ROYAL CARIBBEAN CRUISES LTD - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2022
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
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $0.01 per share | RCL | New York Stock Exchange | ||||||||||||
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 ☒ No ☐
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 ☒ No ☐
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 ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ | |||||||||||||||||
Emerging growth company ☐ | ||||||||||||||||||||
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 255,182,015 shares of common stock outstanding as of October 31, 2022.
ROYAL CARIBBEAN CRUISES LTD.
TABLE OF CONTENTS
| Page | |||||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited; in thousands, except per share data)
| Quarter Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Passenger ticket revenues | $ | 2,020,974 | $ | 280,153 | |||||||
| Onboard and other revenues | 972,101 | 176,805 | |||||||||
| Total revenues | 2,993,075 | 456,958 | |||||||||
| Cruise operating expenses: | |||||||||||
| Commissions, transportation and other | 484,054 | 64,780 | |||||||||
| Onboard and other | 220,216 | 42,703 | |||||||||
| Payroll and related | 304,369 | 265,974 | |||||||||
| Food | 194,966 | 48,950 | |||||||||
| Fuel | 316,214 | 118,127 | |||||||||
| Other operating | 436,444 | 273,157 | |||||||||
| Total cruise operating expenses | 1,956,263 | 813,691 | |||||||||
| Marketing, selling and administrative expenses | 373,116 | 323,422 | |||||||||
| Depreciation and amortization expenses | 355,085 | 325,907 | |||||||||
| Impairment and credit losses (recoveries) | 10,186 | (238) | |||||||||
| Operating Income (Loss) | 298,425 | (1,005,824) | |||||||||
| Other income (expense): | |||||||||||
| Interest income | 11,953 | 3,786 | |||||||||
| Interest expense, net of interest capitalized | (352,187) | (430,661) | |||||||||
| Equity investment income (loss) | 73,997 | (29,085) | |||||||||
| Other income | 780 | 37,230 | |||||||||
| (265,457) | (418,730) | ||||||||||
| Net Income (Loss) | $ | 32,968 | $ | (1,424,554) | |||||||
| Earnings (Loss) per Share: | |||||||||||
| Basic | $ | 0.13 | $ | (5.59) | |||||||
| Diluted | $ | 0.13 | $ | (5.59) | |||||||
| Weighted-Average Shares Outstanding: | |||||||||||
| Basic | 255,071 | 254,713 | |||||||||
| Diluted | 255,378 | 254,713 | |||||||||
| Comprehensive Loss | |||||||||||
| Net Income (Loss) | $ | 32,968 | $ | (1,424,554) | |||||||
| Other comprehensive loss: | |||||||||||
| Foreign currency translation adjustments | 11,498 | 5,022 | |||||||||
| Change in defined benefit plans | 7,226 | (3,627) | |||||||||
| Loss on cash flow derivative hedges | (259,949) | (13,264) | |||||||||
| Total other comprehensive loss | (241,225) | (11,869) | |||||||||
| Comprehensive Loss | $ | (208,257) | $ | (1,436,423) | |||||||
The accompanying notes are an integral part of these consolidated financial statements
1
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited; in thousands, except per share data)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Passenger ticket revenues | $ | 4,091,035 | $ | 323,782 | |||||||
| Onboard and other revenues | 2,145,513 | 226,104 | |||||||||
| Total revenues | 6,236,548 | 549,886 | |||||||||
| Cruise operating expenses: | |||||||||||
| Commissions, transportation and other | 964,256 | 72,917 | |||||||||
| Onboard and other | 450,225 | 55,782 | |||||||||
| Payroll and related | 981,128 | 530,250 | |||||||||
| Food | 450,376 | 74,618 | |||||||||
| Fuel | 779,873 | 219,058 | |||||||||
| Other operating | 1,206,036 | 569,383 | |||||||||
| Total cruise operating expenses | 4,831,894 | 1,522,008 | |||||||||
| Marketing, selling and administrative expenses | 1,138,571 | 867,021 | |||||||||
| Depreciation and amortization expenses | 1,046,094 | 959,512 | |||||||||
| Impairment and credit losses (recoveries) | (584) | 39,934 | |||||||||
| Operating Loss | (779,427) | (2,838,589) | |||||||||
| Other income (expense): | |||||||||||
| Interest income | 21,765 | 13,317 | |||||||||
| Interest expense, net of interest capitalized | (932,552) | (1,007,986) | |||||||||
| Equity investment income (loss) | 29,759 | (137,044) | |||||||||
| Other income | 4,699 | 66,771 | |||||||||
| (876,329) | (1,064,942) | ||||||||||
| Net Loss | $ | (1,655,756) | $ | (3,903,531) | |||||||
| Loss per Share: | |||||||||||
| Basic | $ | (6.49) | $ | (15.56) | |||||||
| Diluted | $ | (6.49) | $ | (15.56) | |||||||
| Weighted-Average Shares Outstanding: | |||||||||||
| Basic | 254,953 | 250,808 | |||||||||
| Diluted | 254,953 | 250,808 | |||||||||
| Comprehensive Loss | |||||||||||
| Net Loss | $ | (1,655,756) | $ | (3,903,531) | |||||||
| Other comprehensive (loss) income: | |||||||||||
| Foreign currency translation adjustments | 31,958 | 11,255 | |||||||||
| Change in defined benefit plans | 34,991 | 3,748 | |||||||||
| (Loss) Gain on cash flow derivative hedges | (148,541) | 48,514 | |||||||||
| Total other comprehensive (loss) income | (81,592) | 63,517 | |||||||||
| Comprehensive Loss | $ | (1,737,348) | $ | (3,840,014) | |||||||
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, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 1,566,213 | $ | 2,701,770 | |||||||
Trade and other receivables, net of allowances of $10,542 and $13,411 at September 30, 2022 and December 31, 2021, respectively | 534,414 | 408,067 | |||||||||
| Inventories | 237,186 | 150,224 | |||||||||
| Prepaid expenses and other assets | 435,709 | 286,026 | |||||||||
| Derivative financial instruments | 63,524 | 54,184 | |||||||||
| Total current assets | 2,837,046 | 3,600,271 | |||||||||
| Property and equipment, net | 27,693,240 | 25,907,949 | |||||||||
| Operating lease right-of-use assets | 554,424 | 542,128 | |||||||||
| Goodwill | 809,201 | 809,383 | |||||||||
Other assets, net of allowances of $72,160 and $86,781 at September 30, 2022 and December 31, 2021, respectively | 1,570,279 | 1,398,624 | |||||||||
| Total assets | $ | 33,464,190 | $ | 32,258,355 | |||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities | |||||||||||
| Current portion of long-term debt | $ | 3,945,145 | $ | 2,243,131 | |||||||
| Current portion of operating lease liabilities | 75,179 | 68,922 | |||||||||
| Accounts payable | 623,565 | 545,978 | |||||||||
| Accrued interest | 274,022 | 251,974 | |||||||||
| Accrued expenses and other liabilities | 858,936 | 887,575 | |||||||||
| Derivative financial instruments | 242,648 | 127,236 | |||||||||
| Customer deposits | 3,774,499 | 3,160,867 | |||||||||
| Total current liabilities | 9,793,994 | 7,285,683 | |||||||||
| Long-term debt | 19,384,226 | 18,847,209 | |||||||||
| Long-term operating lease liabilities | 542,576 | 534,726 | |||||||||
| Other long-term liabilities | 537,970 | 505,181 | |||||||||
| Total liabilities | 30,258,766 | 27,172,799 | |||||||||
| 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; 283,198,625 and 282,703,246 shares issued, September 30, 2022 and December 31, 2021, respectively) | 2,832 | 2,827 | |||||||||
| Paid-in capital | 7,270,521 | 7,557,297 | |||||||||
| (Accumulated deficit) retained earnings | (1,207,223) | 302,276 | |||||||||
| Accumulated other comprehensive loss | (792,477) | (710,885) | |||||||||
Treasury stock (28,018,385 and 27,882,987 common shares at cost, September 30, 2022 and December 31, 2021, respectively) | (2,068,229) | (2,065,959) | |||||||||
| Total shareholders’ equity | 3,205,424 | 5,085,556 | |||||||||
| Total liabilities and shareholders’ equity | $ | 33,464,190 | $ | 32,258,355 | |||||||
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, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating Activities | |||||||||||
| Net Loss | $ | (1,655,756) | $ | (3,903,531) | |||||||
| Adjustments: | |||||||||||
| Depreciation and amortization | 1,046,094 | 959,512 | |||||||||
| Impairment and credit losses (recoveries) | (584) | 39,934 | |||||||||
| Net deferred income tax benefit | (14,345) | (31,395) | |||||||||
| Loss (gain) on derivative instruments not designated as hedges | 175,686 | (11,560) | |||||||||
| Share-based compensation expense | 24,285 | 55,435 | |||||||||
| Equity investment (income) loss | (29,759) | 137,044 | |||||||||
| Amortization of debt issuance costs | 118,307 | 94,511 | |||||||||
| Amortization of debt discounts and premiums | 11,650 | 93,517 | |||||||||
| Loss on extinguishment of debt | 16,449 | 138,759 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Increase in trade and other receivables, net | (173,555) | (225,535) | |||||||||
| Increase in inventories | (86,962) | (26,711) | |||||||||
| Increase in prepaid expenses and other assets | (108,429) | (123,935) | |||||||||
| Increase in accounts payable | 79,249 | 107,215 | |||||||||
| Increase (decrease) in accrued interest | 22,053 | (3,685) | |||||||||
| Decrease in accrued expenses and other liabilities | (18,973) | (5,911) | |||||||||
| Increase in customer deposits | 613,632 | 1,031,930 | |||||||||
| Other, net | (113,783) | 1,637 | |||||||||
| Net cash used in operating activities | (94,741) | (1,672,769) | |||||||||
| Investing Activities | |||||||||||
| Purchases of property and equipment | (2,543,266) | (1,654,271) | |||||||||
| Cash received on settlement of derivative financial instruments | 42,958 | 27,497 | |||||||||
| Cash paid on settlement of derivative financial instruments | (389,387) | (54,916) | |||||||||
| Investments in and loans to unconsolidated affiliates | (614) | (70,084) | |||||||||
| Cash received on loans to unconsolidated affiliates | 14,030 | 25,647 | |||||||||
| Proceeds from the sale of property and equipment and other assets | 66 | 175,439 | |||||||||
| Other, net | 5,262 | (9,546) | |||||||||
| Net cash used in investing activities | (2,870,951) | (1,560,234) | |||||||||
The accompanying notes are an integral part of these consolidated financial statements
4
| ROYAL CARIBBEAN CRUISES LTD. | |||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
| (unaudited, in thousands) | |||||||||||
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Financing Activities | |||||||||||
| Debt proceeds | 7,207,566 | 4,144,077 | |||||||||
| Debt issuance costs | (222,787) | (159,147) | |||||||||
| Repayments of debt | (5,135,323) | (2,212,510) | |||||||||
| Premium on repayment of debt | — | (135,372) | |||||||||
| Repayments of commercial paper notes | — | (414,570) | |||||||||
| Proceeds from common stock issuances | — | 1,621,860 | |||||||||
| Other, net | (16,556) | (5,779) | |||||||||
| Net cash provided by financing activities | 1,832,900 | 2,838,559 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (2,765) | (704) | |||||||||
| Net decrease in cash and cash equivalents | (1,135,557) | (395,148) | |||||||||
| Cash and cash equivalents at beginning of period | 2,701,770 | 3,684,474 | |||||||||
| Cash and cash equivalents at end of period | $ | 1,566,213 | $ | 3,289,326 | |||||||
| Supplemental Disclosure | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest, net of amount capitalized | $ | 752,623 | $ | 630,740 | |||||||
| Non-cash Investing Activities | |||||||||||
| Notes receivable issued upon sale of property and equipment and other assets | $ | — | $ | 16,000 | |||||||
| Purchase of property and equipment included in accounts payable and accrued expenses and other liabilities | $ | 26,026 | $ | 22,925 | |||||||
| Acquisition of property and equipment from assumed debt | $ | 275,000 | $ | — | |||||||
| Non-cash Financing Activity | |||||||||||
| Debt related to acquisition of property and equipment | $ | 275,000 | $ | — | |||||||
The accompanying notes are an integral part of these consolidated financial statements
5
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited; in thousands)
| Common Stock | Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||
| Balance at July 1, 2022 | $ | 2,831 | $ | 7,254,939 | $ | (1,240,191) | $ | (551,252) | $ | (2,068,229) | $ | 3,398,098 | |||||||||||||||||||||||
| Activity related to employee stock plans | 1 | 15,582 | — | — | — | 15,583 | |||||||||||||||||||||||||||||
| Changes related to cash flow derivative hedges | — | — | — | (259,949) | — | (259,949) | |||||||||||||||||||||||||||||
| Change in defined benefit plans | — | — | — | 7,226 | — | 7,226 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 11,498 | — | 11,498 | |||||||||||||||||||||||||||||
| Net Income | — | — | 32,968 | — | — | 32,968 | |||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | 2,832 | $ | 7,270,521 | $ | (1,207,223) | $ | (792,477) | $ | (2,068,229) | $ | 3,205,424 | |||||||||||||||||||||||
| Common Stock | Paid-in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | 2,827 | $ | 7,557,297 | $ | 302,276 | $ | (710,885) | $ | (2,065,959) | $ | 5,085,556 | |||||||||||||||||||||||
| Activity related to employee stock plans | 5 | 20,864 | 37 | — | — | 20,906 | |||||||||||||||||||||||||||||
| — | (307,640) | 146,220 | — | — | (161,420) | ||||||||||||||||||||||||||||||
| Changes related to cash flow derivative hedges | — | — | — | (148,541) | — | (148,541) | |||||||||||||||||||||||||||||
| Change in defined benefit plans | — | — | — | 34,991 | — | 34,991 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 31,958 | — | 31,958 | |||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | (2,270) | (2,270) | |||||||||||||||||||||||||||||
| Net Loss | — | — | (1,655,756) | — | — | (1,655,756) | |||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | 2,832 | $ | 7,270,521 | $ | (1,207,223) | $ | (792,477) | $ | (2,068,229) | $ | 3,205,424 | |||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
6
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited; in thousands)
| Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||
| Balance at July 1, 2021 | $ | 2,826 | $ | 7,527,305 | $ | 3,083,798 | $ | (663,955) | $ | (2,065,959) | $ | 7,884,015 | |||||||||||||||||||||||
| Activity related to employee stock plans | 1 | 20,045 | — | — | — | 20,046 | |||||||||||||||||||||||||||||
| Common stock issuance | — | (140) | — | — | — | (140) | |||||||||||||||||||||||||||||
| Changes related to cash flow derivative hedges | — | — | — | (13,264) | — | (13,264) | |||||||||||||||||||||||||||||
| Change in defined benefit plans | — | — | — | (3,627) | — | (3,627) | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 5,022 | — | 5,022 | |||||||||||||||||||||||||||||
| Net Loss attributable to Royal Caribbean Cruises Ltd. | — | — | (1,424,554) | — | — | (1,424,554) | |||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | 2,827 | $ | 7,547,210 | $ | 1,659,244 | $ | (675,824) | $ | (2,065,959) | $ | 6,467,498 | |||||||||||||||||||||||
| Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | 2,652 | $ | 5,998,574 | $ | 5,562,775 | $ | (739,341) | $ | (2,063,991) | $ | 8,760,669 | |||||||||||||||||||||||
| Activity related to employee stock plans | 5 | 52,799 | — | — | — | 52,804 | |||||||||||||||||||||||||||||
| Common stock issuance | 170 | 1,495,837 | — | — | — | 1,496,007 | |||||||||||||||||||||||||||||
| Changes related to cash flow derivative hedges | — | — | — | 48,514 | — | 48,514 | |||||||||||||||||||||||||||||
| Change in defined benefit plans | — | — | — | 3,748 | — | 3,748 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 11,255 | — | 11,255 | |||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | (1,968) | (1,968) | |||||||||||||||||||||||||||||
| Net Loss attributable to Royal Caribbean Cruises Ltd. | — | — | (3,903,531) | — | — | (3,903,531) | |||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | 2,827 | $ | 7,547,210 | $ | 1,659,244 | $ | (675,824) | $ | (2,065,959) | $ | 6,467,498 | |||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
7
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,” "Royal Caribbean Group," 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,” and "Silversea Cruises" refer to our wholly owned global cruise brands. Throughout this Quarterly Report on Form 10-Q, we also refer to our partner brands in which we hold an ownership interest, including “TUI Cruises” and "Hapag-Lloyd Cruises." However, because these partner 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 Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021.
This Quarterly Report on Form 10-Q also includes trademarks, trade names and service marks of other companies. Use or display by us of other parties’ trademarks, trade names or service marks is not intended to and does not imply a relationship with, or endorsement or sponsorship of us by, these other parties other than as described herein.
Note 1. General
Description of Business
We are a global cruise company. We own and operate three global cruise brands: Royal Caribbean International, Celebrity Cruises and Silversea Cruises (collectively, our "Global Brands"). We also own a 50% joint venture interest in TUI Cruises GmbH ("TUIC"), which operates the German brands TUI Cruises and Hapag-Lloyd Cruises (collectively, our "Partner Brands"). We account for our investments in our Partner Brands under the equity method of accounting. Together, our Global Brands and our Partner Brands have a combined fleet of 64 ships as of September 30, 2022. Our ships offer a selection of worldwide itineraries that call on more than 1,000 destinations on all seven continents.
Management's Plan and Liquidity
During 2021, we restarted our global cruise operations in a phased manner, following our voluntary suspension of global cruise operations that commenced in March of 2020 in response to the COVID-19 pandemic. Since then, we have steadily increased the number of ships that have returned to service, with our full fleet in service by June 2022. Effective July 18, 2022, the U.S. Centers for Disease Control and Prevention ended its COVID-19 Program for Cruise Ships, which has allowed us to modify our health and safety protocols to more closely align with the broader travel industry. We announced the easing of testing and vaccination protocols for most itineraries on August 23, 2022.
Since the start of the pandemic, we have implemented a number of proactive measures to mitigate the financial and operational impacts of COVID-19 and to manage our liquidity. As part of our liquidity management, we rely on estimates of our future liquidity requirements, which include numerous assumptions that are subject to various risks and uncertainties. The principal assumptions used to estimate our future liquidity requirements consist of:
•our continued cruise operations and expected timing of cash collections for cruise bookings;
•an expected continued moderate increase in revenue per available passenger cruise day;
•an expected increase in occupancy levels over time until we reach historical occupancy levels; and
•inflationary increases to our operating costs, mostly impacting the expected cost of fuel and food.
As of September 30, 2022, we had liquidity of $3.1 billion, including $0.8 billion of undrawn revolving credit facility capacity, $1.6 billion in cash and cash equivalents, and a $0.7 billion commitment for a 364-day term loan facility available to draw on at any time on or prior to August 11, 2023. Our revolving credit facilities were utilized through a combination of amounts drawn and letters of credit issued under the facilities as of September 30, 2022.
During the nine months ended September 30, 2022, we entered into various transactions to refinance $6.9 billion of 2022 and 2023 debt maturities. Refer to Note 7. Debt for further information regarding these transactions.
Based on our refinancing actions as well as our present financial condition and the aforementioned assumptions on liquidity, we believe that we have sufficient financial resources to fund our obligations for at least the next twelve months from the issuance of these financial statements. Additionally, we will continue to pursue various opportunities to raise additional
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capital to fund obligations associated with future debt maturities and/or to extend the maturity dates associated with our existing indebtedness or facilities. Actions to raise capital may include issuances of debt, convertible debt or equity in private or public transactions or entering into new or extended credit facilities.
As of September 30, 2022, we were in compliance with our financial covenants and we estimate we will be in compliance for the next twelve months. If the Company is unable to comply with the applicable financial covenants, including maintaining the applicable minimum liquidity requirement, it could have a significant adverse effect on the Company’s business, financial condition and operating results.
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 Securities and Exchange Commission 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, 2021 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 6. Other Assets for further information regarding our variable interest entities. For affiliates we do not control but over which we have significant influence on financial and operating policies, usually evidenced by a direct ownership interest from 20% to 50%, the investment is accounted for using the equity method.
Effective March 19, 2021, we sold our wholly-owned brand, Azamara Cruises ("Azamara"), including its three-ship fleet and associated intellectual property, to Sycamore Partners for $201 million, before closing adjustments. The March 2021 sale of Azamara did not represent a strategic shift that will have a major effect on our operations and financial results, as we continue to provide similar itineraries to and source passengers from the markets served by the Azamara business. Therefore, the sale of Azamara did not meet the criteria for discontinued operations reporting. Effective March 19, 2021, we no longer consolidate Azamara's balance sheet nor recognize its results of operations in our consolidated financial statements. We recognized an immaterial gain on the sale during the quarter ended March 31, 2021 and have agreed to provide certain transition services to Azamara for a period of time for a fee.
Prior to October 1, 2021, we consolidated the operating results of Silversea Cruises on a three-month reporting lag to allow for more timely preparation of our consolidated financial statements. Effective October 1, 2021, we eliminated the three- month reporting lag to reflect Silversea Cruises' financial position, results of operations and cash flows concurrently and consistently with the fiscal calendar of the Company ("elimination of the Silversea reporting lag"). The elimination of the Silversea reporting lag represents a change in accounting principle, which we believe to be preferable, because it provides more current information to the users of our financial statements. A change in accounting principle requires retrospective application, if material. The impact of the elimination of the reporting lag was immaterial to prior periods and was immaterial for our fiscal year ended December 31, 2021. As a result, we have accounted for this change in accounting principle in our consolidated results for the quarter and year ended December 31, 2021. Accordingly, the results of Silversea Cruises from July 1, 2022, through September 30, 2022 and from January 1, 2022 through September 30, 2022 are included in our consolidated statement of comprehensive loss for the quarter ended and nine months ended September 30, 2022, respectively. The results of Silversea Cruises from April 1, 2021 through June 30, 2021 and from October 1, 2020 through June 30, 2021 are included in our consolidated statement of comprehensive loss for the quarter ended and nine months ended September 30, 2021, respectively.
Note 2. Summary of Significant Accounting Policies
Adoption of Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU") , Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) ("ASU 2020-06"), which simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for convertible instruments, requiring bifurcation only if the convertible debt feature qualifies as a derivative under Accounting Standards Codification ("ASC") 815, Derivatives and Hedging ("ASC 815") or for convertible debt issued at a substantial
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premium. The ASU removes certain settlement conditions required for equity contracts to qualify for the derivative scope exception, permitting more contracts to qualify for it. In addition, the guidance eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The guidance also decreases interest expense due to the reversal of the remaining non-cash convertible debt discount. On January 1, 2022, we adopted this pronouncement using the modified retrospective approach to recognize our convertible notes as single liability instruments given they do not qualify as derivatives under ASC 815, nor were they issued at a substantial premium. Accordingly, as of January 1, 2022, we recorded a $161.4 million increase to debt, primarily as a result of the reversal of the remaining non-cash convertible debt discount, as well as a reduction of $307.6 million to additional paid in capital, which resulted in a cumulative effect on adoption of approximately $146.2 million to increase retained earnings.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions to the current guidance on contract modifications and hedging relationships to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. Subsequently, in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which presents amendments to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance in both ASUs was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We adopted the new guidance during the quarter ended September 30, 2022. The impact to our consolidated financial statements, if any, will be dependent on the timing and terms of any future contract modifications related to a change in reference rate.
Recent Accounting Pronouncements
In September 2022, the FASB issued ASU No. 2022-04, Liabilities-Supplier Finance Programs (Subtopic 405-50) - Disclosure of Supplier Finance Program Obligations. This ASU requires that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. This ASU is expected to improve financial reporting by requiring new disclosures about the programs, thereby allowing financial statement users to better consider the effect of the programs on an entity’s working capital, liquidity, and cash flows. This ASU is effective for fiscal years beginning after December 15, 2022, except for the amendment on roll forward information which is effective for fiscal years beginning after December 15, 2023. We are currently evaluating the impact of the new guidance on the disclosures to our consolidated financial statements.
