, fuel types, fuel curves, interest rate yield curves, creditworthiness of the counterparty and the Company. |
3. | Inputs that are unobservable for the asset or liability. The Company did not use any Level 3 inputs for the fair value measurements during the periods presented. |
4. | Consists of foreign currency forward contracts and interest rate, cross currency and fuel swaps. |
5. | Consists of exchange-traded equity securities and mutual funds. |
6. | Consists of fuel swaps and foreign currency forward contracts. |
7. | Inputs based on a quoted price in an active market adjusted for the condition of the asset. |
8. | Consists of the fair value of the Atlantic Star and the loss recognized during the period to reduce the carrying value to its fair value less cost to sell. |
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Long-lived assets held for sale with a carrying amount of $57.8 million, were written down to their fair value of $53.4 million, less cost to sell of $2.7 million (or $50.7 million), resulting in a loss of $7.1 million which was recognized in our consolidated statements of operations. Long-lived assets held for sale are reported within prepaid expenses and other assets in our consolidated balance sheet.
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 September 30, 2009 or December 31, 2008, or that will be realized in the future and do not include expenses that could be incurred in an actual sale or settlement.
Concentrations of Credit Risk
We monitor concentrations of credit risk associated with financial and other institutions with which we conduct significant business. Our exposure under foreign currency contracts, interest rate and fuel swap agreements is limited to the cost of replacing the contracts in the event of non-performance by the counterparties to the contracts, all of which are currently our lending banks. To minimize this risk, we select counterparties with credit risks acceptable to us and we limit our exposure to an individual counterparty. Credit risk, including but not limited to counterparty nonperformance under derivative instruments, our revolving credit facility and new ship progress payment guarantees, is not considered significant, as we primarily conduct business with large, well-established financial institutions and insurance companies with which we have long-term relationships and have credit risks acceptable to us or the credit risk is spread out among a large number of counterparties. We do not anticipate nonperformance by any of our significant counterparties. In addition, we have established guidelines regarding credit ratings and instrument maturities that we follow 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. We normally require guarantees to support new ship progress payments to shipyards.
Derivative Instruments
We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We manage these risks through a combination of our normal operating and financing activities and through the use of derivative financial instruments pursuant to our hedging practices and policies. The financial impact of these hedging instruments is primarily offset by corresponding changes in the underlying exposures being hedged. We achieve this by closely matching the amount, term and conditions of the derivative instrument with the underlying risk being hedged. We do not hold or issue derivative financial instruments for trading or other speculative purposes. We monitor our derivative positions using techniques including market valuations and sensitivity analyses.
We enter into various forward, swap and option contracts to manage our interest rate exposure and to limit our exposure to fluctuations in foreign currency exchange rates and fuel prices. We also have a non-derivative financial instrument designated as a hedge of our net investment in our foreign operations. These instruments are designated as hedges and are recorded on the balance sheet at their fair value.
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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. Changes in fair value of derivatives that are designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) until the underlying hedged transactions are recognized in earnings. The foreign-currency transaction gain or loss of our nonderivative financial instrument designated as a hedge of our net investment in our foreign operations is recognized as a component of accumulated other comprehensive income (loss) along with the associated foreign currency translation adjustment of the foreign operation.
On an ongoing basis, we assess whether derivatives used in hedging transactions are highly effective in offsetting changes in the fair value or cash flow of hedged items. We use the long-haul method to assess hedge effectiveness using regression analysis for each hedge relationship under our interest rate, foreign currency and fuel hedging programs. We apply the same methodology on a consistent basis for assessing hedge effectiveness to all hedges within each hedging program (i.e. interest rate, foreign currency and fuel). We generally perform regression analysis over an observation period commensurate with the contractual life of the derivative instrument up to three years. High effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the fair values of the derivative instrument and the hedged item. The determination of ineffectiveness is based on the amount of dollar offset between the change in fair value of the derivative instrument and the change in fair value of the hedged item at the end of the reporting period. If it is determined that a derivative is not highly effective as a hedge or hedge accounting is discontinued, any change in fair value of the derivative since the last date at which it was determined to be effective is recognized in earnings. In addition, the ineffective portion of our highly effective hedges is recognized in earnings immediately and reported in other income (expense) in our consolidated statements of operations.
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 consistent with the nature of the instrument.
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 September 30, 2009, approximately 45% of our long-term debt was effectively fixed and approximately 55% was floating. We enter into interest rate and cross currency swap agreements to modify our exposure to interest rate movements and to manage our interest expense. We assess the risk that changes in interest rates will have either on the fair value of debt obligations or on the amount of future interest payments by monitoring changes in interest rate exposures and by evaluating hedging opportunities.
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Market risk associated with our long-term fixed rate debt is the potential increase in fair value resulting from a decrease in interest rates. We enter into interest swap agreements that effectively convert a portion of our fixed-rate debt to a floating-rate basis to manage this risk. At September 30, 2009 our interest rate swap agreements effectively changed $350.0 million of debt with a fixed rate of 7.25% to LIBOR-based floating rate debt, and 1.0 billion of debt with a fixed rate of 5.625% to EURIBOR-based floating rate. In addition, at September 30, 2009 we had cross currency swap agreements that effectively changed 300.0 million of the 1.0 billion floating EURIBOR-based debt to $389.1 million of floating LIBOR-based debt.
Our interest rate swaps and cross currency swap agreements are accounted for as fair value hedges. During the quarter and nine months ended September 30, 2009, we recognized in earnings, a net loss of approximately $0.8 million and $9.8 million, respectively, which represented the total ineffectiveness of the fair value hedges pertaining to interest rate and cross currency swaps. The amount for the nine months ended September 30, 2009 includes an out of period adjustment of approximately $7.1 million which represents the cumulative reduction in the fair value of certain interest rate swaps during 2007 and 2008 due to an error in data embedded in the software we use to assist with calculating the fair value of our interest rate swaps. Because the adjustment, both individually and in the aggregate, was not material to any of the prior years financial statements, and the impact of correcting the adjustment in the current year is not expected to be material to the full year 2009 financial statements, we recorded the correction of this adjustment in the financial statements in the first quarter of 2009.
The notional amount of outstanding debt related to interest rate swaps as of September 30, 2009 was $1.8 billion. The notional amount of outstanding debt related to cross currency swaps as of September 30, 2009 was $389.1 million.
Foreign Currency Exchange Rate Risk
Our primary exposure to foreign currency exchange rate risk relates to our ship construction firm commitments denominated in euros and a portion of our euro-denominated debt. We enter into euro-denominated forward contracts to manage our exposure to movements in foreign currency exchange rates. As discussed above, we also have cross currency swap agreements that effectively change 300.0 million of floating EURIBOR-based debt to $389.1 million of floating LIBOR-based debt at September 30, 2009. At September 30, 2009, approximately 14.6% of the aggregate cost of the ships was exposed to fluctuations in the euro exchange rate. Our foreign exchange contracts are accounted for as fair value or cash flow hedges depending on the designation of the related hedge.
The notional amount of outstanding foreign exchange contracts as of September 30, 2009 was $4.2 billion.
We consider our investments in foreign subsidiaries to be denominated in relatively stable currencies and of a long-term nature. We partially address the exposure of our investments in foreign subsidiaries by denominating a portion of our debt in our subsidiaries functional currencies (generally euros). Specifically, we have assigned debt of approximately 347.0 million, or approximately $507.9 million, as a hedge of our net investment in Pullmantur.
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Fuel Price Risk
Our exposure to market risk for changes in fuel prices relates to the consumption of fuel on our ships. We use fuel swap agreements to mitigate the financial impact of fluctuations in fuel prices. As of September 30, 2009, we have entered into fuel related swap agreements, which pertain to approximately 600,000 metric tons of our projected 2009 fuel purchases, 700,000 metric tons of our projected 2010 fuel purchases, 650,000 metric tons of our projected 2011 fuel purchases and 70,000 metric tons of our projected 2012 fuel requirements. Such agreements pertain to 48% of our projected 2009 fuel requirements, 50% of our projected 2010 fuel requirements, 45% of our projected 2011 fuel requirements and 5% of our projected 2012 fuel requirements. Our fuel swap agreements are accounted for as cash flow hedges.
At September 30, 2009, $1.9 million of estimated unrealized net losses associated with our cash flow hedges pertaining to fuel swap agreements are expected to be reclassified as earnings from other accumulated comprehensive loss within the next twelve months. Reclassification is expected to occur primarily as the result of fuel consumption associated with our hedged forecasted fuel purchases. At September 30, 2009, we have hedged the variability in future cash flows for certain forecasted transactions occurring through 2012.
