QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 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
(Registrant’s 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 ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
There were 209,647,874 shares of common stock outstanding as of April 24, 2019.
Liabilities, Redeemable Noncontrolling Interest and Shareholders’ Equity
Current liabilities
Current portion of debt
$
1,646,324
$
1,646,841
Commercial paper
1,112,030
775,488
Current portion of operating lease liabilities
88,497
—
Accounts payable
497,180
488,212
Accrued interest
120,131
74,550
Accrued expenses and other liabilities
823,097
899,761
Derivative financial instruments
89,023
78,476
Customer deposits
3,729,661
3,148,837
Total current liabilities
8,105,943
7,112,165
Long-term debt
7,526,330
8,355,370
Long-term operating lease liabilities
708,371
—
Other long-term liabilities
560,690
583,254
Total liabilities
16,901,334
16,050,789
Commitments and contingencies (Note 11)
Redeemable noncontrolling interest
549,645
542,020
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; 236,380,544 and 235,847,683 shares issued, March 31, 2019 and December 31, 2018, respectively)
2,364
2,358
Paid-in capital
3,432,419
3,420,900
Retained earnings
10,366,612
10,263,282
Accumulated other comprehensive loss
(578,980
)
(627,734
)
Treasury stock (26,830,765 common shares at cost, at both March 31, 2019 and December 31, 2018)
(1,953,345
)
(1,953,345
)
Total shareholders’ equity
11,269,070
11,105,461
Total liabilities, redeemable noncontrolling interest and shareholders’ equity
$
28,720,049
$
27,698,270
The accompanying notes are an integral part of these consolidated financial statements.
As used in this Quarterly Report on Form 10-Q, the terms “Royal Caribbean,” the “Company,” “we,” “our” and “us” refer to Royal Caribbean Cruises Ltd. and, depending on the context, Royal Caribbean Cruises Ltd.’s consolidated subsidiaries and/or affiliates. The terms “Royal Caribbean International,” “Celebrity Cruises,” “Azamara Club Cruises” and "Silversea Cruises" refer to our wholly- or majority-owned global cruise brands. Throughout this report, we also refer to regional brands in which we hold an ownership interest, including “TUI Cruises” and “Pullmantur.” However, because these regional brands are unconsolidated investments, our operating results and other disclosures herein do not include these brands unless otherwise specified. In accordance with cruise vacation industry practice, the term “berths” is determined based on double occupancy per cabin even though many cabins can accommodate three or more passengers. This report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018, including the audited consolidated financial statements and related notes included therein.
This Quarterly Report on Form 10-Q also includes trademarks, trade names and service marks of other companies. Use or display by us of other parties’ trademarks, trade names or service marks is not intended to and does not imply a relationship with, or endorsement or sponsorship of us by, these other parties other than as described herein.
Note 1. General
Description of Business
We are a global cruise company. As of March 31, 2019, we control and operate four global cruise brands: Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises and Silversea Cruises (collectively, our "Global Brands").
We also own a 50% joint venture interest in the German brand TUI Cruises and a 49% interest in the Spanish brand Pullmantur (collectively, our "Partner Brands"). We account for our investments in our Partner Brands under the equity method of accounting.
Basis for Preparation of Consolidated Financial Statements
The unaudited consolidated financial statements are presented pursuant to the rules and regulations of the Securities and Exchange Commission. In our opinion, these statements include all adjustments necessary for a fair statement of the results of the interim periods reported herein. Adjustments consist only of normal recurring items, except for any items discussed in the notes below. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted as permitted by such rules and regulations. Estimates are required for the preparation of financial statements in accordance with these principles. Actual results could differ from these estimates. Refer to Note 2. Summary of Significant Accounting Policies in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of our significant accounting policies.
All significant intercompany accounts and transactions are eliminated in consolidation. We consolidate entities over which we have control, usually evidenced by a direct ownership interest of greater than 50%, and variable interest entities where we are determined to be the primary beneficiary. Refer to Note 7. Other Assets for further information regarding our variable interest entities. We consolidate the operating results of Silversea Cruises on a three-month reporting lag to allow for more timely preparation of our consolidated financial statements. No material events or other transactions involving Silversea Cruises have occurred from December 31, 2018 through March 31, 2019 that would require further disclosure or adjustment to our consolidated financial statements as of and for the quarter ended March 31, 2019. For affiliates we do not control but over which we have significant influence on financial and operating policies, usually evidenced by a direct ownership interest from 20% to 50%, the investment is accounted for using the equity method.
Note 2. Summary of Significant Accounting Policies
Adoption of Accounting Pronouncements
Leases
On January 1, 2019, we adopted the guidance codified in Accounting Standard Codification ("ASC") 842, Leases, ("ASC 842") using the modified retrospective approach and elected the optional transition method, which allows entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Upon adoption, we applied the guidance to all existing leases.
For leases with a term greater than 12 months, the new guidance requires the lease rights and obligations arising from the leasing arrangements, including operating leases, to be recognized as assets and liabilities on the balance sheet. Upon adoption of the new guidance, the most significant impact was the recognition of right-of-use assets and lease liabilities relating to operating leases in the amounts of $801.8 million and $820.5 million, respectively, reported within Operating lease right-of-use assets and Long-term operating lease liabilities, respectively, with the current portion of the liability reported within Current portion of operating lease liabilities, in our consolidated balance sheet as of January 1, 2019. Accounting for finance leases remained substantially unchanged and continues to be reported within Property and equipment, net and Long-term debt, with the current portion of the debt reported within Current portion of debt, in our consolidated balance sheets. There was no cumulative effect of applying the new standard and accordingly there was no adjustment to our retained earnings upon adoption. The comparative information presented has not been restated and continues to be reported under the accounting standards in effect for those periods. For further information on leases, refer to Note 9. Leases.
This guidance did not have a material impact to our consolidated statements of comprehensive income (loss), consolidated statements of cash flows and our debt-covenants calculations under our current agreements.
Note 3. Business Combination
On July 31, 2018, we acquired a 66.7% equity stake in Silversea Cruise Holding Ltd. ("Silversea Cruises"), an ultra-luxury and expedition cruise line with nine ships, from Silversea Cruises Group Ltd. ("SCG"). Silversea Cruises enhances our presence in the ultra-luxury and expedition markets and provides us with an opportunity to drive long-term capacity growth in these markets.
The purchase price consisted of $1.02 billion in cash, net of assumed liabilities, and contingent consideration that can range from zero up to a maximum of approximately 472,000 shares of our common stock, and is payable upon achievement of certain 2019-2020 performance metrics by Silversea Cruises. The fair value of the contingent consideration at the acquisition date was $44.0 million and is recorded within Other long-term liabilities in our consolidated balance sheets. Changes in the fair value of the contingent consideration are recorded in our results of operations, if any, in the period of the change. Refer to Note 14. Fair Value Measurements and Derivative Instruments for further information on the valuation of the contingent consideration.
