SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) | |
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-11884
ROYAL CARIBBEAN CRUISES LTD.
(Exact name of registrant as specified in its charter)
Republic of Liberia (State or other jurisdiction of incorporation or organization) | 98-0081645 (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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $.01 per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act).
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the registrant's common stock at June 28, 2013 (based upon the closing sale price of the common stock on the New York Stock Exchange on June 28, 2013) held by those persons deemed by the registrant to be non-affiliates was approximately $5.8 billion. Shares of the registrant's common stock held by each executive officer and director and by each entity or person that, to the registrant's knowledge, owned 10% or more of the registrant's outstanding common stock as of June 28, 2013 have been excluded from this number in that these persons may be deemed affiliates of the registrant. This determination of possible affiliate status is not necessarily a conclusive determination for other purposes.
There were 221,215,079 shares of common stock outstanding as of February 13, 2014.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement relating to its 2014 Annual Meeting of Shareholders are incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K as indicated herein.
ROYAL CARIBBEAN CRUISES LTD.
TABLE OF CONTENTS
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PART I
As used in this Annual Report on Form 10-K, the terms “Royal Caribbean,” the “Company,” “we,” “our” and “us” refer to Royal Caribbean Cruises Ltd. and, depending on the context, Royal Caribbean Cruises Ltd.’s consolidated subsidiaries and/or affiliates. The terms “Royal Caribbean International,” “Celebrity Cruises,” “Pullmantur,” “Azamara Club Cruises,” “CDF Croisières de France,” and “TUI Cruises” refer to our cruise brands. However, because TUI Cruises is an unconsolidated investment, our operating results and other disclosures herein do not include TUI Cruises unless otherwise specified. In accordance with cruise vacation industry practice, the term “berths” is determined based on double occupancy per cabin even though many cabins can accommodate three or more passengers.
This Annual Report on Form 10-K 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.
Item 1. Business.
General
Royal Caribbean was founded in 1968 as a partnership. Its corporate structure evolved over the years and the current parent corporation, Royal Caribbean Cruises Ltd., was incorporated on July 23, 1985 in the Republic of Liberia under the Business Corporation Act of Liberia.
We are the world’s second largest cruise company. We own Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises, CDF Croisières de France and a 50% joint venture interest in TUI Cruises. Together, these six brands operate a combined 41 ships in the cruise vacation industry with an aggregate capacity of approximately 98,750 berths as of December 31, 2013.
Our ships operate on a selection of worldwide itineraries that call on approximately 490 destinations on all seven continents. In addition to our headquarters in Miami, Florida, we have offices and a network of international representatives around the world which primarily focus on our global guest sourcing.
We compete principally on the basis of exceptional service provided by our crew, innovation and quality of ships, variety of itineraries, choice of destinations and price. We believe that our commitment to build state-of-the-art ships and to invest in the maintenance and revitalization of our fleet to, among other things, incorporate our latest signature innovations, allows us to continue to attract new and loyal repeat guests.
We believe cruising continues to be a widely accepted vacation choice due to its inherent value, extensive itineraries and variety of shipboard and shoreside activities. In addition, we believe that our products appeal to a large consumer base and are not dependent on a single market or demographic.
Our Brands
Our global brands include Royal Caribbean International, Celebrity Cruises, and Azamara Club Cruises. These brands are complemented by our Pullmantur brand, which has been tailored to serve the cruise markets in Spain, Portugal and Latin America; our CDF Croisières de France brand, which provides us with a tailored product targeted at the French market; and our 50% joint venture TUI Cruises which is specifically tailored for the German market. The operating results of all of our brands are included in our consolidated results of operations, except for TUI Cruises, which is accounted for under the equity method of accounting. See Note 1. General and Note 6. Other Assets to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data for further details.
We believe our global brands possess the versatility to enter multiple cruise market segments within the cruise vacation industry. Although each of our brands has its own marketing style as well as ships and crews of various sizes, the nature of the products sold and services delivered by our brands share a common base (i.e., the sale and provision
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of cruise vacations). Our brands also have similar itineraries as well as similar cost and revenue components. In addition, our brands source passengers from similar markets around the world and operate in similar economic environments with a significant degree of commercial overlap. As a result, we strategically manage our brands as a single business with the ultimate objective of maximizing long-term shareholder value.
Royal Caribbean International
We currently operate 21 ships with an aggregate capacity of approximately 59,650 berths under our Royal Caribbean International brand, offering cruise itineraries that range from two to 18 nights. In the fourth quarter of 2014, Royal Caribbean International is scheduled to take delivery of the 4,150 berth Quantum of the Seas, its first newbuild since 2010 and the first of a new generation of cruise ships. In addition, we currently have three other ships on order for our Royal Caribbean International brand with an aggregate capacity of approximately 13,700 berths. These include our third Oasis-class ship, which is scheduled to enter service in the second quarter of 2016 and the second and third Quantum-class ships which are scheduled to enter service in the second quarter of 2015 and the second quarter of 2016. Royal Caribbean International offers a variety of itineraries to destinations worldwide, including Alaska, Asia, Australia, Bahamas, Bermuda, Canada, the Caribbean, Europe, the Panama Canal, South America and New Zealand.
Royal Caribbean International is positioned at the upper end of the contemporary segment of the cruise vacation industry, generally characterized by cruises that are seven nights or shorter and feature a casual ambiance as well as a variety of activities and entertainment venues. We believe that the quality of the Royal Caribbean International brand also enables it to attract guests from the premium segment, which is generally characterized by cruises that are seven to 14 nights and appeal to the more experienced guest who is usually more affluent. This allows Royal Caribbean International to achieve market coverage that is among the broadest of any of the major cruise brands in the cruise vacation industry. Royal Caribbean International’s strategy is to attract an array of vacationing guests by providing a wide variety of itineraries and cruise lengths with multiple innovative options for onboard dining, entertainment and other onboard activities. We believe that the variety and quality of Royal Caribbean International’s product offerings represent excellent value to consumers, especially to couples and families traveling with children. Because of the brand’s extensive and innovative product offerings, we believe Royal Caribbean International is well positioned to attract new consumers to the cruise vacation industry and to continue to bring loyal repeat guests back for their next vacation.
Royal Caribbean International has a vessel revitalization program designed to incorporate certain of the most popular features of our newer ships across the fleet. From 2011 to 2013, a total of 12 ships have been revitalized under this program. An additional two ships are scheduled for revitalization in 2014.
Celebrity Cruises
We currently operate 11 ships with an aggregate capacity of approximately 24,900 berths under our Celebrity Cruises brand, offering cruise itineraries that range from three to 18 nights. Celebrity Cruises offers a variety of itineraries to popular destinations, including Alaska, Asia, Australia, Bermuda, Canada, the Caribbean, Europe, Hawaii, New Zealand, the Panama Canal and South America.
Celebrity Cruises is positioned within the premium segment of the cruise vacation industry. Celebrity Cruises’ strategy is to target experienced cruisers and quality and service oriented new cruisers by delivering a destination-rich experience onboard upscale ships that offer, among other things, luxurious accommodations, a high staff-to-guest ratio, fine dining, personalized service and extensive spa facilities. The brand has a vessel revitalization program in order to incorporate well-received concepts from its Solstice-class ships.
Azamara Club Cruises
We currently operate two ships with an aggregate capacity of approximately 1,400 berths under our Azamara Club Cruises brand, offering cruise itineraries that range from four to 18 nights. Azamara Club Cruises is designed
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to serve the up-market segment of the North American, United Kingdom and Australian markets. The up-market segment incorporates elements of the premium segment and the luxury segment which is generally characterized by smaller ships, high standards of accommodation and service, higher prices and exotic itineraries.
Azamara Club Cruises’ strategy is to deliver distinctive destination experiences through unique itineraries with more overnights and longer stays as well as thorough tours allowing guests to experience the destination in more depth. Azamara Club Cruises’ focus is to attract experienced travelers who are looking for more comprehensive destination experiences, and who seek a more intimate onboard experience and a high level of service. In furtherance of this strategy, Azamara Club Cruises includes as part of the base price of the cruise certain complimentary onboard services, amenities and activities which are not normally included in the base price of most other cruise lines. Azamara Club Cruises sails in Asia, Northern and Western Europe, the Mediterranean, South and Central America, the less-traveled islands of the Caribbean and North America.
Pullmantur
During 2013, we operated four ships with an aggregate capacity of approximately 7,650 berths under our Pullmantur brand, offering cruise itineraries that ranged from four to 12 nights throughout South America, the Caribbean and Europe. One of these ships, Zenith, was redeployed from Pullmantur to CDF Croisières de France in January 2014. Pullmantur serves the contemporary segment of the Spanish, Portuguese and Latin American cruise markets. Pullmantur's strategy is to attract cruise guests from these target markets by providing a variety of cruising options and onboard activities directed at couples and families traveling with children. Over the last few years, Pullmantur has systematically increased its focus on Latin America. In recognition of this, Pullmantur recently opened a regional head office in Panama to place the operating management closer to its largest and fastest growing market.
In order to facilitate Pullmantur's ability to focus on its core cruise business, in December 2013, Pullmantur reached an agreement to sell the majority of its interest in its land-based tour operations, travel agency and Pullmantur Air, the closing of which is subject to customary closing conditions. In connection with the agreement, we will retain a 19% interest in the non-core businesses. We will retain ownership of the Pullmantur aircraft which will be dry leased to Pullmantur Air.
CDF Croisières de France
In January 2014, we redeployed Zenith from Pullmantur to CDF Croisières de France. As a result, as of January 2014, we operate two ships with an aggregate capacity of approximately 2,750 berths under our CDF Croisières de France brand. During the summer of 2014, CDF Croisières de France will operate both ships in Europe and, for the first time, the brand will operate in the Caribbean during the winter of 2014. In addition, CDF Croisières de France offers seasonal itineraries to the Mediterranean. CDF Croisières de France is designed to serve the contemporary segment of the French cruise market by providing a brand tailored for French cruise guests.
TUI Cruises
TUI Cruises is designed to serve the contemporary and premium segments of the German cruise market by offering a product tailored for German guests. All onboard activities, services, shore excursions and menu offerings are designed to suit the preferences of this target market. TUI Cruises operates two ships, Mein Schiff 1 and Mein Schiff 2, with an aggregate capacity of approximately 3,800 berths. In addition, TUI Cruises has two ships on order, each with a capacity of 2,500 berths, scheduled for delivery in the second quarter of 2014 and second quarter of 2015. TUI Cruises is a joint venture owned 50% by us and 50% by TUI AG, a German tourism and shipping company that also owns 51% of TUI Travel, a British tourism company.
Industry
Cruising is considered a well-established vacation sector in the North American market, a growing sector over the long-term in the European market and a developing but promising sector in several other emerging markets.
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Industry data indicates that market penetration rates are still low and that a significant portion of cruise guests carried are first-time cruisers. We believe this presents an opportunity for long-term growth and a potential for increased profitability.
The following table details market penetration rates for North America and Europe computed based on the number of annual cruise guests as a percentage of the total population:
Year | North America(1) | Europe(2) | ||
2009 | 3.0% | 1.0% | ||
2010 | 3.1% | 1.1% | ||
2011 | 3.4% | 1.1% | ||
2012 | 3.3% | 1.2% | ||
2013 | 3.4% | 1.2% | ||
(1) | Source: International Monetary Fund and Cruise Line International Association based on cruise guests carried for at least two consecutive nights for years 2009 through 2012. Year 2013 amounts represent our estimates. Includes the United States of America and Canada. |
(2) | Source: International Monetary Fund and CLIA Europe, formerly European Cruise Council, for years 2009 through 2012. Year 2013 amounts represent our estimates. |
We estimate that the global cruise fleet was served by approximately 436,000 berths on approximately 269 ships at the end of 2013. There are approximately 26 ships with an estimated 71,000 berths that are expected to be placed in service in the global cruise market between 2014 and 2018, although it is also possible that ships could be ordered or taken out of service during these periods. We estimate that the global cruise industry carried 21.3 million cruise guests in 2013 compared to 20.9 million cruise guests carried in 2012 and 20.2 million cruise guests carried in 2011.
The following table details the growth in global weighted average berths and the global, North American and European cruise guests over the past five years:
Year | Weighted-Average Supply of Berths Marketed Globally(1) | Royal Caribbean Cruises Ltd. Total Berths | Global Cruise Guests(1) | North American Cruise Guests(2) | European Cruise Guests (3) | |||||
2009 | 363,000 | 84,050 | 17,340,000 | 10,198,000 | 5,000,000 | |||||
2010 | 391,000 | 92,300 | 18,800,000 | 10,781,000 | 5,540,000 | |||||
2011 | 412,000 | 92,650 | 20,227,000 | 11,625,000 | 5,894,000 | |||||
2012 | 425,000 | 98,650 | 20,898,000 | 11,640,000 | 6,139,000 | |||||
2013 | 432,000 | 98,750 | 21,300,000 | 11,816,000 | 6,399,000 | |||||
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(1) | Source: Our estimates of the number of global cruise guests and the weighted-average supply of berths marketed globally are based on a combination of data that we obtain from various publicly available cruise industry trade information sources including Seatrade Insider, Cruise Industry News and Cruise Line International Association (“CLIA”). In addition, our estimates incorporate our own statistical analysis utilizing the same publicly available cruise industry data as a base. |
(2) | Source: Cruise Line International Association based on cruise guests carried for at least two consecutive nights for years 2009 through 2012. Year 2013 amounts represent our estimates (see number 1 above). Includes the United States of America and Canada. |
(3) | Source: CLIA Europe, formerly European Cruise Council, for years 2009 through 2012. Year 2013 amounts represent our estimates (see number 1 above). |
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North America
The majority of cruise guests are sourced from North America, which represented approximately 56% of global cruise guests in 2013. The compound annual growth rate in cruise guests sourced from this market was approximately 3.2% from 2009 to 2013.
Europe
Cruise guests sourced from Europe represented approximately 30% of global cruise guests in 2013. The compound annual growth rate in cruise guests sourced from this market was approximately 6.0% from 2009 to 2013.
Other Markets
In addition to expected industry growth in North America and Europe, we expect the Asia/Pacific region to demonstrate an even higher growth rate in the near term, although it will continue to represent a relatively small sector compared to North America and Europe. Based on industry data, cruise guests sourced from the Asia/Pacific region represented approximately 4.5% of global cruise guests in 2013. The compound annual growth rate in cruise guests sourced from this market was approximately 15% from 2011 to 2013.