At September 30, 2009, the fair value and line item caption of derivative instruments recorded were as follows:
Fair Value of Derivative Instruments
Asset Derivatives |
Liability Derivatives | ||||||||||||
As of September 30, 2009 |
As of September 30, 2009 | ||||||||||||
Balance Sheet Location |
Fair Value | Balance Sheet Location |
Fair Value | ||||||||||
In thousands | |||||||||||||
Derivatives designated as hedging instruments under FASB ASC 815-201 |
|||||||||||||
Interest rate swaps |
Other Assets | $ | 151,647 | Other long-term liabilities | $ | | |||||||
Cross currency swaps |
Other Assets | 55,083 | Other long-term liabilities | | |||||||||
Foreign currency forward contracts |
Derivative Financial Instruments | 71,246 | Accrued expenses and other liabilities | (28,457 | ) | ||||||||
Foreign currency forward contracts |
Other Assets | 44,223 | Other long-term liabilities | (28,970 | ) | ||||||||
Fuel swaps |
Derivative Financial Instruments | 33,838 | Accrued expenses and other liabilities | (35,177 | ) | ||||||||
Fuel swaps |
Other Assets | 44,184 | Other long-term liabilities | (9,259 | ) | ||||||||
Total derivatives designated as hedging instruments under Subtopic 815-20 |
$ | 400,221 | $ | (101,863 | ) | ||||||||
1 | Accounting Standard Codification 815-20 Derivatives and Hedging. |
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At September 30, 2009, the fair value and line item caption of non-derivative instruments recorded was as follows:
Non-derivative instrument designated as hedging instrument under Subtopic 815-20 |
Balance Sheet Location |
Carrying Value | ||||
In thousands | ||||||
Foreign currency debt | Long-term debt | $ | (507,898 | ) | ||
$ | (507,898 | ) | ||||
The effect of derivative instruments qualifying and designated as hedging instruments and the related hedged items in fair value hedges on the consolidated statement of operations for the quarter and nine months ended September 30, 2009 was as follows:
Derivatives and related Hedged Items under Subtopic 815-20 Fair |
Location of Gain (Loss) Recognized in Income on |
Amount of Gain (Loss) Recognized in Income of Derivative |
Amount of Gain (Loss) Recognized in Income on Hedged Item |
|||||||||||||
Value Hedging Relationships |
Derivative and Hedged Item |
Quarter Ended September 30, 2009 |
Nine Months Ended September 30, 2009 |
Quarter Ended September 30, 2009 |
Nine Months Ended September 30, 2009 |
|||||||||||
In thousands | ||||||||||||||||
Interest rate swaps | Interest expense, net of interest capitalized | $ | 13,682 | $ | 30,092 | $ | | $ | | |||||||
Cross currency swaps | Interest expense, net of interest capitalized | 955 | 3,437 | | | |||||||||||
Interest rate swaps | Other income (expense) | 19,687 | 9,926 | (20,745 | ) | (17,701 | ) | |||||||||
Cross currency swaps | Other income (expense) | 18,395 | 17,908 | (18,105 | ) | (19,950 | ) | |||||||||
Foreign currency forward contracts | Other income (expense) | 36,284 | 56,342 | (36,535 | ) | (52,986 | ) | |||||||||
$ | 89,003 | $ | 117,705 | $ | (75,385 | ) | $ | (90,637 | ) | |||||||
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The effect of derivative instruments qualifying and designated as hedging instruments in cash flow hedges on the consolidated financial statements for the quarter and nine months ended September 30, 2009 was as follows:
Derivatives under Subtopic 815-20 Cash Flow Hedging Relationships |
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) |
Location of Gain |
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Location of Gain (Loss) from |
Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness testing) | |||||||||||||||||||||
Quarter Ended September 30, 2009 |
Nine Months Ended September 30, 2009 |
Quarter Ended September 30, 2009 |
Nine Months Ended September 30, 2009 |
Quarter Ended September 30, 2009 |
Nine Months Ended September 30, 2009 | |||||||||||||||||||||
In thousands | ||||||||||||||||||||||||||
Interest rate swaps | $ | | $ | | Interest Expense, net of interest capitalized | $ | | $ | (619 | ) | Other income (expense) | $ | | $ | | |||||||||||
Foreign currency forward contracts | 111,361 | 149,728 | Depreciation and amortization expenses | 67 | 207 | Other income (expense) | 94 | 138 | ||||||||||||||||||
Foreign currency forward contracts | | | Passenger ticket revenues | | 103 | Other income (expense) | | | ||||||||||||||||||
Foreign currency forward contracts | (163 | ) | 21,884 | Other income (expense) | 259 | 259 | Other income (expense) | (65 | ) | 94 | ||||||||||||||||
Fuel swaps | (4,677 | ) | 141,536 | Fuel | (3,337 | ) | (84,363 | ) | Other income (expense) | 591 | 1,326 | |||||||||||||||
$ | 106,521 | $ | 313,148 | $ | (3,011 | ) | $ | (84,413 | ) | $ | 620 | $ | 1,558 | |||||||||||||
The effect of derivative instruments qualifying and designated as hedging instruments in net investment hedges on the consolidated financial statements for the quarter and nine months ended September 30, 2009 was as follows:
Non-derivatives instrument under Subtopic 815-20 Net Investment Hedging Relationships |
Amount of Gain (Loss) Recognized in OCI (Effective Portion) |
Location of Gain OCI into Income (Effective Portion) |
Amount of Gain (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |||||||||||||
Quarter Ended September 30, 2009 |
Nine Months Ended September 30, 2009 |
Quarter Ended September 30, 2009 |
Nine Months Ended September 30, 2009 | |||||||||||||
In thousands | ||||||||||||||||
Foreign Currency Debt |
$ | (20,992 | ) | $ | (21,191 | ) | Other Income (expense) | $ | | $ | | |||||
$ | (20,992 | ) | $ | (21,191 | ) | $ | | $ | | |||||||
The effect of derivatives not designated as hedging instruments on the consolidated financial statements for the quarter and nine months ended September 30, 2009 was as follows:
Derivatives Not Designated as Hedging Instruments under Subtopic 815-20 |
Location of Gain (Loss) Recognized in Income on Derivative |
Amount of Gain (Loss) Recognized in Income on Derivative | ||||||
Quarter Ended September 30, 2009 |
Nine Months Ended September 30, 2009 | |||||||
In thousands | ||||||||
Foreign exchange contracts |
Other income / (expense) | $ | 71 | $ | 71 | |||
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Contingent Features
Starting in 2012, our current interest rate and cross currency derivative instruments may require us to post collateral if our Standard & Poors and Moodys credit ratings are below specified levels. Specifically, if on the fifth anniversary of entering into a derivative transaction and on all succeeding fifth-year anniversaries our credit ratings for our senior debt were to be below BBB- by Standard & Poors and Baa3 by Moodys, then each counterparty to such derivatives with whom we are in a net liability position that exceeds the applicable minimum call amount may demand that we post collateral in an amount equal to the net liability position. The amount of collateral required to be posted following such event will change each time our net liability position increases or decreases by more than the applicable minimum call amount. If our credit rating for our senior debt is equal to or above BBB- by Standard & Poors or Baa3 by Moodys, then any collateral posted at such time will be released to us. Currently, our senior debt credit rating is BB- with a negative outlook by Standard & Poors and Ba3 with a negative outlook by Moodys. Only our interest rate and cross currency derivative instruments have a term of at least five years and will not reach their fifth anniversary until 2012. Therefore, as of September 30, 2009, we are not required to post any collateral for our derivative instruments.