To finance a portion of the purchase price, we drew in full on a $700 million unsecured credit agreement and the remainder of the transaction consideration was financed through the use of our revolving credit facilities.
We have accounted for this transaction under the provisions of ASC 805, Business Combinations. The purchase price for the Silversea Cruises acquisition was allocated based on estimates of the fair value of assets acquired and liabilities assumed at the acquisition date, with the excess allocated to goodwill. Goodwill is not deductible for tax purposes and consisted primarily of the opportunity to expand our cruise operations in strategic growth areas.
For reporting purposes, we include Silversea Cruises’ results of operations on a three-month reporting lag from October 1, 2018 through December 31, 2018. We have included Silversea Cruises' balance sheet as of December 31, 2018 in our consolidated balance sheet as of March 31, 2019. Refer to Note 1. General for further information on this three-month reporting lag.
Our purchase price allocation was final as of March 31, 2019. There were no measurement period adjustments recorded during the quarter ended March 31, 2019.
Pro-forma financial results relating to the Silversea Cruises acquisition are not presented, as this acquisition was not material to our consolidated results of operations.
Note 4. Intangible Assets
Intangible assets consist of finite and indefinite life assets and are reported within Other assets in our consolidated balance sheets.
The following is a summary of our intangible assets as of March 31, 2019 and December 31, 2018 (in thousands):
March 31, 2019
Gross Carrying Value
Accumulated Amortization
Net Carrying Value
Finite-life intangible assets:
Customer relationships
$
97,400
$
2,706
$
94,694
Galapagos operating license
47,669
4,553
43,116
Other finite-life intangible assets
11,560
2,408
9,152
Total finite-life intangible assets
156,629
9,667
146,962
Indefinite-life intangible assets
351,725
—
351,725
Total intangible assets, net
$
508,354
$
9,667
$
498,687
December 31, 2018
Gross Carrying Value
Accumulated Amortization
Net Carrying Value
Finite-life intangible assets:
Customer relationships
$
97,400
$
1,082
$
96,318
Galapagos operating license
47,669
4,206
43,463
Other finite-life intangible assets
11,560
963
10,597
Total finite-life intangible assets
156,629
6,251
150,378
Indefinite-life intangible assets
351,725
—
351,725
Total intangible assets, net
$
508,354
$
6,251
$
502,103
Amortization expense for finite-life intangible assets was immaterial for the quarters ended March 31, 2019 and March 31, 2018.
The estimated future amortization for finite-life intangible assets for each of the next five years is as follows (in thousands):
Year
Remainder of 2019
$
10,469
2020
$
12,995
2021
$
8,179
2022
$
8,179
2023
$
8,179
2024
$
8,179
Note 5. Revenues
Revenue Recognition
Revenues are measured based on consideration specified in our contracts with customers and are recognized as the related performance obligations are satisfied.
The majority of our revenues are derived from passenger cruise contracts which are reported within Passenger ticket revenues in our consolidated statements of comprehensive income (loss). Our performance obligation under these contracts is to provide a cruise vacation in exchange for the ticket price. We satisfy this performance obligation and recognize revenue over the duration of each cruise, which generally range from two to 25 nights.
Passenger ticket revenues include charges to our guests for port costs that vary with passenger head counts. These type of port costs, along with port costs that do not vary by passenger head counts, are included in our operating expenses. The amounts of port costs charged to our guests and included within Passenger ticket revenues on a gross basis were $152.0 million and $136.7 million for the quarters ended March 31, 2019 and 2018, respectively.
Our total revenues also include onboard and other revenues, which consist primarily of revenues from the sale of goods and services onboard our ships that are not included in passenger ticket prices. We receive payment before or concurrently with the transfer of these goods and services to passengers during a cruise and recognize revenue at the time of transfer over the duration of the related cruise.
Disaggregated Revenues
The following table disaggregates our total revenues by geographic regions where we provide cruise itineraries (in thousands):
Quarter Ended March 31,
2019
2018
Revenues by itinerary
North America(1)
$
1,681,058
$
1,347,260
Asia/Pacific(2)
490,075
532,979
Europe(3)
7,982
—
Other regions(4)
162,505
77,185
Total revenues by itinerary
2,341,620
1,957,424
Other revenues(5)
98,147
70,332
Total revenues
$
2,439,767
$
2,027,756
(1)
Includes the United States, Canada, Mexico and the Caribbean.
(2)
Includes Southeast Asia (e.g., Singapore, Thailand and the Philippines), East Asia (e.g., China and Japan), South Asia (e.g., India and Pakistan) and Oceania (e.g., Australia and Fiji Islands) regions.
(3)
Includes European countries (e.g., Nordics, Germany, France, Italy, Spain and the United Kingdom).
(4)
Includes seasonality impacted itineraries primarily in South and Latin American countries.
(5)
Includes revenues primarily related to cancellation fees, vacation protection insurance, pre- and post-cruise tours and fees for operating certain port facilities. Amounts also include revenues related to our bareboat charter, procurement and management related services we perform on behalf of our unconsolidated affiliates. Refer to Note 7. Other Assets for more information on our unconsolidated affiliates.
Passenger ticket revenues are attributed to geographic areas based on where the reservation originates. For the quarters ended March 31, 2019 and 2018, our guests were sourced from the following areas:
Quarter Ended March 31,
2019
2018
Passenger ticket revenues:
United States
66
%
60
%
Australia
8
%
13
%
All other countries (1)
26
%
27
%
(1)
No other individual country's revenue exceeded 10% for the quarters ended March 31, 2019 and 2018.
Customer Deposits and Contract Liabilities
Our payment terms generally require an upfront deposit to confirm a reservation, with the balance due prior to the cruise. Deposits received on sales of passenger cruises are initially recorded as Customer deposits in our consolidated balance sheets and subsequently recognized as passenger ticket revenues during the duration of the cruise. ASC 606, Revenues from Contracts with Customers, defines a “contract liability” as an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration from the customer. We do not consider customer deposits to be a contract liability until the customer no longer retains the unilateral right, resulting from the passage of time, to cancel such customer's reservation and receive a full refund. Customer deposits presented in our consolidated balance sheets include contract liabilities of $2.2 billion and $1.9 billion as of March 31, 2019 and December 31, 2018, respectively. Substantially all of our contract liabilities as of December 31, 2018 were recognized and reported within Total revenues in our consolidated statement of comprehensive income (loss) for the quarter ended March 31, 2019.
Although we generally require full payment from our customers prior to their cruise, we grant credit terms to a relatively small portion of our revenue sourced in select markets outside of the United States. As a result, we have outstanding receivables from passenger cruise contracts in those markets. We also have receivables from credit card merchants for cruise ticket purchases and goods and services sold to guests during cruises that are collected before, during or shortly after the cruise voyage. In addition, we have receivables due from concessionaires onboard our vessels. These receivables are included within Trade and other receivables, net in our consolidated balance sheets.