Note 3. 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 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 ranges from to 24 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 cruise operating expenses. The amounts of port costs charged to our guests and included within Passenger ticket revenues on a gross basis were $210.2 million and $29.3 million for the quarters ended September 30, 2022 and 2021, respectively, and $446.3 million and $33.9 million for the nine months ended September 30, 2022 and 2021, 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 cruise passengers and recognize revenue over the duration of the related cruise.
As a practical expedient, we have omitted disclosures on our remaining performance obligations as the duration of our contracts with customers is less than a year.
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Disaggregated Revenues
The following table disaggregates our total revenues by geographic regions where we provide cruise itineraries (in thousands):
| Quarter Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues by itinerary | |||||||||||||||||||||||
| North America (1) | $ | 1,638,226 | $ | 279,339 | $ | 3,871,356 | $ | 290,971 | |||||||||||||||
| Asia/Pacific | 46,137 | 22,651 | 125,986 | 71,854 | |||||||||||||||||||
| Europe | 1,002,936 | 111,054 | 1,531,495 | 114,819 | |||||||||||||||||||
| Other regions(2) | 169,200 | 8,561 | 408,222 | 11,270 | |||||||||||||||||||
| Total revenues by itinerary | 2,856,499 | 421,605 | 5,937,059 | 488,914 | |||||||||||||||||||
| Other revenues(3) | 136,576 | 35,353 | 299,489 | 60,972 | |||||||||||||||||||
| Total revenues | $ | 2,993,075 | $ | 456,958 | $ | 6,236,548 | $ | 549,886 | |||||||||||||||
(1)Includes the United States, Canada, Mexico and the Caribbean.
(2) Includes seasonality impacted itineraries primarily in South and Latin American countries.
(3) 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 procurement and management related services we perform on behalf of our unconsolidated affiliates. Refer to Note 6. 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 and nine months ended September 30, 2022 and 2021, our guests were sourced from the following areas:
| Quarter Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Passenger ticket revenues: | |||||||||||
| United States | 71 | % | 74 | % | |||||||
| United Kingdom | 11 | % | 14 | % | |||||||
| All other countries (1) | 18 | % | 12 | % | |||||||
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Passenger ticket revenues: | |||||||||||
| United States | 75 | % | 67 | % | |||||||
| United Kingdom | 9 | % | 13 | % | |||||||
| Singapore | 2 | % | 13 | % | |||||||
| All other countries (1) | 14 | % | 7 | % | |||||||
(1)No other individual country's revenue exceeded 10% for the quarters and nine months ended September 30, 2022 and 2021.
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 or onboard 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 $1.6 billion and $0.8 billion as of September 30, 2022 and December 31, 2021, respectively.
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We have provided flexibility to guests with bookings on sailings cancelled due to COVID-19 by allowing guests to receive future cruise credits (“FCC”). As of September 30, 2022, our customer deposit balance includes approximately $0.5 billion of unredeemed FCCs. Given the uncertainty of travel demand caused by COVID-19 and lack of comparable historical experience of FCC redemptions, we are unable to estimate the number of FCCs that will not be used in future periods and get recognized as breakage. We will update our breakage analysis as future information is received.
Contract Receivables and Contract Assets
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 September 30, 2022 and December 31, 2021, our contract assets were $139.6 million and $52.9 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 advisor 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 advisor commissions were $78.6 million as of September 30, 2022 and $75.4 million as of December 31, 2021. Substantially all of our prepaid travel advisor commissions at December 31, 2021 were expensed and reported primarily within Commissions, transportation and other in our consolidated statements of comprehensive loss for the nine months ended September 30, 2022.
Note 4. Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share is as follows (in thousands, except per share data):
| Quarter Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net Income (Loss) for basic and diluted loss per share | $ | 32,968 | $ | (1,424,554) | $ | (1,655,756) | $ | (3,903,531) | |||||||||||||||
| Weighted-average common shares outstanding | 255,071 | 254,713 | 254,953 | 250,808 | |||||||||||||||||||
| Dilutive effect of stock-based awards | 307 | — | — | — | |||||||||||||||||||
| Diluted weighted-average shares outstanding | 255,378 | 254,713 | 254,953 | 250,808 | |||||||||||||||||||
| Basic earnings (loss) per share | $ | 0.13 | $ | (5.59) | $ | (6.49) | $ | (15.56) | |||||||||||||||
| Diluted earnings (loss) per share | $ | 0.13 | $ | (5.59) | $ | (6.49) | $ | (15.56) | |||||||||||||||
Basic earnings (loss) per share is computed by dividing Net Income (Loss) by the weighted-average number of common stock outstanding during each period. Diluted earnings (loss) per share incorporates the incremental shares issuable upon the assumed exercise of stock options and conversion of potentially dilutive securities. If we have a net loss for the period, all potential common shares will be considered antidilutive, resulting in the same basic and diluted net loss per share amounts for those periods. There were approximately 30,532,145 and 31,085,736 antidilutive shares for the quarter and nine months ended September 30, 2022, respectively, compared to 339,835 and 433,705 for the quarter and nine months ended September 30, 2021, respectively.
Effective January 1, 2022, ASU 2020-06 eliminated the treasury stock method and instead required the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share when the instruments may be settled in cash or shares. Under the if-converted method, shares related to our convertible notes, to the extent dilutive, are assumed to be converted into common stock at the beginning of the reporting period. The required use of the if-converted method for our convertible notes did not impact our diluted net earnings (loss) per share for the quarter and nine months ended September 30, 2022 as the if-converted calculation was antidilutive for these periods. For further information regarding the adoption of ASU 2020-06, refer to Note 2. Summary of Significant Accounting Policies.
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Note 5. Property and Equipment
In January 2022 and April 2022, we took delivery of Wonder of the Seas and Celebrity Beyond, respectively. Refer to Note 7. Debt for further information on the financing for Wonder of the Seas and Celebrity Beyond.
In July 2022, we purchased a ship for our Silversea Cruises brand for $275.0 million, plus transaction fees. The ship is expected to enter service during the fourth quarter of 2022. For information regarding the financing of the ship, refer to Note 7. Debt.
Note 6. Other Assets
A Variable Interest Entity (“VIE”) is an entity in which the equity investors have not provided enough equity to finance the entity’s activities or the equity investors: (1) cannot directly or indirectly make decisions about the entity’s activities through their voting rights or similar rights; (2) do not have the obligation to absorb the expected losses of the entity; (3) do not have the right to receive the expected residual returns of the entity; or (4) have voting rights that are not proportionate to their economic interests and the entity’s activities involve or are conducted on behalf of an investor with a disproportionately small voting interest.
We have determined that TUI Cruises GmbH ("TUIC"), our 50%-owned joint venture, which operates the brands TUI Cruises and Hapag-Lloyd Cruises, is a VIE. We have determined that we are not the primary beneficiary of TUIC. We believe that the power to direct the activities that most significantly impact TUIC’s economic performance is shared between ourselves and TUI AG, our joint venture partner. All the significant operating and financial decisions of TUIC require the consent of both parties, which we believe creates shared power over TUIC. Accordingly, we do not consolidate this entity and account for this investment under the equity method of accounting.
As of September 30, 2022, the net book value of our investment in TUIC was $412.9 million, primarily consisting of $315.6 million in equity and a loan of €91.2 million, or approximately $89.3 million based on the exchange rate at September 30, 2022. As of December 31, 2021, the net book value of our investment in TUIC was $444.4 million, primarily consisting of $322.4 million in equity and a loan of €103.0 million, or approximately $117.2 million based on the exchange rate at December 31, 2021. 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 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. During the quarter ended March 31, 2021, we and TUI AG each contributed €59.5 million, or approximately $69.9 million based on the exchange rate at March 31, 2021, of additional equity through a combination of cash contributions and conversion of existing receivables.
TUIC 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 2033. Our investment amount and outstanding term loan are substantially our maximum exposure to loss in connection with our investment in TUIC.
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 nine months ended September 30, 2022, we made payments of $7.8 million to Grand Bahama for ship repair and maintenance services compared to payments of $3.6 million for the nine months ended September 30, 2021, respectively. 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.
As of September 30, 2022, we had exposure to credit loss in Grand Bahama of $8.8 million related to a loan. The loan to Grand Bahama matures March 2026 and bears interest at LIBOR plus 3.5% to 3.75%, capped at 5.75%. Interest payable on the loan is due on a semi-annual basis. During the nine months ended September 30, 2021, we received principal and interest payments of $8.9 million related to a term loan that had fully matured. We did not receive principal and interest payments during the nine months ended September 30, 2022. The outstanding loan balance is in non-accrual status and is included within Other assets in our consolidated balance sheets. In addition, we are currently recognizing our share of net accumulated equity method losses against the carrying value of our loan receivable from Grand Bahama. 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.
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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 September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Share of equity income (loss) from investments | $ | 73,997 | $ | (29,085) | $ | 29,759 | $ | (137,044) | ||||||||||||||||||
| Dividends received (1) | $ | — | $ | — | $ | 986 | $ | — | ||||||||||||||||||
(1) Represents dividends received from our investments accounted for under the equity method of accounting for the quarters and nine months ended September 30, 2022 and September 30, 2021.
| As of September 30, 2022 | As of December 31, 2021 | |||||||||||||
| Total notes receivable due from equity investments | $ | 99,845 | $ | 130,587 | ||||||||||
| Less-current portion (1) | 18,151 | 21,508 | ||||||||||||
| Long-term portion (2) | $ | 81,694 | $ | 109,079 | ||||||||||
(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 TUIC and 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 September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Revenues | $ | 3,678 | $ | 7,835 | $ | 13,988 | $ | 18,979 | ||||||||||||||||||
| Expenses | $ | 1,672 | $ | 1,749 | $ | 5,189 | $ | 4,738 | ||||||||||||||||||
Credit Losses
We reviewed our notes receivable for credit losses in connection with the preparation of our financial statements for the quarter ended September 30, 2022. In evaluating the allowance, management considered factors such as historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. Our credit loss allowance beginning and ending balances as of January 1, 2022 and September 30, 2022 primarily relate to credit losses recognized on notes receivable for the previous sale of our property and equipment of $81.6 million and other receivable balances primarily related to loans due from travel advisors of $12.6 million.
The following table summarizes our credit loss allowance related to receivables for the nine months ended September 30, 2022 (in thousands):
| Credit Loss Allowance | ||||||||
| Beginning balance January 1, 2022 | $ | 100,192 | ||||||
| Credit loss recovery, net | (8,466) | |||||||
| Write-offs | (9,024) | |||||||
| Ending balance September 30, 2022 | $ | 82,702 | ||||||
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Note 7. Debt
Debt consists of the following (in thousands):
Interest Rate (1) | Maturities Through | As of September 30, 2022 | As of December 31, 2021 | |||||||||||||||||||||||
| Fixed rate debt: | ||||||||||||||||||||||||||
| Unsecured senior notes | 3.70% to 11.63% | 2023 - 2028 | $ | 7,199,316 | $ | 5,604,498 | ||||||||||||||||||||
| Secured senior notes | 10.88% to 11.50% | 2023 - 2025 | 2,364,360 | 2,354,037 | ||||||||||||||||||||||
| Unsecured term loans | 1.28% to 5.89% | 2026 - 2034 | 4,598,946 | 2,860,567 | ||||||||||||||||||||||
| Convertible notes | 2.88% to 6.00% | 2023 - 2025 | 1,725,000 | 1,558,780 | ||||||||||||||||||||||
| Total fixed rate debt | 15,887,622 | 12,377,882 | ||||||||||||||||||||||||
| Variable rate debt: | ||||||||||||||||||||||||||
Unsecured revolving credit facilities (2) | 4.44% to 4.84% | 2022 - 2024 | 2,329,342 | 2,899,342 | ||||||||||||||||||||||
| USD unsecured term loan | 4.63% to 8.25% | 2022 - 2037 | 4,608,777 | 5,018,740 | ||||||||||||||||||||||
| Euro unsecured term loan | 2.26% to 6.01% | 2022 - 2028 | 540,885 | 685,633 | ||||||||||||||||||||||
| Total variable rate debt | 7,479,004 | 8,603,715 | ||||||||||||||||||||||||
| 402,227 | 472,275 | |||||||||||||||||||||||||
Total debt (3) | 23,768,853 | 21,453,872 | ||||||||||||||||||||||||
| Less: unamortized debt issuance costs | (439,482) | (363,532) | ||||||||||||||||||||||||
| Total debt, net of unamortized debt issuance costs | 23,329,371 | 21,090,340 | ||||||||||||||||||||||||
| Less—current portion | (3,945,145) | (2,243,131) | ||||||||||||||||||||||||
| Long-term portion | $ | 19,384,226 | $ | 18,847,209 | ||||||||||||||||||||||
(1) Interest rates based on outstanding loan balance as of September 30, 2022 and, for variable rate debt, include either LIBOR, EURIBOR or Term SOFR plus the applicable margin.
(2) Includes $1.9 billion facility and $1.3 billion facility, the vast majority of which is due in 2024. Our $1.9 billion facility accrues interest at LIBOR plus a maximum interest rate margin of 1.30% which interest was 4.44% as of September 30, 2022 and is subject to a facility fee of a maximum of 0.20%. Our $1.3 billion facility accrues interest at LIBOR plus a maximum interest rate margin of 1.70%, which interest was 4.84% as of September 30, 2022 and is subject to a facility fee of a maximum of 0.30%.
(3) At September 30, 2022 and December 31, 2021, the weighted average interest rate for total debt was 7.19% and 5.47%, respectively.
In January 2022, we took delivery of Wonder of the Seas. To finance the delivery, we borrowed a total of $1.3 billion under a credit agreement novated to us upon delivery of the ship in January 2022, resulting in an unsecured term loan which is 100% guaranteed by Bpifrance Assurance Export ("BpiFAE"), the official export credit agency ("ECA") of France. The unsecured loan amortizes semi-annually over 12 years and bears interest at a fixed rate of 3.18% per annum.
In January 2022, we issued $1.0 billion of senior notes (the "January 2022 Unsecured Notes") due in 2027 for net proceeds of approximately $990.0 million. Interest accrues on the January 2022 Unsecured Notes at a fixed rate of 5.375% per annum and is payable semi-annually in arrears. The proceeds from the January 2022 Unsecured Notes are being used to repay principal payments on debt maturing in 2022 (including to pay fees and expenses in connection with such repayments).
In February 2022 we entered into certain agreements with Morgan Stanley & Co., LLC (“MS”) where MS agreed to provide backstop committed financing to refinance, repurchase and/or repay in whole or in part our existing and outstanding 10.875% Senior Secured Notes due 2023, 9.125% Senior Priority Guaranteed Notes due 2023 (the "Priority Guaranteed Notes"), and 4.25% Convertible Notes due June 2023. Pursuant to the agreements, we are able, at our sole option, to issue and sell to MS (subject to the satisfaction of certain conditions) five-year senior unsecured notes with gross proceeds of up to $3.15 billion at any time between April 1, 2023 and June 29, 2023. As of September 30, 2022, the $3.15 billion was reduced to $2.35 billion after the repurchase of an aggregate principal amount of $800 million of the June 2023 Convertible Notes with the proceeds of the 2025 Convertible Notes, as described below. Additionally, in October 2022, we completed the offering of the
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8.25% senior secured notes due 2029 and 9.25% senior guaranteed notes due 2029, as a result of which the amount available under the MS backstop facility was reduced to $350 million. The MS backstop facility will continue to be available to refinance the remaining $350 million due under the 4.25% Convertible Notes due June 2023.
In April 2022, we took delivery of Celebrity Beyond. To finance the delivery, we borrowed a total of €0.7 billion under a credit agreement novated to us upon delivery of the ship in April 2022, resulting in an unsecured term loan which is 100% guaranteed by BpiFAE. The unsecured loan amortizes semi-annually over 12 years and bears interest at a fixed rate of 1.28% per annum.
In July 2022, we purchased a ship for our Silversea Cruises brand. To finance the purchase, we assumed $277 million of debt, which is 95% guaranteed by Euler Hermes Aktiengesellschaft (“Hermes”), the official export credit agency of Germany. The loan amortizes semi-annually over 13 years starting in July 2024 and bears interest at a floating rate equal to SOFR plus a margin of 1.25%. The loan will mature in July 2037.
In August 2022, we issued $1.15 billion of convertible senior notes which accrue interest at 6.00% and mature in August 2025. Upon conversion election, we may deliver shares of our common stock, cash, or a combination of common stock and cash, at our election. The initial conversion rate per $1,000 principal amount of the convertible notes is 19.9577 shares of our common stock, which is equivalent to an initial conversion price of approximately $50.11 per share, subject to adjustment in certain circumstances. Prior to May 15, 2025, the convertible notes will be convertible at the option of holders during certain periods, and only under the following circumstances:
•during any calendar quarter commencing after the calendar quarter ending on or after September 30, 2022 (and only during such calendar quarter), if the last reported sale price per share of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•the trading price per $1,000 principal amount of notes is less than 98% of the product of the last reported sale price per share of our common stock and the conversation rate for ten consecutive trading days (in which case the notes are convertible at any time during the five business day period following the 10 consecutive trading day period);
•if we call the notes for a tax redemption; or
•upon the occurrence of specified corporate events.
On or after May 15, 2025 the convertible notes will be convertible at any time until the close of business on the second scheduled trading day immediately preceding their maturity date. We received gross proceeds from the offering of $1.15 billion, which we used to repurchase $800 million aggregate principal amount of our 4.25% convertible senior notes due June 15, 2023 and $350 million aggregate principal amount of our 2.875% convertible senior notes due November 15, 2023 (the "Existing Convertible Notes") in privately negotiated transactions. The $1.15 billion repayment resulted in a total loss on the extinguishment of debt of $12.8 million, which was recognized within Interest expense, net of interest capitalized within our consolidated statements of comprehensive loss for the quarter and nine months ended September 30,2022.
In August 2022, we issued $1.25 billion of senior unsecured notes which accrue interest at 11.625% and mature in August 2027. The net proceeds of the offering of $1.23 billion were first used to temporarily repay borrowings under our revolving credit facilities. The proceeds were subsequently used to repay other debt scheduled to mature in 2022, including the $650 million 5.25% unsecured senior notes due November 2022, which resulted in a loss on extinguishment of debt of $3.62 million that was recognized within Interest expense, net of interest capitalized within our consolidated statements of comprehensive loss for the quarter and nine months ended September 30, 2022.
In August 2022, we extended our binding commitment for a $700.0 million term loan facility by one year. As amended, we may draw on the facility at any time prior to August 11, 2023. Once drawn, the loan will bear interest at SOFR plus a margin of 5.75% and will mature 364 days from funding. In addition, the facility (if drawn) will be guaranteed by RCI Holdings LLC, our wholly owned subsidiary that owns the equity interests in subsidiaries that own seven of our vessels. We have the ability to increase the capacity of the facility by an additional $300.0 million from time to time subject to the receipt of additional or increased commitments and the issuance of guarantees from additional subsidiaries.
In September 2022, we amended our $0.6 billion unsecured term loan due October 2023. The amendments, among other things, extend the maturity date of advances under the facilities held by consenting lenders by 12 months to October 2024. Consenting lenders received a prepayment equal to 10% of their respective outstanding advances. Following this amendment, the aggregate outstanding principal balance of advances under the unsecured term loan is $501.6 million, with $30.0 million maturing in October 2023 and $471.6 million maturing in October 2024.
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In October 2022, we issued $1.0 billion aggregate principal amount of 9.250% senior guaranteed notes due 2029 and $1.0 billion aggregate principal amount of 8.250% senior secured notes due 2029, both callable in April 2025. We used the combined net proceeds, of the respective offerings, together with cash on hand, to fund the redemption, including call premiums, fees and expenses, of our outstanding 9.125% senior guaranteed notes due 2023 and 10.875% senior secured notes due 2023.
Our export credit facilities and our non-export credit facilities have an outstanding principal amount of approximately $12.0 billion as of September 30, 2022. These facilities contain covenants that require us, among other things, to maintain a fixed charge coverage ratio of at least 1.25x and limit our net debt-to-capital ratio, and under certain facilities, to maintain a minimum shareholders' equity. In 2021, we amended our non-export credit facilities and export credit facilities, and certain credit card processing agreements, to extend the waiver of our financial covenants through and including at least the third quarter of 2022, and subsequently in the third quarter of 2021, we entered into a letter agreement to extend the waiver period for our export credit facilities to the end of the fourth quarter of 2022. Further, in July 2022, we amended our non-export-credit facilities and export credit facilities, and certain credit card processing agreements. Among other things, the amendments modified the levels at which our net debt to capitalization covenant will be tested during the period commencing immediately following the end of the waiver period and continuing through the end of 2025 and the amount of minimum shareholders' equity required to be maintained through 2025. The amendments impose a monthly-tested minimum liquidity covenant of $350.0 million, which in the case of the non-export credit facilities terminates at the end of the waiver period and in the case of the export credit facilities terminates either in July 2025, or when we pay off all deferred amounts, whichever is earlier. In addition, the amendments to the non-export credit facilities place restrictions on paying cash dividends and effectuating share repurchases through the end of the third quarter of 2022, while the export credit facility amendments require us to prepay any deferred amounts if we elect to issue dividends or complete share repurchases.
As of September 30, 2022, our aggregate revolving borrowing capacity was $3.2 billion and was utilized through a combination of amounts drawn and letters of credits issued under the facilities. As of September 30, 2022, $0.8 billion remained undrawn. Certain of our surety agreements with third party providers for the benefit of certain agencies and associations that provide travel related bonds, allow the sureties to request collateral. We also have agreements with our credit card processors relating to customer deposits received by us for future voyages. These agreements allow the credit card processors to require us, under certain circumstances, to maintain a reserve that can be satisfied by posting collateral. As of September 30, 2022, we have posted letters of credit as collateral with our sureties under our revolving credit facilities in the amount of $14.2 million.
Executed amendments are in place for the majority of our credit card processors, waiving reserve requirements tied to the breach of our financial covenants through at least September 30, 2022, with modified covenants thereafter, and as such, we do not anticipate any incremental collateral requirements for the processors covered by these waivers in the next 12 months. We have a reserve with a processor where the agreement was amended in the first quarter of 2021, such that proceeds are withheld in reserve, until the sailing takes place or the funds are refunded to the customer. The agreement with this processor was further amended in the third quarter of 2021 such that a portion of the proceeds are withheld in reserve. The maximum projected exposure with the processor, including amounts currently withheld and reported in Trade and other receivables, is approximately $244.5 million. The amount and timing are dependent on future factors that are uncertain, such as the value of future deposits and any decisions about transferring business to other processors. If we require additional waivers on the credit card processing agreements and are not able to obtain them, this could lead to the termination of these agreements or the trigger of reserve requirements.
Except for the term loans we incurred to acquire Celebrity Flora and Silver Moon, all of our unsecured ship financing term loans are guaranteed by the export credit agency in the respective country in which the ship is constructed. For the majority of the loans as of September 30, 2022, we pay to the applicable export credit agency, depending on the financing agreement, an upfront fee of 2.35% to 5.48% of the maximum loan amount in consideration for these guarantees. We amortize the fees that are paid upfront over the life of the loan. We classify these fees within Amortization of debt issuance costs in our consolidated statements of cash flows. Prior to the loan being drawn, we present these fees within Other assets in our consolidated balance sheets. Once the loan is drawn, such fees are classified as a discount to the related loan, or contra-liability account, within Current portion of long-term debt or long-term debt.
The following is a schedule of annual maturities on our total debt, net of debt issuance costs of $439.5 million, and including finance leases, as of September 30, 2022 for each of the next five years (in thousands):
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| Year | As of September 30, 2022 (1) | ||||
| Remainder of 2022 | 589,222 | ||||
| 2023 (2) | 4,062,005 | ||||
| 2024 | 4,063,513 | ||||
| 2025 | 3,617,022 | ||||
| 2026 | 2,706,650 | ||||
| Thereafter | 8,290,959 | ||||
| 23,329,371 | |||||
(1) Debt denominated in other currencies is calculated based on the applicable exchange rate at September 30, 2022.