Competition
We compete with a number of cruise lines. Our principal competitors are Carnival Corporation & plc, which owns, among others, Aida Cruises, Carnival Cruise Lines, Costa Cruises, Cunard Line, Holland America Line, Iberocruceros, P&O Cruises and Princess Cruises; Disney Cruise Line; MSC Cruises; Norwegian Cruise Line and Oceania Cruises. Cruise lines compete with other vacation alternatives such as land-based resort hotels and sightseeing destinations for consumers’ leisure time. Demand for such activities is influenced by political and general economic conditions. Companies within the vacation market are dependent on consumer discretionary spending.
Operating Strategies
Our principal operating strategies are to:
• | protect the health, safety and security of our guests and employees and protect the environment in which our vessels and organization operate, |
• | strengthen and support our human capital in order to better serve our global guest base and grow our business, |
• | further strengthen our consumer engagement in order to enhance our revenues, |
• | increase the awareness and market penetration of our brands globally, |
• | focus on cost efficiency, manage our operating expenditures and ensure adequate cash and liquidity, with the overall goal of maximizing our return on invested capital and long-term shareholder value, |
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• | strategically invest in our fleet through the revitalization and maintenance of existing ships and the transfer of key innovations across each brand, while prudently expanding our fleet with new state-of-the-art cruise ships, |
• | capitalize on the portability and flexibility of our ships by deploying them into those markets and itineraries that provide opportunities to optimize returns, while continuing our focus on existing key markets, |
• | further enhance our technological capabilities to service customer preferences and expectations in an innovative manner, while supporting our strategic focus on profitability, and |
• | maintain strong relationships with travel agencies, which continue to be the principal industry distribution channel, while enhancing our consumer outreach programs. |
Safety, Environment and Health policies
We are committed to protecting the safety, environment and health of our guests, employees and others working on our behalf. We are also committed to protecting the marine environment and communities in which we operate. As part of this commitment, our Safety, Environment and Health Department oversees our maritime safety, global security, environmental stewardship and medical/public health activities. Our dedication to these areas is guided by a Maritime Advisory Board of experts and overseen by the Safety, Environment and Health Committee of our Board of Directors. We publicly share our safety, environment and health performance through our annual Stewardship Report and through our report under the Global Reporting Initiative, each of which can be accessed on our brand websites. Our brand websites also provide information about our Environmental Performance Goals and our voluntary reporting of onboard security incidents. The foregoing information contained on our websites is not a part of any of these reports and is not incorporated by reference herein or in any other report or document we file with the Securities and Exchange Commission.
Human capital
We believe that our employees, both shipboard and shoreside, are a critical success factor for our business. We strive to identify, hire, develop, motivate, and retain the best employees, with backgrounds and perspectives as diverse as our guest base. Attracting, engaging, and retaining key employees has been and will remain critical to our success.
We continue our focus on providing our employees with a competitive compensation structure, development and other personal and professional growth opportunities in order to strengthen and support our human capital. We also seek to select, develop and retain leaders to advance the enterprise now and in the future. To that end, we pay special attention to identifying high performing potential leaders and developing deep bench strength so these leaders can assume leadership roles throughout the organization. We strive to maintain a work environment that reinforces collaboration, motivation and innovation, and believe that maintaining our vibrant and distinctive culture is critical to the growth of our business.
Consumer engagement
We place a strong focus on identifying the needs of our guests and creating product features that our customers value. We are focused on targeting high-value guests by better understanding consumer data and insights and creating communication strategies that best resonate with our target audiences.
We interact with customers across all touch points and seek to identify underlying needs for which guests are willing to pay a premium. We rely on various programs prior to, during and after a cruise vacation aimed at increasing our ticket prices, onboard revenues and occupancy. We have strategically invested in a number of projects onboard our ships, including the implementation of new onboard revenue initiatives that we believe drive profitability and improve the guest experience.
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Global awareness and market penetration
We increase brand awareness and market penetration of our cruise brands in various ways, including through the use of communication strategies and marketing campaigns designed to emphasize the unique qualities of each brand and to broaden the awareness of the brand, especially among the brand target customer groups. Our marketing strategies include the use of traditional media, social media, brand websites and travel agencies. Our brands engage past and potential guests by collaborating with travel partners and through call centers, international offices and international representatives. In addition, Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises target repeat guests with exclusive benefits offered through their respective loyalty programs.
We also increase brand awareness across all of our brands through travel agencies who generate the majority of our bookings. We are committed to further developing and strengthening this very important distribution channel by continuing to focus the travel agents on the unique qualities of each of our brands.
We sell and market our global brands, Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises, to guests outside of North America through our offices in the United Kingdom, France, Germany, Norway, Italy, Spain, Singapore, China, Brazil, Australia and Mexico. We believe that having a local presence in these markets provides us with the ability to react more quickly to local market conditions and better understand our consumer base in each market. We further extend our geographic reach with a network of 36 independent international representatives located throughout the world covering 112 countries. Historically, our focus has been to primarily source guests for our global brands from North America. Over the last several years, we have continued to expand our focus on selling and marketing our cruise brands to guests in countries outside of North America by tailoring itineraries and onboard product offerings to the cultural characteristics and preferences of our international guests. In addition, we explore opportunities that may arise to acquire or develop brands tailored to specific markets.
Passenger ticket revenues generated by sales originating in countries outside of the United States were approximately 48% of total passenger ticket revenues in 2013 and 49% in 2012 and 2011. International guests have grown from approximately 1.5 million in 2009 to approximately 2.3 million in 2013.
Cost efficiency, operating expenditures and adequate cash and liquidity
We continue our commitment to identify and implement cost containment initiatives. Our most recent initiatives relate to realizing economies of scale and improving service delivery to our travel partners and guests by restructuring and consolidating our global sales, marketing, general and administrative structure. We also continue our initiatives to reduce energy consumption and, by extension, fuel costs. These include the design of more fuel-efficient ships as well as the implementation of more efficient hardware, including propulsion and cooling systems incorporating energy efficiencies.
We are focused on maintaining a strong liquidity position, reducing our debt and improving our credit metrics. In addition, we continue to pursue our long-term objective of returning our credit ratings to investment grade. We believe these strategies enhance our ability to achieve our overall goal of maximizing our return on invested capital and long-term shareholder value.
Fleet revitalization, maintenance and expansion
We place a strong focus on product innovation, which we seek to achieve by introducing new concepts on our new ships and continuously making improvements to our fleet. Several of these innovations have become signature elements of our brands, such as the “Royal Promenade” (a boulevard with shopping, dining and entertainment venues) for the Royal Caribbean International brand and enhanced design features found on our Solstice-class ships for the Celebrity Cruises brand.
We are committed to building state-of-the-art ships and our brands, including our 50% joint venture TUI Cruises, currently have signed agreements for the construction of six new ships. These consist of three Quantum-class ships
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which are scheduled to enter service in the fourth quarter of 2014 and the second quarters of 2015 and 2016, one Oasis-class ship, which is scheduled to enter service in the second quarter of 2016, and two ships of a new generation for TUI Cruises, which are scheduled to enter service in the second quarters of 2014 and 2015. These additions are expected to increase our passenger capacity by approximately 22,850 berths by December 31, 2016, or approximately 23.1%, as compared to our capacity as of December 31, 2013. We continuously evaluate opportunities to order new ships, purchase existing ships or sell ships in our current fleet.
Our revitalization and maintenance programs enable us to incorporate many of our latest signature innovations throughout the brand fleet and allow us to benefit from economies of scale by leveraging our suppliers. Ensuring consistency across our fleet provides us with the flexibility to redeploy our ships among our brand portfolio.
Markets and itineraries
In an effort to penetrate untapped markets, diversify our consumer base and respond to changing economic and geopolitical market conditions, we continue to seek opportunities to optimally deploy ships to new and stronger markets and itineraries throughout the world. The portability of our ships allows us to readily deploy our ships to meet demand within our existing cruise markets. We make deployment decisions with the goal of optimizing the overall profitability of our portfolio, with these decisions generally made 12 to 18 months in advance. Additionally, the infrastructure investments we have made in creating a flexible global sourcing model has made our brand relevant in a number of markets around the world, which allows us to be opportunistic and source the highest yielding guests for our itineraries.
Our ships offer a wide selection of itineraries that call on approximately 490 destinations in 103 countries, spanning all seven continents. We are focused on obtaining the best possible long-term shareholder returns by operating in established markets while growing our presence in developing markets. New capacity allows us to expand into new markets and itineraries. Our brands have expanded their mix of itineraries while strengthening our ability to further penetrate the Asian, Australian, Caribbean, and Latin American markets. Additionally, in order to capitalize on the summer season in the Southern Hemisphere and mitigate the impact of the winter weather in the Northern Hemisphere, our brands have focused on deployment in Australia and Latin America during that period.
In an effort to secure desirable berthing facilities for our ships, and to provide new or enhanced cruise destinations for our guests, we actively assist or invest in the development or enhancement of certain port facilities and infrastructure, including mixed-use commercial properties, located in strategic ports of call. Generally, we collaborate with local, private or governmental entities by providing management and/or financial assistance and often enter into long-term port usage arrangements. Our participation in these efforts is generally accomplished via investments with the relevant government authority and/or various other strategic partnerships established to develop and/or operate the port facilities, by providing direct development and management expertise or in certain limited circumstances, by providing direct or indirect financial support. In exchange for our involvement, we generally secure preferential berthing rights for our ships.
Technological capabilities
The need to develop and use innovative technology is increasingly important. Technology is a pervasive part of virtually every business process we use to support our strategic focus and provide a quality experience to our customers before, during and after their cruise. Moreover, as the use of our various websites and social media platforms continue to increase along with the increasing use of technology onboard our ships by both our guests and crew, we continually need to upgrade our systems, infrastructure and technologies to facilitate this growth. As a result, we have launched several new initiatives, which included among other improvements, revamped websites, new vacation packaging capabilities, support of mobile apps and increased bandwidth onboard our ships helping our guests remain well-connected while at sea.
To support our strategic focus on improving revenue yields, we began to implement new capabilities to improve our revenue management systems and decision support processes in advance of our WAVE season (traditionally the
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first two months of the year where cruise lines experience disproportionately higher volume cruise sales). As part of this effort, we have introduced new price optimization tools and pricing and promotion management capabilities in our reservations system. We also provided our sales force with new tools to better support our travel agents.
Travel agency support and direct business
Travel agencies continue to be the primary source of ticket sales for our ships. We believe in the value of this distribution channel and invest heavily in maintaining strong relationships with our travel partners. To accomplish this goal, we seek to ensure that our commission rates and incentive structures remain competitive with the marketplace. We provide brand dedicated sales representatives who serve as advisors to our travel partners. We also provide trained customer service representatives, call centers and online training tools.
To support our direct sales initiatives, we have established a Consumer Outreach department which allows consumers 24-hour access to our vacation planners, group vacation planners and customer service agents in our call centers. In addition, we maintain and invest in our websites, including mobile applications and mobile websites, which allow guests to directly plan, book and customize their cruise, as well as encourage guests to book their next cruise vacations onboard our ships.
Guest Services
We offer to handle virtually all travel aspects related to guest reservations and transportation, including arranging guest pre- and post-hotel stay arrangements and air transportation.
Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises offer rewards to their guests through their loyalty programs, Crown & Anchor Society, Captain’s Club and Le Club Voyage, respectively, to encourage repeat business. Crown & Anchor Society has over 7.8 million members worldwide. Captain’s Club and Le Club Voyage have 2.5 million members combined worldwide. Members earn increasing membership status by accumulating cruise points or credits, depending on the brand, which may be redeemed on future sailings. Members are awarded points or credits in proportion to the number of cruise days and stateroom category. The loyalty programs provide certain tiers of membership benefits which can be redeemed by guests after accumulating the number of cruise points or credits specified for each tier. In addition, upon achieving a certain level of cruise points or credits, members benefit from reciprocal membership benefits across all of our loyalty programs. Examples of the rewards available under our loyalty programs include, but are not limited to, priority ship embarkation, priority waitlist for shore excursions, complimentary laundry service, complimentary internet, booklets with onboard discount offers, upgraded bathroom amenities, private seating on the pool deck, ship tours and, in the case of our most loyal guests who have achieved the highest levels of cruise points or credits, complimentary cruises. We regularly work to enhance each of our loyalty programs by adding new features and amenities in order to reward our repeat guests.
Operations
Cruise Ships and Itineraries
As of December 31, 2013, our brands, including our 50% joint venture TUI Cruises, operate 41 ships with a selection of worldwide itineraries ranging from two to 23 nights that call on approximately 490 destinations.
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The following table presents summary information concerning the ships we will operate in 2014 under these six cruise brands and their geographic areas of operation based on 2014 itineraries (subject to change).