Note 11. Subsequent Events
We evaluated subsequent events through November 3, 2009, the date our financial statements were issued.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Concerning Factors That May Affect Future Results
Certain statements under this caption Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this document constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, could, estimate, expect, goal, intend, may, plan, project, seek, should, will, and similar expressions are intended to identify these forward-looking statements. Forward-looking statements do not guarantee future performance and may involve risks, uncertainties and other factors, which 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 the following:
| the adverse impact of the worldwide economic downturn on the demand for cruises, |
| the impact of the economic downturn on the availability of our credit facility and on our ability to generate cash flows from operations or obtain new borrowings from the credit or capital markets in amounts sufficient to satisfy our capital expenditures, debt repayments and other financing needs, |
| the impact of disruptions in the global financial markets on the ability of our counterparties and others to perform their obligations to us, |
| the uncertainties of conducting business internationally and expanding into new markets, |
| the volatility in fuel prices and foreign exchange rates, |
| the impact of changes in operating and financing costs, including changes in foreign currency, interest rates, fuel, food, payroll, airfare for our shipboard personnel, insurance and security costs, |
| the impact of problems encountered at shipyards and their subcontractors including insolvency or financial difficulties, |
| vacation industry competition and changes in industry capacity and overcapacity, |
| the impact of compliance with or changes in tax, environmental, health, safety and other laws and regulations affecting our business or our principal shareholders, |
| the impact of pending or threatened litigation, enforcement actions, fines or penalties, |
| the impact of delayed or cancelled ship orders, |
| the impact of emergency ship repairs, including the related lost revenue, |
| the impact on prices of new ships due to shortages in available shipyard facilities, component parts and shipyard consolidations, |
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| negative incidents involving cruise ships including those involving the health and safety of passengers, |
| reduced consumer demand for cruises as a result of any number of reasons, including geo-political and economic uncertainties and the unavailability or cost of air service, |
| the international political climate, fears of terrorist and pirate attacks, armed conflict and the resulting concerns over safety and security aspects of traveling, |
| the impact of the spread of contagious diseases, |
| the impact of changes or disruptions to external distribution channels for our guest bookings, |
| the loss of key personnel or our inability to retain or recruit qualified personnel, |
| changes in our stock price or principal shareholders, |
| uncertainties of a foreign legal system as we are not incorporated in the United States, |
| the unavailability of ports of call, |
| weather. |
The above examples are not exhaustive and new risks emerge from time to time. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a further discussion of risk factors related to our business, see Part I, Item 1A. Risk Factors in our annual report on Form 10-K for the year ended December 31, 2008.
Critical Accounting Policies
Valuation of Goodwill
We review goodwill for impairment whenever events or circumstances indicate but at least annually. We performed an interim test for impairment of goodwill during the third quarter of 2009. We continue to believe that the fair value of our two reporting units which include goodwill, Royal Caribbean International and Pullmantur, exceeded their carrying values. We will perform our annual review for goodwill impairment in the fourth quarter of 2009 based on the then current facts and circumstances.
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Derivative Instruments
We enter into forward and swap 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 designated as hedges and are recorded on the balance sheet at their fair value. Our derivative instruments are not held for trading or speculative purposes. We account for derivative financial instruments in accordance with authoritative guidance. See Note 2 and 14 of the Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2008 for more information on related authoritative guidance, the Companys hedging programs and derivative financial instruments.
We enter into foreign currency forward contracts and interest rate, cross-currency and fuel swaps 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 curves for foreign currency exchange and interest rates. 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 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. 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 adjust the valuation of our derivative financial instruments to incorporate credit risk, when applicable.
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 would be derived from using other valuation models, assumptions, inputs or conditions suggested by actual historical experience.
Ship Accounting - Drydock
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 vessels 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 vessels 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, stabilizers, 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
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planned major maintenance activities necessary to maintain Class. The costs deferred are not otherwise routinely periodically performed to maintain a vessels 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 vessels class certification as compared to those costs attributable to repairs and maintenance which are expensed as incurred.
For a further discussion of our critical accounting policies, refer to Managements Discussion and Analysis of Financial Condition and Results of Operations within our annual report on Form 10-K for the year ended December 31, 2008.
Terminology
Our revenues are seasonal based on demand for cruises. Demand is strongest for cruises during the Northern Hemisphere summer months and holidays.
Our revenues consist of the following:
Passenger ticket revenues consist of revenue recognized from the sale of passenger tickets and the sale of air transportation to and from our ships.
Onboard and other revenues 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, pre- and post-cruise tours, Pullmanturs land-based tours and hotel and air packages. Also included are 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.
Our cruise operating expenses consist of the following:
Commissions, transportation and other expenses 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 consist of the direct costs associated with onboard and other revenues. These costs include the cost of products sold onboard our ships, vacation protection insurance premiums, costs associated with pre- and post-cruise tours and related credit card fees. These costs also include minimal costs associated with concession revenues, as the costs are mostly incurred by third-party concessionaires.
Payroll and related expenses consist of costs for shipboard personnel.
Food expenses include food costs for both passengers and crew.
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Fuel expenses include fuel and related delivery and storage costs, including the financial impact of fuel swap agreements.
Other operating expenses consist primarily of operating costs such as repairs and maintenance, port costs that do not vary with passenger head counts, vessel operating lease costs, costs associated with Pullmanturs land-based tours, vessel related insurance and entertainment.
We do not allocate payroll and related costs, food costs, fuel costs or other operating costs 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.
Non-GAAP Financial Measures
Available Passenger Cruise Days (APCD) are our measurement of capacity and represent double occupancy per cabin multiplied by the number of cruise days for the period. We use this measure to perform capacity and rate analysis to identify our main non-capacity drivers which cause our cruise revenue and expenses to vary.
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 represent Gross Cruise Costs excluding commissions, transportation and other expenses and onboard and other expenses (each of which is described above under the Terminology heading). In measuring our ability to control costs in a manner that positively impacts net income, we believe changes in Net Cruise Costs to be the most relevant indicator of our performance. A reconciliation of historical Gross Cruise Costs to Net Cruise Costs is provided below under Summary of Historical Results of Operations. We have not provided a quantitative reconciliation of projected Gross Cruise Costs to projected Net Cruise Costs 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.
Net Debt-to-Capital is a ratio which represents total long-term debt, including current portion of long-term debt, less cash and cash equivalents (Net Debt) divided by the sum of Net Debt and total shareholders equity. We believe Net Debt and Net Debt-to-Capital, along with total long-term debt and shareholders equity are useful measures of our capital structure. A reconciliation of historical Debt-to-Capital to Net Debt-to-Capital is provided below under Summary of Historical Results of Operations.
Net Revenues represent total revenues less commissions, transportation and other expenses and onboard and other expenses (each of which is described under the Terminology heading).
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 is the most relevant measure of our pricing performance because it reflects 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 Summary of Historical 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.
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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.
The use of certain significant non-GAAP measures, such as Net Yields and Net Cruise Costs, allow us to perform capacity and rate analyses 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 measures, and as such, there exists the possibility that they may not be comparable to measures used by other companies within the industry.
Summary of Historical Results of Operations
Total revenues decreased 14.5% to $1.8 billion in the third quarter of 2009 from total revenues of $2.1 billion for the same period in 2008 primarily due to the decrease in ticket prices. Net Yields decreased by approximately 16.5% compared to the same period in 2008. The decrease in Net Yields was primarily due to the decrease in ticket prices and to a lesser extent, a decrease in onboard spending and a slight decrease in occupancy. These decreases were partially offset by decreases in operating expenses. As a result, our net income was $230.4 million or $1.07 per share on a diluted basis for the third quarter of 2009 compared to $411.9 million or $1.92 per share on a diluted basis for the third quarter of 2008.
The environment for travel remains challenging and we continue to discount pricing below recent historical levels. As a result of our discounted pricing and the elasticity of the market for our cruise vacations, we have maintained levels of occupancy in excess of 100%. General business conditions and the booking environment have remained stable and consistent with those we have observed since the beginning of 2009 with the exception of the effect of the H1N1 virus on Pullmanturs operations (Pullmanturs operating results are consolidated on a two-month lag) and the diminished demand for our cruises and tours to Mexico and the Caribbean.