(2) In October 2022, we issued $2.0 billion of aggregate principal notes due 2029, the proceeds of which were used to repay $2.0 billion of 2023 debt maturities.
Note 8. Leases
Operating Leases
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 sheets as of September 30, 2022 and December 31, 2021. Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term. Our operating leases include Silver Explorer, operated by Silversea Cruises. The operating lease for Silver Explorer will expire in 2023.
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 to 10 years and the renewal periods for berthing agreements range from 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.
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. 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.
Finance Leases
Our finance leases primarily relate to buildings and surrounding land located at our Miami headquarters, our Silver Dawn, and Silver Whisper ships. Finance leases are included within Property, and Equipment, net, and Long-term debt with the current portion of the liability included within Current portion of long-term debt in our consolidated balance sheets as of September 30, 2022 and December 31, 2021.
In June 2019, the Company entered into a new master lease agreement (“Master Lease”) with Miami-Dade County related to the buildings and surrounding land located at our Miami headquarters, which has been classified as a finance lease in accordance with ASC 842, Leases. In January of 2022, we executed a modification to the Master Lease to extend the expiration of the lease from 2072 to 2074, which continues to include the two five-year options to extend the lease. We continue to consider the probability of exercising the two five-year options as reasonably certain. The modification of the Master Lease did not change the classification of the lease. The total aggregate amount of the finance lease liabilities recorded for this Master Lease was $101.6 million and $127.0 million as of September 30, 2022 and December 31, 2021, respectively.
Silversea Cruises operates Silver Dawn under a sale-leaseback agreement with a bargain purchase option at the end of the 15-year lease term. Due to the bargain purchase option at the end of the lease term in 2036, whereby Silversea Cruises is reasonably certain of obtaining ownership of the ship, Silver Dawn is accounted for as a finance lease. The lease includes other purchase options beginning in year three, none of which are reasonably certain of being exercised at this time. The total aggregate amount of finance lease liabilities recorded for this ship was $269.5 million and $283.7 million as of September 30, 2022 and December 31, 2021, respectively. The lease payments on the Silver Dawn are subject to adjustments based on the LIBOR rate.
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Silversea Cruises operates the Silver Whisper under a finance lease. The finance lease for Silver Whisper will expire in 2023, subject to an option to purchase the ship. Additionally, certain scheduled payments have been deferred and are reflected in Long-term debt in our Consolidated Balance Sheet as of September 30, 2022 and December 31, 2021. The total aggregate amount of the finance lease liabilities recorded for this ship was $8.9 million and $24.1 million at September 30, 2022 and December 31, 2021, respectively. The lease payments on the Silver Whisper are subject to adjustments based on the LIBOR rate.
The components of lease expense were as follows (in thousands):
| Consolidated Statement of Comprehensive Loss Classification | Quarter Ended September 30, 2022 | Nine Months Ended September 30, 2022 | ||||||||||||
| Lease costs: | ||||||||||||||
| Operating lease costs | Commission, transportation and other | $ | 26,924 | $ | 77,646 | |||||||||
| Operating lease costs | Other operating expenses | 5,545 | 16,540 | |||||||||||
| Operating lease costs | Marketing, selling and administrative expenses | 4,545 | 14,191 | |||||||||||
| Financial lease costs: | ||||||||||||||
| Amortization of right-of-use-assets | Depreciation and amortization expenses | 6,115 | 18,311 | |||||||||||
| Interest on lease liabilities | Interest expense, net of interest capitalized | 5,942 | 15,196 | |||||||||||
| Total lease costs | $ | 49,071 | $ | 141,884 | ||||||||||
| Consolidated Statement of Comprehensive Loss Classification | Quarter Ended September 30, 2021 | Nine Months Ended September 30, 2021 | ||||||||||||
| Lease costs: | ||||||||||||||
| Operating lease costs | Commission, transportation and other | $ | 1,626 | $ | 1,626 | |||||||||
| Operating lease costs | Other operating expenses | 5,424 | 15,365 | |||||||||||
| Operating lease costs | Marketing, selling and administrative expenses | 5,957 | 14,468 | |||||||||||
| Financial lease costs: | ||||||||||||||
| Amortization of right-of-use-assets | Depreciation and amortization expenses | 3,790 | 11,517 | |||||||||||
| Interest on lease liabilities | Interest expense, net of interest capitalized | 1,095 | 1,769 | |||||||||||
| Total lease costs | $ | 17,892 | $ | 44,745 | ||||||||||
In addition, certain of our berthing agreements include variable lease costs based on the number of passengers berthed. During the quarter and nine months ended September 30, 2022, we had $12.6 million and $32.0 million variable lease costs recorded within Commission, transportation and other in our consolidated statement of comprehensive loss, respectively. During the quarter and nine months ended September 30, 2021, we had no variable lease costs.
Weighted average of the remaining lease terms and weighted average discount rates are as follows:
| As of September 30, 2022 | As of December 31, 2021 | ||||||||||
| Weighted average of the remaining lease term in years | |||||||||||
| Operating leases | 17.52 | 18.18 | |||||||||
| Finance leases | 22.83 | 23.96 | |||||||||
| Weighted average discount rate | |||||||||||
| Operating leases | 6.90 | % | 6.52 | % | |||||||
| Finance leases | 5.78 | % | 5.54 | % | |||||||
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Supplemental cash flow information related to leases is as follows (in thousands):
| Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | 92,859 | $ | 20,682 | ||||
| Operating cash flows from finance leases | $ | 15,196 | $ | 1,769 | ||||
| Financing cash flows from finance leases | $ | 42,791 | $ | 15,058 | ||||
As of September 30, 2022, maturities related to lease liabilities were as follows (in thousands):
| Year | Operating Leases | Finance Leases | |||||||||
| Remainder of 2022 | $ | 27,170 | $ | 11,543 | |||||||
| 2023 | 113,427 | 53,069 | |||||||||
| 2024 | 101,668 | 44,348 | |||||||||
| 2025 | 96,207 | 43,986 | |||||||||
| 2026 | 90,152 | 38,843 | |||||||||
| Thereafter | 859,333 | 705,811 | |||||||||
| Total lease payments | 1,287,957 | 897,600 | |||||||||
| Less: Interest | (670,202) | (495,373) | |||||||||
| Present value of lease liabilities | $ | 617,755 | $ | 402,227 | |||||||
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Note 9. Commitments and Contingencies
Ship Purchase Obligations
Our future capital commitments consist primarily of new ship orders. As of September 30, 2022, the dates that the ships on order by our Global and Partner Brands are expected to be delivered, subject to change in the event of construction delays, and their approximate berths are as follows:
| Ship | Shipyard | Expected to be delivered | Approximate Berths | |||||||||||||||||
| Royal Caribbean International — | ||||||||||||||||||||
| Oasis-class: | ||||||||||||||||||||
| Utopia of the Seas | Chantiers de l'Atlantique | 2nd Quarter 2024 | 5,700 | |||||||||||||||||
| Icon-class: | ||||||||||||||||||||
| Icon of the Seas | Meyer Turku Oy | 4th Quarter 2023 | 5,600 | |||||||||||||||||
| Unnamed | Meyer Turku Oy | 2nd Quarter 2025 | 5,600 | |||||||||||||||||
| Unnamed | Meyer Turku Oy | 2nd Quarter 2026 | 5,600 | |||||||||||||||||
| Celebrity Cruises — | ||||||||||||||||||||
| Edge-class: | ||||||||||||||||||||
| Celebrity Ascent | Chantiers de l'Atlantique | 4th Quarter 2023 | 3,250 | |||||||||||||||||
| Silversea Cruises — | ||||||||||||||||||||
| Evolution Class: | ||||||||||||||||||||
| Silver Nova | Meyer Werft | 2nd Quarter 2023 | 730 | |||||||||||||||||
| Unnamed | Meyer Werft | 2nd Quarter 2024 | 730 | |||||||||||||||||
| TUI Cruises (50% joint venture) — | ||||||||||||||||||||
| Mein Schiff 7 | Meyer Turku Oy | 2nd Quarter 2024 | 2,900 | |||||||||||||||||
| Unnamed | Fincantieri | 4th Quarter 2024 | 4,100 | |||||||||||||||||
| Unnamed | Fincantieri | 2nd Quarter 2026 | 4,100 | |||||||||||||||||
| Total Berths | 38,310 | |||||||||||||||||||
In addition, as of September 30, 2022, we have an agreement in place with Chantiers de l'Atlantique to build an additional Edge-class ship for delivery in 2025, which is contingent upon completion of conditions precedent and financing.
As of September 30, 2022, the aggregate cost of our ships on order presented in the table above, excluding any ships on order by our Partner Brands, was approximately $9.1 billion, of which we had deposited $0.7 billion as of such date. Approximately 54.4% of the aggregate cost was exposed to fluctuations in the Euro exchange rate at September 30, 2022. Refer to Note 12. Fair Value Measurements and Derivative Instruments for further information.
Litigation
As previously reported, two lawsuits were filed against us in August 2019 in the U.S. District Court for the Southern District of Florida (the "Court") under Title III of the Cuban Liberty and Democratic Solidarity Act, also known as the Helms-Burton Act. The complaint filed by Havana Docks Corporation ("Havana Docks Action") alleges it holds an interest in the Havana Cruise Port Terminal, and the complaint filed by Javier Garcia-Bengochea (the "Port of Santiago Action") alleges that he holds an interest in the Port of Santiago, Cuba, both of which were expropriated by the Cuban government. The complaints further allege that we trafficked in those properties by embarking and disembarking passengers at these facilities. The plaintiffs seek all available statutory remedies, including the value of the expropriated property, plus interest, treble damages, attorneys’ fees and costs.
The Court dismissed the Port of Santiago Action with prejudice on the basis that the plaintiff lacked standing, and the plaintiff’s appeal of the dismissal is awaiting a decision by the appellate court. In the Havana Docks Action, the Court granted summary judgement in favor of the plaintiff as to liability in March 2022 with a decision on damages to be made subsequently. In August 2022, the Court ruled on several determinative issues with respect to the calculation on damages. On the basis of these rulings, in October 2022, the plaintiff filed a motion for entry of judgment in the amount of approximately $110 million plus attorney’s fees. The Court plans to issue a final judgement in the lawsuit, including a final ruling on damages following
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briefing to the Court scheduled to be completed by December 2022. We believe we have meritorious defenses to the claims alleged in both the Havana Docks Action and the Port of Santiago Action, and we intend to vigorously defend ourselves against them, including, in the Havana Docks Action, by appealing the Court’s final judgment. At this time, we have concluded that the likelihood of loss is reasonably possible, and therefore, no liability has been recorded. The outcome of the litigation is inherently unpredictable and subject to significant uncertainties, and there can be no assurances that the final outcome of either case will not be material.
In addition, 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
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 in any material amount is probable.
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 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 10. Shareholders' Equity
On January 1, 2022, we adopted using the modified retrospective approach to recognize our convertible notes as single liability instruments. As a result of the adoption of this pronouncement, the cumulative effect to Shareholders' equity was a reduction of $161.4 million. For further information regarding the entry recorded and the adoption of ASU 2020-06, refer to Note 2. Summary of Significant Accounting Policies.
Common Stock Issued
During March 2021, we issued 16.9 million shares of common stock, par value $0.01 per share, at a price of $91.00 per share. We received net proceeds of $1.5 billion from the sale of our common stock, after deducting the estimated offering expenses payable by us.
Dividends
During the second quarter of 2020, we agreed with certain of our lenders not to pay dividends or engage in common stock repurchases for so long as our debt covenant waivers are in effect. In addition, in the event we declare a dividend or engage in share repurchases, we will need to repay the amounts deferred under our export credit facilities. Accordingly, during the nine months ended September 30, 2022 and 2021, we did not declare dividends. Pursuant to amendments made to these agreements during the first quarter of 2021, the restrictions on paying cash dividends and effectuating share repurchases were extended through and including the third quarter of 2022.
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Note 11. Changes in Accumulated Other Comprehensive Loss
The following table presents the changes in accumulated other comprehensive loss by component for the nine months ended September 30, 2022 and 2021 (in thousands):
| Accumulated Other Comprehensive Loss for the Nine Months Ended September 30, 2022 | Accumulated Other Comprehensive Loss for the Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | (646,473) | $ | (56,835) | $ | (7,577) | $ | (710,885) | $ | (650,519) | $ | (65,542) | $ | (23,280) | $ | (739,341) | |||||||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (18,061) | 32,504 | 31,958 | 46,401 | 23,752 | 313 | 11,255 | 35,320 | |||||||||||||||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | (130,480) | 2,487 | — | (127,993) | 24,762 | 3,435 | — | 28,197 | |||||||||||||||||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | (148,541) | 34,991 | 31,958 | (81,592) | 48,514 | 3,748 | 11,255 | 63,517 | |||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | (795,014) | $ | (21,844) | $ | 24,381 | $ | (792,477) | $ | (602,005) | $ | (61,794) | $ | (12,025) | $ | (675,824) | |||||||||||||||||||||||||||||||
The following table presents reclassifications out of accumulated other comprehensive loss for the quarters and nine months ended September 30, 2022 and 2021 (in thousands):
| Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income | ||||||||||||||||||||||||||||||||
| Details About Accumulated Other Comprehensive Loss Components | Quarter Ended September 30, 2022 | Quarter Ended September 30, 2021 | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | Affected Line Item in Statements of Comprehensive Loss | |||||||||||||||||||||||||||
| Gain (loss) on cash flow derivative hedges: | ||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | (4,197) | $ | (11,418) | $ | (19,782) | $ | (32,376) | Interest expense, net of interest capitalized | |||||||||||||||||||||||
| Foreign currency forward contracts | (4,363) | (3,905) | (12,722) | (11,541) | Depreciation and amortization expenses | |||||||||||||||||||||||||||
| Foreign currency forward contracts | (466) | (505) | (2,155) | (2,311) | Other income (expense) | |||||||||||||||||||||||||||
| Fuel swaps | 18 | (2) | (336) | (416) | Other income (expense) | |||||||||||||||||||||||||||
| Fuel swaps | 43,490 | 10,600 | 165,475 | 21,882 | Fuel | |||||||||||||||||||||||||||
| 34,482 | (5,230) | 130,480 | (24,762) | |||||||||||||||||||||||||||||
| Amortization of defined benefit plans: | ||||||||||||||||||||||||||||||||
| Actuarial loss | (829) | (1,145) | (2,487) | (3,435) | Payroll and related | |||||||||||||||||||||||||||
| (829) | (1,145) | (2,487) | (3,435) | |||||||||||||||||||||||||||||
| Total reclassifications for the period | $ | 33,653 | $ | (6,375) | $ | 127,993 | $ | (28,197) | ||||||||||||||||||||||||
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Note 12. 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 September 30, 2022 | Fair Value Measurements at December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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) | $ | 1,566,213 | $ | 1,566,213 | $ | 1,566,213 | $ | — | $ | — | $ | 2,701,770 | $ | 2,701,770 | $ | 2,701,770 | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||
| Total Assets | $ | 1,566,213 | $ | 1,566,213 | $ | 1,566,213 | $ | — | $ | — | $ | 2,701,770 | $ | 2,701,770 | $ | 2,701,770 | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-term debt (including current portion of debt)(5) | $ | 22,927,144 | $ | 21,948,811 | $ | — | $ | 21,948,811 | $ | — | $ | 20,618,065 | $ | 22,376,480 | $ | — | $ | 22,376,480 | $ | — | ||||||||||||||||||||||||||||||||||||||||||
| Total Liabilities | $ | 22,927,144 | $ | 21,948,811 | $ | — | $ | 21,948,811 | $ | — | $ | 20,618,065 | $ | 22,376,480 | $ | — | $ | 22,376,480 | $ | — | ||||||||||||||||||||||||||||||||||||||||||
(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 September 30, 2022 and December 31, 2021.
(4) Consists of cash and marketable securities with original maturities of less than 90 days.
(5) Consists of unsecured revolving credit facilities, senior notes, term loans and convertible notes. These amounts do not include our finance lease obligations or commercial paper.
Other Financial Instruments
The carrying amounts of accounts receivable, accounts payable, accrued interest and accrued expenses approximate fair value at September 30, 2022 and December 31, 2021.
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 September 30, 2022 | Fair Value Measurements at December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 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) | $ | 189,150 | $ | — | $ | 189,150 | $ | — | $ | 69,808 | $ | — | $ | 69,808 | $ | — | ||||||||||||||||||||||||||||||||||
| Total Assets | $ | 189,150 | $ | — | $ | 189,150 | $ | — | $ | 69,808 | $ | — | $ | 69,808 | $ | — | ||||||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments(5) | $ | 312,358 | $ | — | $ | 312,358 | $ | — | $ | 200,541 | $ | — | $ | 200,541 | $ | — | ||||||||||||||||||||||||||||||||||
| Total Liabilities | $ | 312,358 | $ | — | $ | 312,358 | $ | — | $ | 200,541 | $ | — | $ | 200,541 | $ | — | ||||||||||||||||||||||||||||||||||
(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. No Level 3 inputs were used in fair value measurements of Other financial instruments as of September 30, 2022 and December 31, 2021.
(4)Consists of 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 and fuel swaps. Refer to the "Fair Value of Derivative Instruments" table for breakdown by instrument type.
The reported fair values are based on a variety of factors and assumptions. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of September 30, 2022 or December 31, 2021, or that will be realized in the future, and do not include expenses that could be incurred in an actual sale or settlement.
Nonfinancial Instruments Recorded at Fair Value on a Nonrecurring Basis
Nonfinancial instruments include items such as goodwill, indefinite-lived intangible assets, long-lived assets, right-of-use assets and equity method investments that are measured at fair value on a nonrecurring basis when events and circumstances indicate the carrying value is not recoverable. The following table presents information about the Company’s nonfinancial instruments recorded at fair value on a nonrecurring basis (in thousands):
| Fair Value Measurements at September 30, 2022 | ||||||||||||||
| Description | Total Carrying Amount | Total Fair Value | Level 3 | Total Impairment for the Nine Months ended September 30, 2022 (1) | ||||||||||
| Long-lived assets | — | — | — | 10,186 | ||||||||||
| Total | — | — | — | 10,186 | ||||||||||
(1) Amount is primarily composed of construction in progress assets that were impaired during the three months ended September 30, 2022 due to a reduction in scope or the decision to not complete the projects. The impairments were calculated based on orderly liquidation values. The fair value of these assets was estimated as of the date the assets were last impaired.
| Fair Value Measurements at December 31, 2021 | ||||||||||||||
| Description | Total Carrying Amount | Total Fair Value | Level 3 | Total Impairment for the Year Ended December 31, 2021 (1) | ||||||||||
| Long-lived assets | — | — | — | 55,213 | ||||||||||
| Total | — | — | — | 55,213 | ||||||||||
(1) Amount is primarily composed of construction in progress assets that were impaired during the year ended 2021 due to a reduction in scope or the decision to not complete the projects. The impairments were calculated based on orderly liquidation values. The fair value of these assets was estimated as of the date the assets were last impaired.
Master Netting Agreements
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 September 30, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 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 Liabilities | Cash Collateral Received | Net Amount of Derivative Assets | |||||||||||||||||||||||||||||||||||||||||||
| Derivatives subject to master netting agreements | $ | 189,150 | $ | (145,297) | $ | — | $ | 43,853 | $ | 69,808 | $ | (67,995) | $ | — | $ | 1,813 | ||||||||||||||||||||||||||||||||||
| Total | $ | 189,150 | $ | (145,297) | $ | — | $ | 43,853 | $ | 69,808 | $ | (67,995) | $ | — | $ | 1,813 | ||||||||||||||||||||||||||||||||||
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 September 30, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 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 Assets | Cash Collateral Pledged | Net Amount of Derivative Liabilities | |||||||||||||||||||||||||||||||||||||||||||
| Derivatives subject to master netting agreements | $ | (312,358) | $ | 145,297 | $ | — | $ | (167,061) | $ | (200,541) | $ | 67,995 | $ | 44,411 | $ | (88,135) | ||||||||||||||||||||||||||||||||||
| Total | $ | (312,358) | $ | 145,297 | $ | — | $ | (167,061) | $ | (200,541) | $ | 67,995 | $ | 44,411 | $ | (88,135) | ||||||||||||||||||||||||||||||||||
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 September 30, 2022, we had counterparty credit risk exposure under our derivative instruments of $38.2 million, which was 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. In certain hedges of our net investment in foreign operations and investments, we exclude forward points from the assessment of hedge effectiveness and we amortize the related amounts directly into 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. For our net investment hedges, we use the dollar offset method to measure effectiveness. For all other hedging programs, we use the long-haul method to assess hedge effectiveness using regression analysis for each hedge relationship. The methodology for assessing hedge effectiveness is applied on a consistent basis for each one of our hedging programs (i.e., interest rate, foreign currency ship construction, foreign currency net investment and fuel). For our regression analyses, we use 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 highly 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 September 30, 2022 and December 31, 2021, approximately 75.3% and 65.7%, respectively, of our debt was effectively fixed-rate debt. 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 December 31, 2021, we maintained interest rate swap agreements on the following fixed-rate debt instruments:
| Debt Instrument | Swap Notional as of December 31, 2021 (in thousands) | Maturity | Debt Fixed Rate | Swap Floating Rate: LIBOR plus | All-in Swap Floating Rate as of December 31, 2021 | ||||||||||||
| Unsecured senior notes | 650,000 | November 2022 | 5.25% | 3.63% | 3.79% | ||||||||||||
| $ | 650,000 | ||||||||||||||||
During the quarter ended September 30, 2022, we redeemed our 5.25% senior unsecured notes due 2022 in full and terminated the related interest rate swap agreements, which resulted in the dedesignation of the fair value hedges and recognition of an immaterial loss representing the fair value hedge carrying amount adjustment on these notes.
We use interest rate swap agreements that effectively convert a portion of our floating-rate debt to a fixed-rate basis to manage the market risk of increasing interest rates. At September 30, 2022 and December 31, 2021, we maintained interest rate swap agreements on the following floating-rate debt instruments:
| Debt Instrument | Swap Notional as of September 30, 2022 (in thousands) | Maturity | Debt Floating Rate | All-in Swap Fixed Rate as of September 30, 2022 | |||||||||||||
Celebrity Reflection term loan | $ | 136,354 | October 2024 | LIBOR plus | 0.40% | 2.85% | |||||||||||
Quantum of the Seas term loan | 275,625 | October 2026 | LIBOR plus | 1.30% | 3.74% | ||||||||||||
Anthem of the Seas term loan | 302,083 | April 2027 | LIBOR plus | 1.30% | 3.86% | ||||||||||||
Ovation of the Seas term loan | 415,000 | April 2028 | LIBOR plus | 1.00% | 3.16% | ||||||||||||
Harmony of the Seas term loan (1) | 339,697 | May 2028 | EURIBOR plus | 1.15% | 2.26% | ||||||||||||
Odyssey of the Seas term loan (2) | 402,500 | October 2032 | LIBOR plus | 0.96% | 3.21% | ||||||||||||
Odyssey of the Seas term loan (2) | 191,667 | October 2032 | LIBOR plus | 0.96% | 2.84% | ||||||||||||
| $ | 2,062,926 | ||||||||||||||||
(1)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 September 30, 2022.
(2)Interest rate swap agreements hedging the term loan of Odyssey of the Seas include LIBOR zero-floors matching the debt LIBOR zero-floor. The effective dates of the $402.5 million and $191.7 million interest rate swap agreements are October 2020 and October 2022, respectively. The unsecured term loan for the financing of Odyssey of the Seas was drawn on March 2021.
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 September 30, 2022 and December 31, 2021 was $2.1 billion and $2.9 billion, respectively.