We have contract assets that are conditional rights to consideration for satisfying the construction services performance obligations under a service concession arrangement. As of March 31, 2019 and December 31, 2018, our contract assets were $57.2 million and $57.8 million, respectively, and were included within Other assets in our consolidated balance sheets. Given the short duration of our cruises and our collection terms, we do not have any other significant contract assets.
Assets Recognized from the Costs to Obtain a Contract with a Customer
Prepaid travel agent commissions are an incremental cost of obtaining contracts with customers that we recognize as an asset and include within Prepaid expenses and other assets in our consolidated balance sheets. Prepaid travel agent commissions were $182.9 million and $153.5 million as of March 31, 2019 and December 31, 2018, respectively. Substantially all of our prepaid travel agent commissions at December 31, 2018 were expensed and reported within Commissions, transportation and other in our consolidated statements of comprehensive income (loss) for the quarter ended March 31, 2019.
Note 6. Earnings Per Share
A reconciliation between basic and diluted earnings per share is as follows (in thousands, except per share data):
Quarter Ended March 31,
2019
2018
Net Income attributable to Royal Caribbean Cruises Ltd. for basic and diluted earnings per share
$
249,681
$
218,653
Weighted-average common shares outstanding
209,322
212,610
Dilutive effect of stock-based awards
552
992
Diluted weighted-average shares outstanding
209,874
213,602
Basic earnings per share
$
1.19
$
1.03
Diluted earnings per share
$
1.19
$
1.02
There were no antidilutive shares for the quarters ended March 31, 2019 and 2018.
Note 7. Other Assets
A Variable Interest Entity (“VIE”) is an entity in which the equity investors have not provided enough equity to finance the entity’s activities or the equity investors: (1) cannot directly or indirectly make decisions about the entity’s activities through their voting rights or similar rights; (2) do not have the obligation to absorb the expected losses of the entity; (3) do not have the right to receive the expected residual returns of the entity; or (4) have voting rights that are not proportionate to their economic interests and the entity’s activities involve or are conducted on behalf of an investor with a disproportionately small voting interest.
We have determined that TUI Cruises GmbH, our 50%-owned joint venture, which operates the brand TUI Cruises, is a VIE. As of March 31, 2019, the net book value of our investment in TUI Cruises was $537.5 million, primarily consisting of $370.4 million in equity and a loan of €146.6 million, or approximately $164.6 million based on the exchange rate at March 31, 2019. As of December 31, 2018, the net book value of our investment in TUI Cruises was $578.1 million, primarily consisting of $403.0 million in equity and a loan of €150.6 million, or approximately $172.2 million based on the exchange rate at December 31, 2018. The loan, which was made in connection with the sale of Splendour of the Seas in April 2016, accrues interest at a rate of 6.25% per annum and is payable over 10 years. This loan is 50% guaranteed by TUI AG, our joint venture partner in TUI Cruises, and is secured by a first priority mortgage on the ship. The majority of these amounts were included within Other assets in our consolidated balance sheets.
In addition, we and TUI AG have each guaranteed the repayment by TUI Cruises of 50% of a bank loan. As of March 31, 2019, the outstanding principal amount of the loan was €34.4 million, or approximately $38.6 million based on the exchange rate at March 31, 2019. The loan amortizes quarterly and is currently secured by a first mortgage on Mein Schiff Herz. Based on current
facts and circumstances, we do not believe potential obligations under our guarantee of this bank loan are probable. In addition to our guarantee of the bank loan, TUI Cruises has various ship construction and financing agreements which include certain restrictions on each of our and TUI AG’s ability to reduce our current ownership interest in TUI Cruises below 37.55% through May 2031.
Our investment amount, outstanding term loan and the potential obligations under the bank loan guarantee are substantially our maximum exposure to loss in connection with our investment in TUI Cruises. We have determined that we are not the primary beneficiary of TUI Cruises. We believe that the power to direct the activities that most significantly impact TUI Cruises’ economic performance are shared between ourselves and TUI AG. All the significant operating and financial decisions of TUI Cruises require the consent of both parties, which we believe creates shared power over TUI Cruises. Accordingly, we do not consolidate this entity and account for this investment under the equity method of accounting.
We have determined that Pullmantur Holdings S.L. ("Pullmantur Holdings"), in which we have a 49% noncontrolling interest and Springwater Capital LLC has a 51% interest, is a VIE for which we are not the primary beneficiary, as we do not have the power to direct the activities that most significantly impact the entity's economic performance. Accordingly, we do not consolidate this entity and we account for this investment under the equity method of accounting. As of March 31, 2019 and December 31, 2018, our maximum exposure to loss in Pullmantur Holdings was $63.7 million and $58.5 million, respectively, consisting of loans and other receivables. These amounts were included within Trade and other receivables, net and Other assets in our consolidated balance sheets.
We have provided a non-revolving working capital facility to a Pullmantur Holdings subsidiary in the amount of up to €15.0 million or approximately $16.8 million based on the exchange rate at March 31, 2019. Proceeds of the facility, which were available to be drawn through December 2018 accrue interest at an interest rate of 6.5% per annum and are payable through 2022. An affiliate of Springwater Capital LLC has guaranteed repayment of 51% of the outstanding amounts under the facility. As of March 31, 2019, €14.0 million, or approximately $15.7 million, based on the exchange rate at March 31, 2019, was outstanding under this facility. As of December 31, 2018, €14.0 million, or approximately $16.0 million, based on the exchange rate at December 31, 2018, was outstanding under this facility.
We have determined that Grand Bahama Shipyard Ltd. (“Grand Bahama”), a ship repair and maintenance facility in which we have a 40% noncontrolling interest, is a VIE. This facility serves cruise and cargo ships, oil and gas tankers and offshore units. We utilize this facility, among other ship repair facilities, for our regularly scheduled drydocks and certain emergency repairs as may be required. During the quarters ended March 31, 2019 and 2018, we made payments of $40.3 million and $22.3 million, respectively, to Grand Bahama for ship repair and maintenance services. We have determined that we are not the primary beneficiary of this facility as we do not have the power to direct the activities that most significantly impact the facility’s economic performance. Accordingly, we do not consolidate this entity and we account for this investment under the equity method of accounting. As of March 31, 2019, the net book value of our investment in Grand Bahama was $64.1 million, consisting of $51.2 million in equity and a loan of $12.9 million. As of December 31, 2018, the net book value of our investment in Grand Bahama was $56.1 million, consisting of $41.4 million in equity and a loan of $14.6 million. These amounts represent our maximum exposure to loss related to our investment in Grand Bahama. Our loan to Grand Bahama matures in March 2025 and bears interest at the lower of (i) LIBOR plus 3.50% and (ii) 5.50%. Interest payable on the loan is due on a semi-annual basis. During the quarters ended March 31, 2019 and 2018, we received principal and interest payments of $6.6 million and $3.0 million, respectively. The loan balance is included within Other assets in our consolidated balance sheets. The loan is currently accruing interest under the effective yield method.