Other significant items for the third quarter of 2009 include:
| Net Cruise Costs per APCD decreased by 10.0% compared to the same period in 2008. |
| Net Debt-to-Capital decreased to 48.5% as of September 30, 2009 compared to 49.3% as of December 31, 2008. Similarly, our Debt-to-Capital ratio decreased to 49.5% as of September 30, 2009 compared to 50.8% as of December 31, 2008. |
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| In July 2009, we issued $300.0 million of 11.875% senior unsecured notes due 2015 at a price of 97.399% of par. The net proceeds from the offering were used to repay $285.0 million outstanding under our unsecured revolving credit facility. |
| In July 2009, we took delivery of Celebrity Equinox, the second Solstice-class ship for Celebrity Cruises. To finance the purchase, we drew in full $524.5 million of an unsecured term loan. |
| In August 2009, we entered into an agreement to sell the Atlantic Star. We have classified the ship as held for sale and transferred the net book value of $50.7 million to prepaid expenses and other assets within our consolidated balance sheet. We anticipate that the sale will be completed during the fourth quarter of 2009. We recognized a charge of $7.1 million during the third quarter of 2009 to reduce the carrying value of the ship to its fair value less cost to sell. This amount is recorded within other operating expenses in our consolidated statements of operations. |
Other Items:
| In October 2009, we took delivery of Oasis of the Seas, the first Oasis-class ship for Royal Caribbean International. To finance the purchase, we drew in full $840.0 million and 159.4 million from an unsecured term loan. |
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Operating results for the quarter and nine months ended September 30, 2009 compared to the same periods in 2008 are shown in the following table (in thousands, except per share data):
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||
% of Total Revenues |
% of Total Revenues |
% of Total Revenues |
% of Total Revenues |
|||||||||||||||||||||||||
Passenger ticket revenues |
$ | 1,270,610 | 72.0 | % | $ | 1,498,221 | 72.6 | % | $ | 3,176,473 | 71.6 | % | $ | 3,676,201 | 72.4 | % | ||||||||||||
Onboard and other revenues |
492,932 | 28.0 | % | 565,168 | 27.4 | % | 1,261,686 | 28.4 | % | 1,400,047 | 27.6 | % | ||||||||||||||||
Total revenues |
1,763,542 | 100 | % | 2,063,389 | 100 | % | 4,438,159 | 100 | % | 5,076,248 | 100 | % | ||||||||||||||||
Cruise operating expenses: |
||||||||||||||||||||||||||||
Commissions, transportation and other |
303,969 | 17.2 | % | 375,638 | 18.2 | % | 772,350 | 17.4 | % | 918,313 | 18.1 | % | ||||||||||||||||
Onboard and other |
152,579 | 8.7 | % | 168,145 | 8.1 | % | 348,336 | 7.8 | % | 363,980 | 7.2 | % | ||||||||||||||||
Payroll and related |
171,164 | 9.7 | % | 170,269 | 8.3 | % | 505,376 | 11.4 | % | 487,851 | 9.6 | % | ||||||||||||||||
Food |
88,394 | 5.0 | % | 90,432 | 4.4 | % | 254,710 | 5.7 | % | 255,530 | 5.0 | % | ||||||||||||||||
Fuel |
146,254 | 8.3 | % | 207,274 | 10.0 | % | 437,617 | 9.9 | % | 539,807 | 10.6 | % | ||||||||||||||||
Other operating |
253,726 | 14.4 | % | 263,903 | 12.8 | % | 715,468 | 16.1 | % | 763,365 | 15.0 | % | ||||||||||||||||
Total cruise operating expenses |
1,116,086 | 63.3 | % | 1,275,661 | 61.8 | % | 3,033,857 | 68.4 | % | 3,328,846 | 65.6 | % | ||||||||||||||||
Marketing, selling and administrative expenses |
196,594 | 11.1 | % | 191,115 | 9.3 | % | 576,344 | 13.0 | % | 592,604 | 11.7 | % | ||||||||||||||||
Depreciation and amortization expenses |
144,021 | 8.2 | % | 134,706 | 6.5 | % | 421,802 | 9.5 | % | 386,373 | 7.6 | % | ||||||||||||||||
Operating Income |
306,841 | 17.4 | % | 461,907 | 22.4 | % | 406,156 | 9.2 | % | 768,425 | 15.1 | % | ||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||||||
Interest income |
2,225 | 0.1 | % | 5,620 | 0.3 | % | 5,114 | 0.1 | % | 11,143 | 0.2 | % | ||||||||||||||||
Interest expense, net of interest capitalized |
(73,912 | ) | (4.2 | )% | (80,560 | ) | (3.9 | )% | (221,701 | ) | (5.0 | )% | (239,594 | ) | (4.7 | )% | ||||||||||||
Other (expense) income |
(4,762 | ) | (0.3 | )% | 24,920 | 1.2 | % | (30,501 | ) | (0.7 | )% | 32,269 | 0.6 | % | ||||||||||||||
(76,449 | ) | (4.3 | )% | (50,020 | ) | (2.4 | )% | (247,088 | ) | (5.6 | )% | (196,182 | ) | (3.9 | )% | |||||||||||||
Net Income |
230,392 | 13.1 | % | 411,887 | 20.0 | % | 159,068 | 3.6 | % | 572,243 | 11.3 | % | ||||||||||||||||
Diluted Earnings Per Share |
$ | 1.07 | $ | 1.92 | $ | 0.74 | $ | 2.67 | ||||||||||||||||||||
Selected historical statistical information is shown in the following table:
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Passengers Carried |
1,046,943 | 1,072,358 | 2,958,219 | 3,093,748 | ||||||||
Passenger Cruise Days |
7,545,314 | 7,487,096 | 21,105,895 | 20,719,165 | ||||||||
APCD |
7,157,608 | 6,945,217 | 20,486,192 | 19,640,167 | ||||||||
Occupancy |
105.4 | % | 107.8 | % | 103.0 | % | 105.5 | % |
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Gross Yields and Net Yields were calculated as follows (in thousands, except APCD and Yields):
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
2009 | 2008 | % Change | 2009 | 2008 | % Change | |||||||||||||
Passenger ticket revenues |
$ | 1,270,610 | $ | 1,498,221 | (15.2 | )% | $ | 3,176,473 | $ | 3,676,201 | (13.6 | )% | ||||||
Onboard and other revenues |
492,932 | 565,168 | (12.8 | )% | 1,261,686 | 1,400,047 | (9.9 | )% | ||||||||||
Total revenues |
1,763,542 | 2,063,389 | (14.5 | )% | 4,438,159 | 5,076,248 | (12.6 | )% | ||||||||||
Less: |
||||||||||||||||||
Commissions, transportation and other |
303,969 | 375,638 | (19.1 | )% | 772,350 | 918,313 | (15.9 | )% | ||||||||||
Onboard and other |
152,579 | 168,145 | (9.3 | )% | 348,336 | 363,980 | (4.3 | )% | ||||||||||
Net revenues |
$ | 1,306,994 | $ | 1,519,606 | (14.0 | )% | $ | 3,317,473 | $ | 3,793,955 | (12.6 | )% | ||||||
APCD |
7,157,608 | 6,945,217 | 3.1 | % | 20,486,192 | 19,640,167 | 4.3 | % | ||||||||||
Gross Yields |
$ | 246.39 | $ | 297.09 | (17.1 | )% | $ | 216.64 | $ | 258.46 | (16.2 | )% | ||||||
Net Yields |
$ | 182.60 | $ | 218.80 | (16.5 | )% | $ | 161.94 | $ | 193.17 | (16.2 | )% |
Gross Cruise Costs and Net Cruise Costs were calculated as follows (in thousands, except APCD and costs per APCD):
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
2009 | 2008 | % Change | 2009 | 2008 | % Change | |||||||||||||
Total cruise operating expenses |
$ | 1,116,086 | $ | 1,275,661 | (12.5 | )% | $ | 3,033,857 | $ | 3,328,846 | (8.9 | )% | ||||||
Marketing, selling and administrative expenses |
196,594 | 191,115 | 2.9 | % | 576,344 | 592,604 | (2.7 | )% | ||||||||||
Gross Cruise Costs |
1,312,680 | 1,466,776 | (10.5 | )% | 3,610,201 | 3,921,450 | (7.9 | )% | ||||||||||
Less: |
||||||||||||||||||
Commissions, transportation and other |
303,969 | 375,638 | (19.1 | )% | 772,350 | 918,313 | (15.9 | )% | ||||||||||
Onboard and other |
152,579 | 168,145 | (9.3 | )% | 348,336 | 363,980 | (4.3 | )% | ||||||||||
Net Cruise Costs |
$ | 856,132 | $ | 922,993 | (7.2 | )% | $ | 2,489,515 | $ | 2,639,157 | (5.7 | )% | ||||||
APCD |
7,157,608 | 6,945,217 | 3.1 | % | 20,486,192 | 19,640,167 | 4.3 | % | ||||||||||
Gross Cruise Costs per APCD |
$ | 183.40 | $ | 211.19 | (13.2 | )% | $ | 176.23 | $ | 199.66 | (11.7 | )% | ||||||
Net Cruise Costs per APCD |
$ | 119.61 | $ | 132.90 | (10.0 | )% | $ | 121.52 | $ | 134.38 | (9.6 | )% |
Net Debt-to-Capital was calculated as follows (in thousands):
As of | ||||||||
September 30, 2009 |
December 31, 2008 |
|||||||
Long-term debt, net of current portion |
$ | 6,628,442 | $ | 6,539,510 | ||||
Current portion of long-term debt |
667,608 | 471,893 | ||||||
Total debt |
7,296,050 | 7,011,403 | ||||||
Less: Cash and cash equivalents |
285,863 | 402,878 | ||||||
Net Debt |
$ | 7,010,187 | $ | 6,608,525 | ||||
Total shareholders equity |
$ | 7,443,746 | $ | 6,803,012 | ||||
Total debt |
7,296,050 | 7,011,403 | ||||||
Total debt and shareholders equity |
14,739,796 | 13,814,415 | ||||||
Debt-to-Capital |
49.5 | % | 50.8 | % | ||||
Net Debt |
7,010,187 | 6,608,525 | ||||||
Net Debt and shareholders equity |
$ | 14,453,933 | $ | 13,411,537 | ||||
Net Debt-to-Capital |
48.5 | % | 49.3 | % |
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Outlook
Fourth Quarter 2009
We expect Net Yields will decrease in the range of 7% to 8% compared to 2008.