Ship | Year Ship Entered Service(1) | Approximate Berths | Primary Areas of Operation | ||
Royal Caribbean International | |||||
Quantum of the Seas | 2014 | 4,150 | Bahamas, Eastern/Southern Caribbean | ||
Allure of the Seas | 2010 | 5,400 | Eastern/Western Caribbean | ||
Oasis of the Seas | 2009 | 5,400 | Eastern/Western Caribbean, Europe | ||
Independence of the Seas | 2008 | 3,600 | Europe, Eastern/Western Caribbean | ||
Liberty of the Seas | 2007 | 3,600 | Europe, Short Caribbean | ||
Freedom of the Seas | 2006 | 3,600 | Eastern/Western Caribbean | ||
Jewel of the Seas | 2004 | 2,100 | Southern Caribbean | ||
Mariner of the Seas | 2003 | 3,100 | Asia | ||
Serenade of the Seas | 2003 | 2,100 | Western Caribbean, Europe | ||
Navigator of the Seas | 2002 | 3,250 | Western Caribbean | ||
Brilliance of the Seas | 2002 | 2,100 | Europe, Western Caribbean, Canada | ||
Adventure of the Seas | 2001 | 3,100 | Southern Caribbean, Europe | ||
Radiance of the Seas | 2001 | 2,100 | Alaska, Australia/New Zealand | ||
Explorer of the Seas | 2000 | 3,100 | Eastern/Southern Caribbean, Bermuda, Canada | ||
Voyager of the Seas | 1999 | 3,250 | Asia, Australia/New Zealand | ||
Vision of the Seas | 1998 | 2,000 | Western Caribbean, Short Caribbean, Southern Caribbean, Bermuda | ||
Enchantment of the Seas | 1997 | 2,250 | Bahamas | ||
Rhapsody of the Seas | 1997 | 2,000 | Australia/New Zealand, Alaska | ||
Grandeur of the Seas | 1996 | 1,950 | Southern/Eastern/Western Caribbean, Bermuda, Canada | ||
Splendour of the Seas | 1996 | 1,800 | Europe, Brazil | ||
Legend of the Seas | 1995 | 1,800 | Europe, Eastern/Southern Caribbean, Panama Canal | ||
Majesty of the Seas | 1992 | 2,350 | Bahamas | ||
Celebrity Cruises | |||||
Celebrity Reflection | 2012 | 3,000 | Europe, Eastern/Western Caribbean | ||
Celebrity Silhouette | 2011 | 2,850 | Europe, Eastern/Western Caribbean | ||
Celebrity Eclipse | 2010 | 2,850 | Europe, Southern Caribbean | ||
Celebrity Equinox | 2009 | 2,850 | Europe, Eastern/Western/Southern Caribbean | ||
Celebrity Solstice | 2008 | 2,850 | Alaska, Australia/New Zealand | ||
Celebrity Constellation | 2002 | 2,150 | Short Caribbean, Eastern Caribbean, Europe | ||
Celebrity Summit | 2001 | 2,150 | Southern Caribbean, Bermuda, Canada | ||
Celebrity Infinity | 2001 | 2,150 | Europe, Panama Canal, S. America | ||
Celebrity Millennium | 2000 | 2,150 | Alaska, Asia, Panama Canal | ||
Celebrity Century | 1995 | 1,800 | Alaska, Hawaii, Panama Canal, Australia | ||
Celebrity Xpedition(2) | 2004 | 100 | Galapagos Islands | ||
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Ship | Year Ship Entered Service(1) | Approximate Berths | Primary Areas of Operation | ||
Azamara Club Cruises | |||||
Azamara Quest(3) | 2006 | 700 | Europe, South/Central America, Asia | ||
Azamara Journey(3) | 2004 | 700 | Europe, Asia, South America | ||
Pullmantur(4) | |||||
Monarch of the Seas | 1991 | 2,350 | Southern Caribbean | ||
Empress | 1990 | 1,600 | Europe, Brazil | ||
Sovereign | 1988 | 2,300 | Europe, Brazil | ||
CDF Croisières de France | |||||
Horizon(5) | 2010 | 1,350 | Europe, Southern Caribbean | ||
Zenith(6) | 1992 | 1,400 | Europe, Brazil | ||
TUI Cruises | |||||
Mein Schiff 3 | 2014 | 2,500 | Europe, Canary Islands | ||
Mein Schiff 2(7) | 2011 | 1,900 | Europe, Middle East | ||
Mein Schiff 1(8) | 2009 | 1,900 | Europe, Southern Caribbean | ||
Total | 105,700 | ||||
_______________________________________________________________________________
(1) | The year a ship entered service refers to the year in which the ship commenced cruise revenue operations for the Company, which is the same as the year the ship was built, unless otherwise noted. |
(2) | Originally built in 2001. |
(3) | Originally built in 2000. |
(4) | Does not include Pullmantur’s Ocean Dream as it was delivered to an unrelated third party in April 2012 as part of a six-year bareboat charter agreement. The charter agreement provides a renewal option exercisable by the unrelated third party for an additional four years. |
(5) | Originally built in 1990. |
(6) | Zenith was redeployed from Pullmantur to CDF Croisières de France in January 2014. |
(7) | Originally built in 1997. |
(8) | Originally built in 1996. |
Our brands, including our 50% joint venture, TUI Cruises, have six ships on order. Three ships on order are being built in Germany by Meyer Werft GmbH, two are being built in Finland by STX Finland and one will be built in France by STX France. The expected dates that our ships on order will enter service and their approximate berths are as follows:
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Ship | Expected to Enter Service | Approximate Berths | ||
Royal Caribbean International— | ||||
Quantum-class: | ||||
Quantum of the Seas | 4th Quarter 2014 | 4,150 | ||
Anthem of the Seas | 2nd Quarter 2015 | 4,150 | ||
Unnamed | 2nd Quarter 2016 | 4,150 | ||
Oasis-class: | ||||
Unnamed | 2nd Quarter 2016 | 5,400 | ||
TUI Cruises— | ||||
Mein Schiff 3 | 2nd Quarter 2014 | 2,500 | ||
Mein Schiff 4 | 2nd Quarter 2015 | 2,500 | ||
Total Berths | 22,850 | |||
Seasonality
Our revenues are seasonal based on the demand for cruises. Demand is strongest for cruises during the Northern Hemisphere’s summer months and holidays. In order to mitigate the impact of the winter weather in the Northern Hemisphere and to capitalize on the summer season in the Southern Hemisphere, our brands have focused on deployment in Australia and Latin America during that period.
Passengers and Capacity
Selected statistical information is shown in the following table (see Description of Certain Line Items and Selected Operational and Financial Metrics under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, for definitions):
Year Ended December 31, | ||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||
Passengers Carried | 4,884,763 | 4,852,079 | 4,850,010 | 4,585,920 | 3,970,278 | |||||||||
Passenger Cruise Days | 35,561,772 | 35,197,783 | 34,818,335 | 32,251,217 | 28,503,046 | |||||||||
Available Passenger Cruise Days (APCD) | 33,974,852 | 33,705,584 | 33,235,508 | 30,911,073 | 27,821,224 | |||||||||
Occupancy | 104.7 | % | 104.4 | % | 104.8 | % | 104.3 | % | 102.5 | % | ||||
Cruise Pricing
Our cruise ticket prices include accommodations and a wide variety of activities and amenities, including meals and entertainment. Prices vary depending on many factors including the destination, cruise length, stateroom category selected and the time of year the cruise takes place. Although we grant credit terms in select markets mainly outside of the United States, our payment terms generally require an upfront deposit to confirm a reservation, with the balance due prior to the sailing. During the selling period of a cruise, we continually monitor and adjust our cruise ticket prices for available guest staterooms based on demand, with the objective of maximizing net yields. In 2013, we launched new initiatives, which enable us to set pricing and leverage enhancements for the web and our reservation systems. During 2014, we will continue to develop and implement revenue management tools that we believe will enable us to better understand and react to the current demand and pricing environment. Historically, we have opened cruises for sale at least one year in advance and often as much as two years in advance. Our air transportation program is available in major cities around the world and prices vary by gateway and destination. Generally, air tickets are sold to guests at prices close to cost.
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Passenger ticket revenues accounted for approximately 72% of total revenues in 2013 and approximately 73% of total revenues in 2012 and 2011. While none of our brands are currently charging fuel supplements, we have introduced temporary fuel supplements from time to time.
Onboard Activities and Other Revenues
Our cruise brands offer modern fleets with a wide array of onboard services, amenities and activities which vary by brand and ship. While many onboard activities are included in the base price of a cruise, we realize additional revenues from, among other things, gaming, the sale of alcoholic and other beverages, gift shop items, shore excursions, photography, spa/salon and fitness services, art auctions, catalogue gifts for guests and a wide variety of specialty restaurants and dining options. Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises offer functionality on their respective internet sites for selecting shore excursions, specialty dining and amenities prior to embarkation.
In conjunction with our cruise vacations, we offer pre- and post-cruise hotel packages to our Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises guests. During 2013, we expanded the markets in which we sell our cruise vacation protection coverage, which provides guests with coverage for trip cancellation, medical protection and baggage protection. Onboard and other revenues accounted for approximately 28% of total revenues in 2013 and approximately 27% of total revenues in 2012 and 2011.
Segment Reporting
We operate five wholly-owned cruise brands, Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises, Pullmantur and CDF Croisières de France. In addition, we have a 50% investment in a joint venture with TUI AG which operates the brand TUI Cruises. We believe our global brands possess the versatility to enter multiple cruise market segments within the cruise vacation industry. Although each of our brands has its own marketing style as well as ships and crews of various sizes, the nature of the products sold and services delivered by our brands share a common base (i.e., the sale and provision of cruise vacations). Our brands also have similar itineraries as well as similar cost and revenue components. In addition, our brands source passengers from similar markets around the world and operate in similar economic environments with a significant degree of commercial overlap. As a result, our brands (including TUI Cruises) have been aggregated as a single reportable segment based on the similarity of their economic characteristics, types of consumers, regulatory environment, maintenance requirements, supporting systems and processes as well as products and services provided. Our Chairman and Chief Executive Officer has been identified as the chief operating decision-maker and all significant operating decisions including the allocation of resources are based upon the analyses of the Company as one segment. (For financial information see Item 8. Financial Statements and Supplementary Data.)
Employees
As of December 31, 2013, we employed approximately 64,000 employees, including 57,000 shipboard employees as well as 6,200 full-time and 700 part-time employees in our shoreside operations. As of December 31, 2013, approximately 80% of our shipboard employees were covered by collective bargaining agreements.
Insurance
We maintain insurance on the hull and machinery of our ships, which includes additional coverage for disbursements, earnings and increased value, which are maintained in amounts related to the net book value of each ship. The coverage for each of the hull policies is maintained with syndicates of insurance underwriters from the British, Scandinavian, French, United States and other international insurance markets.
We maintain liability protection and indemnity insurance for each of our ships through either the United Kingdom Mutual Steam Ship Assurance Association (Bermuda) Limited or the Steamship Mutual Underwriting Association (Bermuda) Limited. Our protection and indemnity liability insurance is done on a mutual basis and we are subject
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to additional premium calls in amounts based on claim records of all members of the mutual protection and indemnity association. We are also subject to additional premium calls based on investment shortfalls experienced by the insurer.
We maintain war risk insurance which covers damage due to acts of war, including invasion, insurrection, terrorism, rebellion, piracy and hijacking, on each ship, through a Norwegian war risk insurance organization. This coverage includes coverage for physical damage to the ship which is not covered under the hull policies as a result of war exclusion clauses in such hull policies. We also maintain protection and indemnity war risk coverage for risks that would be excluded by the rules of the indemnity insurance organizations, subject to certain limitations. Consistent with most marine war risk policies, under the terms of our war risk insurance coverage, underwriters can give seven days notice to us that the policy will be canceled and reinstated at higher premium rates.
Insurance coverage for shoreside property, shipboard inventory, and general liability risks are maintained with insurance underwriters in the United States and the United Kingdom.
We do not carry business interruption insurance for our ships based on our evaluation of the risks involved and protective measures already in place, as compared to the cost of insurance.
All insurance coverage is subject to certain limitations, exclusions and deductible levels. In addition, in certain circumstances, we either self-insure or co-insure a portion of these risks. Premiums charged by insurance carriers, including carriers in the maritime insurance industry, increase or decrease from time to time and tend to be cyclical in nature. These cycles are impacted both by our own loss experience and by losses incurred in direct and reinsurance markets. We historically have been able to obtain insurance coverage in amounts and at premiums we have deemed to be commercially acceptable. No assurance can be given that affordable and secure insurance markets will be available to us in the future, particularly for war risk insurance.
Recent European Union regulations (effective December 31, 2012) and the 2002 Protocol to the Athens Convention (effective April 2014 for countries that have ratified the Protocol) both provide for substantial increases to the level of compulsory insurance which must be maintained by passenger ship operators. Compliance with these EU regulations has not had a material impact on operating costs and we do not expect that compliance with the 2002 Protocol, when it becomes effective, will have a material impact on our operating costs.
Trademarks
We own a number of registered trademarks related to the Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises, Pullmantur and CDF Croisières de France cruise brands. The registered trademarks include the name “Royal Caribbean International” and its crown and anchor logo, the name “Celebrity Cruises” and its “X” logo, the name “Azamara Club Cruises” and its globe with an “A” logo, the names “Pullmantur Cruises” and “Pullmantur” and their logos, the name “CDF Croisières de France” and its logo, and the names of various cruise ships. We believe our trademarks are widely recognized throughout the world and have considerable value.
Regulation
Our ships are regulated by various international, national, state and local laws, regulations and treaties in force in the jurisdictions in which they operate. In addition, our ships are registered in the Bahamas, Malta or in the case of Celebrity Xpedition, Ecuador. Each ship is subject to regulations issued by its country of registry, including regulations issued pursuant to international treaties governing the safety of our ships, guests and crew as well as environmental protection. Each country of registry conducts periodic inspections to verify compliance with these regulations as discussed more fully below. Ships operating out of United States ports are subject to inspection by the United States Coast Guard for compliance with international treaties and by the United States Public Health Service for sanitary and health conditions. Our ships are also subject to similar inspections pursuant to the laws and regulations of various other countries our ships visit.
We believe that we are in material compliance with all the regulations applicable to our ships and that we have
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all licenses necessary to conduct our business. Health, safety, security, environmental and financial responsibility issues are, and we believe will continue to be, an area of focus by the relevant government authorities in the United States and internationally. From time to time, various regulatory and legislative changes may be proposed that could impact our operations and subject us to increasing compliance costs in the future.
Safety and Security Regulations
Our ships are required to comply with international safety standards defined in the International Convention for Safety of Life at Sea (“SOLAS”), which among other things, establishes requirements for ship design, structural features, materials, construction, life saving equipment and safe management and operation of ships to ensure guest and crew safety. The SOLAS standards are revised from time to time and the most recent modifications were phased in through 2010. Compliance with these modified standards did not have a material effect on our operating costs. SOLAS incorporates the International Safety Management Code (“ISM Code”), which provides an international standard for the safe management and operation of ships and for pollution prevention. The ISM Code is mandatory for all vessels, including passenger vessel operators.
All of our operations and ships are regularly audited by various national authorities and maintain the required certificates of compliance with the ISM Code.
Our ships are subject to various security requirements, including the International Ship and Port Facility Security Code (“ISPS Code”), which is part of SOLAS, and the U.S. Maritime Transportation Security Act of 2002 (“MTSA”), which applies to ships that operate in U.S. ports. In order to satisfy these security requirements, we implement security measures, conduct vessel security assessments, and develop security plans. The security plans for all of our ships have been submitted to and approved by the respective countries of registry for our ships in compliance with the ISPS Code and the MTSA.