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 September 30, 2022, the aggregate cost of our ships on order was $9.1 billion, of which we had deposited $0.7 billion as of such date. These amounts do not include any ships placed on order that are contingent upon completion of conditions precedent and/or financing and any ships on order by our Partner Brands. Refer to Note 9. Commitments and Contingencies, for further information on our ships on order. At September 30, 2022 and December 31, 2021, approximately 54.4% and 59.0%, 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 third quarter of 2022, we maintained an average of approximately $1.2 billion of these foreign currency forward contracts. These instruments are not designated as hedging instruments. For the quarters ended September 30, 2022 and 2021, changes in the fair value of the foreign
currency forward contracts resulted in losses of $88.4 million and $12.9 million, respectively, which offset gains arising from the remeasurement of monetary assets and liabilities denominated in foreign currencies in those same periods of $84.0 million and $13.2 million, respectively. For the nine months ended September 30, 2022 and 2021, changes in the fair value of the foreign currency forward contracts resulted in losses of $176.3 million and $25.9 million, respectively, which offset gains arising from the remeasurement of monetary assets and liabilities denominated in foreign currencies in those same periods of $169.7 million and $17.9 million, respectively. These amounts were recognized in earnings within Other income (expense) in our consolidated statements of comprehensive loss.
The notional amount of outstanding foreign exchange contracts, excluding the forward contracts entered into to minimize remeasurement volatility, as of September 30, 2022 and December 31, 2021 was $2.4 billion and $3.4 billion, respectively.
Non-Derivative Instruments
We consider our investment in our foreign operations to be denominated in relative stable currencies and to be of a long-term nature. We 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 €367.0 million, or approximately $359.6 million, as of September 30, 2022. As of December 31, 2021, we had designated debt as a hedge of our net investments primarily in TUI Cruises of €97.0 million, or approximately $110.3 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. In the case that our hedged forecasted fuel consumption is not probable of occurring, hedge accounting will be discontinued and the related accumulated other comprehensive gain or loss will be reclassified to Other income (expense) immediately. For hedged forecasted fuel consumption that remains possible of occurring, hedge accounting will be discontinued and the related accumulated other comprehensive gain or loss will remain in accumulated other comprehensive gain or loss until the underlying hedged transactions are recognized in earnings or the related hedged forecasted fuel consumption is deemed probable of not occurring.
Prior suspension of our cruise operations due to the COVID-19 pandemic and our gradual resumption of cruise operations has resulted in reductions to our forecasted fuel purchases. During the quarter and nine months ended September 30, 2021, we discontinued cash flow hedge accounting on 48.1 thousand and 95.8 thousand metric tons of our fuel swap agreements, respectively, maturing in 2021 and 2022, which resulted in the reclassification of a net $2.4 million gain and $1.9 million loss from Accumulated other comprehensive loss to Other income (expense), respectively. For the nine months ended September 30, 2022, we did not discontinue cash flow hedge accounting on any of our fuel swap agreements. Changes in the fair value of fuel swaps for which cash flow hedge accounting was discontinued are currently recognized in Other income (expense) each reporting period through the maturity dates of the fuel swaps.
Future suspension of our operations or modifications to our itineraries may affect our expected forecasted fuel purchases which could result in further discontinuance of fuel swap cash flow hedge accounting and the reclassification of deferred gains or losses from Accumulated other comprehensive loss into earnings. Refer to Risk Factors in Part II, Item 1A. for further discussion on risks related to COVID-19.
At September 30, 2022, we have hedged the variability in future cash flows for certain forecasted fuel transactions occurring through 2023. As of September 30, 2022 and December 31, 2021, we had the following outstanding fuel swap agreements:
| Fuel Swap Agreements | |||||||||||
| As of September 30, 2022 | As of December 31, 2021 | ||||||||||
| Designated as hedges: | (metric tons) | ||||||||||
| 2022 | 257,950 | 821,850 | |||||||||
| 2023 | 743,601 | 249,050 | |||||||||
| Fuel Swap Agreements | |||||||||||
| As of September 30, 2022 | As of December 31, 2021 | ||||||||||
| (% hedged) | |||||||||||
| Designated hedges as a % of projected fuel purchases: | |||||||||||
| 2022 | 64 | % | 54 | % | |||||||
| 2023 | 45 | % | 15 | % | |||||||
| Fuel Swap Agreements | |||||||||||
| As of September 30, 2022 | As of December 31, 2021 | ||||||||||
| Not designated as hedges: | (metric tons) | ||||||||||
| 2022(1) | 94,382 | 231,900 | |||||||||
| 2023 | — | — | |||||||||
(1) As of September 30, 2022, 47,191 metric tons relate to fuel swap agreements with discontinued hedge accounting, in which we effectively pay fixed prices and receive floating prices from the counterparty. The remaining 47,191 metric tons relate to fuel swap agreements that were not designated as hedges since inception, in which we effectively pay floating prices and receive fixed prices from the counterparty.
As of September 30, 2022, there was $9.8 million of estimated unrealized gain 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 when compared to $23.8 million of estimated unrealized net gain at December 31, 2021. 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 September 30, 2022 | As of December 31, 2021 | Balance Sheet Location | As of September 30, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||
| Fair Value | Fair Value | Fair Value | Fair Value | |||||||||||||||||||||||||||||||||||
Derivatives designated as hedging instruments under ASC 815-20(1) | ||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | Other assets | $ | 115,495 | $ | — | Other long-term liabilities | $ | — | $ | 62,080 | ||||||||||||||||||||||||||||
| Interest rate-swaps | Derivative financial instruments | 6,478 | Derivative financial instruments | — | — | |||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | Derivative financial instruments | — | 7,357 | Derivative financial instruments | 189,396 | 116,027 | ||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | Other assets | — | 2,070 | Other long-term liabilities | 53,307 | 8,813 | ||||||||||||||||||||||||||||||||
| Fuel swaps | Derivative financial instruments | 53,903 | 31,919 | Derivative financial instruments | 41,793 | 7,944 | ||||||||||||||||||||||||||||||||
| Fuel swaps | Other assets | 10,131 | 13,452 | Other long-term liabilities | 16,403 | 1,202 | ||||||||||||||||||||||||||||||||
| Total derivatives designated as hedging instruments under 815-20 | $ | 179,529 | $ | 61,276 | $ | 300,899 | $ | 196,066 | ||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments under ASC 815-20 | ||||||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | Derivative financial instruments | $ | — | $ | — | Derivative financial instruments | $ | — | $ | — | ||||||||||||||||||||||||||||
| Foreign currency forward contracts | Other assets | — | — | Other long-term liabilities | — | — | ||||||||||||||||||||||||||||||||
| Fuel swaps | Derivative financial instruments | 9,621 | 8,430 | Derivative financial instruments | 11,459 | 3,264 | ||||||||||||||||||||||||||||||||
| Fuel swaps | Other Assets | — | 102 | Other long-term liabilities | — | 1,211 | ||||||||||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments under 815-20 | 9,621 | 8,532 | 11,459 | 4,475 | ||||||||||||||||||||||||||||||||||
| Total derivatives | $ | 189,150 | $ | 69,808 | $ | 312,358 | $ | 200,541 | ||||||||||||||||||||||||||||||
(1)Subtopic 815-20 “Hedging-General” under ASC 815.
The carrying value and line item caption of non-derivative instruments designated as hedging instruments recorded within our consolidated balance sheets were as follows (in thousands):
| Carrying Value | ||||||||||||||||||||
| Non-derivative instrument designated as hedging instrument under ASC 815-20 | Balance Sheet Location | As of September 30, 2022 | As of December 31, 2021 | |||||||||||||||||
| Foreign currency debt | Current portion of debt | $ | 57,211 | $ | 75,518 | |||||||||||||||
| Foreign currency debt | Long-term debt | 302,376 | 34,795 | |||||||||||||||||
| $ | 359,587 | $ | 110,313 | |||||||||||||||||
The effect of derivative instruments qualifying and designated as hedging instruments and the related hedged items in fair value hedges on the consolidated statements of comprehensive loss was as follows (in thousands):
| Derivatives and Related Hedged Items under ASC 815-20 Fair Value Hedging Relationships | Location of Gain (Loss) Recognized in Income on Derivative and Hedged Item | Amount of Gain (Loss) Recognized in Income on Derivative | Amount of Gain (Loss) Recognized in Income on Hedged Item | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Quarter Ended September 30, 2022 | Quarter Ended September 30, 2021 | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | Quarter Ended September 30, 2022 | Quarter Ended September 30, 2021 | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | Interest expense (income), net of interest capitalized | $ | 966 | $ | 383 | $ | (3,569) | $ | 148 | $ | (4,417) | $ | 2,100 | $ | 4,534 | $ | 7,098 | |||||||||||||||||||||||||||||||||||||||
| $ | 966 | $ | 383 | $ | (3,569) | $ | 148 | $ | (4,417) | $ | 2,100 | $ | 4,534 | $ | 7,098 | |||||||||||||||||||||||||||||||||||||||||
The fair value and line item caption of derivative instruments recorded within our consolidated balance sheets for the cumulative basis adjustment for fair value hedges were as follows (in thousands):
| Line Item in the Statement of Financial Position Where the Hedged Item is Included | Carrying Amount of the Hedged Liabilities | Cumulative amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liabilities | ||||||||||||||||||||||||
| As of September 30, 2022 | As of December 31, 2021 | As of September 30, 2022 | As of December 31, 2021 | |||||||||||||||||||||||
| Current portion of debt and Long-term debt | $ | — | $ | 655,502 | $ | — | $ | 6,428 | ||||||||||||||||||
| $ | — | $ | 655,502 | $ | — | $ | 6,428 | |||||||||||||||||||
The effect of derivative instruments qualifying and designated as cash flow hedging instruments on the consolidated financial statements was as follows (in thousands):
| Derivatives under ASC 815-20 Cash Flow Hedging Relationships | Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Loss on Derivatives | |||||||||||||||||||||||||
| Quarter Ended September 30, 2022 | Quarter Ended September 30, 2021 | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | |||||||||||||||||||||||
| Interest rate swaps | $ | 55,016 | $ | 1,534 | $ | 159,132 | $ | 29,228 | ||||||||||||||||||
| Foreign currency forward contracts | (148,275) | (48,221) | (311,252) | (150,376) | ||||||||||||||||||||||
| Fuel swaps | (132,208) | 28,193 | 134,059 | 144,900 | ||||||||||||||||||||||
| $ | (225,467) | $ | (18,494) | $ | (18,061) | $ | 23,752 | |||||||||||||||||||
The table below represents amounts excluded from the assessment of effectiveness for our net investment hedging instruments for which the difference between changes in fair value and periodic amortization is recorded in accumulated other comprehensive income (loss) (in thousands):
| Gain (Loss) Recognized in Income (Net Investment Excluded Components) | Nine Months Ended September 30, 2022 | |||||||
| Net inception fair value at January 1, 2022 | $ | (554) | ||||||
| Amount of gain recognized in income on derivatives for the period ended September 30, 2022 | 554 | |||||||
| Fair value at September 30, 2022 | $ | — | ||||||
The effect of non-derivative instruments qualifying and designated as net investment hedging instruments on the consolidated financial statements was as follows (in thousands):
| Amount of Gain (Loss) Recognized in Other Comprehensive Loss | ||||||||||||||||||||||||||
| Non-derivative instruments under ASC 815-20 Net Investment Hedging Relationships | Quarter Ended September 30, 2022 | Quarter Ended September 30, 2021 | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||||||||||||||||||
| Foreign Currency Debt | $ | 22,464 | $ | 2,585 | $ | 42,023 | $ | 5,593 | ||||||||||||||||||
| $ | 22,464 | $ | 2,585 | $ | 42,023 | $ | 5,593 | |||||||||||||||||||
There was no amount recognized in income (ineffective portion and amount excluded from effectiveness testing) for the quarters and nine months ended September 30, 2022 and September 30, 2021.
The effect of derivatives not designated as hedging instruments on the consolidated financial statements was as follows (in thousands):
| Amount of Gain (Loss) Recognized in Income on Derivatives | ||||||||||||||||||||||||||||||||
| Derivatives Not Designated as Hedging Instruments under ASC 815-20 | Location of Gain (Loss) Recognized in Income on Derivatives | Quarter Ended September 30, 2022 | Quarter Ended September 30, 2021 | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||
| Foreign currency forward contracts | Other income (expense) | $ | (88,440) | $ | (12,880) | $ | (176,322) | $ | (25,854) | |||||||||||||||||||||||
| Fuel swaps | Other income (expense) | (230) | 8,222 | 36 | 35,858 | |||||||||||||||||||||||||||
| $ | (88,670) | $ | (4,658) | $ | (176,286) | $ | 10,004 | |||||||||||||||||||||||||
Credit Related Contingent Features
Our current interest rate derivative instruments require us to post collateral if our Standard & Poor’s and Moody’s credit ratings fall below specified levels. Specifically, under most of our agreements, if on the fifth anniversary of executing a derivative instrument, or on any succeeding fifth-year anniversary, our credit ratings for our senior unsecured debt is rated below BBB- by Standard & Poor’s and Baa3 by Moody’s, then the counterparty will periodically have the right to demand that we post collateral in an amount equal to the difference
between (i) the net market value of all derivative transactions with such counterparty that have reached their fifth year anniversary, to the extent negative, and (ii) the applicable minimum call amount.
The amount of collateral required to be posted will change as, and to the extent, our net liability position increases or decreases by more than the applicable minimum call amount. If our credit rating for our senior unsecured debt is subsequently equal to or above BBB- by Standard & Poor’s or Baa3 by Moody’s, then any collateral posted at such time will be released to us and we will no longer be required to post collateral unless we meet the collateral trigger requirement, generally, at the next fifth-year anniversary.
As of September 30, 2022, our senior unsecured debt credit rating was B by Standard & Poor's and B3 by Moody's. As of September 30, 2022, five of our interest rate derivative hedges had reached their fifth-year anniversary; however, the net market value for these derivative hedges were in a net asset position, accordingly, we were not required to post any collateral as of such date.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Concerning Forward-Looking Statements
The discussion under this caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding our expectations for future periods, business and industry prospects or future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking. Words such as "anticipate," "believe," "considering," "could," "driving," "estimate," "expect," "goal," "intend," "may," "plan," "project," "seek," "should," "will," "would," and similar expressions are intended to further identify any of these forward-looking statements. Forward-looking statements reflect management's current expectations, but they are based on judgments and are inherently uncertain. Furthermore, they are subject to risks, uncertainties and other factors that could cause our actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied in those forward-looking statements. Examples of these risks, uncertainties and other factors include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q and, in particular, the risks discussed under the caption "Risk Factors" in Part II, Item 1A herein.
All forward-looking statements made in this Quarterly Report on Form 10-Q speak only as of the date of this filing. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
The discussion and analysis of our financial condition and results of operations is organized to present the following:
•a review of our financial presentation, including discussion of certain operational and financial metrics we utilize to assist us in managing our business;
•a discussion of our results of operations for the quarter and nine months ended September 30, 2022, compared to the same period in 2021; and
•a discussion of our liquidity and capital resources, including our future capital and contractual commitments and potential funding sources.
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Critical Accounting Policies and Estimates
For a discussion of our critical accounting policies and estimates, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations within our Annual Report on Form 10-K for the year ended December 31, 2021.
Seasonality
Our revenues are seasonal based on demand for cruises. Demand has historically been strongest for cruises during the Northern Hemisphere’s summer months and holidays. In order to mitigate the impact of the winter weather in the Northern Hemisphere and to capitalize on the summer season in the Southern Hemisphere, our brands have historically focused on deployment to the Caribbean, Asia and Australia during that period. This seasonal trend was disrupted with the voluntary suspension of our global cruise operations effective March 2020 in response to the COVID-19 outbreak. We resumed our global cruise operations commencing in the second half of 2021, with our full fleet in service by June 2022. Since our full fleet is in service, we expect to return to seasonal trends.
Financial Presentation
Description of Certain Line Items
Revenues
Our revenues are comprised of the following:
•Passenger ticket revenues, which consist of revenue recognized from the sale of passenger tickets and the sale of air transportation to and from our ships; and
•Onboard and other revenues, which consist primarily of revenues from the sale of goods and/or services onboard our ships not included in passenger ticket prices, cancellation fees, sales of vacation protection insurance, pre- and post-cruise tours and fees for operating certain port facilities. Onboard and other revenues also include 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, as well as revenues received for procurement and management related services we perform on behalf of our unconsolidated affiliates.
Cruise Operating Expenses
Our cruise operating expenses are comprised of the following:
•Commissions, transportation and other expenses, which consist of those costs directly associated with passenger ticket revenues, including travel agent commissions, air and other transportation expenses, port costs that vary with passenger head counts and related credit card fees;
•Onboard and other expenses, which consist of the direct costs associated with onboard and other revenues, including the costs of products sold onboard our ships, vacation protection insurance premiums, costs associated with pre- and post-cruise tours and related credit card fees, as well as the minimal costs associated with concession revenues, as the costs are mostly incurred by third-party concessionaires, and costs incurred for the procurement and management related services we perform on behalf of our unconsolidated affiliates;
•Payroll and related expenses, which consist of costs for shipboard personnel (costs associated with our shoreside personnel are included in Marketing, selling and administrative expenses);
•Food expenses, which include food costs for both guests and crew;
•Fuel expenses, which include fuel and related delivery, storage and emission consumable costs and the financial impact of fuel swap agreements; and
•Other operating expenses, which consist primarily of operating costs such as repairs and maintenance, port costs that do not vary with passenger head counts, vessel related insurance, entertainment and gains and/or losses related to the sale of our ships, if any.
We do not allocate payroll and related expenses, food expenses, fuel expenses or other operating expenses to the expense categories attributable to passenger ticket revenues or onboard and other revenues since they are incurred to provide the total cruise vacation experience.
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Selected Operational and Financial Metrics
We utilize a variety of operational and financial metrics which are defined below to evaluate our performance and financial condition. As discussed in more detail herein, certain of these metrics are non-GAAP financial measures. These non-GAAP financial measures are provided along with the related GAAP financial measures as we believe they provide useful information to investors as a supplement to our consolidated financial statements, which are prepared and presented in accordance with GAAP. The presentation of non-GAAP financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.
Adjusted EBITDA is a non-GAAP measure that represents EBITDA (as defined below) excluding certain items that we believe adjusting for is meaningful when assessing our profitability on a comparative basis. For the 2022 and 2021 periods presented, these items included (i) other income; (ii) impairment and credit losses (recoveries); (iii) restructuring charges and other initiative expenses; (iv) equity investment asset impairments; (v) net insurance recoveries related to the collapse of the drydock structure at the Grand Bahama Shipyard involving Oasis of the Seas; (vi) Pullmantur reorganization settlement; and (vii) the net gain recognized in 2021 in relation to the sale of the Azamara brand. A reconciliation of Net Income (Loss) to Adjusted EBITDA is provided below under Results of Operations.
Adjusted Earnings (Loss) per Share ("Adjusted EPS") is a non-GAAP measure that represents Adjusted Net Income (Loss) (as defined below) divided by weighted average shares outstanding or by diluted weighted average shares outstanding, as applicable. We believe that this non-GAAP measure is meaningful when assessing our performance on a comparative basis. A reconciliation of Earnings (Loss) per Share to Adjusted Earnings (Loss) per share is provided below under Results of Operations.
Adjusted Net Income (Loss) is a non-GAAP measure that represents net income (loss) excluding certain items that we believe adjusting for is meaningful when assessing our performance on a comparative basis. For the 2022 and 2021 periods presented, these items included (i) impairment and credit losses (recoveries); (ii) restructuring charges and other initiative expenses; (iii) the amortization of the Silversea Cruises intangible assets resulting from the Silversea Cruises acquisition in 2018; (iv) gain or loss on the extinguishment of debt; (v) the amortization of non-cash debt discount on our convertible notes; (vi) the estimated cash refunds expected to be paid to Pullmantur guests as part of the Pullmantur S.A. reorganization in 2020; (vii) equity investment asset impairments; (viii) net insurance recoveries related to the collapse of the drydock structure at the Grand Bahama Shipyard involving Oasis of the Seas; and (ix) the net gain recognized in 2021 in relation to the sale of the Azamara brand. A reconciliation of Net Income (Loss) to Adjusted Net Income (Loss) is provided below under Results of Operations.
Available Passenger Cruise Days (“APCD”) is our measurement of capacity and represents double occupancy per cabin multiplied by the number of cruise days for the period, which excludes canceled cruise days and cabins not available for sale. We use this measure to perform capacity and rate analysis to identify our main non-capacity drivers that cause our cruise revenue and expenses to vary.
EBITDA is a non-GAAP measure that represents net income (loss) excluding (i) interest income; (ii) interest expense, net of interest capitalized; (iii) depreciation and amortization expenses; and (iv) income tax benefit or expense. We believe that this non-GAAP measure is meaningful when assessing our operating performance on a comparative basis. A reconciliation of Net Income (Loss) to EBITDA is provided below under Results of Operations.
Gross Cruise Costs represent the sum of total cruise operating expenses plus marketing, selling and administrative expenses.
Net Cruise Costs and Net Cruise Costs Excluding Fuel are non-GAAP measures that represent Gross Cruise Costs excluding commissions, transportation and other expenses and onboard and other expenses and, in the case of Net Cruise Costs Excluding Fuel, fuel expenses (each of which is described above under the Description of Certain Line Items heading). In measuring our ability to control costs in a manner that positively impacts net income, we believe changes in Net Cruise Costs and Net Cruise Costs Excluding Fuel to be the most relevant indicators of our performance. A reconciliation of Gross Cruise Costs to Net Cruise Costs and Net Cruise Costs Excluding Fuel is provided below under Results of Operations. For the 2022 period presented, Net Cruise Costs and Net Cruise Costs Excluding Fuel excludes restructuring and other initiative expenses.
Occupancy ("Load Factor"), in accordance with cruise vacation industry practice, is calculated by dividing Passenger Cruise Days (as defined below) 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.
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Although discussed in prior periods, we did not disclose or reconcile in this report our Gross Yields and Net Yields, as defined in our Annual Report on Form 10-K for the year ended December 31, 2019. Historically, we have utilized these financial metrics to measure relevant rate comparisons to other periods. However, our 2022 and 2021 reduction in capacity and revenues, due to the impact of the COVID-19 pandemic on our operations, do not allow for a meaningful analysis and comparison of these metrics and as such these metrics have been excluded from this report.
We have not provided a quantitative reconciliation of projected non-GAAP financial measures to the most comparable GAAP financial measures because preparation of meaningful U.S.GAAP projections would require unreasonable effort. Due to significant uncertainty, we are unable to predict, without unreasonable effort, the future movement of foreign exchange rates, fuel prices and interest rates inclusive of our related hedging programs. In addition, we are unable to determine the future impact of non-core business related gains and losses which may result from strategic initiatives. These items are uncertain and could be material to our results of operations in accordance with U.S GAAP. Due to this uncertainty, we do not believe that reconciling information for such projected figures would be meaningful.
Recent Developments
Continued Fleet Ramp-up
During 2021, we restarted our global cruise operations in a phased manner, following our voluntary suspension of global cruise operations that commenced in March of 2020 in response to the COVID-19 pandemic. Since then, we have steadily increased the number of ships that have returned to service, with our full fleet in service as of June 30, 2022.
Wonder of the Seas and Celebrity Beyond were delivered and commenced operations in the first quarter and second quarter of 2022, respectively.
We are currently offering cruise itineraries in all of our key destinations with the exception of China. China remains closed to cruising, resulting in the redeployment of ships planned for China to other markets.
Operating Costs
Operating costs for the third quarter of 2022 included costs related to our health and safety protocols and lagging costs related to our fleet ramp-up. As we approach full occupancy and crew staffing levels, as well as modify our health and safety protocols, we expect these costs to normalize. The improvement in operating costs is expected to be partially offset by inflationary and supply chain challenges, mainly related to fuel and food costs. We expect these challenges to continue to have an adverse impact on our 2022 operating costs.