We monitor credit risk associated with the loan through our participation on Grand Bahama’s board of directors along with our review of Grand Bahama’s financial statements and projected cash flows. Based on this review, we believe the risk of loss associated with the outstanding loan is not probable as of March 31, 2019.
In March 2018, we and Ctrip.com International Ltd. ("Ctrip") announced the decision to end the Skysea Holding International Ltd. ("Skysea Holding") venture in which we have a 36% ownership interest. As a result, we reviewed the recoverability of our investment in Skysea Holding and determined that our investment, debt facility and other receivables due from the brand were impaired and recognized an impairment charge of $23.3 million, which was included within Other expense in our consolidated statement of comprehensive income (loss) for the quarter ended March 31, 2018. The charge reflected a full impairment of our investment in Skysea Holding and other receivables due to us and reduced the debt facility and the related accrued interest due to us from Skysea Holding to its net realizable value. In December 2018, the Golden Era, the ship operated by SkySea Cruises, and owned by a wholly-owned subsidiary of Skysea Holding, was sold to an affiliate of TUI AG. Proceeds from the sale were distributed to Ctrip and us, which eliminated our net receivable balance due from Skysea Holding, resulting in no further impairment charges. As of March 31, 2019 and December 31, 2018, we do not have any material exposures to loss related to our investment in Skysea Holding.
The following tables set forth information regarding our investments accounted for under the equity method of accounting, including the entities discussed above (in thousands):
Quarter Ended March 31,
2019
2018
Share of equity income from investments
$
33,694
$
28,752
Dividends received (1)
$
42,435
$
37,918
(1)
For the quarter ended March 31, 2019, amount includes a €50.0 million dividend from TUI Cruises, net of tax withholdings.
As of March 31, 2019
As of December 31, 2018
Total notes receivable due from equity investments
$
193,351
$
201,979
Less-current portion(1)
19,681
19,075
Long-term portion(2)
$
173,670
$
182,904
(1)
Included within Trade and other receivables, net in our consolidated balance sheets.
(2)
Included within Other assets in our consolidated balance sheets.
We also provide ship management services to TUI Cruises GmbH, Pullmantur Holdings and Skysea Holding (which ceased cruising operations in September 2018). Additionally, we bareboat charter to Pullmantur Holdings the vessels currently operated by its brands, which were retained by us following the sale of our 51% interest in Pullmantur Holdings. We recorded the following as it relates to these services in our operating results within our consolidated statements of comprehensive income (loss) (in thousands):
Quarter Ended March 31,
2019
2018
Revenues
$
11,882
$
14,073
Expenses
$
974
$
3,638
Note 8. Debt
In June 2018, we established a commercial paper program pursuant to which we may issue short-term unsecured notes from time to time in an aggregate amount of up to $1.2 billion. The interest rate for the commercial paper notes varies based on duration, market conditions and our credit ratings. The maturities of the commercial paper notes can vary, but cannot exceed 397 days from the date of issuance. We use the proceeds from our commercial paper notes for general corporate purposes. The commercial paper issued is backstopped by our revolving credit facilities. As of March 31, 2019, we had $1.1 billion of commercial paper notes outstanding with a weighted average interest rate of 3.04% and a weighted average maturity of approximately 34 days. As of December 31, 2018, we had $777.0 million of commercial paper notes outstanding with a weighted average interest rate of 3.19% and a weighted average maturity of approximately 23 days.
In April 2019, we amended our $1.4 billion unsecured revolving credit facility due in 2020 to extend the termination date through April 2024 and increase the facility size to $1.7 billion. The interest rate and facility fee vary with our senior debt rating and are currently set at LIBOR plus 1.0% per annum and 0.125% per annum, respectively. These amendments did not result in the extinguishment of debt.
In April 2019, we entered into and drew in full on an unsecured three-year term loan agreement in the amount of $1.0 billion. The loan accrues interest at a floating rate of LIBOR plus an applicable margin, which varies with our senior debt rating, and is currently 1.075% per annum. Proceeds of this loan were used to repay the $700 million 364-day loan due July 2019 related to the acquisition of Silversea Cruises and the remaining balance of the unsecured term loan originally incurred in 2010 to purchase Allure of the Seas. The repayment of these loans resulted in a total loss on the extinguishment of debt of approximately $6.5 million, which will be recognized in the statement of comprehensive income (loss) subsequent to March 31, 2019.
In April 2019, we took delivery of Spectrum of the Seas. To finance the purchase, we borrowed $908.0 million under a previously committed unsecured term loan which is 95% guaranteed by Euler Hermes Deutschland AG, the official export credit agency of Germany. The loan amortizes semi-annually over 12 years and bears interest at a fixed rate of 3.45% per annum.
Our operating leases primarily relate to preferred berthing arrangements, real estate and shipboard equipment and are included within Operating lease right-of-use assets, and Long-term operating lease liabilities with the current portion of the liability included within Current portion of operating lease liabilities in our consolidated balance sheet as of March 31, 2019. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term. Refer to Note 2. Summary of Significant Accounting Policies, for further information on the adoption of ASC 842.
Our finance leases primarily relate to two ships, Silver Whisper and Silver Explorer, operated by Silversea Cruises. Finance leases are included within Property and equipment, net and Long-term debt, with the current portion of the debt reported within Current portion of debt, in our consolidated balance sheets. The finance lease for Silver Whisper will expire in 2022, subject to an option to purchase the ship, and the finance lease for Silver Explorer will expire in 2021, subject to an option to extend the lease for up to an additional six years.
For some of our real estate leases and berthing agreements, we do have the option to extend our current lease term. For those lease agreements with renewal options, the renewal periods for real estate leases range from one to 10 years and the renewal periods for berthing agreements range from one to 20 years. Generally, we do not include renewal options as a component of our present value calculation for berthing agreements. However, for certain real estate leases, we include them. Additionally, we do have a residual value guarantee associated with our lease of a terminal at PortMiami in Miami, Florida that approximates a percentage of cost of the asset as of the inception of the lease. We consider the possibility of incurring costs associated with the residual value guarantee to be remote.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of lease payments. We estimate our incremental borrowing rates based on LIBOR and U.S. Treasury note rates corresponding to lease terms increased by the Company’s credit risk spread and reduced by the estimated impact of collateral. We used the incremental borrowing rate as of the adoption date for operating leases that commenced prior to that date. In addition, we have lease agreements with lease and non-lease components, which are generally accounted for separately. However, for berthing agreements, we account for the lease and non-lease components as a single lease component.
Additionally, we bareboat charter to Pullmantur Holdings the vessels currently operated by its brands, which were retained by us following the sale of our 51% interest in Pullmantur Holdings in 2016. We account for the bareboat charters of these vessels as operating leases for which we are the lessor. The remaining payments and term of these leases are immaterial to our consolidated financial statements.