The Cruise Vessel Security and Safety Act of 2010, which applies to passenger vessels which embark or include port stops within the United States, requires the implementation of certain safety design features as well the establishment of practices for the reporting of and dealing with allegations of crime. The cruise industry supported this legislation and we believe that our internal standards are generally as strict or stricter than the law requires. A few provisions of the law call for regulations which have not yet been issued. We expect the U.S. Coast Guard to issue these regulations in 2014. While we cannot predict the full scope of such regulations, we believe we already meet or exceed the requirements of the act and do not expect any material costs due implementing these regulations.
Environmental Regulations
We are subject to various United States and international laws and regulations relating to environmental protection. Under such laws and regulations, we are prohibited from, among other things, discharging certain materials, such as petrochemicals and plastics, into the waterways. We have made, and will continue to make, capital and other expenditures to comply with environmental laws and regulations. From time to time, environmental and other regulators consider more stringent regulations, which may affect our operations and increase our compliance costs. We believe that the impact of ships on the global environment will continue to be an area of focus by the relevant authorities throughout the world and, accordingly, may subject us to increasing compliance costs in the future, including the items described below.
Our ships are subject to the International Maritime Organization’s (‘‘IMO’’) regulations under the International Convention for the Prevention of Pollution from Ships (the ‘‘MARPOL Regulations’’), which includes requirements designed to minimize pollution by oil, sewage, garbage and air emissions. We have obtained the relevant international compliance certificates relating to oil, sewage and air pollution prevention for all of our ships.
The MARPOL Regulations impose global limitations on the sulfur content of fuel used by ships operating worldwide. Permitted sulfur content was reduced from 4.5% to 3.5% on January 1, 2012. This reduction has not had a material effect on our fuel and operating costs.
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The MARPOL Regulations also establish special Emission Control Areas (‘‘ECAs’’) with stringent limitations on sulfur and nitrogen oxide emissions in these areas. As of February 2014, there are four established ECAs: the Baltic Sea, the North Sea/English Channel, certain of the waters surrounding the North American coast, and the waters surrounding Puerto Rico and the U.S. Virgin Islands. Since July 1, 2010, ships operating in ECAs are required to operate on fuel with a sulfur content of 1.0%. These ECA sulfur content reductions have not had a material impact on our results of operations.
Beginning January 1, 2015, ships operating in ECAs will be required to further reduce their fuel sulfur content to 0.1%. We have been planning for this additional requirement for the last several years and continue to take steps to mitigate the potential impact on our fuel cost. All of our ships on order, including those for TUI Cruises, will be built with advanced exhaust purification ("AEP") systems covering all engines. As these new vessels are delivered, they will provide us with additional operational and deployment flexibility.
In addition, we have been actively developing and testing AEP systems on our existing fleet. We have received exemptions for six of our ships which will apply while they are sailing in the North American and Caribbean ECAs. These exemptions delay the requirement to comply with the additional sulfur content reduction pending our continued development and deployment of AEP systems on these ships. We believe that the learning from our existing endeavors, including our newbuild program, as well as our further efforts with regards to this technology will allow us to execute an effective AEP system strategy for our fleet.
As a result of these and other mitigating actions, we believe the cost of complying with the 2015 ECA sulfur emission requirement will not be significant to our results of operations in 2015 and the years following.
By January 1, 2020, the MARPOL regulations will require the worldwide limitations on sulfur content of fuel to be further reduced to 0.5%. If such a reduced limitation is implemented worldwide in 2020 and we have not been able to successfully mitigate the impact with evolving technical solutions, our fuel costs could increase significantly.
We have also taken a number of other steps to improve the overall fuel efficiency of our fleet and, accordingly, reduce our fuel costs. We are targeting a 25% efficiency improvement for our ships on order. In addition, we continue to work to improve the efficiency of our existing fleet, including improvements to the propulsion, machinery, HVAC systems and lighting. The overall impact of these efforts has resulted in a 21% improvement in energy efficiency since 2005 and we believe that our energy consumption per guest is currently the lowest in the cruise industry.
In July 2011, new MARPOL Regulations introduced mandatory measures to reduce greenhouse gas emissions. These include the utilization of an energy efficiency design index (EEDI) for new ships as well as the establishment of an energy efficient management plan for all ships. The EEDI is a performance-based mechanism that requires a certain minimum energy efficiency in new ships. These regulations apply to new vessels commissioned after January 1, 2013. Compliance with these regulations has not had a material effect on our operating costs. In June 2013, the European Commission proposed legislation which would require cruise ship operators using ports in the European Union to monitor and report on the vessels’ annual carbon dioxide emissions starting in 2018. We expect that compliance with this regulation, if adopted, will not materially impact our results of operations.
Labor Regulations
The International Labour Organization, an agency of the United Nations that develops worldwide employment standards, has adopted a new Consolidated Maritime Labour Convention (the “Convention”) which became effective in August 2013. The Convention reflects a broad range of standards and conditions governing all aspects of crew management for ships in international commerce, including additional requirements not previously in effect relating to the health, safety, repatriation, entitlements and status of crewmembers and crew recruitment practices. Each of our ships has received its certification of compliance with the requirements of the Convention. We have not incurred and do not expect to incur material costs related to implementation and ongoing compliance with the Convention.
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Consumer Financial Responsibility Regulations
We are required to obtain certificates from the United States Federal Maritime Commission relating to our ability to satisfy liability in cases of non-performance of obligations to guests, as well as casualty and personal injury. As a condition to obtaining the required certificates, we arrange through our insurers for the provision of surety for three of our ship-operating companies. The required surety amount is currently $15.0 million per operator. However, under amendments approved in February 2013, the required amount will increase to $22.0 million and $30.0 million per operator in 2014 and 2015, respectively. Once fully phased-in in 2015, these surety requirements will be subject to additional consumer price index based adjustments. We do not anticipate that compliance with the new rules will have a material effect on our costs.
We are also required by the United Kingdom, Norway, Finland, and the Baltics to establish our financial responsibility for any liability resulting from the non-performance of our obligations to guests from these jurisdictions. In the United Kingdom we are currently required by the Association of British Travel Agents to provide performance bonds totaling approximately £31.5 million. The Norwegian Travel Guarantee Fund requires us to maintain performance bonds in varying amounts during the course of the year to cover our financial responsibility in Norway, Finland and the Baltics. These amounts ranged from NOK 28 million to NOK 67 million during 2013.
Certain other jurisdictions also require that we establish financial responsibility to our guests resulting from the non-performance of our obligations; however, the related amounts do not have a material effect on our costs.
Regulations Regarding Protection of Disabled Persons
In June 2013, the U.S. Architectural and Transportation Barriers Compliance Board proposed guidelines for the construction and alteration of passenger vessels to ensure that the vessels are readily accessible to and usable by passengers with disabilities. Once finalized, these guidelines will be used by the U.S. Department of Transportation and U.S. Department of Justice to implement mandatory and enforceable standards for passenger vessels covered by the Americans with Disabilities Act. While we believe our vessels have been designed and outfitted to meet the needs of our guests with disabilities, we cannot at this time accurately predict whether we will be required to make material modifications or incur significant additional expenses given the preliminary status of the proposed guidelines.
Taxation of the Company
The following is a summary of our principal taxes, exemptions and special regimes. In addition to or instead of income taxation, virtually all jurisdictions where our ships call impose some tax or fee, or both, based on guest headcount, tonnage or some other measure.
We are primarily foreign corporations engaged in the owning and operating of passenger cruise ships in international transportation. During 2013, we also operated other businesses primarily consisting of the Pullmantur land-tour and air business.
United States Income Taxation
The following is a discussion of the application of the United States federal and state income tax laws to us and is based on the current provisions of the United States Internal Revenue Code, Treasury Department regulations, administrative rulings, court decisions and the relevant state tax laws, regulations, rulings and court decisions of the states where we have business operations. All of the foregoing is subject to change, and any such change could affect the accuracy of this discussion.
Application of Section 883 of the Internal Revenue Code
We and Celebrity Cruises, Inc. are engaged in a trade or business in the United States, and many of our ship-owning subsidiaries, depending upon the itineraries of their ships, receive income from sources within the United
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States. Additionally, our United Kingdom tonnage tax company, owned by us and Celebrity Cruises, Inc., is a ship-operating company classified as a partnership for United States federal income tax purposes that may earn United States source income. Under Section 883 of the Internal Revenue Code, certain foreign corporations are not subject to United States federal income or branch profits tax on United States source income derived from or incidental to the international operation of a ship or ships, including income from the leasing of such ships.
A foreign corporation will qualify for the benefits of Section 883 if, in relevant part: (1) the foreign country in which the foreign corporation is organized grants an equivalent exemption to corporations organized in the United States; and (2) the stock of the corporation (or the direct or indirect corporate parent thereof) is “primarily and regularly traded on an established securities market” in the United States or another qualifying country such as Norway. In the opinion of our United States tax counsel, Drinker Biddle & Reath LLP, based on the representations and assumptions set forth in that opinion, we, Celebrity Cruises Inc. and our ship-owning subsidiaries qualify for the benefits of Section 883 because we and each of those subsidiaries are incorporated in Liberia or Malta, which are qualifying countries, and our common stock is primarily and regularly traded on an established securities market in the United States or Norway (i.e., we are a "publicly traded" corporation). If, in the future, (1) Liberia or Malta no longer qualifies as an equivalent exemption jurisdiction, and we do not reincorporate in a jurisdiction that does qualify for the exemption, or (2) we fail to qualify as a publicly traded corporation, we and all of our ship-owning or operating subsidiaries that rely on Section 883 for tax exemption on qualifying income would be subject to United States federal income tax on their United States source shipping income and income from activities incidental thereto.
We believe that most of our income and the income of our ship-owning subsidiaries is derived from or incidental to the international operation of a ship or ships and, therefore, is exempt from taxation under Section 883. Additionally, income earned through a partnership will qualify as income derived from or incidental to the international operation of a ship or ships to the same extent as the income would so qualify if earned directly by the partners. Thus, we believe that United States source income derived from or incidental to the international operation of a ship or ships earned by the United Kingdom tonnage tax company will qualify for exemption under Section 883 to the same extent as if it were earned directly by the owners of the United Kingdom tonnage tax company.
Regulations under Section 883 list activities that are not considered by the Internal Revenue Service to be incidental to the international operation of ships including the sale of air and land transportation, shore excursions and pre- and post-cruise tours. Our income from these activities that is earned from sources within the United States will be subject to United States taxation.
Taxation in the Absence of an Exemption Under Section 883
If we, the operator of our vessels, Celebrity Cruises Inc., or our ship-owning subsidiaries were to fail to meet the requirements of Section 883 of the Internal Revenue Code, or if the provision was repealed, then, as explained below, such companies would be subject to United States income taxation on a portion of their income derived from or incidental to the international operation of our ships.
Because we and Celebrity Cruises Inc. conduct a trade or business in the United States, we and Celebrity Cruises Inc. would be taxable at regular corporate rates on our separate company taxable income (i.e., without regard to the income of our ship-owning subsidiaries) from United States sources. In addition, if any of our earnings and profits effectively connected with our United States trade or business were withdrawn, or were deemed to have been withdrawn, from our United States trade or business, those withdrawn amounts would be subject to a “branch profits” tax at the rate of 30%. We and Celebrity Cruises Inc. would also be potentially subject to tax on portions of certain interest paid by us at rates of up to 30%.
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If Section 883 were not available to our ship-owning subsidiaries, each such subsidiary would be subject to a special 4% tax on its United States source gross transportation income, if any, each year because it does not have a fixed place of business in the United States and its income is derived from the leasing of a ship.
Other United States Taxation
We and Celebrity Cruises, Inc. earn United States source income from activities not considered incidental to international shipping. The tax on such income is not material to our results of operation for all years presented.
State Taxation
We, Celebrity Cruises Inc. and certain of our subsidiaries are subject to various United States state income taxes which are generally imposed on each state’s portion of the United States source income subject to federal income taxes. Additionally, the state of Alaska subjects an allocated portion of the total income of companies doing business in Alaska and certain other affiliated companies to Alaska corporate state income taxes and also imposes a 33% tax on adjusted gross income from onboard gambling activities conducted in Alaska waters. This did not have a material impact to our results of operations for all years presented.
Maltese and Spanish Income Tax
Our Pullmantur ship owner-operator subsidiaries, which include the owner-operator of CDF Croisières de France’s ship, qualify as licensed shipping organizations in Malta. No Maltese income tax is charged on the income derived from shipping activities of a licensed shipping organization. Instead, a licensed shipping organization is liable to pay a tonnage tax based on the net tonnage of the ship or ships registered under the relevant provisions of the Merchant Shipping Act. A company qualifies as a shipping organization if it engages in qualifying activities and it obtains a license from the Registrar-General to enable it to carry on such activities. Qualifying activities include, but are not limited to, the ownership, operation (under charter or otherwise), administration and management of a ship or ships registered as a Maltese ship in terms of the Merchant Shipping Act and the carrying on of all ancillary financial, security and commercial activities in connection therewith.
Our Maltese operations that do not qualify as licensed shipping organizations, which are not considered significant, remain subject to normal Maltese corporate income tax.
Pullmantur has sales and marketing functions, land-based tour operations and air business in Spain. These activities are subject to Spanish taxation. The tax from these operations is not considered significant to our operations. As a result of Pullmantur's increased focus in Latin America and need to have operating management closer to its largest and fastest growing market, Pullmantur has opened a regional head office in Panama. This office has been formed as a "Sedes de Empresas Multinacionales" (SEM) otherwise known in Panama as a Multinational Headquarters company. The SEM regime provides tax advantages for Panamanian entities that only carry out transactions with other entities belonging to their same international group. This new company is expected to be exempt from Panamanian taxation.
United Kingdom Income Tax
We operate thirteen ships under companies which have elected to be subject to the United Kingdom tonnage tax regime (“U.K. tonnage tax”).
Companies subject to U.K. tonnage tax pay a corporate tax on a notional profit determined with reference to the net tonnage of qualifying vessels. Normal United Kingdom corporate income tax is not chargeable on the relevant shipping profits of a qualifying U.K. tonnage tax company. The requirements for a company to qualify for the U.K. tonnage tax regime include being subject to United Kingdom corporate income tax, operating qualifying ships, which are strategically and commercially managed in the United Kingdom, and fulfilling a seafarer training requirement.
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Failure to meet any of these requirements could cause us to lose the benefit of the tonnage tax regime which will have a material effect on our results of operations.