We expect Net Cruise Costs per APCD to decrease approximately 10% compared to 2008. Excluding fuel, we expect Net Cruise Costs per APCD to decrease in the range of 7% to 8% compared to 2008.
We expect a 7.5% increase in capacity, primarily driven by a full quarter of Celebrity Solstice, the addition of Celebrity Equinox, which entered service during the third quarter of 2009 and the addition of Oasis of the Seas which will enter service during the fourth quarter of 2009.
Depreciation and amortization expenses are expected to be approximately $150.0 million and interest expense is expected to be approximately $80 million.
We do not forecast fuel price changes and our cost calculations for fuel are based on current at-the-pump prices net of any hedging impacts. If fuel prices for the fourth quarter of 2009 remain at the level of current at-the-pump prices, fuel expenses for the fourth quarter of 2009 would be approximately $158.0 million. For the fourth quarter of 2009, our fuel expense is approximately 40% hedged and a 10% change in fuel prices would result in a change of fuel expenses of approximately $9.0 million for the fourth quarter of 2009, after taking into account existing hedges.
Based on the expectations above, and assuming that fuel prices remain at the level of current at-the-pump prices, we expect a fourth quarter 2009 loss per share of approximately $0.05.
Full Year 2009
We expect Net Yields to decrease approximately 14% compared to 2008.
We expect Net Cruise Costs per APCD to decrease approximately 10% compared to 2008. Excluding fuel, we expect Net Cruise Costs per APCD to decrease in the range of 6% to 7% compared to 2008.
We expect a 5.1% increase in capacity in 2009, primarily driven by a full year of Celebrity Solstice, a full year of Independence of the Seas, the addition of Celebrity Equinox, which entered service during the third quarter of 2009, and the addition of Oasis of the Seas, which will enter service during the fourth quarter of 2009.
Depreciation and amortization expenses are expected to be in the range of $565.0 million to $570.0 million, and interest expense is expected to be approximately $305.0 million.
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We do not forecast fuel price changes and our cost calculations for fuel are based on current at-the-pump prices net of any hedging impacts. If fuel prices for the full year 2009 remain at the level of current at-the-pump prices, fuel expenses for the full year 2009 would be approximately $596.0 million.
Based on the expectations above, and assuming that fuel prices remain at the level of current at-the-pump prices, we expect full year 2009 earnings per share to be approximately $0.70.
2010
We affirmed our earlier outlook for year over year improvements in Net Yields in the first quarter and for the full year of 2010.
While it is early in our annual planning process, we anticipate flat Net Cruise Cost per APCD, excluding fuel, for the full year 2010.
Quarter Ended September 30, 2009 Compared to Quarter Ended September 30, 2008
Revenues
Total revenues for 2009 decreased $299.8 million or 14.5% to $1.8 billion from $2.1 billion for the same period in 2008. This decrease is primarily due to higher discounts on our ticket prices, and to a lesser extent a decrease in onboard spending and the adverse effect of foreign currency as a result of a stronger U.S. dollar against the euro, British pound and Canadian dollar compared to 2008. Our revenues were also adversely impacted by a decrease in occupancy from 107.8% in 2008 compared to 105.4% in 2009. The decrease in occupancy was driven by the current worldwide economic downturn with disproportionate pressure within the Spanish market and by the H1N1 virus which resulted in selective itinerary modifications and diminished demand for our cruises and tours to Mexico and the Caribbean due to Pullmanturs operating results included on a two-month lag. This revenue decrease was partially offset by an estimated $63.1 million attributable to an increase in capacity of 3.1%. Although the number of passengers carried for the third quarter of 2009 decreased as compared to the same period in 2008, on average, passengers sailed more days per voyage in 2009 as compared to the same period in 2008 due to certain itinerary changes. The increase in capacity is primarily due to the addition of Celebrity Solstice, which entered service in November 2008 and the addition of Celebrity Equinox, which entered service in July 2009. This increase in capacity was partially offset by the sale of Celebrity Galaxy to TUI Cruises in March 2009 and the sale of Oceanic in April 2009.
Onboard and other revenues included concession revenues of $62.3 million in 2009 compared to $70.9 million for the same period in 2008. The decrease in concession revenues was primarily due to a decrease in spending on a per passenger basis, partially offset by the increase in capacity mentioned above.
Cruise Operating Expenses
Total cruise operating expenses for 2009 decreased $159.6 million or 12.5% to $1.1 billion from $1.3 billion for the same period in 2008. This decrease was primarily due to a decrease in commissions as a result of discounted ticket prices, a decrease in air expense due to a reduction in guests booking air service through us, a decrease in transportation and lodging expenses related to certain itinerary changes, and the impact of the stronger U.S. dollar against the euro, British pound and Canadian dollar compared to 2008. In addition, fuel expenses, which are net of the financial impact of fuel swap agreements, decreased 31.3% per metric ton in 2009 as compared to 2008 primarily as a result of lower fuel prices. To a lesser extent, the decrease was also related to a decrease in tour expenses. These decreases were partially offset by the increase in capacity mentioned above.
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Marketing, Selling and Administrative Expenses
Marketing, selling and administrative expenses for 2009 increased $5.5 million or 2.9% to $196.6 million from $191.1 million for the same period in 2008. The increase is primarily due to an increase in marketing and selling expenses associated with our international expansion.
Depreciation and Amortization expenses
Depreciation and amortization expenses for 2009 increased $9.3 million or 6.9% to $144.0 million from $134.7 million for the same period in 2008. The increase is primarily due to the addition of Celebrity Solstice, which entered service in November 2008 and the addition of Celebrity Equinox, which entered service in July 2009. To a lesser extent, the increase is also due to depreciation associated with shipboard and shore-side additions. These increases were partially offset by the sale of Celebrity Galaxy to TUI Cruises.
Other Income (Expense)
Interest expense, net of interest capitalized, decreased to $73.9 million in 2009 from $80.6 million in 2008. Gross interest expense decreased to $85.0 million in 2009 from $91.5 million in 2008. The decrease was primarily due to lower interest rates, partially offset by a higher average debt level. Interest capitalized remained consistent with the same period in 2008.
Other expense increased to $4.8 million in 2009 from other income of $24.9 million in 2008 for a net change of $29.7 million when comparing these periods. This change was primarily due to a $17.6 million settlement gain received in the case against Pentair Water Treatment (OH) Company (formerly known as Essef Corporation) during 2008 that did not recur in 2009. The change was also due to $6.5 million in foreign currency exchange losses in 2009 as compared to $6.1 million in foreign currency exchange gains in 2008, for a net change of $12.6 million when comparing these periods. The change was also due to gains of $5.2 million in hedge ineffectiveness primarily associated with our interest rate swaps and our ship construction firm commitments denominated in euros in 2008 as compared to losses of $0.3 million in 2009. These changes were offset by an out of period adjustment of $12.3 million to correct an error in our deferred tax liability. The out of period adjustment represents the cumulative reduction to a deferred tax liability due to the change in the enacted Spanish statutory tax rate used to calculate the liability in 2006 which was identified during the third quarter of 2009.
Net Yields
Net Yields decreased 16.5% in 2009 compared to 2008 primarily due to the decrease in ticket prices, the decrease in onboard spending and slight decrease in occupancy, the adverse effect of foreign currency due to a stronger U.S. dollar compared to the euro, British pound and Canadian dollar and the impact of itinerary modifications and diminished demand for our cruises and tours to Mexico as mentioned above. Net Yields decreased 14.5% in 2009 compared to 2008 after adjusting for year over year changes in currency.