Update on Bookings
Booking volumes in the third quarter of 2022 were significantly higher than the corresponding 2019 period. Guests continue to book their cruises closer to sailing compared to prior years, resulting in approximately 50% more bookings in the third quarter of 2022 for current year sailings when compared to bookings in the third quarter of 2019 for 2019 sailings. Additionally, booking volumes for 2023 sailings doubled during the third quarter of 2022, when compared to the second quarter of 2022, and were considerably higher than the booking volumes for 2020 sailings during the comparable period in 2019.
As of September 30, 2022 we had $3.8 billion in customer deposits, reflecting typical seasonality as peak summer sailing deposits have been recognized in the revenue. In the third quarter, approximately 95% of total bookings were new versus FCC redemptions.
Update on Recent Liquidity Actions and Ongoing Uses of Cash
Refer to Funding Needs and Sources for discussion regarding our recent liquidity actions and ongoing uses of cash.
Capital Expenditures
Refer to Future Capital Commitments for discussion on capital expenditures.
Debt Maturities, New Financings and Other Liquidity Actions
During the nine months ended September 30, 2022, we continued to take actions to further improve our liquidity position and manage cash flow. We refinanced $6.9 billion of 2022 and 2023 maturities during the nine months ended September 30, 2022. Refer to Note 7. Debt to our consolidated financial statements under Part I. Item 1, Financial Statements for further information regarding these transactions.
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Expected debt maturities for the remainder of 2022 are $0.6 billion and $4.0 billion for 2023. In October 2022 we addressed $2.0 billion of the 2023 debt maturities as described in Note 7. Debt. We continue to identify and evaluate further actions to enhance our liquidity and support our recovery. These include and are not limited to further reductions in capital expenditures, operating expenses and administrative costs, refinancing opportunities and additional financings.
Results of Operations
Summary
Net Income and Adjusted Net Income for the third quarter of 2022 were $33.0 million and $65.8 million, or $0.13 and $0.26 per share on a diluted basis, respectively, reflecting our return to full operations, compared to Net (Loss) and Adjusted Net (Loss) of $(1.4) billion and $(1.2) billion, or $(5.59) and $(4.91) per share on a diluted basis, respectively, for the third quarter of 2021.
Net (Loss) and Adjusted Net (Loss) for the nine months ended September 30, 2022 were $(1.7) billion and $(1.6) billion, or $(6.49) and $(6.39) per share on a diluted basis, respectively, compared to Net (Loss) and Adjusted Net (Loss) of $(3.9) billion and $(3.6) billion, or $(15.56) and $(14.41) per share on a diluted basis, respectively, for the nine months ended September 30, 2021.
Significant items for the quarter and nine months ended September 30, 2022 include:
•Total revenues, excluding the effect of changes in foreign currency exchange rates, increased $2.6 billion and $5.8 billion, respectively, for the quarter and nine months ended September 30, 2022 as compared to the same period in 2021. The increase reflects our full return to operations by June 2022 compared to 2021 when the suspension of our global cruise operations was in effect for a substantial portion of our fleet. APCDs for the third quarter and nine months ended September 30, 2022 were 11,564,662 and 29,553,564, respectively, compared to 4,112,256 and 4,967,078, respectively, in the same period in 2021.
•The effect of changes in foreign currency exchange rates related to our passenger ticket and onboard and other revenue transactions denominated in currencies other than the United States dollar, resulted in a decrease in total revenues of $74.4 million and $107.2 million, respectively for the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.
•Total cruise operating expenses, excluding the effect of changes in foreign currency exchange rates, increased $1.2 billion and $3.4 billion, respectively, for the quarter and nine months ended September 30, 2022 as compared to the same period in 2021. The increase reflects our return to operations in 2022 compared to 2021 when the suspension of our global cruise operations was in effect for the substantial portion of our fleet.
•The effect of changes in foreign currency exchange rates related to our cruise operating expenses, denominated in currencies other than the United States dollar resulted, in a decrease in total operating expenses of $34.9 million and $59.2 million for the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.
•In January 2022 and April 2022, we took delivery of Wonder of the Seas and Celebrity Beyond, respectively.
•During the first quarter of 2022, we issued the January 2022 Unsecured Notes.
•In February 2022, we entered into certain agreements with MS where MS has agreed to provide backstop committed financing.
•In July 2022, we purchased a ship for our Silversea Cruises brand. To finance the purchase, we assumed $277 million of debt, which is 95% guaranteed by Hermes.
•In August 2022, we issued $1.15 billion aggregate principal amount of 6.00% senior convertible notes due 2025, the proceeds of which we used to repurchase $800 million of our 4.25% senior convertible notes due June 2023 and $350 million of our 2.875% senior convertible notes due November 2023.
•In August 2022, we issued $1.25 billion of aggregate principal amount of 11.625% senior unsecured notes due 2027, the proceeds of which were or will be used to repay debt scheduled to mature in 2022, including the $650 million 5.25% unsecured senior notes due November 2022.
•In September 2022, we amended our $0.6 billion unsecured term loan due October 2023, to among other things, extend the maturity date of advances held by consenting lenders by 12 months, and we prepaid consenting lenders 10% of their respective outstanding advances.
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For further information regarding the debt transactions discussed above, refer to Note 7. Debt to our consolidated financial statements under Part I. Item 1. Financial Statements.
Operating results for the quarters and nine months ended September 30, 2022 compared to the same period in 2021 are shown in the following table (in thousands, except per share data):
| Quarter Ended September 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| % of Total Revenues | % of Total Revenues | ||||||||||||||||||||||
| Passenger ticket revenues | $ | 2,020,974 | 67.5 | % | $ | 280,153 | 61.3 | % | |||||||||||||||
| Onboard and other revenues | 972,101 | 32.5 | % | 176,805 | 38.7 | % | |||||||||||||||||
| Total revenues | 2,993,075 | 100.0 | % | 456,958 | 100.0 | % | |||||||||||||||||
| Cruise operating expenses: | |||||||||||||||||||||||
| Commissions, transportation and other | 484,054 | 16.2 | % | 64,780 | 14.2 | % | |||||||||||||||||
| Onboard and other | 220,216 | 7.4 | % | 42,703 | 9.3 | % | |||||||||||||||||
| Payroll and related | 304,369 | 10.2 | % | 265,974 | 58.2 | % | |||||||||||||||||
| Food | 194,966 | 6.5 | % | 48,950 | 10.7 | % | |||||||||||||||||
| Fuel | 316,214 | 10.6 | % | 118,127 | 25.9 | % | |||||||||||||||||
| Other operating | 436,444 | 14.6 | % | 273,157 | 59.8 | % | |||||||||||||||||
| Total cruise operating expenses | 1,956,263 | 65.4 | % | 813,691 | 178.1 | % | |||||||||||||||||
| Marketing, selling and administrative expenses | 373,116 | 12.5 | % | 323,422 | 70.8 | % | |||||||||||||||||
| Depreciation and amortization expenses | 355,085 | 11.9 | % | 325,907 | 71.3 | % | |||||||||||||||||
| Impairment and credit losses (recoveries) | 10,186 | 0.3 | % | (238) | (0.1) | % | |||||||||||||||||
| Operating Income (Loss) | 298,425 | 10.0 | % | (1,005,824) | (220.1) | % | |||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income | 11,953 | 0.4 | % | 3,786 | 0.8 | % | |||||||||||||||||
| Interest expense, net of interest capitalized | (352,187) | (11.8) | % | (430,661) | (94.2) | % | |||||||||||||||||
| Equity investment income (loss) | 73,997 | 2.5 | % | (29,085) | (6.4) | % | |||||||||||||||||
| Other income | 780 | — | % | 37,230 | 8.1 | % | |||||||||||||||||
| (265,457) | (8.9) | % | (418,730) | (91.6) | % | ||||||||||||||||||
| Net Income (Loss) | $ | 32,968 | 1.1 | % | $ | (1,424,554) | (311.7) | % | |||||||||||||||
| Diluted Earnings (Loss) per Share | $ | 0.13 | $ | (5.59) | |||||||||||||||||||
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| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| % of Total Revenues | % of Total Revenues | ||||||||||||||||||||||
| Passenger ticket revenues | $ | 4,091,035 | 65.6 | % | $ | 323,782 | 58.9 | % | |||||||||||||||
| Onboard and other revenues | 2,145,513 | 34.4 | % | 226,104 | 41.1 | % | |||||||||||||||||
| Total revenues | 6,236,548 | 100.0 | % | 549,886 | 100.0 | % | |||||||||||||||||
| Cruise operating expenses: | |||||||||||||||||||||||
| Commissions, transportation and other | 964,256 | 15.5 | % | 72,917 | 13.3 | % | |||||||||||||||||
| Onboard and other | 450,225 | 7.2 | % | 55,782 | 10.1 | % | |||||||||||||||||
| Payroll and related | 981,128 | 15.7 | % | 530,250 | 96.4 | % | |||||||||||||||||
| Food | 450,376 | 7.2 | % | 74,618 | 13.6 | % | |||||||||||||||||
| Fuel | 779,873 | 12.5 | % | 219,058 | 39.8 | % | |||||||||||||||||
| Other operating | 1,206,036 | 19.3 | % | 569,383 | 103.5 | % | |||||||||||||||||
| Total cruise operating expenses | 4,831,894 | 77.5 | % | 1,522,008 | 276.8 | % | |||||||||||||||||
| Marketing, selling and administrative expenses | 1,138,571 | 18.3 | % | 867,021 | 157.7 | % | |||||||||||||||||
| Depreciation and amortization expenses | 1,046,094 | 16.8 | % | 959,512 | 174.5 | % | |||||||||||||||||
| Impairment and credit losses (recoveries) | (584) | — | % | 39,934 | 7.3 | % | |||||||||||||||||
| Operating Loss | (779,427) | (12.5) | % | (2,838,589) | (516.2) | % | |||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income | 21,765 | 0.3 | % | 13,317 | 2.4 | % | |||||||||||||||||
| Interest expense, net of interest capitalized | (932,552) | (15.0) | % | (1,007,986) | (183.3) | % | |||||||||||||||||
| Equity investment income (loss) | 29,759 | 0.5 | % | (137,044) | (24.9) | % | |||||||||||||||||
| Other income | 4,699 | 0.1 | % | 66,771 | 12.1 | % | |||||||||||||||||
| (876,329) | (14.1) | % | (1,064,942) | (193.7) | % | ||||||||||||||||||
| Net Loss | $ | (1,655,756) | (26.5) | % | $ | (3,903,531) | (709.9) | % | |||||||||||||||
| Diluted Loss per Share | $ | (6.49) | $ | (15.56) | |||||||||||||||||||
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Adjusted Net Income (Loss) and Adjusted Earnings (Loss) per Share were calculated as follows (in thousands, except per share data):
| Quarter Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net Income (Loss) | $ | 32,968 | $ | (1,424,554) | $ | (1,655,756) | $ | (3,903,531) | |||||||||||||||
| Impairment and credit losses (recoveries) (1) | 10,186 | (237) | (584) | 39,934 | |||||||||||||||||||
| Restructuring charges and other initiatives expense | 4,573 | 74 | 6,448 | 1,721 | |||||||||||||||||||
| Amortization of Silversea Cruises intangible assets related to Silversea Cruises acquisition | 1,623 | 1,623 | 4,870 | 4,869 | |||||||||||||||||||
| Loss on extinguishment of debt (2) | 16,449 | 141,915 | 16,449 | 138,759 | |||||||||||||||||||
| Convertible debt amortization of debt discount (3) | — | 26,073 | — | 78,219 | |||||||||||||||||||
| Pullmantur reorganization settlement (4) | — | 5,242 | — | 10,242 | |||||||||||||||||||
| Equity investment impairment (5) | — | — | — | 26,042 | |||||||||||||||||||
| Oasis of the Seas incident (6) | — | — | — | (6,584) | |||||||||||||||||||
| Net gain related to the sale of the Azamara brand | — | 163 | — | (4,773) | |||||||||||||||||||
| Adjusted Net Income (Loss) | $ | 65,799 | $ | (1,249,701) | $ | (1,628,573) | $ | (3,615,102) | |||||||||||||||
| Basic: | |||||||||||||||||||||||
| Earnings (Loss) per Share | $ | 0.13 | $ | (5.59) | $ | (6.49) | $ | (15.56) | |||||||||||||||
| Adjusted Earnings (Loss) per Share | $ | 0.26 | $ | (4.91) | $ | (6.39) | $ | (14.41) | |||||||||||||||
| Diluted: | |||||||||||||||||||||||
| Earnings (Loss) per Share | $ | 0.13 | $ | (5.59) | $ | (6.49) | $ | (15.56) | |||||||||||||||
| Adjusted Earnings (Loss) per Share | $ | 0.26 | $ | (4.91) | $ | (6.39) | $ | (14.41) | |||||||||||||||
| Weighted-Average Shares Outstanding: | |||||||||||||||||||||||
| Basic | 255,071 | 254,713 | 254,953 | 250,808 | |||||||||||||||||||
| Diluted | 255,378 | 254,713 | 254,953 | 250,808 | |||||||||||||||||||
(1)Primarily represents asset impairments and a credit loss recovery for a note receivable in which credit losses were previously recorded in 2022.
(2)Represents net losses related to the early repayment of debt. For further information regarding the repayment transactions, refer to Note 7. Debt to our consolidated financial statements.
(3)Represents the amortization of non-cash debt discount on our convertible notes. For further information regarding the adoption of ASU 2020-06 as of January 1, 2022, which impacts the accounting of the non-cash debt discount on convertible notes, refer to Note 2. Summary of Significant Accounting Policies to our consolidated financial statements.
(4)Represents estimated cash refunds expected to be paid to Pullmantur guests as part of the Pullmantur S.A. reorganization.
(5)Represents equity investment asset impairments for TUI Cruises GmbH in 2021 as a result of the impact of COVID-19.
(6)Represents net insurance recoveries related to the collapse of the drydock structure at the Grand Bahama Shipyard involving Oasis of the Seas.
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Selected statistical information is shown in the following table:
| Quarter Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 (1) | 2021 (2) | 2022 (1) | 2021 (2) | ||||||||||||||||||||
| Passengers Carried | 1,714,774 | 251,744 | 3,790,205 | 327,226 | |||||||||||||||||||
| Passenger Cruise Days | 11,136,331 | 1,496,609 | 23,998,975 | 1,771,087 | |||||||||||||||||||
| APCD | 11,564,662 | 4,112,256 | 29,553,564 | 4,967,078 | |||||||||||||||||||
| Occupancy | 96.3 | % | 36.4 | % | 81.2 | % | 35.7 | % | |||||||||||||||
(1)Due to the elimination of the Silversea Cruises three-month reporting lag in October 2021, we included Silversea Cruises' metrics from July 1, 2022 through September 30, 2022 in the quarter ended September 30, 2022 and from January 1, 2022 through September 30, 2022 in the nine months ended September 30, 2022.
(2)Due to the three-month reporting lag, we included Silversea Cruises' metrics from April 1, 2021 through June 30, 2021 in the quarter ended September 30, 2021 and from October 1, 2020 through June 30, 2021 in the nine months ended September 30, 2021.
EBITDA and Adjusted EBITDA were calculated as follows (in thousands):
| Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Net Income (Loss) | $ | 32,968 | $ | (1,424,554) | $ | (1,655,756) | $ | (3,903,531) | ||||||||||||||||||
| Interest income | (11,953) | (3,786) | (21,765) | (13,317) | ||||||||||||||||||||||
| Interest expense, net of interest capitalized | 352,187 | 430,661 | 932,552 | 1,007,986 | ||||||||||||||||||||||
| Depreciation and amortization expenses | 355,085 | 325,907 | 1,046,094 | 959,512 | ||||||||||||||||||||||
| Income tax (benefit) expense (1) | (38) | (26,252) | 4,515 | (36,257) | ||||||||||||||||||||||
| EBITDA | 728,249 | (698,024) | 305,640 | (1,985,607) | ||||||||||||||||||||||
| Other income (2) | (742) | (10,978) | (9,214) | (30,514) | ||||||||||||||||||||||
| Impairment and credit losses (recoveries) (3) | 10,186 | (237) | (584) | 39,934 | ||||||||||||||||||||||
| Restructuring charges and other initiatives expense | 4,573 | 74 | 6,448 | 1,721 | ||||||||||||||||||||||
| Equity investment impairment (4) | — | — | — | 26,042 | ||||||||||||||||||||||
| Oasis of the Seas incident (5) | — | — | — | (6,584) | ||||||||||||||||||||||
| Pullmantur reorganization settlement | — | 5,242 | — | 5,242 | ||||||||||||||||||||||
| Net gain related to the sale of the Azamara brand | — | 163 | — | (4,773) | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 742,266 | $ | (703,760) | $ | 302,290 | $ | (1,954,539) | ||||||||||||||||||
(1) Included within Other income in our consolidated statements of comprehensive loss.
(2) Represents net non-operating income or expense. For the periods reported, primarily relates to gains or losses arising from the remeasurement of monetary assets and liabilities denominated in foreign currencies and changes in the fair value of fuel swaps for which cash flow hedge accounting was discontinued. The amount excludes income tax (benefit) expense, included in the EBITDA calculation above.
(3) Primarily represents asset impairments and a credit loss recovery for a note receivable in which credit losses were previously recorded in 2022.
(4) Represents equity investment asset impairments for TUI Cruises GmbH in 2021 as a result of the impact of COVID-19.
(5) Represents net insurance recoveries related to the collapse of the drydock structure at the Grand Bahama Shipyard involving Oasis of the Seas.
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Gross Cruise Costs, Net Cruise Costs and Net Cruise Costs Excluding Fuel were calculated as follows (in thousands, except APCD and costs per APCD):
| Quarter Ended September 30, | Nine Months Ended September 30, | ||||||||||
| 2022 | 2022 | ||||||||||
| Total cruise operating expenses | $ | 1,956,263 | $ | 4,831,894 | |||||||
| Marketing, selling and administrative expenses | 373,116 | 1,138,571 | |||||||||
| Gross Cruise Costs | 2,329,379 | 5,970,465 | |||||||||
| Less: | |||||||||||
| Commissions, transportation and other | 484,054 | 964,256 | |||||||||
| Onboard and other | 220,216 | 450,225 | |||||||||
| Net Cruise Costs Including Other Costs | 1,625,109 | 4,555,984 | |||||||||
| Less: | |||||||||||
| Restructuring charges and other initiatives expense (1) | 4,573 | 6,448 | |||||||||
| Net Cruise Costs | $ | 1,620,536 | $ | 4,549,536 | |||||||
| Less: | |||||||||||
| Fuel | 316,214 | 779,873 | |||||||||
| Net Cruise Costs Excluding Fuel | $ | 1,304,322 | $ | 3,769,663 | |||||||
| APCD | 11,564,662 | 29,553,564 | |||||||||
| Gross Cruise Costs per APCD | $ | 201.42 | $ | 202.02 | |||||||
| Net Cruise Costs per APCD | $ | 140.13 | $ | 153.94 | |||||||
| Net Cruise Costs Excluding Fuel per APCD | $ | 112.79 | $ | 127.55 | |||||||
(1) Included within Marketing, selling and administrative expenses in our consolidated statements of comprehensive loss.
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Quarter Ended September 30, 2022 Compared to Quarter Ended September 30, 2021
In this section, references to 2022 refer to the quarter ended September 30, 2022 and references to 2021 refer to the quarter ended September 30, 2021.
Revenues
Total revenues for 2022 increased $2.5 billion to $3.0 billion from $457.0 million in 2021.
Passenger ticket revenues comprised 67.5% of our 2022 total revenues. Passenger ticket revenues for 2022 increased by $1.7 billion from $280.2 million in 2021, and was partially offset by unfavorable movements in foreign currency exchange rates related to our revenue transactions denominated in currencies other than the United States dollar of $65.5 million
The remaining 32.5% of 2022 total revenues was comprised of Onboard and other revenues, which increased $0.8 billion to $1.0 billion in 2022 from $176.8 million in 2021, and was partially offset by unfavorable movements in foreign currency exchange rates related to our revenue transactions denominated in currencies other than the United States dollar of $8.9 million.
The increase in revenues was due to the return of operations in 2022, in which our full fleet was in service, compared to 2021, when the suspension of our global cruise operations was in effect for a substantial portion of our fleet. Occupancy in 2022 was 96.3% compared to 36.4% in 2021.
Onboard and other revenues included concession revenues of $104.4 million in 2022 and $22.9 million in 2021.
Cruise Operating Expenses
Total Cruise operating expenses for 2022 increased $1.1 billion to $2.0 billion from $0.8 billion in 2021. The increase was primarily due to:
•a $419.3 million increase in Commissions, transportation and other expenses;
•a $198.1 million increase in Fuel expense;
•a $177.5 million increase in Onboard and other expenses;
•a $163.3 million increase in Other operating expenses;
•a $146.0 million increase in Food expense; and
•a $38.4 million increase in Payroll and related.
The increase in operating expenses noted above was driven by the return to operations in 2022, with our full fleet in service compared to 2021, when the suspension of our global cruise operations was in effect for a substantial portion of our fleet. Additionally, as discussed above in Recent Developments, high inflation has impacted our operating costs, especially in fuel and food expense. Our cost of fuel (net of the financial impact of fuel swap agreements) for 2022 increased 56% per metric ton compared to 2021 mainly due to the increase in fuel price.
Marketing, Selling and Administrative Expenses
Marketing, selling and administrative expenses for 2022 increased $49.7 million, or 15.4%, to $373.1 million from $323.4 million in 2021. The increase was primarily due to an increase in payroll and benefits primarily due to an increase in headcount associated with our return to operations. Additionally, having our full fleet in service in 2022 increased overall expenses compared to 2021.
Depreciation and Amortization Expenses
Depreciation and amortization expenses for 2022 increased $29.2 million, or 9.0%, to $355.1 million from $325.9 million in 2021. The increase was primarily due to the addition of Wonder of the Seas to our fleet in January 2022, Celebrity Beyond in April 2022 and Silver Dawn in November 2021.
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Other Income (Expense)
Interest expense, net of interest capitalized for 2022 decreased $78.5 million, or 18.2%, to $352.2 million from $430.7 million in 2021. The decrease was primarily due to a debt extinguishment loss of $141.9 million recognized in the third quarter of 2021 associated with the partial redemption of the 11.50% senior secured notes due 2025, compared to a debt extinguishment loss of $16.4 million in 2022, and the elimination of the non-cash debt discount amortization on our convertible notes under the adoption of ASU 2020-06. The decrease was partially offset by a higher average cost of debt in 2022 compared to 2021. Refer to Note 2. Summary of Significant Accounting Policies to our consolidated financial statements for further information on ASU 2020-06.
Equity investment income for 2022 was $74.0 million compared to Equity investment (loss) of $(29.1) million in 2021. The increase in income was primarily due to income from TUI Cruises, one of our equity investments, in 2022 compared to losses in 2021.
Other income decreased $36.5 million, or 97.9%, to $0.8 million from $37.2 million in 2021. The decrease was primarily due to the 2021 recognition of $8.2 million in net gains related to the change in fair value of our fuel swap derivative instruments with no hedge accounting, which did not recur in 2022, and a decrease in tax benefit of $26.2 million in 2022 compared to 2021.
Other Comprehensive (Loss)
Other comprehensive (loss) increased $229.4 million to $241.2 million from $11.9 million in 2021 due to an increase in the Loss on cash flow derivative hedges of $246.7 million in 2022, which was mostly due to a decrease in the fair value of our fuel swaps in 2022 compared to an increase in 2021, and a greater decrease in the fair value of our foreign currency forwards in 2022 compared to 2021.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
In this section, references to 2022 refer to the nine months ended September 30, 2022 and references to 2021 refer to the nine months ended September 30, 2021
Revenues
Total revenues for 2022 increased $5.7 billion to $6.2 billion from $0.5 billion in 2021.