Relevant shipping profits include income from the operation of qualifying ships and from shipping related activities. Our United Kingdom income from non-shipping activities which do not qualify under the U.K. tonnage tax regime and which are not considered significant, remain subject to United Kingdom corporate income tax.
Brazilian Income Tax
Pullmantur and our U.K. tonnage tax company charters certain ships to Brazilian companies for operations in Brazil from November to May. Some of these charters are with unrelated third parties and others are with a Brazilian affiliate. The Brazilian affiliate’s earnings are subject to Brazilian taxation which is not considered significant. The charter payments made to the U.K. tonnage tax company and to Pullmantur are exempt from Brazilian income tax under current Brazilian domestic law.
Other Taxation
We and certain of our subsidiaries are subject to income tax in other jurisdictions on income that does not qualify for exemption or tonnage tax regimes. The tax on such income was not material to our results of operations for all years presented. Our U.K. tonnage tax companies are exempt from some taxation in certain jurisdictions where those companies have business operations under relevant United Kingdom tax treaties. CDF Croisières de France’s operations within France are minimal and therefore, its French income taxes are minimal.
Website Access to Reports
We make available, free of charge, access to our Annual Reports, all quarterly and current reports and all amendments to those reports, as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission through our website at www.rclinvestor.com. The information contained on our website is not a part of any of these reports and is not incorporated by reference herein.
Executive Officers of the Company
As of February 20, 2014, our executive officers are:
Name | Age | Position | |
Richard D. Fain | 66 | Chairman, Chief Executive Officer and Director | |
Adam M. Goldstein | 54 | President and Chief Executive Officer, Royal Caribbean International | |
Michael W. Bayley | 55 | President and Chief Executive Officer, Celebrity Cruises | |
Lawrence Pimentel | 62 | President and Chief Executive Officer, Azamara Club Cruises | |
Brian J. Rice (1) | 55 | Vice Chairman | |
Harri U. Kulovaara | 61 | Executive Vice President, Maritime | |
Lisa Lutoff-Perlo | 56 | Executive Vice President, Operations, Royal Caribbean International | |
Jason T. Liberty | 38 | Senior Vice President, Chief Financial Officer | |
Bradley H. Stein | 58 | Senior Vice President, General Counsel, Chief Compliance Officer | |
Henry L. Pujol | 46 | Senior Vice President, Chief Accounting Officer | |
(1) | Mr. Rice is retiring in early 2014. |
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Richard D. Fain has served as a director since 1979 and as our Chairman and Chief Executive Officer since 1988. Mr. Fain has been involved in the shipping industry for over 35 years.
Adam M. Goldstein has served as President of Royal Caribbean International since February 2005 and as its President and Chief Executive Officer since September 2007. Mr. Goldstein has been employed with Royal Caribbean since 1988 in a variety of positions, including Executive Vice President, Brand Operations of Royal Caribbean International, Senior Vice President, Total Guest Satisfaction and Senior Vice President, Marketing. Mr. Goldstein served as National Chair of the United States Travel Association (formerly, Travel Industry Association of America) in 2001.
Michael W. Bayley has served as President and Chief Executive Officer of Celebrity Cruises since August 2012. Mr. Bayley has been employed by Royal Caribbean for over 30 years, having started as a Purser onboard one of the Company’s ships. He has served in a number of roles including, most recently, as Executive Vice President, Operations from February 2012 until August 2012. Other positions Mr. Bayley has held include Executive Vice President, International from May 2010 until February 2012; Senior Vice President, International from December 2007 to May 2010; Senior Vice President, Hotel Operations for Royal Caribbean International; and Chairman and Managing Director of Island Cruises.
Lawrence Pimentel has served as President and Chief Executive Officer of Azamara Club Cruises since July 2009. From 2001 until January 2009, Mr. Pimentel was President, Chief Executive Officer, Director and co-owner of SeaDream Yacht Club, a privately held luxury cruise line located in Miami, Florida with two yacht-style ships that sailed primarily in the Caribbean and Mediterranean. From April 1991 to February 2001, Mr. Pimentel was President and Chief Executive Officer of Carnival Corp.’s Seabourn Cruise Line and from May 1998 to February 2001, he was President and Chief Executive Officer of Carnival Corp.’s Cunard Line.
Brian J. Rice has served as Vice Chairman since September 2012. In this capacity, Mr. Rice oversees Royal Caribbean’s finance, supply chain, strategy and information technology functions. Mr. Rice previously served as our Chief Financial Officer from November 2006 through May 2013, when these responsibilities were transitioned in preparation for Mr. Rice’s retirement in early 2014. Mr. Rice has been employed with Royal Caribbean since 1989 in a variety of positions including Executive Vice President, Revenue Performance.
Harri U. Kulovaara has served as Executive Vice President, Maritime since January 2005. Mr. Kulovaara is responsible for fleet design and newbuild operations. Mr. Kulovaara also chairs our Maritime Safety Advisory Board. Mr. Kulovaara has been employed with Royal Caribbean since 1995 in a variety of positions, including Senior Vice President, Marine Operations, and Senior Vice President, Quality Assurance. Mr. Kulovaara is a naval architect and engineer.
Lisa Lutoff-Perlo has served as Executive Vice President, Operations for Royal Caribbean International since September 2012. Ms. Lutoff-Perlo has been employed with the Company since 1985 in a variety of positions within both Celebrity Cruises and Royal Caribbean International. She started at Royal Caribbean International as District Sales Manager for New England and more recently, from August 2008 to August 2012, she was responsible for Celebrity Cruises’ entire hotel operation. In her role as Executive Vice President of Operations, Ms. Lutoff-Perlo is responsible for all of Royal Caribbean International's hotel, marine and port operations.
Jason T. Liberty has been employed by the Company since 2005 and has served as Senior Vice President and Chief Financial Officer since May 2013. Mr. Liberty previously served as Senior Vice President, Strategy and Finance from September 2012 through May 2013, overseeing the Company’s Corporate and Strategic Planning, Treasury, Investor Relations and Deployment functions. Prior to this, Mr. Liberty served, from 2010 through 2012, as Vice President of Corporate and Revenue Planning and, from 2008 to 2010, as Vice President of Corporate and Strategic Planning. Before joining Royal Caribbean, Mr. Liberty was a Senior Manager at the international public accounting firm of KPMG LLP.
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Bradley H. Stein has served as General Counsel of the Company since 2006. He has also served as Senior Vice President and Chief Compliance Officer of the Company since February 2009 and February 2011, respectively. Mr. Stein has been with Royal Caribbean since 1992. Before joining Royal Caribbean, Mr. Stein worked in private practice in New York and Miami.
Henry L. Pujol has served as Senior Vice President, Chief Accounting Officer of the Company since May 2013. Mr. Pujol originally joined Royal Caribbean in 2004 as Assistant Controller and was promoted to Corporate Controller in May 2007. Before joining Royal Caribbean, Mr. Pujol was a Senior Manager at the international public accounting firm of KPMG LLP.
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Item 1A. Risk Factors
The risk factors set forth below and elsewhere in this Annual Report on Form 10-K are important factors that could cause actual results to differ from expected or historical results. It is not possible to predict or identify all such risks. The risks described below are only those known risks relating to our operations and financial condition that we consider material. There may be additional risks that we consider not to be material, or which are not known, and any of these risks could have the effects set forth below. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a cautionary note regarding forward-looking statements.
Adverse worldwide economic, geopolitical or other conditions could reduce the demand for cruises and adversely impact our operating results, cash flows and financial condition including potentially impairing the value of our ships, goodwill and other assets.
The demand for cruises is affected by international, national and local economic and geopolitical conditions. In recent years, we have been faced with very challenging global economic conditions, which have adversely affected vacationers’ discretionary income and consumer confidence. This, in turn, resulted in cruise booking slowdowns, decreased cruise prices and lower onboard revenues for us and for others in the cruise industry as compared to more robust economic times. Although the cruise industry continued to recover in 2013, recovery remains slow in certain key markets, including Southern Europe, and has been hindered in some other markets by ongoing economic instability. We cannot predict with any certainty whether demand for cruises will continue to improve or the rate of such improvement. In addition, any significant deterioration of global economic conditions could result in a prolonged period of booking slowdowns, depressed cruise prices and reduced onboard revenues. Demand for our cruises is also influenced by geopolitical events. Unfavorable conditions, such as cross-border conflicts, civil unrest and governmental changes, especially in regions with popular ports of call, can undermine consumer demand and/or pricing for itineraries featuring these ports.
Continued unrest and economic instability could materially adversely impact our operating results, cash flows and financial condition including potentially impairing the value of our ships, goodwill and other assets. During 2012, we recognized material impairment related charges associated with our Pullmantur brand. Despite these charges, if the economies where Pullmantur operates perform worse than contemplated in our discounted cash flow model, or if there are relatively modest changes to the projected future cash flows used in the impairment analyses, especially in Net Yields or if certain transfers of vessels from our other cruise brands to the Pullmantur fleet do not take place, it is reasonably possible that an additional impairment charge of the Pullmantur reporting unit’s goodwill and trademarks and trade names may be required.
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 and scheduled debt payments, we have historically relied on a combination of cash flows provided by operations, drawdowns under available credit facilities, the incurrence of additional indebtedness and the sale of equity or debt securities in private or public securities markets. Any circumstance or event which leads to a decrease in consumer cruise spending, such as worsening global economic conditions or significant incidents impacting the cruise industry, could negatively affect our operating cash flows. See “-Adverse worldwide economic, geopolitical or other conditions…” and “-Incidents or adverse publicity concerning the cruise vacation industry…” for more information.
Although we believe we can access sufficient liquidity to fund our operations and obligations as expected, there can be no assurances to that effect. Our ability to access additional funding as and when needed, our ability to timely refinance and/or replace our outstanding debt securities and credit facilities on acceptable terms and, our cost of funding will depend upon numerous factors including but not limited to the vibrancy of the financial markets, our financial performance and credit ratings and the performance of our industry in general.
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Our inability to satisfy the covenants required by our credit facilities could adversely impact our liquidity.
Our debt agreements contain covenants, including covenants restricting our ability to take certain actions and financial covenants that require us to maintain minimum net worth and fixed charge coverage ratios and limit our net debt-to-capital ratio. Our ability to comply with the terms of our outstanding facilities may be affected by general economic conditions, industry conditions and other events, some of which may be beyond our control. In addition, our ability to make borrowings under our available credit facilities is subject to the absence of material adverse changes in our business. 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 a majority of our debt facilities if (i) any person or entity other than A. Wilhelmsen AS. and Cruise Associates and their respective affiliates (the “Applicable Group”) acquires ownership of more than 33% of our common stock and the Applicable Group owns less of our common stock than such person or (ii) subject to certain exceptions, during any 24-month period, a majority of the Board is no longer comprised of individuals who were members of the Board on the first day of such period. Certain of our outstanding debt securities also contain change of control provisions that would be triggered by the acquisition of greater than 50% of our common stock by a person other than a member of the Applicable Group coupled with a ratings downgrade.
Our failure to comply with the terms of our debt facilities could result in an event of default. Generally, if an event of default under any debt agreement occurs, then pursuant to cross default acceleration clauses, our outstanding debt and derivative contract payables could become due and/or terminated. We cannot provide assurances that we would have sufficient liquidity to repay or the ability to refinance the borrowings under any of the credit facilities or settle other outstanding contracts if such amounts were accelerated upon an event of default.
In addition, under several of our agreements with credit card processors that accept credit cards for the sale of cruises and other services, the credit card processor may hold back a reserve from our credit card receivables following the occurrence of certain events, including a default under our major credit facilities. As of December 31, 2013, we were not required to maintain any reserve under such agreements.
Incidents or adverse publicity concerning the cruise vacation industry, unusual weather conditions and other natural disasters or disruptions could affect our reputation as well as impact our sales and results of operations.
The operation of cruise ships, airplanes, land tours, port facilities and shore excursions involves the risk of accidents, illnesses, mechanical failures, environmental incidents and other incidents which may bring into question safety, health, security and vacation satisfaction which could negatively impact our reputation. Incidents involving cruise ships, and, in particular the safety and security of guests and crew, media coverage thereof, as well as adverse media publicity concerning the cruise vacation industry have impacted and could in the future impact demand for our cruises and pricing in the industry. The considerable expansion in the use of social media over recent years has compounded the potential scope of the negative publicity that could be generated by those incidents. If any such incident occurs during a time of high seasonal demand, the effect could disproportionately impact our results of operations for the year. In addition, incidents involving cruise ships may result in additional costs to our business, increasing government or other regulatory oversight and, in the case of incidents involving our ships, potential litigation.
Our cruise ships and port facilities may also be adversely impacted by unusual weather patterns or natural disasters or disruptions, such as hurricanes and earthquakes. It is possible that we could be forced to alter itineraries or cancel a cruise or a series of cruises due to these or other factors, which would have an adverse effect on our sales and profitability. In addition, these and any other events which impact the travel industry more generally may negatively impact our ability to deliver guests or crew to our cruises and/or interrupt our ability to obtain services and goods from key vendors in our supply chain. Any of the foregoing could have an adverse impact on our results of operations and on industry performance.
The impact of disruptions in the global financial markets may affect the ability of our counterparties and others to perform their obligations to us.
The financial crisis of 2008, including failures of financial service and insurance companies and the related liquidity crisis, disrupted the capital and credit markets. A recurrence of these or similar disruptions could cause our
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counterparties and others to breach their obligations to us under our contracts with them. 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 under our derivative contracts for hedging of fuel prices, interest rates and foreign currencies or other agreements. If any of the foregoing occurs it may have a negative impact on our cash flows, including our ability to meet our obligations, our results of operations and our financial condition.
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 both by the introduction of new ships into the marketplace and by deployment decisions of ourselves and our competitors. A total of 26 new ships with approximately 71,000 berths are on order for delivery through 2018 in the cruise industry. The further growth in capacity from these new ships and future orders, without an increase in the cruise industry’s share of the vacation market, could depress cruise prices and impede our ability to achieve yield improvement. In addition, to the extent that we or our competitors deploy ships to a particular itinerary and the resulting capacity in that region exceeds the demand, we may lower pricing and profitability may be lower than anticipated. 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, goodwill and other assets.
If we are unable to appropriately balance our cost management strategies with our goal of satisfying guest expectations, it may adversely impact our business success.
Our goals call for us to provide high quality products and deliver high quality services. There can be no assurances that we can successfully balance these goals with our cost management strategies.