Net Cruise Costs
Net Cruise Costs decreased 7.2% in 2009 compared to 2008 due to a 10.0% decrease in Net Cruise Cost per APCD offset by the 3.1% increase in capacity mentioned above. The decrease in Net Cruise Costs per APCD was primarily driven by decreases in fuel expenses and a decrease in air and tour expenses. Net Cruise Costs per APCD decreased 8.8% in 2009 compared to 2008 after adjusting for year over year changes in currency.
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Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Revenues
Total revenues for 2009 decreased $638.1 million or 12.6% to $4.4 billion from $5.1 billion for the same period in 2008. This decrease is primarily due to higher discounts on our ticket prices, and to a lesser extent a decrease in onboard spending and the adverse effect of foreign currency as a result of a stronger U.S. dollar against the euro, British pound and Canadian dollar compared to 2008. Our revenues were also adversely impacted by a decrease in occupancy from 105.5% in 2008 compared to 103.0% in 2009. The decrease in occupancy was driven by the current worldwide economic downturn with disproportionate pressure within the Spanish market and by the H1N1 virus which resulted in selective itinerary modifications and diminished demand for our cruises to Mexico and the Caribbean due to Pullmanturs operating results included on a two-month lag. This revenue decrease was partially offset by an increase of approximately $218.7 million attributable to an increase in capacity of 4.3%. Although the number of passengers carried for the first nine months of 2009 decreased as compared to the same period in 2008, on average, passengers sailed more days per voyage in 2009 as compared to the same period in 2008 due to certain itinerary changes. The increase in capacity is primarily due to the addition of Celebrity Solstice, which entered service in November 2008, a full nine months of Independence of the Seas, which entered service in May 2008, the addition of Celebrity Equinox, which entered service in July 2009, and a full nine months of Ocean Dream which entered service in March 2008. This increase in capacity was partially offset by the sale of Celebrity Galaxy to TUI Cruises in March 2009 and the sale of Oceanic in April 2009.
Onboard and other revenues included concession revenues of $169.2 million in 2009 compared to $191.5 million for the same period in 2008. The decrease in concession revenues was primarily due to a decrease in spending on a per passenger basis, partially offset by the increase in capacity mentioned above.
Cruise Operating Expenses
Total cruise operating expenses for 2009 decreased $295.0 million or 8.9% to $3.0 billion from $3.3 billion for the same period in 2008. This decrease was primarily due to a decrease in commissions as a result of discounted ticket prices, a decrease in air expense due to a reduction in guests booking air service through us, a decrease in transportation and lodging expenses related to certain itinerary changes and the impact of the stronger U.S. dollar against the euro, British pound and Canadian dollar compared to 2008. In addition, fuel expenses, which are net of the financial impact of fuel swap agreements, decreased 20.0% per metric ton in 2009 as compared to 2008 primarily as a result of lower fuel prices. To a lesser extent, the decrease was also related to a decrease in tour expenses. These decreases were partially offset by the increase in capacity mentioned above.
Marketing, Selling and Administrative Expenses
Marketing, selling and administrative expenses for 2009 decreased $16.3 million or 2.8% to $576.3 million from $592.6 million for the same period in 2008. The decrease is mainly due to the cost savings initiatives we announced during the third quarter of 2008.
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Depreciation and Amortization expenses
Depreciation and amortization expenses for 2009 increased $35.4 million or 9.2% to $421.8 million from $386.4 million for the same period in 2008. The increase is primarily due to the addition of Celebrity Solstice, which entered service in November 2008, to a full nine months of Independence of the Seas, which entered service in May 2008 and the addition of Celebrity Equinox which entered service in July 2009. To a lesser extent, the increase is also due to depreciation associated with shipboard and shore-side additions. These increases were partially offset by the sale of Celebrity Galaxy to TUI Cruises.
Other Income (Expense)
Interest expense, net of interest capitalized, decreased to $221.7 million in 2009 from $239.6 million in 2008. Gross interest expense decreased to $253.1 million in 2009 from $274.0 million in 2008. The decrease was primarily due to lower interest rates, partially offset by a higher average debt level. Interest capitalized decreased to $31.4 million in 2009 from $34.4 million in 2008 primarily due to lower interest rates.
Other expense increased to $30.5 million in 2009 compared to other income of $32.3 million in 2008 for a net change of $62.8 million when comparing these periods. The change was primarily due to $19.4 million in foreign currency exchange losses in 2009 as compared to $13.0 million in foreign currency exchange gains in 2008, for a net change of $32.4 million when comparing these periods. The change was also due to a $17.6 million settlement gain received in the case against Pentair Water Treatment (OH) Company (formerly known as Essef Corporation) during 2008 that did not recur in 2009. In addition, we had $11.8 million in losses from our equity method investments in 2009 as compared to $3.1 million in gains from our equity method investments in 2008, for a net change of $14.9 million when comparing these periods. These changes were offset by an out of period adjustment of $12.3 million to correct an error in our deferred tax liability. The out of period adjustment represents the cumulative reduction to a deferred tax liability due to the change in the enacted Spanish statutory tax rate used to calculate the liability in 2006 which was identified during the third quarter of 2009.
Net Yields
Net Yields decreased 16.2% in 2009 compared to 2008 primarily due to the decrease in ticket prices, the decrease in onboard spending, a stronger U.S. dollar compared to the euro, British pound and Canadian dollar as well as the impact of the itinerary modifications and diminished demand for our cruises and tours to Mexico as mentioned above. Net Yields decreased 13.3% in 2009 compared to 2008 after adjusting for year over year changes in currency.
Net Cruise Costs
Net Cruise Costs decreased 5.7% in 2009 compared to 2008 due to a 9.6% decrease in Net Cruise Cost per APCD offset by the 4.3% increase in capacity mentioned above. The decrease in Net Cruise Costs per APCD was primarily driven by the decrease in fuel
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expenses, the decrease in air and tour expenses and the decrease in marketing, selling and administrative expenses. Net Cruise Costs per APCD decreased 7.4% in 2009 compared to 2008 after adjusting for year over year changes in currency.
Recently Adopted, and Future Application of, Accounting Standards
Refer to Note 2. Summary of Significant Accounting Policies to our financial statements for further information on Recently Adopted Accounting Standards and Future Application of Accounting Standards.
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 decreased $381.0 million to $663.8 million for the first nine months of 2009 compared to $1.0 billion for the same period in 2008. The decrease is primarily due to a decrease in cash generated from ticket and onboard sales during the first nine months of 2009 compared to the same period in 2008. The decrease in cash from ticket sales is a result of a compression in the booking window, forward bookings lagging behind the prior year and cruises being purchased for lower prices compared to prior year. To a lesser extent, the decrease is also due to a decrease in the value of foreign denominated customer deposits due to the strengthening of the U.S. dollar as compared to 2008. As a result of the above factors, we received $558.5 million less in customer deposits during the first nine months of 2009 as compared to the same period in 2008. The decrease in onboard and other revenues is due to less spending per guest as compared to the prior year. The decreases mentioned above were partially offset primarily by a decrease in payments to suppliers and vendors due to our continued focus on cost improvement.
Net cash used in investing activities decreased to $938.0 million for the first nine months of 2009 from $1.2 billion for the same period in 2008. The decrease was primarily due to the proceeds received from the sale of Celebrity Galaxy to TUI Cruises of $290.9 million and a decrease in capital expenditures of approximately $260.3 million. Our capital expenditures decreased to approximately $1.2 billion for the first nine months of 2009 from $1.4 billion for the same period in 2008, primarily due to a decrease in the number of ships under construction. These decreases were offset by a decrease in settlements of approximately $150.4 million on our foreign currency forward contracts and an increase in equity contributions to our unconsolidated affiliates of $140.3 million.
Net cash provided by financing activities was $156.4 million in the first nine months of 2009 compared to $238.7 million for the same period in 2008. The change was due to a decrease in debt proceeds of approximately $151.2 million primarily due to a decrease in amounts drawn under our unsecured revolving credit facility in 2009 as compared to 2008 partially offset by proceeds from our $300.0 million senior unsecured notes issued during 2009. The change was also due to an increase in repayments of debt of approximately $41.5 million. This change was offset by a decrease in dividends paid of approximately $128.0 million during the first nine months in 2009 compared to the same period in 2008.