Passenger ticket revenues comprised 65.6% of our 2022 total revenues. Passenger ticket revenues for 2022 increased by $3.8 billion to $4.1 billion from $323.8 million in 2021, and was partially offset by unfavorable movements in foreign currency exchange rates related to our revenue transactions denominated in currencies other than the United States dollar of $93.8 million.
The remaining 34.4% of 2022 total revenues was comprised of Onboard and other revenues, which increased $1.9 billion to $2.1 billion in 2022 from $226.1 million in 2021, and was partially offset by unfavorable movements in foreign currency exchange rates related to our revenue transactions denominated in currencies other than the United States dollar of $13.4 million.
The increase in revenues was due to our return of operations, in which the majority of our fleet was in service in 2022, compared to 2021, when the suspension of our global cruise operations was in effect. Occupancy in 2022 was 81.2% compared to 35.7% in 2021.
Onboard and other revenues included concession revenues of $233.4 million in 2022 and $25.3 million in 2021.
Cruise Operating Expenses
Total Cruise operating expenses for 2022 increased $3.3 billion to $4.8 billion from $1.5 billion in 2021. The increase was primarily due to:
•a $891.3 million increase in Commissions, transportation and other expenses;
•a $636.7 million increase in Other operating expenses;
•a $560.8 million increase in Fuel expense;
•a $450.9 million increase in Payroll and related;
•a $394.4 million increase in Onboard and other expenses; and
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•a $375.8 million increase in Food expense.
The increase in operating expenses noted above was driven by the return to operations in 2022, with the majority of our fleet in service compared to 2021, when the suspension of our global cruise operations was in effect. The 2022 operating expenses include the overhead costs associated with bringing our ships back to service and our crew back on board our ships. Additionally, as discussed above in Recent Developments, high inflation has impacted our operating costs, especially in fuel and food expense. Our cost of fuel (net of the financial impact of fuel swap agreements) for 2022 increased 55% per metric ton compared to 2021 mainly due to the increase in fuel price.
Marketing, Selling and Administrative Expenses
Marketing, selling and administrative expenses for 2022 increased $271.6 million, or 31.3%, to $1.1 billion from $0.9 billion in 2021. The increase was primarily due to the ramp up of our global sales and marketing efforts starting in the second half of 2021 as we commenced our resumption of operations. Additionally, having our full fleet in service as of June 30, 2022 increased overall expenses compared to 2021.
Depreciation and Amortization Expenses
Depreciation and amortization expenses for 2022 increased $86.6 million, or 9.0%, compared to 2021. The increase was primarily due to the addition of Wonder of the Seas and Celebrity Beyond to our fleet in January 2022 and April 2022, respectively, and depreciation for Odyssey of the Seas and Silver Dawn, which were delivered in March 2021 and November 2021, respectively.
Impairment and Credit Losses (Recoveries)
Credit loss recoveries for 2022 was $(0.6) million compared to Impairment and credit losses of $39.9 million in 2021. The decrease in impairment loss was primarily due to 2021 impairment charges of certain construction in progress projects that were reduced in scope or terminated as a result of COVID-19, which did not recur in 2022.
Other Income (Expense)
Interest expense, net of interest capitalized for 2022 decreased $75.4 million, or 7.5%, to $932.6 million from $1.0 billion in 2021. The decrease was primarily due to a debt extinguishment loss of $138.8 million recognized in 2021 associated with the partial redemption of the 11.50% senior secured notes due 2025, compared to a debt extinguishment loss of $16.4 million in 2022, and the elimination of the non-cash debt discount amortization on our convertible notes under the adoption of ASU 2020-06. The decrease was partially offset by a higher average cost of debt in 2022 compared to 2021. Refer to Note 2. Summary of Significant Accounting Policies to our consolidated financial statements for further information on ASU 2020-06.
Equity investment Income for 2022 was $29.8 million compared to Equity investment loss of $(137.0) million in 2021. The increase in income was primarily due to income from TUI Cruises, one of our equity investments, in 2022 compared to losses in 2021.
Other income decreased $62.1 million, or 93.0%, to $4.7 million from $66.8 million in 2021. The decrease in income was primarily due to the 2021 recognition of $35.9 million in net gains related to the change in fair value of our fuel swap derivative instruments with no hedge accounting, which did not recur in 2022, and a decrease in tax benefit $40.7 million in 2022 compared to 2021.
Other Comprehensive (Loss) Income
Other comprehensive (loss) for 2022 was $(81.6) million compared to Other comprehensive income of $63.5 million in 2021. The change was primarily due to a Loss on cash flow derivative hedges in 2022 of $(148.5) million compared to a Gain on cash flow derivative hedges in 2021 of $48.5 million, which was mostly due to the greater decrease in the fair value of our foreign currency forwards in 2022 compared to 2021.
Future Application of Accounting Standards
Refer to Note 2. Summary of Significant Accounting Policies to our consolidated financial statements for further information on Recent Accounting Pronouncements.
Liquidity and Capital Resources
Sources and Uses of Cash
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Net cash used by operating activities decreased $1.6 billion to cash used of $94.7 million for the nine months ended September 30, 2022 compared to cash used of $1.7 billion for the same period in 2021. Our full resumption of cruise operations in 2022 has generated an increase in guest ticket and onboard collections.
Net cash used in investing activities increased $1.3 billion to cash used of $2.9 billion for the nine months ended September 30, 2022, compared to cash used of $1.6 billion for the same period in 2021. The increase was primarily attributable to an increase in capital expenditures of $0.9 billion during the nine months ended September 30, 2022, compared to the same period in 2021, an increase in cash paid on derivative financial instruments of $334.5 million and a decrease in proceeds from the sale of property and equipment and other assets of $175.4 million during the nine months ended September 30, 2022.
Net cash provided by financing activities was $1.8 billion for the nine months ended September 30, 2022, compared to cash provided of $2.8 billion for the same period in 2021. The decrease of $1.0 billion was primarily attributable to $1.6 billion of proceeds from common stock issuances during the first nine months of 2021, which did not recur during the same period in 2022, and higher repayments of debt of $2.9 billion during the nine months ended September 30, 2022, compared to the same period in 2021. These decreases were partially offset by higher debt proceeds of $3.1 billion during the nine months ended September 30, 2022, compared to the same period in 2021 and repayments of commercial paper notes of $414.6 million during the nine months ended September 30, 2021, which did not recur in 2022.
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Future Capital Commitments
Capital Expenditures
COVID-19 has impacted shipyard operations which resulted in delays of our previously contracted ship deliveries. As of September 30, 2022, the dates that the ships on order by our Global and Partner Brands are expected to be delivered, subject to change in the event of construction delays, and their approximate berths are as follows:
| Ship | Shipyard | Expected Delivery Date | Approximate Berths | |||||||||||
| Royal Caribbean International — | ||||||||||||||
| Oasis-class: | ||||||||||||||
| Utopia of the Seas | Chantiers de l'Atlantique | 2nd Quarter 2024 | 5,700 | |||||||||||
| Icon-class: | ||||||||||||||
| Icon of the Seas | Meyer Turku Oy | 4th Quarter 2023 | 5,600 | |||||||||||
| Unnamed | Meyer Turku Oy | 2nd Quarter 2025 | 5,600 | |||||||||||
| Unnamed | Meyer Turku Oy | 2nd Quarter 2026 | 5,600 | |||||||||||
| Celebrity Cruises — | ||||||||||||||
| Edge-class: | ||||||||||||||
| Celebrity Ascent | Chantiers de l'Atlantique | 4th Quarter 2023 | 3,250 | |||||||||||
| Silversea Cruises | ||||||||||||||
| Evolution Class: | ||||||||||||||
| Silver Nova | Meyer Werft | 2nd Quarter 2023 | 730 | |||||||||||
| Unnamed | Meyer Werft | 2nd Quarter 2024 | 730 | |||||||||||
| TUI Cruises (50% joint venture) — | ||||||||||||||
| Mein Schiff 7 | Meyer Turku Oy | 2nd Quarter 2024 | 2,900 | |||||||||||
| Unnamed | Fincantieri | 4th Quarter 2024 | 4,100 | |||||||||||
| Unnamed | Fincantieri | 2nd Quarter 2026 | 4,100 | |||||||||||
| Total Berths | 38,310 | |||||||||||||
In addition, as of September 30, 2022, we have an agreement in place with Chantiers de l’Atlantique to build an additional fifth Edge-class ship with capacity of approximately 3,250 berths, estimated for delivery in 2025, which is contingent upon completion of conditions precedent and financing.
Our future capital commitments consist primarily of new ship orders. As of September 30, 2022, the aggregate expected cost of our ships on order presented in the table above, excluding any ships on order by our Partner Brands, was $9.1 billion, of which we had deposited $0.7 billion. Approximately 54.4% of the aggregate cost was exposed to fluctuations in the Euro exchange rate at September 30, 2022.
We have been, and may continue to be, negatively impacted on our cash flows, liquidity and financial position by the COVID-19 pandemic. In order to preserve liquidity, we deferred a significant portion of our planned 2020, 2021 and 2022 capital expenditures. As of September 30, 2022, we anticipate overall full year capital expenditures, based on our existing ships on order, will be approximately $3.2 billion for 2022. This amount does not include any ships on order by our Partner Brands.
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Material Cash Requirements
As of September 30, 2022, our material cash requirements were as follows (in thousands):
| Remainder of | |||||||||||||||||||||||||||||||||||||||||
| 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | |||||||||||||||||||||||||||||||||||
| Operating Activities: | |||||||||||||||||||||||||||||||||||||||||
| Interest on debt(1) | 211,065 | 1,270,530 | 972,974 | 846,713 | 594,113 | 2,517,694 | 6,413,089 | ||||||||||||||||||||||||||||||||||
| Investing Activities: | |||||||||||||||||||||||||||||||||||||||||
| Ship purchase obligations(2) | 84,118 | 2,484,227 | 1,690,302 | 1,186,366 | 1,118,894 | — | 6,563,907 | ||||||||||||||||||||||||||||||||||
| Total | $ | 295,183 | $ | 3,754,757 | $ | 2,663,276 | $ | 2,033,079 | $ | 1,713,007 | $ | 2,517,694 | $ | 12,976,996 | |||||||||||||||||||||||||||
(1) Long-term debt obligations mature at various dates through fiscal year 2037 and bear interest at fixed and variable rates. Interest on variable-rate debt is calculated based on forecasted debt balances, including the impact of interest rate swap agreements using the applicable rate at September 30, 2022. Debt denominated in other currencies is calculated based on the applicable exchange rate at September 30, 2022.
(2) Amounts are based on contractual installment and delivery dates for our ships on order. Included in these figures are $5.2 billion in final contractual installments, which have committed financing covering 80% of the cost of the ships on order for our Global Brands, almost all of which include sovereign financing guarantees. COVID-19 has impacted shipyard operations which have and may result in delays for our previously contracted ship deliveries. Amounts do not include potential obligations which remain subject to cancellation at our sole discretion or any agreements entered for ships on order that remain contingent upon completion of conditions precedent.
Refer to Note 7. Debt for maturities related to debt.
Refer to Note 8. Leases for maturities related to lease liabilities.
Refer to Funding Needs and Sources for discussion on the planned funding of the above material cash requirements.
As a normal part of our business, depending on market conditions, pricing and our overall growth strategy, we continuously consider opportunities to enter into contracts for the building of additional ships. We may also consider the sale of ships or the purchase of existing ships. We continuously consider potential acquisitions and strategic alliances. If any of these were to occur, they would be financed through the incurrence of additional indebtedness, the issuance of additional shares of equity securities or through cash flows from operations.
Off-Balance Sheet Arrangements
Refer to Note 6. Other Assets for ownership restrictions related to TUI Cruises.
Refer to Note 7. Debt for surety and credit card processor agreements.
Refer to Note 9. Commitments and Contingencies for other agreements.
As of September 30, 2022, other than the items referenced 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.
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Funding Needs and Sources
Historically, we have relied on a combination of cash flows provided by operations, draw-downs under our available credit facilities, the incurrence of additional debt and/or the refinancing of our existing debt and the issuance of additional shares of equity securities to fund our obligations. COVID-19 resulted in our voluntary suspension of global cruise operations from March 2020 up to our full fleet returning to service during the second quarter of 2022. The suspension of operations strained our sources of cash flow and liquidity, causing us to take actions resulting in reductions in our operating expenses, reductions in our capital expenses and new financings and other liquidity actions.
The Company continues to identify and evaluate further actions to improve its liquidity. These include but are not limited to: further reductions in capital expenditures, operating expenses and administrative costs and additional financings. Additionally, we will continue to pursue various opportunities to raise additional capital to fund obligations associated with future debt maturities and/or to extend the maturity dates associated with our existing indebtedness or facilities. Actions to raise capital may include issuances of debt, convertible debt or equity in private or public transactions or entering into new or extended credit facilities.
We have significant contractual obligations of which our debt service obligations and the capital expenditures associated with our ship purchases represent our largest funding needs. As of September 30, 2022, we had $7.0 billion of committed financing for our ships on order.
As of September 30, 2022, our obligations due through September 30, 2023 primarily consisted of $3.9 billion related to debt maturities, $1.3 billion related to interest on debt and $0.7 billion related to progress payments on our ship orders and, based on the expected delivery date, the final installment payable due upon the delivery of Silver Nova. We addressed $2.0 billion of these debt maturities in October 2022 with the closing of the 9.250% senior notes due 2029 and the 8.250% senior secured notes due 2029 and the concurrent redemption of the 2023 notes as further described in Note 7. Debt.
As of September 30, 2022, we had liquidity of $3.1 billion, including cash and cash equivalents of $1.6 billion, $0.8 billion of undrawn revolving credit facility capacity, and a $0.7 billion commitment for a 364-day term loan facility available to draw on at any time on or prior to August 12, 2023. Our revolving credit facilities were partially utilized through a combination of amounts drawn and letters of credit issued under the facilities as of September 30, 2022. We have agreed with certain of our lenders not to pay dividends or engage in stock repurchases. Refer to Note 10. Shareholders' Equity to our consolidated financial statements for further information.
In February 2022 we entered into certain agreements with Morgan Stanley & Co., LLC (“MS”) where MS agreed to provide backstop committed financing to refinance, repurchase and/or repay in whole or in part our existing and outstanding debt. In October 2022, we addressed $2.0 billion of debt maturities by completing the offer and sale of $2.0 billion aggregate principal amount of 9.250% senior guaranteed notes due 2029 and the 8.250% senior secured notes due 2029. This reduced the amount available under the MS backstop facility to $350 million, which will be available to refinance the remaining $350 million due under the 4.25% Convertible Notes due in June 2023. Refer to Note 7. Debt to our consolidated financial statements for further information.
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.
Based on our assumptions and estimates and our financial condition, we believe that we have sufficient financial resources to fund our obligations for at least the next twelve months from the issuance of these financial statements. However, there is no assurance that our assumptions and estimates are accurate as there is inherent uncertainty in our ability to predict future liquidity requirements. Refer to Note 1. General, Management’s Plan and Liquidity, to our consolidated financial statements under Part I. Item 1. Financial Statements for further information.
Debt Covenants
Both our export credit facilities and our non-export credit facilities contain covenants that require us, among other things, to maintain a fixed charge coverage ratio of at least 1.25x and limit our net debt-to-capital ratio, and under certain facilities, to maintain a minimum level of 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. Our minimum net worth and maximum net debt-to-capital calculations exclude the impact of Accumulated other comprehensive loss on Total shareholders’ equity.
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During the first quarter of 2021, we amended $4.9 billion of our non-export credit facilities and $6.3 billion of our export credit facilities, and certain credit card processing agreements, to extend the waiver of our financial covenants through and including at least the third quarter of 2022, and subsequently in the third quarter of 2021, we entered into a letter agreement to extend the waiver period for our export credit facilities to the end of the fourth quarter of 2022. During the fourth quarter of 2021, we amended $7.3 billion of outstanding export-credit facilities plus committed export-credit facilities to modify financial covenant levels for 2023 and 2024, following the waiver period through and including the fourth quarter of 2022.
In addition, pursuant to the amendments for the non-export credit facilities, we have modified the manner in which such covenants are calculated, temporarily in certain cases and permanently in others, as well as the levels at which our net debt to capitalization covenant will be tested during the period commencing immediately following the end of the waiver period and continuing through the end of 2023.
In July 2022, we further amended the financial covenant levels for 2023 and 2024 for our non-export credit facilities and export credit facilities plus committed export credit facilities, and certain credit card processing agreements, following the respective aforementioned waiver periods.
The combined amendments, including the July 2022 amendments, impose a monthly-tested minimum liquidity covenant of $350 million, which in the case of the non-export credit facilities terminates at the end of the waiver period and in the case of the export credit facilities terminates either in July 2025, or when we pay off all deferred amounts, whichever is earlier. In addition, the amendments to the non-export credit facilities place restrictions on paying cash dividends and effectuating share repurchases through the end of the third quarter of 2022, while the export credit facility amendments require us to prepay any deferred amounts if we elect to issue dividends or complete share repurchases. As of September 30, 2022, we were in compliance with our financial covenants and we estimate that we will be in compliance for at least the next twelve months.
Any further covenant waivers may lead to increased costs, increased interest rates, additional restrictive covenants and other available lender protections as may be agreed with our lenders. There can be no assurance that we would be able to obtain additional waivers in a timely manner, or on acceptable terms. If we require additional waivers and are not able to obtain them or repay the debt facilities, this would lead to an event of default and potential acceleration of amounts due under all of our outstanding debt and derivative contracts.
Dividends
During the second quarter of 2020, we agreed with certain of our lenders not to pay dividends or engage in common stock repurchases for so long as our debt covenant waivers are in effect. In addition, in the event we declare a dividend or engage in share repurchases, we will need to repay the amounts deferred under our export credit facilities. Accordingly, we did not declare a dividend during the ten consecutive quarters ended September 30, 2022. Pursuant to amendments made to these agreements during the first quarter of 2021, the restrictions on paying cash dividends and effectuating share repurchases were extended through and including the third quarter of 2022. In addition, in the event we thereafter declare a dividend, we will need to repay our amounts deferred under the export credit facilities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a discussion of our market risks, 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, 2021. There have been no material changes to our exposure to market risks since the date of our 2021 Annual Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission (the "SEC").
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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 Exchange Act Rule 13a-15(d) during the quarter and nine months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, two lawsuits were filed against us in August 2019 in the U.S. District Court for the Southern District of Florida (the "Court") under Title III of the Cuban Liberty and Democratic Solidarity Act, also known as the Helms-Burton Act. The complaint filed by Havana Docks Corporation ("Havana Docks Action") alleges it holds an interest in the Havana Cruise Port Terminal, and the complaint filed by Javier Garcia-Bengochea (the "Port of Santiago Action") alleges that he holds an interest in the Port of Santiago, Cuba, both of which were expropriated by the Cuban government. The complaints further allege that we trafficked in those properties by embarking and disembarking passengers at these facilities. The plaintiffs seek all available statutory remedies, including the value of the expropriated property, plus interest, treble damages, attorneys’ fees and costs.
The Court dismissed the Port of Santiago Action with prejudice on the basis that the plaintiff lacked standing, and the plaintiff’s appeal of the dismissal is awaiting a decision by the appellate court. In the Havana Docks Action, the Court granted summary judgement in favor of the plaintiff as to liability in March 2022 with a decision on damages to be made subsequently. In August 2022, the Court ruled on several determinative issues with respect to the calculation on damages. On the basis of these rulings, in October 2022, the plaintiff filed a motion for entry of judgment in the amount of approximately $110 million plus attorney’s fees. The Court plans to issue a final judgement in the lawsuit, including a final ruling on damages following briefing to the Court scheduled to be completed by December 2022. We believe we have meritorious defenses to the claims alleged in both the Havana Docks Action and the Port of Santiago Action, and we intend to vigorously defend ourselves against them, including, in the Havana Docks Action, by appealing the Court’s final judgment. At this time, we have concluded that the likelihood of loss is reasonably possible, and therefore, no liability has been recorded. The outcome of the litigation is inherently unpredictable and subject to significant uncertainties, and there can be no assurances that the final outcome of either case will not be material.
In addition, 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.
Item 1A. Risk Factors
The risk factors set forth below and elsewhere in this Quarterly Report on Form 10-Q are important factors that could cause actual results to differ from expected or historical results. It is not possible to predict or identify all such risks. There may be additional risks that we consider not to be material, or which are not known, and any of these risks could affect our operations. The ordering of the risk factors set forth below is not intended to reflect a risk's potential likelihood or magnitude. See Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a cautionary note regarding forward-looking statements.
Macroeconomic, Business, Market and Operational Risks
We have been, and may continue to be, negatively impacted by the COVID-19 pandemic. The global spread of COVID-19, the unprecedented responses by governments and other authorities to control and contain the disease, including related variants, and challenges to global vaccination efforts, have caused significant disruptions, created new risks, and exacerbated existing risks to our business.
We have been, and may continue to be, negatively impacted by the COVID-19 pandemic, including impacts that resulted or may result from actions taken in response to the outbreak and the occurrence and spread of related variants. Examples of these include, but are not limited to, cruising advisories and required or voluntary travel restrictions. While we have resumed our global cruise operations, following the March 2020 suspension of our global cruise operations, there is no assurance that our cruise operations will continue uninterrupted. Onboard cases have resulted in illness among our guests and crew, incremental costs, guest refunds and negative publicity and media attention. In addition, we have and may continue to face challenges and increased operating costs related to possible new and evolving operating protocols, including protocols in the countries in which we operate and plan to operate.
Uncertainties remain as to the specifics, timing, duration and costs of administering and implementing our health and safety measures, some of which may be significant. These measures also may negatively impact guest satisfaction. Based on our assessment of these requirements and recommendations, the status of COVID-19 infection, including new variants, and/or vaccination rates in the U.S. or globally or for other reasons, we may determine it necessary to cancel or modify certain of our
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Global Brands’ cruise sailings. The impact to our global bookings resulting from COVID-19 may continue to have a negative impact on our results of operations and liquidity, which may be prolonged beyond containment of the disease and its variants.
Adverse worldwide economic or other conditions could reduce the demand for cruises and passenger spending, adversely impacting our operating results, cash flows and financial condition including impairing the value of our goodwill, ships, trademarks and other assets and potentially affecting other critical accounting estimates where the change may be material to our operating results.
In addition to health and safety concerns, demand for cruises is affected by international, national, and local economic conditions. Weak or uncertain economic conditions may impact consumer confidence and pose a risk as vacationers postpone or reduce discretionary spending. This, in turn, may result in cruise booking slowdowns, decreased cruise prices and lower onboard revenues. Given the global nature of our business, we are exposed to many different economies, and our business could be hurt by challenging conditions in any of our markets.
Our operating costs could increase due to market forces and economic or geopolitical factors beyond our control.
Our operating costs, including fuel, food, payroll and benefits, airfare, taxes, insurance, and security costs, can be and have been subject to increases due to market forces and economic or geopolitical conditions or other factors beyond our control, including global inflationary pressures, which have increased our operating costs. Increases in these operating costs have affected, and may continue to adversely affect, our future profitability.
Any further impairment of our goodwill, long-lived assets, equity investments and notes receivable could adversely affect our financial condition and operating results.
We evaluate goodwill for impairment on an annual basis, or more frequently when circumstances indicate that the carrying value of a reporting unit may not be recoverable. A challenging operating environment, conditions affecting consumer demand or spending, the deterioration of general macroeconomic conditions, or other factors could result in a change to the future cash flows we expect to derive from our operations. Reductions of cash flows used in the valuation analyses may result in the recording of impairments, which could adversely affect our financial condition and operating results.
Price increases for commercial airline services for our guests or major changes or reduction in commercial airline services and/or availability could adversely impact the demand for cruises and undermine our ability to provide reasonably priced vacation packages to our guests.