Supplemental balance sheet information for leases was as follows (in thousands):
The components of lease expense were as follows (in thousands):
Consolidated Statement of Comprehensive Income (Loss) Classification
Quarter Ended March 31, 2019
Lease costs:
Operating lease costs
Commission, transportation and other
$
19,056
Operating lease costs
Other operating expenses
6,931
Operating lease costs
Marketing, selling and administrative expenses
5,679
Financial lease costs:
Amortization of right-of-use-assets
Depreciation and amortization expenses
3,195
Interest on lease liabilities
Interest expense, net of interest capitalized
596
Total lease costs
$
35,457
In addition, certain of our berth agreements include variable lease costs based on the number of passengers berthed. During the quarter ended March 31, 2019, we had $34.3 million of variable lease costs recorded within Commission, transportation and other in our consolidated statement of comprehensive income (loss).
Weighted average of the remaining lease terms and weighted average discount rates are as follows:
As of March 31, 2019
Weighted average of the remaining lease term
Operating leases
10.8 years
Finance leases
3.6 years
Weighted average discount rate
Operating leases
4.6
%
Finance leases
3.8
%
Supplemental cash flow information related to leases is as follows (in thousands):
Quarter Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
31,981
Operating cash flows from finance leases
$
596
Financing cash flows from finance leases
$
3,606
As of March 31, 2019, maturities related to lease liabilities were as follows (in thousands):
Year
Operating Leases
Finance Leases
Remainder of 2019
$
95,927
$
32,468
2020
126,959
36,334
2021
114,278
39,139
2022
107,885
16,097
2023
105,846
5,089
Thereafter
522,270
10,413
Total lease payments
1,073,165
139,540
Less: Interest
(276,297
)
(12,345
)
Present value of lease liabilities
$
796,868
$
127,195
Operating lease payments include $41.0 million related to options to extend lease terms that are reasonably certain of being exercised.
Under ASC 840, Leases, future minimum lease payments under noncancelable operating leases as of December 31, 2018 were as follows (in thousands):
Year
2019
$
67,682
2020
64,237
2021
56,142
2022
52,759
2023
52,522
Thereafter
383,974
$
677,316
Note 10. Redeemable Noncontrolling Interest
In connection with the acquisition of Silversea Cruises, we recorded a redeemable noncontrolling interest of $537.8 million due to the put options held by SCG. The put options may require us to purchase SCG's remaining interest, or 33.3% of Silversea Cruises, upon the occurrence or nonoccurrence of certain future events that are not solely within our control. At the acquisition date, the estimated fair value of the redeemable noncontrolling interest was based on 33.3% of Silversea Cruises' equity value, which was determined based on the transaction price paid for 66.7% of Silversea Cruises. As of March 31, 2019, SCG's interest is presented as Redeemable noncontrolling interest and is classified outside of shareholders' equity in our consolidated balance sheets. Additionally, the noncontrolling interest's share in the net earnings (loss) and contractual accretion requirements associated with the put options are included in Net Income attributable to noncontrolling interest in our consolidated statements of comprehensive income (loss).
The following table presents changes in the redeemable noncontrolling interest as of March 31, 2019 (in thousands):
Beginning balance January 1, 2019
$
542,020
Net income attributable to noncontrolling interest, including the contractual accretion of the put options
Our future capital commitments consist primarily of new ship orders. As of March 31, 2019, we had two Quantum-class ships, one Oasis-class ship and two ships of a new generation of ships, known as our Icon-class, on order for our Royal Caribbean International brand with an aggregate capacity of approximately 25,300 berths. As of March 31, 2019, we have three Edge-class ships and a ship designed for the Galapagos Islands on order for our Celebrity Cruises brand with an aggregate capacity of approximately 9,400 berths. Additionally, as of March 31, 2019, we have three ships on order for our Silversea Cruises brand with an aggregate capacity of approximately 1,200 berths.
In September 2018, Silversea Cruises signed a memorandum of understanding with Meyer Werft (the "MOU") to build two ships of a new generation of ships. The ships are expected to have an aggregate capacity of approximately 1,200 berths and are expected to enter service in 2022 and 2023, respectively. The MOU with Meyer Werft was contingent upon the completion of final documentation, which was completed in April 2019.
In February 2019, we entered into an agreement with Chantiers de l’Atlantique to build the sixth Oasis-class ship for Royal Caribbean International. The ship is expected to have an aggregate capacity of approximately 5,700 berths and is expected to enter service in the fourth quarter of 2023. The order with Chantiers de l’Atlantique is contingent upon completion of conditions precedent and financing, which is expected to be completed in 2019.
In April 2019, we entered into an agreement with Chantiers de l’Atlantique to build the fifth Edge-class ship for Celebrity Cruises. The ship is expected to have an aggregate capacity of approximately 3,200 berths and is expected to enter service in the fourth quarter of 2024. The order with Chantiers de l’Atlantique is contingent upon completion of conditions precedent and financing.
As of March 31, 2019, the aggregate cost of our ships on order, not including any ships on order by our Partner Brands, and the two ships under the MOU for Silversea Cruises and the sixth Oasis-class ship for Royal Caribbean International that remain contingent upon the items discussed above, was $11.4 billion, of which we had deposited $667.8 million. Approximately 54.0% of the aggregate cost was exposed to fluctuations in the Euro exchange rate at March 31, 2019. Refer to Note 14. Fair Value Measurements and Derivative Instruments for further information.
Litigation
We are routinely involved in claims typical within the cruise vacation industry. The majority of these claims are covered by insurance. We believe the outcome of such claims, net of expected insurance recoveries, will not have a material adverse impact on our financial condition or results of operations and cash flows.
Other
If any person acquires ownership of more than 50% of our common stock or, subject to certain exceptions, during any 24-month period, a majority of our board of directors is no longer comprised of individuals who were members of our board of directors on the first day of such period, we may be obligated to prepay indebtedness outstanding under our credit facilities, which we may be unable to replace on similar terms. Our public debt securities also contain change of control provisions that would be triggered by a third-party acquisition of greater than 50% of our common stock coupled with a ratings downgrade. If this were to occur, it would have an adverse impact on our liquidity and operations.
Note 12. Shareholders’ Equity
During the first quarter of 2019, we declared a cash dividend on our common stock of $0.70 per share, which was paid in April 2019. During the first quarter of 2019, we also paid a cash dividend on our common stock of $0.70 per share, which was declared during the fourth quarter of 2018.
During the first quarter of 2018, we declared a cash dividend on our common stock of $0.60 per share, which was paid in April 2018. During the first quarter of 2018, we also paid a cash dividend on our common stock of $0.60 per share, which was declared during the fourth quarter of 2017.
In May 2018, our board of directors authorized a 24-month common stock repurchase program for up to $1.0 billion. The timing and number of shares to be repurchased will depend on a variety of factors, including price and market conditions. Repurchases under the program may be made at management's discretion from time to time on the open market or through privately negotiated transactions. During the first quarter of 2019, there were no common stock repurchases under this program. During the year ended December 31, 2018, we repurchased 2.8 million shares of our common stock under this program, for a total of
$300.0 million, in open market transactions. As of March 31, 2019, we have approximately $700.0 million that remains available for future stock repurchase transactions under our Board authorized program.