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 and package holidays and tours.
We face significant competition from other cruise lines on the basis of cruise pricing, travel agent preference and also in terms of the nature of ships and services we offer to guests. Our principal competitors within the cruise vacation industry include Carnival Corporation & plc, which owns, among others, Aida Cruises, Carnival Cruise Lines, Costa Cruises, Cunard Line, Holland America Line, Iberocruceros, P&O Cruises and Princess Cruises; Disney Cruise Line; MSC Cruises; Norwegian Cruise Line and Oceania Cruises.
In the event that we do not compete effectively with other vacation alternatives and cruise companies, our results of operations and financial position could be adversely affected.
Fears of terrorist and pirate attacks, war, and other hostilities and the spread of contagious diseases could have a negative impact on our results of operations.
Events such as terrorist and pirate attacks, war, and other hostilities and the resulting political instability, travel restrictions, the spread of contagious diseases and concerns over safety, health and security aspects of traveling or the fear of any of the foregoing have had, and could have in the future, a significant adverse impact on demand and pricing in the travel and vacation industry. In view of our global operations, we have become susceptible to a wider range of adverse events.
Fluctuations in foreign currency exchange rates could affect our financial results.
We earn revenues, pay expenses, recognize assets and incur liabilities in currencies other than the U.S. dollar, including, among others, the British pound sterling, the Canadian dollar, the Euro, the Australian dollar and the Brazilian real. In 2013, we derived approximately 48% of revenues from operations outside the United States. Because our
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consolidated financial statements are presented in U.S. dollars, we must convert revenues, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, absent offsetting changes in other foreign currencies, increases or decreases in the value of the U.S. dollar against other major currencies will affect our revenues, net income and the value of balance sheet items denominated in foreign currencies. We use derivative financial instruments to mitigate our net balance sheet exposure to currency exchange rate fluctuations. However, there can be no assurances that fluctuations in foreign currency exchange rates, particularly the strengthening of the U.S. dollar against major currencies, would not materially affect our financial results.
In addition, we have ship construction contracts which are denominated in Euros. While we have entered into Euro-denominated forward contracts and collar options to manage a portion of the currency risk associated with these ship construction contracts, we are exposed to fluctuations in the Euro exchange rate for the portion of the ship construction contracts that has not been hedged. Additionally, if the shipyard is unable to perform under the related ship construction contract, any foreign currency hedges that were entered into to manage the currency risk would need to be terminated. Termination of these contracts could result in a significant loss.
Environmental, labor, health and safety, financial responsibility and other maritime regulations could affect operations and increase operating costs.
The United States and various state and foreign government or regulatory agencies have enacted or are considering new environmental regulations or policies, such as requiring the use of low sulfur fuels, increasing fuel efficiency requirements, further restricting emissions, or other initiatives to limit greenhouse gas emissions that could increase our cost for fuel, cause us to incur significant expenses to purchase and/or develop new equipment and adversely impact the cruise vacation industry. Some environmental groups have also lobbied for more stringent regulation of cruise ships and have generated negative publicity about the cruise vacation industry and its environmental impact. See Item 1. Business-Regulation-Environmental Regulations. An increase in fuel prices not only impacts our fuel costs, but also some of our other expenses, such as crew travel, freight and commodity prices.
In addition, we are subject to various international, national, state and local laws, regulations and treaties that govern, among other things, 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, especially in light of several recent incidents involving cruise ships. This could result in the enactment of more stringent regulation of cruise ships that could subject us to increasing compliance costs in the future.
Conducting business globally may result in increased costs and other risks.
We operate our business globally. Operating internationally exposes us to a number of risks, including unstable local economic conditions, volatile local political conditions, potential changes in duties and taxes, including changing 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, U.S. and global anti-bribery laws or regulations, imposition of trade barriers and restrictions on repatriation of earnings. If we are unable to address these risks adequately, our financial position and results of operations could be adversely affected, including potentially impairing the value of our ships, goodwill and other assets.
Operating globally also exposes us to numerous and sometimes conflicting legal and regulatory requirements. In many parts of the world, including countries in which we operate, practices in the local business communities might not conform to international business standards. We must adhere to policies designed to promote legal and regulatory compliance as well as applicable laws and regulations. However, we might not be successful in ensuring that our employees, agents, representatives and other third parties with which we associate throughout the world properly adhere to them.
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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.
Our attempts to expand our business into new markets may not be successful.
While our historical focus has been to serve the North American cruise market, we have expanded our focus to increase our international guest sourcing, including sourcing from the Latin American, Asian and Australian markets. In addition, in early 2014, Pullmantur opened a regional head office in Panama. Expansion into new markets requires significant levels of investment. There can be no assurance that these markets will develop as anticipated or that we will have success in these markets, 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, including potentially impairing the value of our goodwill.
Ship construction, repair or revitalization delays or mechanical faults may result in cancellation of cruises or unscheduled drydocks and repairs and thus adversely affect our results of operations.
We depend on shipyards to construct, repair and revitalize our cruise ships on a timely basis and in good working order. The sophisticated nature of building a ship involves risks. Delays in ship construction or revitalization or mechanical faults have in the past and may in the future result in delays or cancellation of cruises or necessitate unscheduled drydocks and repairs of ships. These events and any related adverse publicity could result in lost revenue, increased operating expenses, or both, and thus adversely affect our results of operations.
Shipyards and their subcontractors may experience financial difficulties which could cause or result in delay, ship cancellations, our inability to procure new capacity in a timely fashion or increases in shipbuilding costs that could adversely affect our results of operations.
We rely on shipyards to construct, repair and revitalize our ships. Financial difficulties, liquidations or closures suffered by these shipyards and/or their subcontractors may impact the timely delivery or costs of new ships or the ability of shipyards to repair and revitalize our fleet in accordance with our needs or expectations. The shipyard that is building the two newbuilds for our TUI Cruises joint venture continues to experience financial difficulties. This situation could have a material impact on the ability of the shipyard to deliver these ships in accordance with the terms of the contract, the costs borne by TUI Cruises associated with these ships and/or the additional financial support that we may need to provide to TUI Cruises (e.g., parent guarantees, loans, additional equity contributions) or that TUI Cruises may need to provide to the shipyard to seek to ensure timely completion.
In addition, there are a limited number of shipyards with the capability and capacity to build our new ships and, accordingly, closures or consolidation in the cruise shipyard industry could impact our ability to construct new ships when and as planned and/or could result in stronger bargaining power on the part of the shipyards and thus higher prices for our future ship orders. Delivery delays and canceled deliveries can adversely affect our results of operations, as can any constraints on our ability to build, repair and maintain our ships on a timely basis.
Our operating costs, especially fuel expenditures, could increase due to market forces and economic or geo- political factors beyond our control.
Expenditures for fuel represent a significant cost of operating our business. If fuel prices rise significantly in a short period of time, we may be unable to increase fares or other fees sufficiently to offset fully our increased fuel costs. We routinely hedge a portion of our future fuel requirements to protect against rising fuel costs. However, there can be no assurance that our hedge contracts will provide a sufficient level of protection against increased fuel costs or that our counterparties will be able to perform under our hedge contracts, such as in the case of a counterparty’s bankruptcy. Further volatility in fuel prices or disruptions in fuel supplies could have a material adverse effect on our results of operations, financial condition and liquidity.
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Our other operating costs, including food, payroll, airfare, taxes, insurance and security costs are all subject to increases due to market forces and economic or political conditions or other factors beyond our control. Increases in these operating costs could adversely affect our profitability.
Unavailability of ports of call may adversely affect our results of operations.
We believe that port destinations are a major reason why guests choose to go on a particular cruise or on a cruise vacation. The availability of ports is affected by a number of factors, including existing capacity constraints, constraints related to the size of certain ships, security concerns, adverse weather conditions and natural disasters, financial limitations on port development, exclusivity arrangements that ports may have with our competitors, local governmental regulations and local community concerns about port development and other adverse impacts on their communities from additional tourists. In addition, rising fuel costs may adversely impact the destinations on certain of our itineraries. Any limitations on the availability or feasibility of our ports of call or on the availability of shore excursion and other service providers at such ports could adversely affect our results of operations.
Price increases for commercial airline service for our guests or major changes or reduction in commercial airline service and/or availability could adversely impact the demand for cruises and undermine our ability to provide reasonably priced vacation packages to our guests.
Many of our guests depend on scheduled commercial airline services to transport them to or from the ports where our cruises embark or disembark. Increases in the price of airfare would increase the overall price of the cruise vacation to our guests which may adversely impact demand for our cruises. In addition, changes in the availability of commercial airline services could adversely affect our guests’ ability to obtain airfare as well as our ability to fly our guests to or from our cruise ships which could adversely affect our results of operations.
Our reliance on travel agencies to sell and market our cruises exposes us to certain risks which, if realized, could adversely impact our business.
Because we rely on travel agencies to generate the majority of bookings for our ships, we must ensure that our commission rates and incentive structures remain competitive. If we fail to offer competitive compensation packages, these agencies may be incentivized to sell cruises offered by our competitors to our detriment, which could adversely impact our operating results. In addition, the travel agent industry is sensitive to economic conditions that impact discretionary income. Significant disruptions, especially disruptions impacting those agencies that sell a high volume of our business, or contractions in the industry could reduce the number of travel agencies available for us to market and sell our cruises, which could have an adverse impact on our financial condition and results of operations.
Disruptions in our shoreside operations or our information systems may adversely affect our results of operations.
Our principal executive office and principal shoreside operations are located at the Port of Miami, Florida and we have shoreside offices throughout the world. Actual or threatened natural disasters (e.g., hurricanes, earthquakes, tornadoes, fires, floods) or similar events in these locations may have a material impact on our business continuity, reputation and results of operations. In addition, substantial or repeated information systems failures, computer viruses or cyber-attacks impacting our shoreside or shipboard operations could adversely impact our business. We do not generally carry business interruption insurance for our shoreside operations or our information systems. As such, any losses or damages incurred by us could have an adverse impact on our results of operations.
Failure to develop the value of our brands and differentiate our products could adversely affect our results of operations.
Our success depends on the strength and continued development of our cruise brands and on the effectiveness of our brand strategies. Failure to protect and differentiate our brands from competitors throughout the vacation market could adversely affect our results of operations.
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The loss of key personnel, our inability to recruit or retain qualified personnel, or disruptions among our shipboard personnel due to strained employee relations could adversely affect our results of operations.
Our success depends, in large part, on the skills and contributions of key executives and other employees, and on our ability to recruit and retain high quality personnel. We must continue to sufficiently recruit, retain, train and motivate our employees to maintain our current business and support our projected growth. Furthermore, as of December 31, 2013, 80% 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. A loss of key employees or disruptions among our personnel could adversely affect our results of operations.
Business activities that involve our co-investment with third parties may subject us to additional risks.
Partnerships, joint ventures, and other business structures involving our co-investment with third parties, such as our joint venture to operate TUI Cruises, generally include some form of shared control over the operations of the business and create additional risks, including the possibility that other investors in such ventures could become bankrupt or otherwise lack the financial resources to meet their obligations, or could have or develop business interests, policies or objectives that are inconsistent with ours. In addition, actions by another investor may present additional risks of operational difficulties or reputational or legal concerns. These or other issues related to our co-investment with third parties could adversely impact our operations.
We rely on third-party providers of various services integral to the operations of our businesses. These third parties may act in ways that could harm our business.
In order to achieve cost and operational efficiencies, we outsource to third-party vendors certain services that are integral to the operations of our global businesses, such as our onboard concessionaires, certain of our call center operations and operation of a large part of our information technology systems. We are subject to the risk that certain decisions are subject to the control of our third-party service providers and that these decisions may adversely affect our activities. A failure to adequately monitor a third-party service provider’s compliance with a service level agreement or regulatory or legal requirements could result in significant economic and reputational harm to us. There is also a risk the confidentiality, privacy and/or security of data held by third parties or communicated over third-party networks or platforms could become compromised.
A failure to keep pace with developments in technology or technological obsolescence could impair our operations or competitive position.
Our business continues to demand the use of sophisticated technology and systems. These technologies and systems must be refined, updated, and/or replaced with more advanced systems in order to continue to meet our customers’ demands and expectations. If we are unable to do so in a timely manner or within reasonable cost parameters or if we are unable to appropriately and timely train our employees to operate any of these new systems, our business could suffer. We also may not achieve the benefits that we anticipate from any new technology or system, and a failure to do so could result in higher than anticipated costs or could impair our operating results.
We may be exposed to risks and costs associated with protecting the integrity and security of our guests’ and employees’ personal information.
We are subject to various risks associated with the collection, handling, storage and transmission of sensitive information, including risks related to compliance with applicable laws and other contractual obligations, as well as the risk that our systems collecting such information could be compromised. In the course of doing business, we collect large volumes of internal and customer data, including personally identifiable information for various business purposes. If we fail to maintain compliance with the various applicable data collection and privacy laws or with credit card industry standards or other applicable data security standards, we could be exposed to fines, penalties, restrictions, litigation or other expenses, and our business could be adversely impacted. In addition, even if we are fully compliant with legal standards and contractual requirements, we still may not be able to prevent security breaches involving sensitive data. Any breach, theft, loss, or fraudulent use of guest, employee or company data could cause consumers
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to lose confidence in the security of our information technology systems and choose not to purchase from us and expose us to risks of data loss, business disruption, litigation and other liability, any of which could adversely affect our business.
A change in our tax status under the United States Internal Revenue Code, or other jurisdictions, may have adverse effects on our income.
We and a number of our subsidiaries are foreign corporations that derive income from a United States trade or business and/or from sources within the United States. Drinker Biddle & Reath LLP, our United States tax counsel, has delivered to us an opinion, based on certain representations and assumptions set forth in it, to the effect that this income, to the extent derived from or incidental to the international operation of a ship or ships, is exempt from United States federal income tax pursuant to Section 883 of the Internal Revenue Code. We believe that most of our income (including that of our subsidiaries) is derived from or incidental to the international operation of a ship or ships.
Our ability to rely on Section 883 could change in the future. For example, U.S. tax legislation has been proposed that would eliminate the availability of Section 883 to us and would thereby cause a portion of our international shipping income to be subject to tax in the United States. Moreover, changes could occur in the future with respect to the identity, residence or holdings of our direct or indirect shareholders, trading volume or trading frequency of our shares, or relevant foreign tax laws of Liberia or Malta such that 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 United States income tax on United States source shipping income in the future. If we were not entitled to the benefit of Section 883, we and our subsidiaries would be subject to United States taxation on a portion of the income derived from or incidental to the international operation of our ships, which would reduce our net income.