Many of our guests depend on scheduled commercial airline services to transport them to or from the ports where our cruises embark or disembark. Increases in the price of airfare would increase the overall price of the cruise vacation to our guests, which may adversely impact demand for our cruises. In addition, changes in the availability and/or regulations governing commercial airline services could adversely affect our guests’ ability to obtain air travel, as well as our ability to transfer our guests to or from our cruise ships, which could adversely affect our results of operations.
Terrorist attacks, war, and other similar events could have a material adverse impact on our business and results of operations.
We are susceptible to a wide range of adverse events, including terrorist attacks, war, conflicts, civil unrest and other hostilities, such as the armed conflict between Russia and Ukraine. The occurrence of these events or an escalation in the frequency or severity of them, and the resulting political instability, travel restrictions and advisories and concerns over safety and security aspects of traveling or the fear of any of the foregoing, have had, and could have in the future, a significant adverse impact on demand and pricing in the travel and vacation industry. These events could also result in additional security measures taken by local authorities which have, and may in the future, impact access to ports and/or destinations. In addition, such events have led, and could lead, to disruptions, instability and volatility in global markets, supply chains and industries, increased operating costs, such as fuel and food, and disruptions affecting our newbuild construction and fleet modernization efforts, any of which could materially and adversely impact our business and results of operations. Further, such events could have the effect of heightening the other risks we have described in this report, any of which also could materially and adversely affect our business and results of operations.
Disease outbreaks and an increase in concern about the risk of illness could adversely impact our business and results of operations.
Disease outbreaks and increased concern related to illness when traveling to, from, and on our ships could cause a drop in demand for cruises, guest cancellations, travel restrictions, an unavailability of ports and/or destinations, cruise cancellations, ship redeployments and an inability to source our crew, provisions or supplies from certain places. In addition, we may be subject to increased concerns that cruises are more susceptible than other vacation alternatives to the spread of infectious diseases, such as COVID-19. In response to disease outbreaks, our industry, including our passengers and crew, may be subject
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to enhanced health and safety requirements in the future which may be costly and take a significant amount of time to implement across our fleet. For example, local governments may establish their own set of rules for self-quarantines and/or require proof of individuals health status or vaccination prior to or upon visiting. The impact of any of these factors could have a material adverse effect on our business and results of operations. In addition, any operating or health protocols that we may develop or that may be required by law in the future in response to infectious diseases may be costly to develop and implement and may be less effective than we expected in reducing the risk of infection and spread of such disease on our cruise ships, all of which will negatively impact our operations and expose us to reputational and legal risks.
Incidents on ships, at port facilities, land destinations and/or affecting the cruise vacation industry in general, and the associated negative media coverage and publicity, have affected and could continue to affect our reputation and impact our sales and results of operations.
Cruise ships, private destinations, port facilities and shore excursions operated and/or offered by us and third parties may be susceptible to the risk of accidents, illnesses, mechanical failures, environmental incidents and other incidents which could bring into question safety, health, security and vacation satisfaction and negatively impact our sales, operations and reputation. Incidents involving cruise ships, and, in particular the safety, health and security of guests and crew and the media coverage thereof, including those related to the COVID-19 pandemic, have impacted and could continue to impact demand for our cruises and pricing in the industry. In particular, we cannot predict the impact on our financial performance and the public’s concern regarding the health and safety of travel, especially by cruise ship, and related decreases in demand for travel and cruising. Moreover, our ability to attract and retain guests and crew depends, in part, upon the perception and reputation of our company and our brands and the public’s concerns regarding the health and safety of travel generally, as well as regarding the cruising industry and our ships specifically. Our reputation and our business could also be damaged by continued or additional negative publicity regarding the cruise industry in general, including publicity regarding the spread of contagious disease such as COVID-19, over-tourism in key ports and destinations and the potentially adverse environmental impacts of cruising. The considerable expansion in the use of social and digital media has compounded the potential scope and reach of any negative publicity. In addition, incidents involving cruise ships may result in additional costs to our business, increasing government or other regulatory oversight and, in certain cases, potential litigation.
Significant weather, climate events and/or natural disasters could adversely impact our business and results of operations.
Natural disasters (e.g., earthquakes, volcanos, wildfires), weather and/or climate events (including hurricanes and typhoons) could impact our source markets and operations resulting in travel restrictions, guest cancellations, an inability to source our crew or our provisions and supplies from certain places. We are often forced to alter itineraries and occasionally cancel a cruise or a series of cruises or to redeploy our ships due to these types of events, which could have an adverse effect on our sales, operating costs and profitability in the current and future periods. Increases in the frequency, severity or duration of these types of events could exacerbate their impact and disrupt our operations or make certain destinations less desirable or unavailable impacting our revenues and profitability further. Any of the foregoing could have an adverse impact on our results of operations and on industry performance.
Our sustainability activities, including environmental, social and governance (ESG) matters, could result in reputational risks, increased costs and other risks.
Customers, investors, lenders, regulators and other industry stakeholders have placed increasing importance on corporate ESG practices and on the implications and social cost of their investments, which could cause us to incur additional costs and changes to our operations. If our ESG practices or disclosures do not meet stakeholders' evolving expectations and standards, our customer and employee retention, our access to certain types of capital, including export credit financing, and our brands and reputation may be negatively impacted, which could affect our business operations and financial condition. We could also incur additional costs and require additional resources to monitor, report and comply with various ESG practices, which could increase our operating costs and affect our results of operations and financial condition.
In addition, from time to time, we communicate certain initiatives regarding climate change and other ESG matters. We could fail or be perceived to fail to achieve such initiatives, which may negatively affect our reputation. The future adoption of new technology or processes to achieve the initiatives could also result in the impairment of existing assets.
Our reliance on shipyards, their subcontractors and our suppliers to implement our newbuild and ship upgrade programs and to repair and maintain our ships exposes us to risks which could adversely impact our business.
We rely on shipyards, their subcontractors and our suppliers to effectively construct our new ships and to repair, maintain, and upgrade our existing ships on a timely basis and in a cost effective manner. There are a limited number of shipyards with the capability and capacity to build, repair, maintain and/or upgrade our ships. As such, any disruptions affecting the newbuild or fleet modernization supply chain will adversely impact our business as there are limited substitutes.
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Suspensions and/or slowdowns of work at shipyards, has impacted and could continue to impact our ability to construct new ships when and as planned, our ability to timely and cost-effectively procure new capacity, and our ability to execute scheduled drydocks and/or fleet modernizations. For instance, the effects of the COVID-19 pandemic on the shipyards, their subcontractors, and our suppliers have resulted in delays in our previously scheduled ship deliveries. Variations from our plan could have a significant negative impact on our business operations and financial condition.
Building, repairing, maintaining and/or upgrading a ship is sophisticated work that involves significant risks. Material increases in commodity and raw material prices, and other cost pressures impacting the construction of a new ship, such as the cost of labor and financing, could adversely impact the shipyard’s ability to build the ship on a cost-effective basis. We may be impacted if shipyards, their subcontractors, and/or our suppliers encounter financial difficulties, supply chain, technical or design problems when building or repairing a ship. If materialized, these problems could impact the timely delivery or cost of new ships or the ability of shipyards to repair and upgrade our fleet in accordance with our needs or expectations. In addition, delays, mechanical faults and/or unforeseen incidents may result in cancellation of cruises or delays of new ship orders or necessitate unscheduled drydocks. Such events could result in lost revenue, increased operating expenses, or both, and thus adversely affect our results of operations.
An increase in capacity worldwide or excess capacity in a particular market could adversely impact our cruise sales and/or pricing.
Although our ships can be redeployed, cruise sales and/or pricing may be impacted by the introduction of new ships into the marketplace, reductions in cruise capacity, overall market growth and deployment decisions of ourselves and our competitors. As of September 30, 2022, a total of 70 new ships with approximately 165,000 berths were on order for delivery through 2028 in the cruise industry, including 10 ships currently scheduled to be delivered to our Global and Partner Brands. The further net growth in capacity from these new ships and future orders, without an increase in the cruise industry’s demand and/or share of the vacation market, could depress cruise prices and impede our ability to achieve yield improvement. Further, cruise prices and yield improvement could face additional pressure due to the pace at which we and other cruise line operators return to service.
In addition, to the extent that we or our competitors deploy ships to a particular itinerary/region and the resulting capacity in that region exceeds the demand, it may negatively affect our pricing and profitability. Any of the foregoing could have an adverse impact on our results of operations, cash flows and financial condition, including potentially impairing the value of our ships and other assets
Unavailability of ports of call may adversely affect our results of operations.
We believe that port destinations are a major reason why guests choose to go on a particular cruise or on a cruise vacation. The availability of ports and destinations is affected by a number of factors, including industry demand and competition for key ports and destinations, existing capacity constraints, constraints related to the size of certain ships, security, financial limitations on port development, exclusivity arrangements that ports may have with our competitors, geopolitical developments, local governmental regulations and governmental response to disease outbreaks. Higher fuel costs also may adversely impact the destinations on certain of our itineraries as they become too costly to include.
In addition, certain ports and destinations have faced a surge of both cruise and non-cruise tourism which, in certain cases, has fueled anti-tourism sentiments and related countermeasures to limit the volume of tourists allowed in these destinations. In certain destinations, countermeasures to limit the volume of tourists have been contemplated and/or put into effect, including proposed limits on cruise ships and cruise passengers, which could limit the itinerary and destination options we can offer our passengers going forward.
Increased demand and competition for key ports of call or destinations, limitations on the availability or feasibility of use of specific ports of call and/or constraints on the availability of shore excursions and other service providers at such ports or destinations could adversely affect our operations and financial results.
We may lose business to competitors throughout the vacation market.
We operate in the vacation market and cruising is one of many alternatives for people choosing a vacation. We, therefore, risk losing business not only to other cruise lines, but also to other vacation operators, which provide other leisure options, including hotels, resorts, internet-based alternative lodging sites and package holidays and tours.
We face significant competition from other cruise lines on the basis of cruise pricing, travel advisor preference and also in terms of the nature of ships, services and destinations that we offer to guests. Our revenues are sensitive to the actions of other cruise lines in many areas including pricing, scheduling, capacity and promotions, which can have a substantial adverse impact not only on our revenues, but also on overall industry revenues.
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In the event that we do not effectively market or differentiate our cruise brands from our competitors or otherwise compete effectively with other vacation alternatives and new or existing cruise companies, our results of operations and financial position could be adversely affected.
If we are unable to appropriately balance our cost management and capital allocation strategies with our goal of satisfying guest expectations, it may adversely impact our business success.
Our goals are to provide high quality products and deliver high quality services. There can be no assurance that we can successfully balance these goals with our cost management and capital allocation strategies. Our business also requires us to make capital allocation decisions across a broad scope of investment options with varying return profiles and time horizons for value realization. These include significant capital investment decisions such as ordering new ships, upgrading our existing fleet, enhancing our technology and/or data capabilities and expanding our portfolio of land-based assets, based on expected market preferences, competition and projected demand. There can be no assurance that our strategies will be successful, which could adversely impact our business, financial condition and results of operations. For example, our ownership and operation of older tonnage, in particular during the business disruption caused by COVID-19, has resulted in impaired asset values due to expected returns less than the carrying value of the assets.
Our attempts to expand our business into new markets and new ventures may not be successful.
We opportunistically seek to grow our business through, among other things, expansion into new destinations or source markets and establishment of new ventures complementary to our current offerings. These attempts to expand our business increase the complexity of our business, require significant levels of investment and can strain our management, personnel, operations and systems. In addition, we may be unable to execute our attempts to expand our business. There can be no assurance that these business expansion efforts will develop as anticipated or that we will succeed, and if we do not, we may be unable to recover our investment, which could adversely impact our business, financial condition and results of operations.
Risks associated with our development and operation of key land-based destination projects may adversely impact our business or results of operations.
We have invested, either directly or indirectly through joint ventures and partnerships, in a growing portfolio of key land-based projects including port and terminal facilities, private destinations and multi-brand destination projects. These investments can increase our exposure to certain key risks depending on the scope, location, and the ownership and management structure of these projects. These risks include susceptibility to weather events, exposure to local political/regulatory developments and policies, logistical challenges and human resource and labor risks and safety, environmental, and health risks, including challenges posed by the COVID-19 pandemic and its effects locally where we have these projects and relationships.
Our reliance on travel advisors to sell and market our cruises exposes us to certain risks which could adversely impact our business.
We rely on travel advisors to generate bookings for our ships. Accordingly, we must maintain competitive commission rates and incentive structures. If we fail to offer competitive compensation packages or fail to maintain our relationships, these agencies may be incentivized to sell cruises offered by our competitors, which could adversely impact our operating results. Our reliance on third-party sellers is particularly pronounced in certain markets. In addition, the travel advisor community is sensitive to economic conditions that impact discretionary income of consumers. Significant disruptions, such as those caused by the COVID-19 pandemic, or contractions in the industry could reduce the number of travel advisors available for us to market and sell our cruises, which could have an adverse impact on our financial condition and results of operations. Additionally, the strength of our recovery from suspended operations could be delayed if we are not aligned and partnered with key travel advisors.
Business activities that involve our co-investments with third parties may subject us to additional risks.
Partnerships, joint ventures and other business structures involving our co-investments with third parties generally include some form of shared control over the operations of the business and create additional risks, including the possibility that other investors in such ventures become bankrupt or otherwise lack the financial resources to meet their obligations or could have or develop business interests, policies or objectives that are inconsistent with ours. In addition to financial risks, our co-investment activities have also presented managerial and operational risks and expose us to reputational or legal concerns. These or other issues related to our co-investments with third parties could adversely impact our operations or liquidity. Further, due to the arrangements we have in place with our partners in these ventures, we are limited in our ability to control the strategy of these ventures, or their use of capital and other key factors to their results of operation, which could adversely affect our investments and impact our results of operations.
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Past or pending business acquisitions or potential acquisitions that we may decide to pursue in the future carry inherent risks which could adversely impact our financial performance and condition.
The Company, from time to time, has engaged in acquisitions and may pursue acquisitions in the future, which are subject to, among other factors, the Company’s ability to identify attractive business opportunities and to negotiate favorable terms for such opportunities. Accordingly, the Company cannot make any assurances that potential acquisitions will be completed timely or at all, or that if completed, we would realize the anticipated benefits of such acquisitions. Acquisitions also carry inherent risks such as, among others: (i) the potential delay or failure of our efforts to successfully integrate business processes and realizing expected synergies; (ii) difficulty in aligning procedures, controls and/or policies; and (iii) future unknown liabilities and costs that may be associated with an acquisition. In addition, acquisitions may adversely impact our liquidity and/or debt levels, and the recognized value of goodwill and other intangible assets can be negatively affected by unforeseen events and/or circumstances, which may result in an impairment charge. Any of the foregoing events could adversely impact our financial condition and results of operations.
We rely on supply chain vendors and third-party service providers who are integral to the operations of our businesses. These vendors and service providers may be unable or unwilling to deliver on their commitments or may act in ways that could harm our business.
We rely on supply chain vendors to deliver key products to the operations of our businesses around the world. Any event impacting a vendor’s ability to deliver goods of the expected quality at the location and time needed could negatively impact our ability to deliver our cruise experience. Events impacting our supply chain could be caused by factors beyond the control of our suppliers or us, including inclement weather, natural disasters, new laws and regulations, labor actions, increased demand, problems in production or distribution, cybersecurity events, and/or disruptions in third-party logistics or transportation systems, including those caused by the COVID-19 pandemic. Any such interruptions to our supply chain could increase our costs and could limit the availability of products critical to our operations. In addition, increased regulation or stakeholder expectations regarding sourcing practices, or supplier conduct that does not meet such standards, could cause our operating costs to increase or result in publicity that negatively affects our reputation.
In order to achieve cost and operational efficiencies, we outsource to third-party vendors certain services that are integral to the operations of our global businesses, such as our onboard concessionaires, certain of our call center operations, guest port services, logistics distribution and operation of a large part of our information technology systems. We are subject to the risk that certain decisions are subject to the control of our third-party service providers and that these decisions may adversely affect our activities. A failure to adequately monitor a third-party service provider’s compliance with a service level agreement or regulatory or legal requirements could result in significant economic and reputational harm to us. There is also a risk the confidentiality, privacy and/or security of data held by third parties or communicated over third-party networks or platforms could become compromised.
The potential unavailability of insurance coverage, an inability to obtain insurance coverage at commercially reasonable rates or our failure to have coverage in sufficient amounts to cover our incurred losses may adversely affect our financial condition or results of operations.
We seek to maintain appropriate insurance coverage at commercially reasonable rates. We normally obtain insurance based on the cost of an asset rather than replacement value, and we also elect to self-insure, co-insure, or use deductibles in certain circumstances for certain risks such as loss of use of a ship or other business interruption. The limits of insurance coverage we purchase are based on the availability of the coverage, evaluation of our risk profile and cost of coverage. We do not carry business interruption insurance and accordingly we have no insurance coverage for loss of revenues or earnings from our ships or other operations. Accordingly, we are not protected against all risks and cannot be certain that our coverage will be adequate for liabilities actually incurred which could result in an unexpected decrease in our revenue and results of operations in the event of an incident
We are members of four Protection and Indemnity (“P&I”) clubs, which are part of a worldwide group of 13 P&I clubs, known as the International Group of P&I Clubs (the “IG”). P&I coverage provided by the clubs is on a mutual basis, and we are subject to additional premium calls in the event of a catastrophic loss incurred by any member of the 13 P&I clubs, whereby the reinsurance limits purchased by the IG are exhausted. We are also subject to additional premium calls based on investment and underwriting shortfalls experienced by our own individual insurers. Certain liabilities, costs, and expenses associated with COVID-19 cases identified on or traced to our vessels are eligible for insurance coverage under our participation in these P&I clubs.
We cannot be certain that insurance and reinsurance coverage will be available to us and at commercially reasonable rates in the future or at all or, if available, that it will be sufficient to cover potential claims. Additionally, if we or other insureds
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sustain significant losses, the result may be higher insurance premiums, cancellation of coverage, or the inability to obtain coverage. Such events could adversely affect our financial condition or results of operations.
Disruptions in our shoreside or shipboard operations or our information systems may adversely affect our results of operations.
Our principal executive office and principal shoreside operations are located in Florida, and we have shoreside offices throughout the world. Actual or threatened natural disasters (e.g., hurricanes/typhoons, earthquakes, tornadoes, fires or floods), municipal lockdowns, curfews, quarantines, or similar events in these locations may have a material impact on our business continuity, reputation and results of operations. In addition, substantial or repeated information system failures, computer viruses or cyber attacks impacting our shoreside or shipboard operations could adversely impact our business. We do not generally carry business interruption insurance for our shoreside or shipboard operations or our information systems. As such, any losses or damages incurred by us could have an adverse impact on our results of operations.
Provisions of our Articles of Incorporation, By-Laws and Liberian law could inhibit a change of control and may prevent efforts by our shareholders to change our management.
Certain provisions of our Articles of Incorporation and By-Laws and Liberian law may inhibit third parties from effectuating a change of control of the Company without approval from our board of directors which could result in the entrenchment of current management. These include provisions in our Articles of Incorporation that prevent third parties, other than A. Wilhelmsen AS and Cruise Associates and their permitted transferees, from acquiring beneficial ownership of more than 4.9% of our outstanding shares without the consent of our board of directors.
We may not be able to achieve our fiscal 2025 financial and climate-related performance goals.
In November 2022, we announced that we are targeting certain financial and climate-related performance goals for fiscal 2025. Our ability to achieve these goals is dependent on a number of factors, including the other risk factors described in this section. If we are not able to achieve these goals, the price of our common stock and reputation may be negatively affected.
Financial Risks
We may not be able to obtain sufficient financing or capital for our needs or may not be able to do so on terms that are acceptable or consistent with our expectations.
To fund our capital expenditures (including new ship orders), operations and scheduled debt payments, we have historically relied on a combination of cash flows provided by operations, drawdowns under available credit facilities, the incurrence of additional indebtedness and the sale of equity or debt securities in private or public securities markets. Any circumstance or event which leads to a decrease in consumer cruise spending, such as worsening global economic conditions or significant incidents impacting the cruise industry, such as the COVID-19 pandemic, negatively affects our operating cash flows. As result of the COVID-19 pandemic and the resulting suspension of our operations, we have experienced credit rating downgrades, which have reduced our ability to incur secured indebtedness by reducing the amount of indebtedness that we are permitted to secure, and may negatively impact our access to, and cost of, debt financing. Additionally, our ability to raise additional financing, whether or not secured, could be limited if our credit rating is further downgraded, and/or if we fail to comply with applicable covenants governing our outstanding indebtedness, and/or if overall financial market conditions worsen.
Our ability to access additional funding as and when needed, our ability to timely refinance and/or replace our outstanding debt securities and credit facilities on acceptable terms and our cost of funding will depend upon numerous factors including, but not limited to, the strength of the financial markets, global market conditions, including inflationary pressures, interest rate fluctuations, our recovery and financial performance, the recovery and performance of our industry in general and the size, scope and timing of our financial needs. In addition, even where financing commitments have been secured, significant disruptions in the capital and credit markets could cause our banking and other counterparties to breach their contractual obligations to us or could cause the conditions to the availability of such funding not to be satisfied. This could include failures of banks or other financial service companies to fund required borrowings under our loan agreements or to pay us amounts that may become due or return collateral that is refundable under our derivative contracts for hedging of fuel prices, interest rates and foreign currencies or other agreements. If any of the foregoing occurs for a prolonged period of time it will have a long-term negative impact on our cash flows and our ability to meet our financial obligations.
Our substantial debt requires a significant amount of cash to service and could adversely affect our financial condition.
We have a substantial amount of debt and significant debt service obligations. As of September 30, 2022, we had total debt of $23.3 billion. Our substantial debt has required us to dedicate a large portion of our cash flow from operations to service
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debt and fund repayments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate expenses.
Our ability to make future scheduled payments on our debt service obligations or refinance our debt depends on our future operating and financial performance and ability to generate cash. This will be affected by our ability to successfully implement our business strategy, as well as general economic, financial, competitive, regulatory and other factors beyond our control, such as the disruption caused by the COVID-19 pandemic. If we cannot generate sufficient cash to meet our debt service obligations or fund our other business needs, we may, among other things, need to refinance all or a portion of our debt, obtain additional financing, delay planned capital expenditures or sell assets. We cannot assure that we will be able to generate sufficient cash through any of the foregoing. If we are not able to refinance any of our debt, obtain additional financing or sell assets on commercially reasonable terms or at all, we may not be able to satisfy our obligations with respect to our debt.
Our substantial debt could also result in other negative consequences for us. For example, it could increase our vulnerability to adverse general economic or industry conditions; limit our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate; place us at a competitive disadvantage compared to our competitors that have less debt; make us more vulnerable to downturns in our business, the economy or the industry in which we operate; limit our ability to raise additional debt or equity capital in the future to satisfy our requirements relating to working capital, capital expenditures, development projects, strategic initiatives or other purposes; restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities; limit or restrict our ability to obtain and maintain performance bonds to cover our financial responsibility requirements in various jurisdictions for non-performance of guest travel, casualty and personal injury; make it difficult for us to satisfy our obligations with respect to our debt; and increase our exposure to the risk of increased interest rates as certain of our borrowings are (and may in the future be) at a variable rate of interest.
Despite our leverage, we may incur more debt, which could adversely affect our business.