Interest capitalized during the first nine months of 2009 decreased to $31.4 million from $34.4 million for the same period in 2008 primarily due to lower interest rates.
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Future Capital Commitments
Our future capital commitments consist primarily of new ship orders. As of September 30, 2009, we had two ships of a new Oasis-class designated for Royal Caribbean International and three Solstice-class ships, designated for Celebrity Cruises, on order for an aggregate additional capacity of approximately 19,350 berths. The aggregate cost of the five ships is approximately $5.8 billion, of which we have deposited $678.7 million as of September 30, 2009. Approximately 14.6% of the aggregate cost of ships was exposed to fluctuations in the euro exchange rate at September 30, 2009.
As of September 30, 2009, we anticipated overall capital expenditures, including the five ships on order, would be approximately $2.1 billion for 2009, $2.2 billion for 2010, $1.0 billion for 2011, and $1.0 billion for 2012.
Contractual Obligations and Off-Balance Sheet Arrangements
As of September 30, 2009, our contractual obligations were as follows (in thousands):
Payments due by period | |||||||||||||||
Total | Less than 1 year |
1-3 years |
3-5 years |
More than 5 years | |||||||||||
Long-term debt obligations (1) |
$ | 7,237,302 | $ | 660,275 | $ | 1,722,849 | $ | 3,043,055 | $ | 1,811,123 | |||||
Interest on long-term debt(2) |
1,431,875 | 293,635 | 450,578 | 288,507 | 399,155 | ||||||||||
Capital lease obligations (3) |
58,748 | 7,333 | 10,047 | 5,262 | 36,106 | ||||||||||
Operating lease obligations(4)(5) |
386,597 | 51,632 | 287,559 | 18,790 | 28,616 | ||||||||||
Ship purchase obligations(6) |
4,610,553 | 1,919,798 | 1,952,275 | 738,480 | | ||||||||||
Other(7) |
717,717 | 91,589 | 196,221 | 172,559 | 257,348 | ||||||||||
Total |
$ | 14,442,792 | $ | 3,024,262 | $ | 4,619,529 | $ | 4,266,653 | $ | 2,532,348 | |||||
(1) | Amounts represent debt obligations with initial terms in excess of one year. |
(2) | Long-term debt obligations mature at various dates through fiscal year 2027 and bear interest at fixed and variable rates. Interest on variable-rate debt is calculated based on forecasted cash outflows, including interest swapped from a fixed-rate to a variable-rate using the applicable rate at September 30, 2009. Debt denominated in other currencies is calculated based on the applicable exchange rate at September 30, 2009. Amounts are based on existing debt obligations and do not consider potential refinancings of expiring debt obligations. |
(3) | Amounts represent capital lease obligations with initial terms in excess of one year. |
(4) | We are obligated under noncancelable operating leases primarily for a ship, offices, warehouses and motor vehicles. |
(5) | Under the Brilliance of the Seas lease agreement, we may be required to make a termination payment of approximately £126.0 million, or approximately $201.4 million based on the exchange rate at September 30, 2009, if the lease is canceled in 2012. This amount is included in the 1-3 years column. |
(6) | Amounts represent contractual obligations with initial terms in excess of one year. |
(7) | Amounts 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. |
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.
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Under the Brilliance of the Seas operating lease, we have agreed to indemnify the lessor to the extent its after-tax return is negatively impacted by unfavorable changes in corporate tax rates, capital allowance deductions and certain unfavorable determinations which may be made by United Kingdom tax authorities. These indemnifications could result in an increase in our lease payments. We are unable to estimate the maximum potential increase in our lease payments due to the various circumstances, timing or a combination of events that could trigger such indemnifications. We have been advised by the lessor that the United Kingdom tax authorities are disputing the lessors accounting treatment of the lease and that the parties are in discussions on the matter. If the characterization of the lease is ultimately determined to be incorrect, we could be required to indemnify the lessor under certain circumstances. The lessor has advised us that they believe their characterization of the lease is correct. Based on the foregoing and our review of available information, we do not believe an indemnification is probable. However, if the lessor loses its dispute and we are required to indemnify the lessor, we cannot at this time predict the impact that such an occurrence would have on our financial condition and results of operations.
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.
Other than the items described above, we are not party to any other off-balance sheet arrangements, including guarantee contracts, retained or contingent interest, certain derivative instruments and variable interest entities, that either have, or are reasonably likely to have, a current or future material effect on our financial position.
Funding Sources
As of September 30, 2009, our liquidity was $1.1 billion consisting of approximately $285.9 million in cash and cash equivalents and $825.0 million available under our unsecured revolving credit facility. In addition, we had a working capital deficit of $1.7 billion as of September 30, 2009 consistent with our working capital deficit of $1.7 billion as of December 31, 2008. Similar to others in our industry, we are able to operate with a substantial working capital deficit because (1) passenger receipts are primarily paid in advance with a relatively low-level of accounts receivable, (2) rapid turnover results in a limited investment in inventories and (3) voyage-related accounts payable usually become due after receipt of cash from related bookings. In addition, we finance the purchase of our ships through long-term debt instruments of which the current portion of these instruments increases our working capital deficit. The current portion of long-term debt increased from $471.9 million as of December 31, 2008 to $667.6 million as of September 30, 2009. We generate substantial cash flows from operations and our business model, along with our unsecured revolving credit facility, 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.
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We have significant contractual obligations of which the capital expenditures associated with our ship purchases and our debt maturities represent our largest funding needs. We have $3.0 billion in contractual obligations due during the twelve month period ending September 30, 2010 of which approximately $1.9 billion relates to the acquisition of the Oasis of the Seas and Celebrity Eclipse along with progress payments on other ship purchases. In addition, we have $11.4 billion in contractual obligations due beyond the twelve month period ending September 30, 2010 of which debt maturities and ship purchase obligations represent $6.6 billion and $2.7 billion, respectively.
We have three Solstice-class ships under construction in Germany as of September 30, 2009, all of which have either committed unsecured bank financing arrangements or an executed credit agreement and include a financing guarantee from HERMES (Euler Hermes Kreditrersicherungs AG), the official export credit agency of Germany for 95% of the financed amount. The terms of the financings are similar to those established for the Celebrity Equinox and are subject to customary funding conditions.
We also have two Oasis-class vessels under construction in Finland as of September 30, 2009. To finance the purchase of Oasis of the Seas, we have arranged an unsecured term loan of approximately $840.0 million plus 159.4 million which amortizes over 12 years with commercial banks providing 60% of the financing, each having the ability to opt-out after six years. Finnish Export Credit Ltd. provided funding for 40% of the financing. Approximately $420.0 million of the facility is at a fixed interest rate of approximately 5.41% (inclusive of the applicable margin), approximately $420.0 million of the facility is at a floating interest rate of LIBOR plus 3.00% and approximately 159.4 million of the facility is at a floating rate of EURIBOR plus 2.25%. We also have a commitment for a financing guarantee from Finnvera for 80% of the financed amount for Allure of the Seas and we believe we will obtain committed financing on acceptable terms for the ship before its delivery date.
We anticipate that our cash flows from operations, our current available credit facilities, and these financing arrangements will be adequate to meet our capital expenditures and debt repayments in the foreseeable future.
The current worldwide economic downturn has adversely impacted our cash flows from operations. In addition, the current state of the credit and capital markets may make it more challenging for us to secure new financing or to raise additional capital or to do so on acceptable terms. During 2009, our credit rating was lowered from BB with a negative outlook to BB- with a negative outlook by Standard and Poors. In addition, our corporate credit rating was lowered from Ba1 with a stable outlook to Ba2 with a negative outlook and our senior debt credit rating was lowered from Ba1 with a stable outlook to Ba3 with a negative outlook by Moodys. The cumulative impact to interest expense in 2009 as a result of these downgrades is not material to our results of operations. There is no assurance that our credit ratings will not be lowered further. The lowering of our credit ratings may increase our cost of financing and can make it more difficult for us to access the credit and capital markets.
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If any person other than A. Wilhelmsen AS. and Cruise Associates, our two principal shareholders, acquires ownership of more than 30% of our common stock and our two principal shareholders, in the aggregate, own less of our common stock than such person and do not collectively have the right to elect, or to designate for election, at least a majority of the board of directors, 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. If this were to occur, it could have an adverse impact on our liquidity and operations.