Additionally, portions of our business are operated by companies that are within tonnage tax regimes of the U.K. and Malta. Further, some of the operations of these companies are conducted in jurisdictions where we rely on tax treaties to provide exemption from taxation. To the extent the tonnage tax laws of these countries change or we do not continue to meet the applicable qualification requirements or if tax treaties are changed or revoked, we may be required to pay higher income tax in these jurisdictions, adversely impacting our results of operations.
As budgetary constraints continue to adversely impact the jurisdictions in which we operate, increases in income tax regulations or tax reform affecting our operations may be imposed.
We are not a United States corporation and our shareholders may be subject to the uncertainties of a foreign legal system in protecting their interests.
Our corporate affairs are governed by our Articles of Incorporation and By-Laws and by the Business Corporation Act of Liberia. The provisions of the Business Corporation Act of Liberia resemble provisions of the corporation laws of a number of states in the United States. However, while most states have a fairly well developed body of case law interpreting their respective corporate statutes, there are very few judicial cases in Liberia interpreting the Business Corporation Act of Liberia. As such, the rights and fiduciary responsibilities of directors under Liberian law are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain United States jurisdictions. For example, the right of shareholders to bring a derivative action in Liberian courts may be more limited than in United States jurisdictions. There may also be practical difficulties for shareholders attempting to bring suit in Liberia and Liberian courts may or may not recognize and enforce foreign judgments. Thus, our public shareholders may have more difficulty in protecting their interests with respect to actions by management, directors or controlling shareholders than would shareholders of a corporation incorporated in a United States jurisdiction.
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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 United States and international laws and regulations that could lead to enforcement actions, fines, civil or criminal penalties or the assertion of litigation claims and damages. In addition, improper conduct by our employees, agents or joint venture partners could damage our reputation and/or lead to litigation or legal proceedings that could result in civil or criminal penalties, including substantial monetary fines. In certain circumstances it may not be economical to defend against such matters and/or a legal strategy may not ultimately result in us prevailing in a matter. Such events could lead to an adverse impact on our financial condition or results of operations.
Provisions of our Articles of Incorporation, By-Laws and Liberian law could inhibit others from acquiring us, prevent a change of control, and may prevent efforts by our shareholders to change our management.
Certain provisions of our Articles of Incorporation and By-Laws and Liberian law may inhibit third parties from effectuating a change of control of the Company without Board approval which could result in the entrenchment of current management. These include provisions in our Articles of Incorporation that prevent third parties, other than A. Wilhelmsen AS. and Cruise Associates, from acquiring beneficial ownership of more than 4.9% of our outstanding shares without the consent of our Board of Directors.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Information about our cruise ships, including their size and primary areas of operation, may be found within the Operating Strategies - Fleet revitalization, maintenance and expansion section and the Operations - Cruise Ships and Itineraries section in Item 1. Business. Information regarding our cruise ships under construction, estimated expenditures and financing may be found within the Future Capital Commitments and Funding Needs and Sources sections of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our principal executive office and principal shoreside operations are located at the Port of Miami, Florida where we lease three office buildings totaling approximately 361,800 square feet from Miami-Dade County, Florida, under long-term leases with current terms expiring in 2021. We lease two office buildings in the United Kingdom totaling approximately 57,000 square feet used to conduct our operations in the United Kingdom. In connection with the consolidation of our global sales structure, we will be reducing our office space in the UK and will lease only one building with approximately 24,000 square feet. We also lease a number of international offices throughout Europe, Asia, Mexico, South America and Australia to administer our brand operations globally.
We lease an office building in Springfield, Oregon totaling approximately 163,000 square feet, which is used as a call center for reservations. In addition, we own two office buildings totaling approximately 95,000 square feet in Wichita, Kansas, which are used as call centers for reservations and customer service. We lease two buildings in Miramar, Florida totaling approximately 178,000 square feet. One building is used primarily as office space and the other building is used as a call center for reservations. We also lease our logistics center in Weston, Florida totaling approximately 267,000 square feet.
We believe that our facilities are adequate for our current needs and that we are capable of obtaining additional facilities as necessary.
We also operate two private destinations which we utilize as a port-of-call on certain of our itineraries: (i) an island we own in the Bahamas which we call CocoCay; and (ii) Labadee, a secluded peninsula we lease on the north coast of Haiti.
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Item 3. Legal Proceedings
A class action complaint was filed in June 2011 against Royal Caribbean Cruises Ltd. in the United States District Court for the Southern District of Florida on behalf of a purported class of stateroom attendants employed onboard Royal Caribbean International cruise vessels alleging that they were required to pay other crew members to help with their duties in violation of the U.S. Seaman’s Wage Act. Plaintiffs seek judgments for damages, wage penalties and interest in an indeterminate amount. In May 2012, the Court granted our motion to dismiss the complaint on the basis that the applicable collective bargaining agreement requires any such claims to be arbitrated. The United States Court of Appeals, 11th Circuit affirmed the Court's dismissal and denied Plaintiff's petition for re-hearing and re-hearing en banc. We believe the underlying claims made against us are without merit, and we intend to vigorously defend ourselves against them. Because of the inherent uncertainty as to the outcome of this proceeding, we are unable at this time to estimate the possible impact of this matter on us.
We are routinely involved in other claims typical within the cruise vacation industry. The majority of these claims are covered by insurance. We believe the outcome of such claims, net of expected insurance recoveries, will not have a material adverse impact on our financial condition or results of operations and cash flows.
Item 4. Mine Safety Disclosures
None.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the New York Stock Exchange ("NYSE") and the Oslo Stock Exchange ("OSE") under the symbol "RCL". The table below sets forth the high and low sales prices of our common stock as reported by the NYSE and the OSE for the two most recent years by quarter:
NYSE Common Stock | OSE Common Stock(1) | ||||||||||||
High | Low | High | Low | ||||||||||
2013 | |||||||||||||
Fourth Quarter | $ | 47.66 | $ | 35.97 | 292.60 | 216.10 | |||||||
Third Quarter | 40.71 | 33.31 | 241.80 | 201.40 | |||||||||
Second Quarter | 38.62 | 31.35 | 224.90 | 178.00 | |||||||||
First Quarter | 38.56 | 31.72 | 213.50 | 184.10 | |||||||||
2012 | |||||||||||||
Fourth Quarter | $ | 36.18 | $ | 30.26 | 202.50 | 169.70 | |||||||
Third Quarter | 31.97 | 22.45 | 182.90 | 134.50 | |||||||||
Second Quarter | 29.45 | 22.12 | 167.60 | 134.60 | |||||||||
First Quarter | 31.96 | 25.40 | 183.70 | 149.30 | |||||||||
_______________________________________________________________________________
(1) | Denominated in Norwegian kroner, as listed in the price history database available at www.oslobors.no |
Holders
As of February 13, 2014 there were 1,047 record holders of our common stock. Since certain of our shares are held by brokers and other institutions on behalf of shareholders, the foregoing number is not representative of the number of beneficial owners.
Dividends
In 2012, we declared cash dividends on our common stock of $0.10 per share during the first and second quarters of 2012. We increased the dividend amount to $0.12 per share for the dividends declared in the third and fourth quarters of 2012 and the first and second quarters of 2013. The dividend amount was increased to $0.25 per share for the dividends declared in the third and fourth quarters of 2013.
Holders of our common stock have an equal right to share in our profits in the form of dividends when and if declared by our Board of Directors out of funds legally available. Holders of our common stock have no rights to any sinking fund.
There are no exchange control restrictions on remittances of dividends on our common stock since (1) we are and intend to maintain our status as a nonresident Liberian entity under the Revenue Code of Liberia (2000) and the regulations thereunder, and (2) our ship-owning subsidiaries are not now engaged, and are not in the future expected to engage, in any business in Liberia, including voyages exclusively within the territorial waters of the Republic of Liberia. Under current Liberian law, no Liberian taxes or withholding will be imposed on payments to holders of our securities other than to a holder that is a resident Liberian entity or a resident individual or an individual or entity subject to taxation in Liberia as a result of having a permanent establishment within the meaning of the Revenue Code of Liberia (2000) in Liberia.
The declaration of dividends shall at all times be subject to the final determination of our Board of Directors that a dividend is prudent at that time in consideration of the needs of the business.
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Performance Graph
The following graph compares the total return, assuming reinvestment of dividends, on an investment in the Company, based on performance of the Company's common stock, with the total return of the Standard & Poor's 500 Composite Stock Index and the Dow Jones United States Travel and Leisure Index for a five year period by measuring the changes in common stock prices from December 31, 2008 to December 31, 2013.
12/08 | 12/09 | 12/10 | 12/11 | 12/12 | 12/13 | ||||||||||||
Royal Caribbean Cruises Ltd. | 100.00 | 183.85 | 341.82 | 181.64 | 253.12 | 359.70 | |||||||||||
S&P 500 | 100.00 | 126.46 | 145.51 | 148.59 | 172.37 | 228.19 | |||||||||||
Dow Jones US Travel & Leisure | 100.00 | 130.99 | 185.20 | 197.58 | 223.93 | 325.76 | |||||||||||
The stock performance graph assumes for comparison that the value of the Company's common stock and of each index was $100 on December 31, 2008 and that all dividends were reinvested. Past performance is not necessarily an indicator of future results.
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Item 6. Selected Financial Data
The selected consolidated financial data presented below for the years 2009 through 2013 and as of the end of each such year are derived from our audited consolidated financial statements and should be read in conjunction with those financial statements and the related notes as well as in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Year Ended December 31, | |||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||
Operating Data: | |||||||||||||||||||
Total revenues | $7,959,894 | $7,688,024 | $7,537,263 | $6,752,504 | $5,889,826 | ||||||||||||||
Operating income(1) | 798,148 | 403,110 | 931,628 | 802,633 | 488,511 | ||||||||||||||
Net income(1)(2) | 473,692 | 18,287 | 607,421 | 515,653 | 152,485 | ||||||||||||||
Per Share Data—Basic: | |||||||||||||||||||
Net income | $ | 2.16 | $ | 0.08 | $ | 2.80 | $ | 2.40 | $ | 0.71 | |||||||||
Weighted-average shares | 219,638 | 217,930 | 216,983 | 215,026 | 213,809 | ||||||||||||||
Per Share Data—Diluted: | |||||||||||||||||||
Net income | $ | 2.14 | $ | 0.08 | $ | 2.77 | $ | 2.37 | $ | 0.71 | |||||||||
Weighted-average shares and potentially dilutive shares | 220,941 | 219,457 | 219,229 | 217,711 | 215,295 | ||||||||||||||
Dividends declared per common share | $ | 0.74 | $ | 0.44 | $ | 0.20 | $ | — | $ | — | |||||||||
Balance Sheet Data: | |||||||||||||||||||
Total assets | $20,072,947 | $19,827,930 | $19,804,405 | $19,653,829 | $18,224,425 | ||||||||||||||
Total debt, including capital leases | 8,074,804 | 8,489,947 | 8,495,853 | 9,150,116 | 8,419,770 | ||||||||||||||
Common stock | 2,308 | 2,291 | 2,276 | 2,262 | 2,243 | ||||||||||||||
Total shareholders' equity | 8,808,265 | 8,308,749 | 8,407,823 | 7,900,752 | 7,489,781 | ||||||||||||||
_______________________________________________________________________________
(1) | Amounts for 2013 include restructuring charges of $23.4 million and an impairment charge of $33.5 million to write down the assets held for sale related to the businesses to be sold and certain long-lived assets, consisting of aircraft owned and operated by Pullmantur Air, to their fair value. (See Note 16. Restructuring and Related Impairment Charges to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data for further information). Amounts for 2012 include an impairment charge of $385.4 million to write down Pullmantur's goodwill to its implied fair value and to write down trademarks and trade names and certain long-lived assets, consisting of aircraft owned and operated by Pullmantur Air, to their fair value. (See Valuation of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for more information regarding the impairment of these assets). |
(2) | Amounts for 2012 include a $33.7 million charge to record a 100% valuation allowance related to our deferred tax assets for Pullmantur. In addition, we reduced the deferred tax liability related to Pullmantur's trademarks and trade names and recorded a deferred tax benefit of $5.2 million. These adjustments resulted in an increase of $28.5 million to Other (expense) income. (See Valuation of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for more information regarding these transactions). |
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Concerning Forward-Looking Statements
The discussion under this caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this document, including, for example, under the "Risk Factors" and "Business" captions, includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance (including our expectations for the first quarter and full year of 2014 set forth under the heading "Outlook" below), business and industry prospects or future results of operations or financial position, made in this Annual Report on Form 10-K are forward-looking. Words such as "anticipate," "believe," "could," "estimate," "expect," "goal," "intend," "may," "plan," "project," "seek," "should," "will," and similar expressions are intended to further identify any of these forward-looking statements. Forward-looking statements reflect management's current expectations but they are based on judgments and are inherently uncertain. Furthermore, they are subject to risks, uncertainties and other factors, that could cause our actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied in those forward-looking statements. Examples of these risks, uncertainties and other factors include, but are not limited to, those discussed in this Annual Report on Form 10-K and, in particular, the risks discussed under the caption "Risk Factors" in Part I, Item 1A of this report.