We may incur substantial additional debt in the future. Except for the restrictions under the indentures governing our Secured Notes, our Priority Guaranteed Notes, and certain of our other debt instruments, including our unsecured bank and export credit facilities, we are not restricted under the terms of our debt instruments from incurring additional debt. Although the indentures governing the Secured Notes, the Priority Guaranteed Notes, and certain of our other debt instruments, including our unsecured bank and export credit facilities, contain restrictions on the incurrence of additional debt, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances the amount of debt that could be incurred in compliance with these restrictions could be substantial. In the event that we execute and borrow under the $0.7 billion commitment available to draw on at any time on or prior to August 11, 2023 for a 364-day term loan facility, the credit agreement that would govern such term loan facility would impose substantially similar restrictions (including the related qualifications and exceptions) as are set forth in the indenture governing the Priority Guaranteed Notes. If new debt is added to our existing debt levels, the related risks that we now face would increase. Additionally, there is no guarantee that financing will be available in the future or that such financing will be available with similar terms or terms that are commercially acceptable to us. As of September 30, 2022, we have commitments for approximately $7.0 billion of debt to finance the purchase of 7 ships on order by our Royal Caribbean International, Celebrity Cruises and Silversea Cruises brands, all of which are guaranteed by the export credit agencies in the countries in which the ships are being built. The ultimate size of each facility will depend on the final contract price (including change orders and owner’s supply) as well as fluctuations in the EUR/USD exchange rate.
We are subject to restrictive debt covenants that may limit our ability to finance our future operations and capital needs and to pursue business opportunities and activities. In addition, if we fail to comply with any of these restrictions, it could have a material adverse effect on us.
Certain of our debt instruments, including our indentures and our unsecured bank and export credit facilities, limit our flexibility in operating our business. For example, certain of our loan agreements and indentures restrict or limit our and our subsidiaries’ ability to, among other things, incur or guarantee additional indebtedness; pay dividends or distributions on, or redeem or repurchase capital stock and make other restricted payments; make investments; consummate certain asset sales; engage in certain transactions with affiliates; grant or assume certain liens; and consolidate, merge or transfer all or substantially all of our assets. In addition, both our export credit facilities and our non-export credit facilities contain covenants that will, once our current waivers expire, require us, among other things, to maintain a specified minimum fixed charge coverage ratio and limit our net debt-to-capital ratio. In addition, our ECA facilities also require us to maintain minimum liquidity and a minimum stock holders' equity. Refer to Note 7. Debt to our consolidated financial statements under Part I, Item 1, Financial Statements for further discussion on our covenants and existing waivers.
All of these limitations are subject to significant exceptions and qualifications. Despite these exceptions and qualifications, we cannot assure you that the operating and financial restrictions and covenants in certain of our debt
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instruments will not adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our interest. Any future indebtedness may include similar or other restrictive terms and we may be required to further encumber our assets. In addition, our ability to comply with these covenants and restrictions may be affected by events beyond our control. These include prevailing economic, financial and industry conditions. If we breach any of these covenants or restrictions, we could be in default under such indebtedness and certain of our other debt instruments, and the relevant debt holders or lenders could elect to declare the debt, together with accrued and unpaid interest and other fees, if any, immediately due and payable and proceed against any collateral securing that debt. If the debt under certain of our debt instruments that we enter into were to be accelerated, our liquid assets may be insufficient to repay in full such indebtedness. Borrowings under other debt instruments that contain cross-default provisions also may be accelerated or become payable on demand. In these circumstances, our assets may not be sufficient to repay in full that indebtedness and our other indebtedness then outstanding.
In addition, our ability to maintain our credit facilities may also be impacted by changes in our ownership base. More specifically, we may be required to prepay our non-ECA and ECA facilities if any person acquires ownership of more than 50% of our common stock or, subject to certain exceptions, during any 24-month period, a majority of 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. Our 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, which would require us to offer to repurchase our debt securities in the event of such change of control.
If we elect to settle conversions of our convertible notes in shares of our common stock or a combination of cash and shares of our common stock, conversions of our convertible notes will result in dilution for our existing shareholders. Furthermore, new equity or convertible debt issuances will also result in dilution for our existing shareholders.
We have an aggregate principal amount of $1.725 billion in convertible notes outstanding. If note holders elect to convert, the notes will be converted into our shares of common stock, cash, or a combination of common stock and cash, at our discretion. Prior to March 15, 2023, August 15, 2023, and May 15, 2025, our convertible notes issued in June 2020, October 2020, and August 2022, respectively, will be convertible at the option of holders during certain periods only upon satisfaction of certain conditions. Beyond those dates, the convertible notes will be convertible at any time until the close of business on the second scheduled trading day immediately preceding their maturity date. Conversions of our convertible notes into shares of our common stock or a combination of common stock and cash, will result in dilution to our shareholders. Additionally, if we raise additional funds through equity or convertible debt issuances, our shareholders could experience dilution of their ownership interest, and these equity or convertible debt securities could have rights, preferences, and privileges that are superior to that of holders of our common stock.
We did not declare quarterly dividends on our common stock in the quarter ended September 30, 2022 and do not expect to pay dividends on our common stock for the foreseeable future.
No cash dividends were declared on our common stock during the ten consecutive quarters ended September 30, 2022. We expect that any income received from operations will be devoted to our future operations and recovery. We do not expect to pay cash dividends on our common stock for the foreseeable future. In addition, in the event we thereafter declare a dividend, we will need to repay our amounts deferred under the export credit facilities. Payment of dividends would, in any case, depend upon our profitability at the time, cash available for those dividends, and other factors as our board of directors may consider relevant.
Increased regulatory oversight, and the phasing out of LIBOR may adversely affect the value of a portion of our indebtedness.
The publication of certain LIBOR settings ceased after December 31, 2021, and uncertainty regarding alternative reference rates remains as many market participants await a wider adoption of replacement products prior to the cessation of the remaining USD LIBOR tenors (currently scheduled for June 30, 2023). When LIBOR ceases to exist, the level of interest payments on the portion of our indebtedness that bears interest at variable rates might be affected if we, the agent, and/or the lenders holding a majority of the outstanding loans or commitments under such indebtedness fail to amend such indebtedness to implement a replacement rate. Regardless, such replacement rate will give due consideration to any evolving or then-existing conventions for similar credit facilities, which may result in different than expected interest payments.
Compliance and Regulatory Risks
Changes in U.S. or other countries’ foreign travel policy have affected, and may continue to affect our results of operations.
Changes in U.S. foreign policy have in the past and could in the future result in the imposition of travel restrictions or travel bans on U.S. persons to certain countries or result in the imposition of travel advisories, warnings, rules, regulations or
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legislation exposing us to penalties or claims of monetary damages. In addition, some countries have adopted restrictions against U.S. travelers, and we currently cannot predict when those restrictions will be eased. The timing and scope of these changes and regulations can be unpredictable, and they could cause us to cancel scheduled sailings, possibly on short notice, or could result in litigation against us. This, in turn, could decrease our revenue, increase our operating costs and otherwise impair our profitability.
Environmental, labor, health and safety, financial responsibility and other maritime regulations and measures could affect operations and increase operating costs.
The U.S. and various state and foreign government or regulatory agencies have enacted or may enact environmental regulations or policies, such as requiring the use of low sulfur fuels (e.g., IMO Sulfur Limit) or the incoming carbon intensity indicator regulation, that have or could increase our direct cost to operate in certain markets, increase our cost of fuel, limit the supply of compliant fuel, cause us to incur significant expenses to purchase and/or develop new equipment and adversely impact the cruise vacation industry. While we have taken and expect to continue to take a number of actions to mitigate the potential impact of certain of these regulations, there can be no assurances that these efforts will be successful over the long term.
There is increasing global regulatory focus on climate change, greenhouse gas and other emissions. These regulatory efforts,both internationally and in the U.S., are still developing, and we cannot yet determine what the final regulatory programs or their impact will be. However, such climate change-related regulatory activity in the future may adversely affect our business and financial results by requiring us to reduce our emissions, pay for our emissions, modify our itineraries and may increase our exposure, if any, to climate change-related litigation. Such activity may also impact us by increasing our operating costs, including fuel costs. For example, the European Union has proposed a series of significant carbon reforms under its Fit for 55 package designed to meet its 2030 emission goals, which would require us, among other things, to increase the use of low carbon fuel onboard our vessels as well as connectivity to shore power, The proposed legislation also includes updates to the European Union Emission Trading System which would impose requirements to purchase carbon emission allowances beginning in 2023. If enacted, the Fit for 55 regulations may individually and collectively have a material adverse effect on our business and results of operations due to increased costs associated with compliance and modified itineraries in the affected regions.
In addition, we are subject to various international, national, state and local laws, regulations and treaties that govern, among other things, discharge from our ships, safety standards applicable to our ships, treatment of disabled persons, health and sanitary standards applicable to our guests, security standards on board our ships and at the ship/port interface areas, and financial responsibilities to our guests. These issues are, and we believe will continue to be, an area of focus by the relevant authorities throughout the world. This could result in the enactment of more stringent regulation of cruise ships that could subject us to increasing compliance costs in the future and may increase our exposure, if any, to environmental-related litigation.
Some environmental groups also have generated negative publicity about the environmental impact of the cruise vacation industry and are advocating for more stringent regulation of ship emissions at berth and at sea. Growing environmental scrutiny of the cruise industry and any related measures could adversely impact our operations and financial results and subject us to reputational impacts and costs.
A change in our tax status under the U.S. Internal Revenue Code, or other jurisdictions, may have adverse effects on our results of operations.
Royal Caribbean Cruises Ltd. and a number of our subsidiaries are foreign corporations that derive income from a U.S. trade or business and/or from sources within the U.S. In connection with the year end audit, each year, Faegre Drinker Biddle & Reath LLP, our U.S. tax counsel, delivers to us an opinion, based on certain representations and assumptions set forth in it, to the effect that this income, to the extent derived from or incidental to the international operation of a ship or ships, is excluded from gross income for U.S. federal income tax purposes pursuant to Section 883 of the Internal Revenue Code. We believe that most of our income (including that of our subsidiaries) is derived from or incidental to the international operation of ships.
Our ability to rely on Section 883 could be challenged or could change in the future. Provisions of the Internal Revenue Code, including Section 883, are subject to legislative change at any time. Moreover, changes could occur in the future with respect to the identity, residence or holdings of our direct or indirect shareholders, trading volume or trading frequency of our shares, or relevant foreign tax laws of Liberia or the Bahamas, such that they no longer qualify as equivalent exemption jurisdictions, that could affect our eligibility for the Section 883 exemption. Accordingly, there can be no assurance that we will continue to be exempt from U.S. income tax on U.S. source shipping income in the future. If we were not entitled to the benefit of Section 883, we and our subsidiaries would be subject to U.S. taxation on a portion of the income derived from or incidental to the international operation of our ships, which would reduce our net income.
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Additionally, portions of our business are operated by companies that are within the United Kingdom tonnage tax regime. Further, some of our operations are conducted in jurisdictions where we rely on tax treaties to provide exemption from taxation. To the extent the United Kingdom tonnage tax laws change or we do not continue to meet the applicable qualification requirements or if tax treaties are changed or revoked, we may be required to pay higher income tax in these jurisdictions, adversely impacting our results of operations.
As budgetary constraints continue to adversely impact the jurisdictions in which we operate, increases in income tax regulations, tax audits or tax reform affecting our operations may be imposed.
We are not a U.S. corporation and, as a result, our shareholders may be subject to the uncertainties of a foreign legal system in protecting their interests.
Our corporate affairs are governed by our Articles of Incorporation and By-Laws and by the Business Corporation Act of Liberia. The provisions of the Business Corporation Act of Liberia resemble provisions of the corporation laws of a number of states in the U.S. However, there are very few judicial cases in Liberia interpreting the Business Corporation Act of Liberia. While the Business Corporation Act of Liberia provides that it is to be applied and construed to make the laws of Liberia, with respect of the subject matter of the Business Corporation Act of Liberia, uniform with the laws of the State of Delaware and other states with substantially similar legislative provisions (and adopts their case law to the extent it is non-conflicting), there have been few Liberian court cases interpreting the Business Corporation Act of Liberia, and we cannot predict whether Liberian courts would reach the same conclusions as United States courts. We understand that legislation has been proposed but not yet adopted by the Liberian legislature which amends the provisions regarding the adoption of non-Liberian law to, among other things, provide for the adoption of the statutory and case law of Delaware and not also states with substantially similar legislative provisions, and potentially provide the courts of Liberia discretion in application of non-statutory corporation law of Delaware in cases when the laws of Liberia are silent. The right of shareholders to bring a derivative action in Liberian courts may be more limited than in U.S. jurisdictions. There may also be practical difficulties for shareholders attempting to bring suit in Liberia, and Liberian courts may or may not recognize and enforce foreign judgments. Thus, our shareholders may have more difficulty challenging actions taken by management, directors or controlling shareholders than would shareholders of a corporation incorporated in a U.S. jurisdiction.
General Risk Factors
Conducting business globally results in increased costs and other risks.
We operate our business globally, which exposes us to a number of risks, including increased exposure to a wider range of regional and local economic conditions, volatile local political conditions, potential changes in duties and taxes, including changing and/or uncertain interpretations of existing tax laws and regulations, required compliance with additional laws and policies affecting cruising, vacation or maritime businesses or governing the operations of foreign-based companies, currency fluctuations, interest rate movements, difficulties in operating under local business environments, port quality and availability in certain regions, U.S. and global anti-bribery laws and regulations, imposition of trade barriers and restrictions on repatriation of earnings.
Our future growth strategies increasingly depend on the growth and sustained profitability of international markets. Factors that will be critical to our success in these markets include our ability to continue to raise awareness of our products and our ability to adapt our offerings to best suit rapidly evolving consumer demands. The execution of our planned growth strategies is dependent on meeting the governmental and regulatory measures and policies in each of these markets. Our ability to realize our future growth strategy is highly dependent on our ability to satisfy country-specific policies and requirements in order to return to service, as well as meet the needs of region-specific consumer preferences as services come back online. These factors may cause us to reevaluate some of our international business strategies.
Operating globally also exposes us to numerous and sometimes conflicting legal, regulatory and tax requirements. In many parts of the world, including countries in which we operate, practices in the local business communities might not conform to international business standards. We cannot guarantee consistent interpretation, application, and enforcement of newly issued rules and regulations, which could place limits on our operations or increase our costs, as well as negatively impact our future growth strategies in our key growth markets. We must adhere to policies designed to promote legal and regulatory compliance as well as applicable laws and regulations. However, we might not be successful in ensuring that our employees, agents, representatives and other third parties with whom we associate properly adhere to applicable laws and regulations. In addition, we may be exposed to the risk of penalties and other liabilities if we fail to comply with all applicable legal and regulatory requirements. Failure by us, our employees or any of these third parties to adhere to our policies or applicable laws or regulations could result in penalties, sanctions, damage to our reputation and related costs, which in turn could negatively affect our results of operations and cash flows.
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As a global operator, our business also may be impacted by changes in U.S. policy or priorities in areas such as trade, immigration and/or environmental or labor regulations, among others. Depending on the nature and scope of any such changes, they could impact our domestic and international business operations. Any such changes, and any international response to them, could potentially introduce new barriers to passenger or crew travel and/or cross border transactions, impact our guest experience and/or increase our operating costs.
If we are unable to address these risks adequately, our financial position and results of operations could be adversely affected, including impairing the value of our ships and other assets.
The terms of our existing debt financing gives, and any future preferred equity or debt financing may give, holders of any preferred securities or debt securities rights that are senior to rights of our common shareholders.
The holders of our existing debt have rights, preferences and privileges senior to those of holders of our common stock in the event of liquidation. If we incur additional debt or raise equity through the issuance of preferred stock or convertible securities, the terms of the debt or the preferred stock issued may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. If we raise funds through the issuance of additional equity, the ownership percentage of our existing shareholders would be diluted.
Fluctuations in foreign currency exchange rates, fuel prices and interest rates could affect our financial results.
We are exposed to market risk attributable to changes in foreign currency exchange rates, fuel prices and interest rates. Significant changes in any of the foregoing could have a material impact on our financial results, net of the impact of our hedging activities and natural offsets. Our operating results have been and will continue to be impacted, often significantly, by changes in each of these factors
A portion of our indebtedness bears interest at variable rates that are linked to changing market interest rates. As a result, an increase in market interest rates would increase our interest expense and our debt service obligations. As of September 30, 2022, we had approximately $5.9 billion of indebtedness that bears interest at variable rates. This amount represented approximately 25.0% of our total indebtedness. As of September 30, 2022, a hypothetical 1% increase in prevailing interest rates would increase our forecasted 2022 interest expense by approximately $9.8 million.
Additionally, the value of our earnings in foreign currencies is adversely impacted by a strong U.S. dollar. In addition, any significant increase in fuel prices could materially and adversely affect our business as fuel prices impact not only our fuel costs, but also some of our other expenses, such as crew travel, freight, and commodity prices. Mandatory fuel restrictions may also create uncertainty related to the price and availability of certain fuel types potentially impacting operating costs and the value of our related hedging instruments.
The loss of key personnel, our inability to recruit or retain qualified personnel, or disruptions among our shipboard personnel could adversely affect our results of operations.
Our success depends, in large part, on the skills and contributions of key executives and other employees and on our ability to recruit, develop and retain high quality personnel as well as having adequate succession plans and back-up operating plans for when critical executives are unable to serve. As demand for qualified personnel in the industry grows, we must continue to effectively recruit, train, motivate and retain our employees, both shoreside and on our ships, in order to effectively compete in our industry, maintain our current business and support our projected global growth.
We are experiencing difficulty in recruiting and retaining qualified personnel primarily due to a competitive labor market. Our ability to rehire crew may be negatively impacted by increasing demands related to our health and safety protocols, including vaccine requirements, and by a reduced labor supply as previous crew may have obtained alternative employment during our suspension of cruise operations. A prolonged shortage of qualified personnel and/or increased turnover could decrease our ability to operate our business in an optimal manner. The shortage and competitive labor market may result in increased costs if we need to hire temporary personnel, and/or increased wages and/or benefits in order to attract and retain employees, all of which may negatively impact our results of operations.
As of September 30, 2022, approximately 87% of our shipboard employees were covered by collective bargaining agreements. A dispute under our collective bargaining agreements could result in a work stoppage of those employees covered by the agreements. We may not be able to satisfactorily renegotiate these collective bargaining agreements when they expire. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage on our ships. We may also be subject to or affected by work stoppages unrelated to our business or collective bargaining agreements. Any such work stoppages or potential work stoppages could have a material adverse effect on our financial results, as could a loss of key employees, our inability to recruit or retain qualified personnel or disruptions among our personnel.
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If we are unable to keep pace with developments, design, and implementation in technology, our operations or competitive position could become impaired.
Our business continues to demand the use of sophisticated technology and systems. These technologies and systems require significant investment and must be proven, refined, updated, upgraded and/or replaced with more advanced systems in order to continue to meet our customers’ demands and expectations as well as to process our information effectively. If we are unable to do so in a timely manner or within reasonable cost parameters, if there are any disruptions, delays or deficiencies in design or if we are unable to appropriately and timely train our employees to operate any of these new systems, our business could suffer. We also may not achieve the benefits that we anticipate from any new technology or system, which could impair our operating results.
We may be unable to procure appropriate technology in a timely manner or at all or we may incur significant costs in doing so. A failure to adopt the appropriate technology, or a failure or obsolescence in the technology that we have adopted, could adversely affect our results of operations.
We are exposed to cyber security attacks and data breaches and the risks and costs associated with protecting our systems and maintaining data integrity and security.
We are subject to cyber security attacks. These cyber attacks can vary in scope and intent from attacks with the objective of compromising our systems, networks, and communications for economic gain or with the objective of disrupting, disabling or otherwise compromising our maritime and/or shoreside operations. The attacks can encompass a wide range of methods and intent, including phishing attacks, illegitimate requests for payment, theft of intellectual property, theft of confidential or non-public information, installation of malware, installation of ransomware and theft of personal or business information. The frequency and sophistication of, and methods used to conduct, these attacks, have increased over time.
A successful cyber security attack may target us directly, or it may be the result of a third party’s inadequate care, or resulting from vulnerabilities in licensed software. In either scenario, the Company may suffer damage to its systems and data that could interrupt our operations, adversely impact our brand reputation, and expose us to increased risks of governmental investigation, litigation, fines, and other liability, any of which could adversely affect our business. Furthermore, responding to such an attack and mitigating the risk of future attacks could result in additional operating and capital costs in technology, personnel, monitoring and other investments.
We are also subject to various risks associated with the collection, handling, storage, and transmission of sensitive information. In the regular course of business, we collect employee, customer, and other third-party data, including personally identifiable information and individual payment data, for various business purposes. Although we have policies and procedures in place to safeguard such sensitive information, this information has been and could be subject to cyber security attacks and the aforementioned risks. In addition, we are subject to federal, state, and international laws relating to the collection, use, retention, security and transfer of personally identifiable information and individual payment data. Those laws include, among others, the European Union General Data Protection Regulation and regulations of the New York State Department of Financial Services and similar state agencies that impose additional cyber security requirements as a result of our provision of certain insurance products. Complying with these and other applicable laws has caused, and may cause, us to incur substantial costs or require us to change our business practices, and our failure to do so may expose us to substantial fines, penalties, restrictions, litigation, or other expenses and adversely affect our business. Further, any changes to laws or regulations, including new restrictions or requirements applicable to our business, or an increase in enforcement of existing laws and regulations, could expose us to additional costs and liability and could limit our use and disclosure of such information.
While we continue to evolve our cyber security practices in line with our business’ reliance on technology and the changing external threat landscape, and we invest time, effort and financial resources to secure our systems, networks and communications, our security measures cannot provide absolute assurance that we will be successful in preventing or defending from all cyber security attacks impacting our operation. There can be no assurance that any breach or incident will not have a material impact on our operations and financial results.
Any breach, theft, loss, or fraudulent use of guest, employee, third-party or company data, could adversely impact our reputation and brand and our ability to retain or attract new customers, and expose us to risks of data loss, business disruption, governmental investigation, litigation and other liability, any of which could adversely affect our business. Significant capital investments and other expenditures could be required to remedy the problem and prevent future breaches, including costs associated with additional security technologies, personnel, experts and credit monitoring services for those whose data has been breached. Further, if we or our vendors experience significant data security breaches or fail to detect and appropriately respond to significant data security breaches, we could be exposed to government enforcement actions and private litigation.
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Litigation, enforcement actions, fines or penalties could adversely impact our financial condition or results of operations and/or damage our reputation.
Our business is subject to various U.S. and international laws and regulations that could lead to enforcement actions, fines, civil or criminal penalties or the assertion of litigation claims and damages. In addition, improper conduct by our employees, agents or joint venture partners could damage our reputation and/or lead to litigation or legal proceedings that could result in civil or criminal penalties, including substantial monetary fines. In certain circumstances it may not be economical to defend against such matters and/or our legal strategy may not ultimately result in us prevailing in a matter. Such events could lead to an adverse impact on our financial condition or results of operations. We cannot predict the quantum or outcome of any such proceedings and the impact that they will have on our financial results, but any such impact may be material. While some of these claims are covered by insurance, we cannot be certain that all of them will be, which could have an adverse impact on our financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchases
There were no repurchases of common stock during the quarter ended September 30, 2022. In connection with our debt covenant waivers, we agreed with our lenders not to engage in stock repurchases for so long as our debt covenant waivers are in effect.
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Item 6. Exhibits
| 4.1 | ||||||||
| 4.2 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| ** | Furnished herewith | |||||||
Interactive Data File
101 The following financial statements of Royal Caribbean Cruises Ltd. for the period ended September 30, 2022, formatted in iXBRL (Inline extensible Reporting Language) are filed herewith:
(i) the Consolidated Statements of Comprehensive Loss for the quarters and nine months ended September 30, 2022 and 2021;
(ii) the Consolidated Balance Sheets at September 30, 2022 and December 31, 2021;
(iii) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021; and
(iv) the Notes to the Consolidated Financial Statements, tagged in summary and detail.
104 Cover page interactive data file (the cover page XBRL tags are embedded within the Inline XBRL document).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ROYAL CARIBBEAN CRUISES LTD. | ||||||||
| (Registrant) | ||||||||
| /s/ NAFTALI HOLTZ | ||||||||
| Naftali Holtz | ||||||||
| Chief Financial Officer | ||||||||
| November 3, 2022 | (Principal Financial Officer and duly authorized signatory) | |||||||
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