Debt Covenants
Our financing agreements contain covenants that require us, among other things, to maintain minimum net worth and a fixed charge coverage ratio and limit our net debt-to-capital ratio. Our minimum net worth and maximum net debt-to-capital calculations exclude the impact of accumulated other comprehensive income (loss) on total shareholders equity. 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 (fixed charges). We are currently in compliance with all debt covenants. As of September 30, 2009, our net worth was $7.3 billion compared with a minimum requirement of $5.2 billion, our net-debt-to-capital was 49.0% compared to a maximum limit of 62.5% and our fixed charge coverage ratio exceeded the minimum requirement of 1.25x as our fixed charges for the period were $0.00.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our growing international business operations subject us to an increasing level of foreign currency exchange risk. Movements in foreign currency exchange rates may affect the translated value of our earnings and cash flows associated with our international operations.
For a further discussion of our market risk, refer to Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our annual report on Form 10-K for the year ended December 31, 2008.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chairman and Chief Executive Officer and Executive Vice President and Chief Financial Officer, we carried out 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 quarterly report and concluded that those controls and procedures were effective.
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 Rules 13a-15 and 15d-15 during the quarter ended September 30, 2009 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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.
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PART II. OTHER INFORMATION
As reported in our annual report on Form 10-K for the year ended December 31, 2008, in January 2006, a purported class action lawsuit was filed in the United States District Court for the Southern District of New York alleging that we and certain other named cruise lines infringed rights in copyrighted works and other intellectual property by presenting performances on our cruise ships without securing the necessary licenses. In March 2009, the Court dismissed the complaint for failure to state a claim with sufficient particularity but granted leave to re-file. In April 2009 plaintiffs filed an amended complaint with substantially the same allegations as the original complaint except that it no longer seeks class action treatment and confines its allegations of infringement to plaintiffs copyrights of the theatrical production of Grease. The suit seeks payment of damages against all named defendants in an undetermined amount of not less than $10.0 million, as well as disgorgement of profits, a permanent injunction against future infringement and punitive and treble damages. We have filed a motion to dismiss the amended complaint or, alternatively, to sever and transfer the case to the United States District Court for the Southern District of Florida. We believe we have meritorious defenses to these claims which we will continue to vigorously pursue.
As reported in our annual report on Form 10-K for the year ended December 31, 2008, we have a lawsuit pending in the Circuit Court for Miami-Dade County, Florida against Rolls Royce, co-producer of the Mermaid pod-propulsion system on Millennium-class ships, for the recurring Mermaid pod failures. Alstom Power Conversion, the other co-producer of the pod-propulsion system, settled out of this suit in January 2006 for $38.0 million. In December 2008, Rolls Royce filed its answer to our lawsuit denying the allegations and asserting various affirmative defenses. Rolls Royce also counterclaimed that we engaged in a civil conspiracy with Alstom Power Conversion and its related parties (Alstom), that we tortiously interfered with Rolls Royces joint venture agreement with Alstom and that we caused Alstom to breach its fiduciary obligations owing to Rolls Royce under the joint venture agreement. Rolls Royce alleges damages against us in excess of $100.0 million for these claims. The case is set for trial in January 2010. We believe we have meritorious claims against Rolls Royce and meritorious defenses to the counterclaims, both of which we intend to vigorously pursue.
As reported in our annual report on Form 10-K for the year ended December 31, 2008, in July 2006, a purported class action lawsuit was filed in the United States District Court for the Central District of California alleging that we failed to timely pay crew wages and failed to pay proper crew overtime. The suit seeks payment of damages in an undetermined amount, including penalty wages under the United States Seamans Wage Act and equitable relief damages under the California Unfair Competition Law. In December 2006, the District Court granted our motion to dismiss the claim and held that it should be arbitrated pursuant to the arbitration provision in Royal Caribbeans collective bargaining agreement. In November 2008, the United States Ninth Circuit Court of Appeals affirmed the District Courts finding and plaintiffs subsequent request for rehearing and rehearing en banc was denied. In June 2009, the United States Supreme Court denied plaintiffs petition for writ of certiorari. We believe we have meritorious defenses to these claims which we will continue to vigorously pursue.
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In July 2009, three purported class actions were filed in United States District Court for the Eastern District of Michigan against Park West Galleries, Inc., doing business as Park West Gallery, PWG Florida, Inc., Fine Art Sales, Inc., Vista Fine Art LLC, doing business as Park West At Sea (together, Park West), other named and unnamed parties and Royal Caribbean Cruises Ltd. In two of the actions, other cruise line companies are also named as additional defendants, including in one of them, Celebrity Cruises Inc. The actions are being brought on behalf of purchasers of artwork at shipboard art auctions conducted by Park West on the named cruise lines. In August 2009, one of the actions was transferred to the United States District Court for the Western District of Washington and orders transferring the other two actions have been entered pending showings by defendants why they should not be transferred. The substance of the claims in all three actions is virtually the same. The suits allege that the artwork Park West sells is not what it represents to its customers and that Royal Caribbean Cruises Ltd., Celebrity Cruises Inc. and other named cruise lines are fraudulently concealing the activities of Park West, are being enriched unjustly from the sale of the artwork and are engaged in a conspiracy with Park West in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). The actions seek from the named defendants refund and restitution of all monies acquired from the sale of artwork at shipboard auctions, recovery for the amount of payments for the purchased artwork, damages on the RICO claims in an indeterminate amount, permitted statutory damages and unspecified equitable or injunctive relief. The suits also seek from certain non-Royal Caribbean parties additional statutory, breach of contract and breach of warranty damages in unspecified amounts. The suits are at their very early stages of litigation; however, we believe we have meritorious defenses to the claims against us and we intend to vigorously pursue them.
In September 2009, demands for arbitration were made under our collective bargaining agreement covering Celebrity Cruises crewmembers on behalf of twenty current and/or former Celebrity Cruises cabin stewards and others similarly situated (the September 2009 Demands). These demands contend that between 2001 and 2005 Celebrity Cruises improperly required the named cabin stewards to share guest gratuities with assistant cabin stewards. The demands seek payment of damages, including penalty wages, under the U.S. Seamans Wage Act of approximately $0.6 million for the named crewmembers and estimates damages in excess of $200.0 million, for the entire class of other similarly situated crewmembers. The September 2009 Demands are in addition to identical arbitration demands brought by the same counsel in April 2009 (the April 2009 Demands) on behalf of ten current and former Celebrity Cruises cabin stewards for themselves and others similarly situated. In October 2009, this same counsel brought on behalf of these same ten crew members and others similarly situated a purported class action in the United States District Court, Southern District of Florida, alleging that Celebrity Cruises waived its right to arbitrate the April 2009 demands (the October 2009 Action). The October 2009 Action makes the same allegations of improper sharing of gratuities as are made in the April 2009 Demands and seeks an indeterminate amount of damages, including penalty wages. The underlying allegations in the September 2009 Demands, the April 2009 Demands and the October 2009 Action are identical to those that were brought by this same counsel in a previously reported purported class action that had been filed against Celebrity Cruises in April 2005 in the United States District Court, Southern District of Florida (the April 2005 Action). The April 2005 Action was eventually dismissed and the matter was directed to arbitration. The arbitrator subsequently rejected plaintiffs request to bring the claim as a class arbitration, and we settled with the individual plaintiff. Consistent with the outcome of the April 2005 Action, we believe that class arbitration will be rejected in the September 2009 Arbitration Demand and the April 2009 Arbitration Demand. We also believe there is no basis on which to claim we waived our right to arbitrate the April 2009 Action. We also believe we have meritorious defenses to the underlying claims in these matters which we intend to vigorously pursue.
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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.
10.1 |
Amendment No. 1 to the Credit Agreement dated as of October 9, 2009 among Oasis of the Seas Inc., as borrower, Royal Caribbean Cruises Ltd. as guarantor, various financial institutions and BNP Paribas, as Administrative Agent. | |
31 |
Certifications required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934. | |
32 |
Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. |
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Pursuant to the requirements of Section 13 or 15(d) 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) | ||
/S/ BRIAN J. RICE | ||
Brian J. Rice | ||
Date: November 3, 2009 | Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
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Exhibit Index
Exhibit No. |
Description | |
10.1 | Amendment No. 1 to the Credit Agreement dated as of October 9, 2009 among Oasis of the Seas Inc., as borrower, Royal Caribbean Cruises Ltd. as guarantor, various financial institutions and BNP Paribas, as Administrative Agent. | |
31 | Certifications required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934. | |
32 | Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. |
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