Note 13. Changes in Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in accumulated other comprehensive income (loss) by component for the quarters ended March 31, 2019 and 2018 (in thousands):
Accumulated Other Comprehensive Income (Loss) for the Quarter Ended March 31, 2019
Accumulated Other Comprehensive Income (Loss) for the Quarter Ended March 31, 2018
Changes related to cash flow derivative hedges
Changes in defined benefit plans
Foreign currency translation adjustments
Accumulated other comprehensive loss
Changes related to cash flow derivative hedges
Changes in defined benefit plans
Foreign currency translation adjustments
Accumulated other comprehensive loss
Accumulated comprehensive loss at beginning of the year
$
(537,216
)
$
(26,023
)
$
(64,495
)
$
(627,734
)
$
(250,355
)
$
(33,666
)
$
(50,244
)
$
(334,265
)
Other comprehensive income (loss) before reclassifications
61,565
(841
)
564
61,288
127,616
7,417
1,160
136,193
Amounts reclassified from accumulated other comprehensive loss
(12,722
)
188
—
(12,534
)
14,914
343
—
15,257
Net current-period other comprehensive income (loss)
48,843
(653
)
564
48,754
142,530
7,760
1,160
151,450
Ending balance
$
(488,373
)
$
(26,676
)
$
(63,931
)
$
(578,980
)
$
(107,825
)
$
(25,906
)
$
(49,084
)
$
(182,815
)
The following table presents reclassifications out of accumulated other comprehensive income (loss) for the quarters ended March 31, 2019 and 2018 (in thousands):
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
Details About Accumulated Other Comprehensive Income (Loss) Components
Quarter Ended March 31, 2019
Quarter Ended March 31, 2018
Affected Line Item in Statements of Comprehensive Income (Loss)
Note 14. Fair Value Measurements and Derivative Instruments
Fair Value Measurements
The estimated fair value of our financial instruments that are not measured at fair value, categorized based upon the fair value hierarchy, are as follows (in thousands):
Fair Value Measurements at March 31, 2019 Using
Fair Value Measurements at December 31, 2018 Using
Description
Total Carrying Amount
Total Fair Value
Level 1(1)
Level 2(2)
Level 3(3)
Total Carrying Amount
Total Fair Value
Level 1(1)
Level 2(2)
Level 3(3)
Assets:
Cash and cash equivalents(4)
$
248,197
$
248,197
$
248,197
$
—
$
—
$
287,852
$
287,852
$
287,852
$
—
$
—
Total Assets
$
248,197
$
248,197
$
248,197
$
—
$
—
$
287,852
$
287,852
$
287,852
$
—
$
—
Liabilities:
Long-term debt (including current portion of debt)(5)
$
9,045,459
$
9,581,920
$
—
$
9,581,920
$
—
$
9,871,267
$
10,244,214
$
—
$
10,244,214
$
—
Total Liabilities
$
9,045,459
$
9,581,920
$
—
$
9,581,920
$
—
$
9,871,267
$
10,244,214
$
—
$
10,244,214
$
—
(1) Inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Valuation of these items does not entail a significant amount of judgment.
(2) Inputs other than quoted prices included within Level 1 that are observable for the liability, either directly or indirectly. For unsecured revolving credit facilities and unsecured term loans, fair value is determined utilizing the income valuation approach. This valuation model takes into account the contract terms of our debt such as the debt maturity and the interest rate on the debt. The valuation model also takes into account the creditworthiness of the Company.
(3) Inputs that are unobservable. The Company did not use any Level 3 inputs as of March 31, 2019 and December 31, 2018.
(4) Consists of cash and marketable securities with original maturities of less than 90 days.
(5) Consists of unsecured revolving credit facilities, senior notes, senior debentures and term loans. These amounts do not include our capital lease obligations or commercial paper.
The carrying amounts of accounts receivable, accounts payable, accrued interest, accrued expenses and commercial paper approximate fair value at March 31, 2019 and December 31, 2018.
Assets and liabilities that are recorded at fair value have been categorized based upon the fair value hierarchy. The following table presents information about the Company’s financial instruments recorded at fair value on a recurring basis (in thousands):
Fair Value Measurements at March 31, 2019 Using
Fair Value Measurements at December 31, 2018 Using
Description
Total
Level 1(1)
Level 2(2)
Level 3(3)
Total
Level 1(1)
Level 2(2)
Level 3(3)
Assets:
Derivative financial instruments(4)
$
119,082
$
—
$
119,082
$
—
$
65,297
$
—
$
65,297
$
—
Total Assets
$
119,082
$
—
$
119,082
$
—
$
65,297
$
—
$
65,297
$
—
Liabilities:
Derivative financial instruments(5)
$
210,426
$
—
$
210,426
$
—
$
201,812
$
—
$
201,812
$
—
Contingent consideration (6)
44,000
—
—
44,000
44,000
—
—
44,000
Total Liabilities
$
254,426
$
—
$
210,426
$
44,000
$
245,812
$
—
$
201,812
$
44,000
(1)
Inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Valuation of these items does not entail a significant amount of judgment.
(2)
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. For foreign currency forward contracts, interest rate swaps and fuel swaps, fair value is derived using valuation models that utilize the income valuation approach. These valuation models take into account the contract terms, such as maturity, as well as other inputs, such as foreign exchange rates and curves, fuel types, fuel curves and interest rate yield curves. Derivative instrument fair values take into account the creditworthiness of the counterparty and the Company.
(3)
Inputs that are unobservable.
(4)
Consists of foreign currency forward contracts, interest rate swaps and fuel swaps. Refer to the “Fair Value of Derivative Instruments” table for breakdown by instrument type.
(5)
Consists of foreign currency forward contracts, interest rate swaps and fuel swaps. Refer to the “Fair Value of Derivative Instruments” table for breakdown by instrument type.
(6)
The contingent consideration related to the Silversea Cruises acquisition was estimated by applying a Monte-Carlo simulation method using our closing stock price along with significant inputs not observable in the market, including the probability of achieving the milestones and estimated future operating results. The Monte-Carlo simulation is a generally accepted statistical technique used to generate a defined number of valuation paths in order to develop a reasonable estimate of fair value. Refer to Note 3. Business Combination for further information on the Silversea Cruises acquisition.
The reported fair values are based on a variety of factors and assumptions. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of March 31, 2019 or December 31, 2018, or that will be realized in the future, and do not include expenses that could be incurred in an actual sale or settlement.
We have master International Swaps and Derivatives Association (“ISDA”) agreements in place with our derivative instrument counterparties. These ISDA agreements generally provide for final close out netting with our counterparties for all positions in the case of default or termination of the ISDA agreement. We have determined that our ISDA agreements provide us with rights of setoff on the fair value of derivative instruments in a gain position and those in a loss position with the same counterparty. We have elected not to offset such derivative instrument fair values in our consolidated balance sheets.
See Credit Related Contingent Features for further discussion on contingent collateral requirements for our derivative instruments.
The following table presents information about the Company’s offsetting of financial assets under master netting agreements with derivative counterparties (in thousands):
Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
As of March 31, 2019
As of December 31, 2018
Gross Amount of Derivative Assets Presented in the Consolidated Balance Sheet
Gross Amount of Eligible Offsetting Recognized Derivative Liabilities
Cash Collateral Received
Net Amount of Derivative Assets
Gross Amount of Derivative Assets Presented in the Consolidated Balance Sheet
Gross Amount of Eligible Offsetting Recognized Derivative Assets
Cash Collateral Received
Net Amount of Derivative Assets
Derivatives subject to master netting agreements
$
119,082
$
(100,198
)
$
—
$
18,884
$
65,297
$
(60,303
)
$
—
$
4,994
Total
$
119,082
$
(100,198
)
$
—
$
18,884
$
65,297
$
(60,303
)
$
—
$
4,994
The following table presents information about the Company’s offsetting of financial liabilities under master netting agreements with derivative counterparties (in thousands):
Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
As of March 31, 2019
As of December 31, 2018
Gross Amount of Derivative Liabilities Presented in the Consolidated Balance Sheet
Gross Amount of Eligible Offsetting Recognized Derivative Assets
Cash Collateral Pledged
Net Amount of Derivative Liabilities
Gross Amount of Derivative Liabilities Presented in the Consolidated Balance Sheet
Gross Amount of Eligible Offsetting Recognized Derivative Liabilities
Cash Collateral Pledged
Net Amount of Derivative Liabilities
Derivatives subject to master netting agreements
$
(210,426
)
$
100,198
$
—
$
(110,228
)
$
(201,812
)
$
60,303
$
—
$
(141,509
)
Total
$
(210,426
)
$
100,198
$
—
$
(110,228
)
$
(201,812
)
$
60,303
$
—
$
(141,509
)
Concentrations of Credit Risk
We monitor our credit risk associated with financial and other institutions with which we conduct significant business and, to minimize these risks, we select counterparties with credit risks acceptable to us and we seek to limit our exposure to an individual counterparty. Credit risk, including but not limited to counterparty nonperformance under derivative instruments, our credit facilities and new ship progress payment guarantees, is not considered significant, as we primarily conduct business with large, well-established financial institutions, insurance companies and export credit agencies many of which we have long-term relationships with and which have credit risks acceptable to us or where the credit risk is spread out among a large number of counterparties. As of March 31, 2019 and December 31, 2018, we had counterparty credit risk exposure under our derivative instruments of $19.2 million and $5.6 million, respectively, which were limited to the cost of replacing the contracts in the event of non-performance by the counterparties to the contracts, the majority of which are currently our lending banks. We do not anticipate nonperformance by any of our significant counterparties. In addition, we have established guidelines we follow regarding credit ratings and instrument maturities to maintain safety and liquidity. We do not normally require collateral or other security to support credit relationships; however, in certain circumstances this option is available to us.
Derivative Instruments
We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We try to mitigate these risks through a combination of our normal operating and financing activities and through the use of derivative financial instruments pursuant to our hedging practices and policies. The financial impact of these hedging instruments is primarily offset by corresponding changes in the underlying exposures being hedged. We achieve this by closely matching the notional amount, term and conditions of the derivative instrument with the underlying risk being hedged. Although certain of our derivative financial instruments do not qualify or are not accounted for under hedge accounting, our objective is not to hold or issue derivative financial instruments for trading or other speculative purposes.
We enter into various forward, swap and option contracts to manage our interest rate exposure and to limit our exposure to fluctuations in foreign currency exchange rates and fuel prices. These instruments are recorded on the balance sheet at their fair value and the vast majority are designated as hedges. We also use non-derivative financial instruments designated as hedges of our net investment in our foreign operations and investments.
At inception of the hedge relationship, a derivative instrument that hedges the exposure to changes in the fair value of a firm commitment or a recognized asset or liability is designated as a fair value hedge. A derivative instrument that hedges a forecasted transaction or the variability of cash flows related to a recognized asset or liability is designated as a cash flow hedge.
Changes in the fair value of derivatives that are designated as fair value hedges are offset against changes in the fair value of the underlying hedged assets, liabilities or firm commitments. Gains and losses on derivatives that are designated as cash flow hedges are recorded as a component of Accumulated other comprehensive loss until the underlying hedged transactions are recognized in earnings. The foreign currency transaction gain or loss of our non-derivative financial instruments and the changes in the fair value of derivatives designated as hedges of our net investment in foreign operations and investments are recognized as a component of Accumulated other comprehensive loss along with the associated foreign currency translation adjustment of the foreign operation or investment, with the amortization of excluded components affecting earnings.
On an ongoing basis, we assess whether derivatives used in hedging transactions are “highly effective” in offsetting changes in the fair value or cash flow of hedged items. We use the long-haul method to assess hedge effectiveness using regression analysis for each hedge relationship under our interest rate, foreign currency and fuel hedging programs. We apply the same methodology on a consistent basis for assessing hedge effectiveness to all hedges within each hedging program (i.e., interest rate, foreign currency and fuel). We perform regression analyses over an observation period of up to three years, utilizing market data relevant to the hedge horizon of each hedge relationship. High effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the changes in the fair values of the derivative instrument and the hedged item. 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.
Cash flows from derivative instruments that are designated as fair value or cash flow hedges are classified in the same category as the cash flows from the underlying hedged items. In the event that hedge accounting is discontinued, cash flows subsequent to the date of discontinuance are classified within investing activities. Cash flows from derivative instruments not designated as hedging instruments are classified as investing activities.
We consider the classification of the underlying hedged item’s cash flows in determining the classification for the designated derivative instrument’s cash flows. We classify derivative instrument cash flows from hedges of benchmark interest rate or hedges of fuel expense as operating activities due to the nature of the hedged item. Likewise, we classify derivative instrument cash flows from hedges of foreign currency risk on our newbuild ship payments as investing activities.
Interest Rate Risk
Our exposure to market risk for changes in interest rates primarily relates to our debt obligations including future interest payments. At March 31, 2019 and December 31, 2018, approximately 61.3% and 59.1%, respectively, of our debt was effectively fixed. We use interest rate swap agreements to modify our exposure to interest rate movements and to manage our interest expense.
Market risk associated with our fixed rate debt is the potential increase in fair value resulting from a decrease in interest rates. We use interest rate swap agreements that effectively convert a portion of our fixed-rate debt to a floating-rate basis to manage this risk. At March 31, 2019 and December 31, 2018, we maintained interest rate swap agreements on the following fixed-rate debt instruments:
Debt Instrument
Swap Notional as of March 31, 2019 (In thousands)
Maturity
Debt Fixed Rate
Swap Floating Rate: LIBOR plus
All-in Swap Floating Rate as of March 31, 2019
Oasis of the Seas term loan
$
105,000
October 2021
5.41%
3.87%
6.63%
Unsecured senior notes
650,000
November 2022
5.25%
3.63%
6.32%
$
755,000
These interest rate swap agreements are accounted for as fair value hedges.
Market risk associated with our long-term floating rate debt is the potential increase in interest expense from an increase in interest rates. We use interest rate swap agreements that effectively convert a portion of our floating-rate debt to a fixed-rate basis to manage this risk. At March 31, 2019 and December 31, 2018, we maintained interest rate swap agreements on the following floating-rate debt instruments:
Interest rate swap agreements hedging the Euro-denominated term loan for Harmony of the Seas include EURIBOR zero-floor matching the hedged debt EURIBOR zero-floor. Amount presented is based on the exchange rate as of March 31, 2019.
These interest rate swap agreements are accounted for as cash flow hedges.
The notional amount of interest rate swap agreements related to outstanding debt as of both March 31, 2019 and December 31, 2018 was $3.4 billion.
Foreign Currency Exchange Rate Risk
Derivative Instruments
Our primary exposure to foreign currency exchange rate risk relates to our ship construction contracts denominated in Euros, our foreign currency denominated debt and our international business operations. We enter into foreign currency forward contracts to manage portions of the exposure to movements in foreign currency exchange rates. As of March 31, 2019, the aggregate cost of our ships on order, not including any ships on order by our Partner Brands and the two ships under the MOU for Silversea Cruises and the sixth Oasis-class ship for Royal Caribbean International that remain contingent upon certain conditions precedent, was $11.4 billion, of which we had deposited $667.8 million as of such date. At March 31, 2019 and December 31, 2018, approximately 54.0% and 53.5%, respectively, of the aggregate cost of the ships under construction was exposed to fluctuations in the Euro exchange rate. Our foreign currency forward contract agreements are accounted for as cash flow or net investment hedges depending on the designation of the related hedge.
On a regular basis, we enter into foreign currency forward contracts and, from time to time, we utilize cross-currency swap agreements and collar options to minimize the volatility resulting from the remeasurement of net monetary assets and liabilities denominated in a currency other than our functional currency or the functional currencies of our foreign subsidiaries. During the first quarter of 2019, we maintained an average of approximately $663.6 million of these foreign currency forward contracts. These instruments are not designated as hedging instruments. For the quarters ended March 31, 2019 and 2018, changes in the fair value of the foreign currency forward contracts resulted in a gain of $5.0 million and $5.6 million, respectively. These amounts were recognized in earnings within Other income (expense) in our consolidated statements of comprehensive income (loss).
We consider our investments in our foreign operations to be denominated in relatively stable currencies and to be of a long-term nature. As of March 31, 2019, we maintained foreign currency forward contracts and designated them as hedges of a portion of our net investments primarily in TUI Cruises of €101.0 million, or approximately $113.4 million based on the exchange rate at March 31, 2019. These forward currency contracts mature in October 2021.
The notional amount of outstanding foreign exchange contracts, excluding the forward contracts entered into to minimize remeasurement volatility, as of both March 31, 2019 and December 31, 2018 was $3.7 billion.
Non-Derivative Instruments
We also address the exposure of our investments in foreign operations by denominating a portion of our debt in our subsidiaries’ and investments’ functional currencies and designating it as a hedge of these subsidiaries and investments. We had designated debt as a hedge of our net investments primarily in TUI Cruises of €279.0 million, or approximately $313.2 million, as of March 31, 2019. As of December 31, 2018, we had designated debt as a hedge of our net investments in TUI Cruises of €280.0 million, or approximately $320.2 million.
Fuel Price Risk
Our exposure to market risk for changes in fuel prices relates primarily to the consumption of fuel on our ships. We use fuel swap agreements to mitigate the financial impact of fluctuations in fuel prices.
Our fuel swap agreements are generally accounted for as cash flow hedges. At March 31, 2019, we have hedged the variability in future cash flows for certain forecasted fuel transactions occurring through 2023. As of March 31, 2019 and December 31, 2018, we had the following outstanding fuel swap agreements:
At March 31, 2019, $45.9 million of estimated unrealized net gain (loss) associated with our cash flow hedges pertaining to fuel swap agreements is expected to be reclassified to earnings from Accumulated other comprehensive loss within the next twelve months. Reclassification is expected to occur as the result of fuel consumption associated with our hedged forecasted fuel purchases.
The fair value and line item caption of derivative instruments recorded within our consolidated balance sheets were as follows (in thousands):
Fair Value of Derivative Instruments
Asset Derivatives
Liability Derivatives
Balance Sheet Location
As of March 31, 2019
As of December 31, 2018
Balance Sheet Location
As of March 31, 2019
As of December 31, 2018
Fair Value
Fair Value
Fair Value
Fair Value
Derivatives designated as hedging instruments under ASC 815-20(1)
Interest rate swaps
Other assets
$
6,010
$
23,518
Other long-term liabilities
$
43,351
$
40,467
Foreign currency forward contracts
Derivative financial instruments
6,605
4,044
Derivative financial instruments
80,989
39,665
Foreign currency forward contracts
Other assets
5,838
10,844
Other long-term liabilities
58,929
16,854
Fuel swaps
Derivative financial instruments
53,470
10,966
Derivative financial instruments
7,757
37,627
Fuel swaps
Other assets
46,783
9,204
Other long-term liabilities
19,123
65,182
Total derivatives designated as hedging instruments under 815-20
118,706
58,576
210,149
199,795
Derivatives not designated as hedging instruments under ASC 815-20
Foreign currency forward contracts
Derivative financial instruments
$
—
$
1,751
Derivative financial instruments
$
—
$
808
Foreign currency forward contracts
Other assets
—
1,579
Other long-term liabilities
—
833
Fuel swaps
Derivative financial instruments
376
2,804
Derivative financial instruments
277
376
Fuel swaps
Other Assets
—
587
Other long-term liabilities
—
—
Total derivatives not designated as hedging instruments under 815-20
376
6,721
277
2,017
Total derivatives
$
119,082
$
65,297
$
210,426
$
201,812
(1)
Accounting Standard Codification 815-20 “Derivatives and Hedging.”
The location and amount of gain or (loss) recognized in income on fair value and cash flow hedging relationships were as follows (in thousands):
Quarter Ended March 31, 2019
Quarter Ended March 31, 2018
Fuel Expense
Depreciation and Amortization Expenses
Interest Income (Expense)
Other Income (Expense)
Fuel Expense
Depreciation and Amortization Expenses
Interest Income (Expense)
Other Income (Expense)
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded
$160,171
$292,285
$(90,631)
$(5,088)
$160,341
$240,230
$(60,145)
$(24,100)
The effects of fair value and cash flow hedging:
Gain or (loss) on fair value hedging relationships in Subtopic 815-20
Interest contracts
Hedged items
n/a
n/a
$(8,459)
$—
n/a
n/a
13,182
$—
Derivatives designated as hedging instruments
n/a
n/a
$(2,257)
$—
n/a
n/a
$(12,570)
$—
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from accumulated other comprehensive income (loss) into income