All forward-looking statements made in this Annual Report on Form 10-K speak only as of the date of this document. 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 has been organized to present the following:
• | a review of our critical accounting policies and 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 year ended December 31, 2013 compared to the same period in 2012 and the year ended December 31, 2012 compared to the same period in 2011; |
• | a discussion of our business outlook, including our expectations for selected financial items for the first quarter and full year of 2014; and |
• | a discussion of our liquidity and capital resources, including our future capital and contractual commitments and potential funding sources. |
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). (See Note 1. General and Note 2. Summary of Significant Accounting Policies to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data). Certain of our accounting policies are deemed "critical," as they require management's highest degree of judgment, estimates and assumptions. We have discussed these accounting policies and estimates with the audit committee of our board of directors. We believe our most critical accounting policies are as follows:
Ship Accounting
Our ships represent our most significant assets and are stated at cost less accumulated depreciation and amortization. Depreciation of ships is generally computed net of a 15% projected residual value using the straight-line method over the estimated useful life of the asset, which is generally 30 years. The 30-year useful life of our newly constructed ships and 15% associated residual value are both based on the weighted-average of all major components
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of a ship. Our useful life and residual value estimates take into consideration the impact of anticipated technological changes, long-term cruise and vacation market conditions and historical useful lives of similarly-built ships. In addition, we take into consideration our estimates of the weighted-average useful lives of the ships' major component systems, such as hull, superstructure, main electric, engines and cabins. Given the very large and complex nature of our ships, our accounting estimates related to ships and determinations of ship improvement costs to be capitalized require considerable judgment and are inherently uncertain. We do not have cost segregation studies performed to specifically componentize our ship systems. Therefore, we estimate the costs of component systems based principally on general and technical information known about major ship component systems and their lives and our knowledge of the cruise vacation industry. We do not identify and track depreciation by ship component systems, but instead utilize these estimates to determine the net cost basis of assets replaced or refurbished. Improvement costs that we believe add value to our ships are capitalized as additions to the ship and depreciated over the shorter of the improvements' estimated useful lives or that of the associated ship. The estimated cost and accumulated depreciation of replaced or refurbished ship components are written off and any resulting losses are recognized in cruise operating expenses.
During the first quarter of 2013, we performed a review of the estimated useful lives and associated residual values of ships in our fleet approaching the last third of their estimated useful lives. As a result, effective January 1, 2013, we revised the estimated useful lives of five ships from 30 years with a 15% associated residual value, to 35 years with a 10% associated residual value. The change in the estimated useful lives and associated residual value was accounted for prospectively as a change in accounting estimate. The 35-year useful life with a 10% associated residual value is based on revised estimates of the weighted-average useful life of all major ship components for these ships. The change in estimate is consistent with our recent investments in and future plans to continue to invest in the revitalizations of these ships and the use of certain ship components longer than originally estimated. The change allows us to better match depreciation expense with the periods these assets are expected to be in use. (See Note 2. Summary of Significant Accounting Policies to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data).
We use the deferral method to account for drydocking costs. Under the deferral method, drydocking costs incurred are deferred and charged to expense on a straight-line basis over the period to the next scheduled drydock, which we estimate to be a period of thirty to sixty months based on the vessel's age as required by Class. Deferred drydock costs consist of the costs to drydock the vessel and other costs incurred in connection with the drydock which are necessary to maintain the vessel's Class certification. Class certification is necessary in order for our cruise ships to be flagged in a specific country, obtain liability insurance and legally operate as passenger cruise ships. The activities associated with those drydocking costs cannot be performed while the vessel is in service and, as such, are done during a drydock as a planned major maintenance activity. The significant deferred drydock costs consist of hauling and wharfage services provided by the drydock facility, hull inspection and related activities (e.g. scraping, pressure cleaning, bottom painting), maintenance to steering propulsion, thruster equipment and ballast tanks, port services such as tugs, pilotage and line handling, and freight associated with these items. We perform a detailed analysis of the various activities performed for each drydock and only defer those costs that are directly related to planned major maintenance activities necessary to maintain Class. The costs deferred are related to activities not otherwise routinely periodically performed to maintain a vessel's designed and intended operating capability. Repairs and maintenance activities are charged to expense as incurred.
We use judgment when estimating the period between drydocks, which can result in adjustments to the estimated amortization of drydock costs. If the vessel is disposed of before the next drydock, the remaining balance in deferred drydock is written-off to the gain or loss upon disposal of vessel in the period in which the sale takes place. We also use judgment when identifying costs incurred during a drydock which are necessary to maintain the vessel's Class certification as compared to those costs attributable to repairs and maintenance which are expensed as incurred. (See Note 2. Summary of Significant Accounting Policies to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data).
We believe we have made reasonable estimates for ship accounting purposes. However, should certain factors or circumstances cause us to revise our estimates of ship useful lives or projected residual values, depreciation expense could be materially higher or lower. If circumstances cause us to change our assumptions in making determinations as to whether ship improvements should be capitalized, the amounts we expense each year as repairs and maintenance costs could increase, partially offset by a decrease in depreciation expense. If we had reduced our estimated average
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30-year ship useful life by one year, depreciation expense for 2013 would have increased by approximately $42.6 million. If our ships were estimated to have no residual value, depreciation expense for 2013 would have increased by approximately $168.2 million.
Valuation of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets
We review goodwill, trademarks and trade names, which are our most significant indefinite-lived intangible assets, for impairment at the reporting unit level annually or, when events or circumstances dictate, more frequently. The impairment review for goodwill consists of a qualitative assessment of whether it is more-likely-than-not that a reporting unit's fair value is less than its carrying amount, and if necessary, a two-step goodwill impairment test. Factors to consider when performing the qualitative assessment include general economic conditions, limitations on accessing capital, changes in forecasted operating results, changes in fuel prices and fluctuations in foreign exchange rates. If the qualitative assessment demonstrates that it is more-likely-than-not that the estimated fair value of the reporting unit exceeds its carrying value, it is not necessary to perform the two-step goodwill impairment test. We may elect to bypass the qualitative assessment and proceed directly to step one, for any reporting unit, in any period. We can resume the qualitative assessment for any reporting unit in any subsequent period.
When performing the two-step goodwill impairment test, the fair value of the reporting unit is determined and compared to the carrying value of the net assets allocated to the reporting unit. We estimate the fair value of our reporting units using a probability-weighted discounted cash flow model. The estimation of fair value utilizing discounted expected future cash flows includes numerous uncertainties which require our significant judgment when making assumptions of expected revenues, operating costs, marketing, selling and administrative expenses, interest rates, ship additions and retirements as well as assumptions regarding the cruise vacation industry's competitive environment and general economic and business conditions, among other factors. The principal assumptions used in the discounted cash flow model are projected operating results, weighted-average cost of capital, and terminal value. The discounted cash flow model uses our 2014 projected operating results as a base. To that base we add future years' cash flows assuming multiple revenue and expense scenarios that reflect the impact of different global economic environments beyond 2014 on the reporting unit. We discount the projected cash flows using rates specific to the reporting unit based on its weighted-average cost of capital. If the fair value of the reporting unit exceeds its carrying value, no further analysis or write-down of goodwill is required. If the fair value of the reporting unit is less than the carrying value of its net assets, the implied fair value of the reporting unit is allocated to all its underlying assets and liabilities, including both recognized and unrecognized tangible and intangible assets, based on their fair value. If necessary, goodwill is then written down to its implied fair value.
The impairment review for indefinite-life intangible assets consists of a comparison of the fair value of the asset with its carrying amount. We estimate the fair value of our indefinite-life intangible assets, which consist of trademarks and trade names related to Pullmantur, using a discounted cash flow model and the relief-from-royalty method. The royalty rate used is based on comparable royalty agreements in the tourism and hospitality industry. The discount rate used is comparable to the rate used in valuing the Pullmantur reporting unit in our goodwill impairment test. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds its carrying amount, the indefinite-life intangible asset is not considered impaired. Other intangible assets assigned finite useful lives are amortized on a straight-line basis over their estimated useful lives.
We review our ships, aircraft and other long-lived assets for impairment whenever events or changes in circumstances indicate, based on estimated undiscounted future cash flows, that the carrying amount of these assets may not be fully recoverable. We evaluate asset impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The lowest level for which we maintain identifiable cash flows that are independent of the cash flows of other assets and liabilities is at the ship level for our ships and at the aggregated asset group level for our aircraft. (See Note 2. Summary of Significant Accounting Policies to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data). If estimated future cash flows are less than the carrying value of an asset, an impairment charge is recognized to the extent its carrying value exceeds fair value.
We estimate fair value based on quoted market prices in active markets, if available. If active markets are not available we base fair value on independent appraisals, sales price negotiations and projected future cash flows discounted at a rate estimated by management to be commensurate with the business risk. Quoted market prices are
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often not available for individual reporting units and for indefinite-life intangible assets. Accordingly, we estimate the fair value of a reporting unit and an indefinite-life intangible asset using an expected present value technique.
Pullmantur
During the fourth quarter of 2013, we performed our annual impairment review of goodwill for Pullmantur's reporting unit. We did not perform a qualitative assessment but instead proceeded directly to the two-step goodwill impairment test. As a result of the test, we determined the fair value of the Pullmantur reporting unit exceeded its carrying value by approximately 8% resulting in no impairment to Pullmantur's goodwill. We also performed the annual impairment review of our trademarks and trade names using a discounted cash flow model and the relief-from-royalty method. Based on the results of our testing, we did not record an impairment of Pullmantur's tradenames and trademarks for the year ended December 31, 2013.
During the fourth quarter of 2012, we performed the annual impairment evaluation of our goodwill and trademarks and trade names and we recognized total impairment related charges of $413.9 million associated with our Pullmantur brand. Included in this amount was a 100% valuation allowance of our deferred tax assets which resulted in a deferred income tax expense of $33.7 million recorded during the fourth quarter of 2012. In addition, Pullmantur has a deferred tax liability that was recorded at the time of acquisition. This liability represents the tax effect of the basis difference between the tax and book values of the trademarks and trade names that were acquired at the time of the acquisition. Due to the 2012 impairment charge related to these intangible assets, we reduced the deferred tax liability and recorded a deferred tax benefit of $5.2 million during the fourth quarter of 2012. The net $28.5 million impact of these adjustments was recognized in earnings during the fourth quarter of 2012 and was reported within Other (expense) income in our statements of comprehensive income (loss).
In connection with the December 2013 agreement to sell a majority stake in Pullmantur’s non-core businesses, we have agreed to retain certain long-lived assets, consisting of the aircraft owned and operated by Pullmantur Air. Due to an anticipated change in the nature of the cash flows to be generated by the Pullmantur aircraft, we reviewed the aircraft for impairment. We identified that the undiscounted future cash flows of the aircraft were less than their carrying value and recorded an impairment charge of $13.5 million during the fourth quarter of 2013, which is reported in Restructuring and related impairment charges in our consolidated statements of comprehensive income (loss).
Pullmantur is a brand targeted primarily at the Spanish, Portuguese and Latin American markets, with an increasing focus on Latin America. The persistent economic instability in these markets has created significant uncertainties in forecasting operating results and future cash flows used in our impairment analyses. We continue to monitor economic events in these markets for their potential impact on Pullmantur’s business and valuation. Further, the estimation of fair value utilizing discounted expected future cash flows includes numerous uncertainties which require our significant judgment when making assumptions of expected revenues, operating costs, marketing, selling and administrative expenses, interest rates, ship additions and retirements as well as assumptions regarding the cruise vacation industry's competitive environment and general economic and business conditions, among other factors. The opening of a regional head office in Latin America was a significant factor in shaping these assumptions.
If there are relatively modest changes to the projected future cash flows used in the impairment analyses, especially in Net Yields or if certain transfers of vessels from our other cruise brands to the Pullmantur fleet do not take place, it is reasonably possible that an impairment charge of Pullmantur’s reporting unit’s goodwill and trademark and trade names may be required. Of these factors, the planned transfers of vessels to the Pullmantur fleet is most significant to the projected future cash flows. If the transfers do not occur, we will likely fail step one of the impairment test. As of December 31, 2013, the carrying amount of goodwill attributable to our Pullmantur reporting unit was $152.1 million.
Royal Caribbean International
During the fourth quarter of 2013, we performed a qualitative assessment of the Royal Caribbean International reporting unit. Based on our qualitative assessment, we concluded that it was more-likely-than-not that the estimated fair value of the Royal Caribbean International reporting unit exceeded its carrying value and thus, we did not proceed to the two-step goodwill impairment test. No indicators of impairment exist primarily because the reporting unit's fair value has consistently exceeded its carrying value by a significant margin, its financial performance has been solid in
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the face of mixed economic environments and forecasts of operating results generated by the reporting unit appear sufficient to support its carrying value. As of December 31, 2013, the carrying amount of goodwill attributable to our Royal Caribbean International reporting unit was $287.1 million.
Derivative Instruments
We enter into various forward, swap and option contracts to manage our interest rate exposure and to limit our exposure to fluctuations in foreign currency exchange rates and fuel prices. These instruments are recorded on the balance sheet at their fair value and the vast majority are designated as hedges. We also have non-derivative financial instruments designated as hedges of our net investment in our foreign operations and investments. The fuel options we entered into represent economic hedges which were not designated as hedging instruments for accounting purposes and thus, changes in their fair value were immediately recognized in earnings. Although certain of our derivative financial instruments do not qualify or are not accounted for under hedge accounting, we do not hold or issue derivative financial instruments for trading or other speculative purposes. We account for derivative financial instruments in accordance with authoritative guidance. Refer to Note 2. Summary of Significant Accounting Policies and Note 14. Fair Value Measurements and Derivative Instruments to our consolidated financial statements for more information on related authoritative guidance, the Company's hedging programs and derivative financial instruments.
We enter into foreign currency forward contracts and collars, interest rate, cross-currency and fuel swaps and options with third party institutions in over-the-counter markets. We estimate the fair value of our foreign currency forward contracts and interest rate and cross-currency swaps using expected future cash flows based on the instruments' contract terms and published forward curves for foreign currency exchange and interest rates. We apply present value techniques and LIBOR-based discount rates to convert the expected future cash flows to the current fair value of the instruments.
We estimate the fair value of our foreign currency collars using standard option pricing models with inputs based on the options' contract terms, such as exercise price and maturity, and readily available public market data, such as foreign exchange curves, foreign exchange volatility levels and discount rates.
We estimate the fair value of our fuel swaps using expected future cash flows based on the swaps' contract terms and forward prices. We derive forward prices from forward fuel curves based on pricing inputs provided by third-party institutions that transact in the fuel indices we hedge. We validate these pricing inputs against actual market transactions and published price quotes for similar assets. We apply present value techniques and LIBOR-based discount rates to convert the expected future cash flows to the current fair value of the instruments. We also corroborate our fair value estimates using valuations provided by our counterparties.
We estimate the fair value for our fuel call options based on the prevailing market price for the instruments consisting of published price quotes for similar assets based on recent transactions in an active market.
We adjust the valuation of our derivative financial instruments to incorporate credit risk.
We believe it is unlikely that materially different estimates for the fair value of our foreign currency forward contracts and interest rate, cross-currency and fuel swaps and options would be derived from other appropriate valuation models using similar assumptions, inputs or conditions suggested by actual historical experience.
Contingencies—Litigation
On an ongoing basis, we assess the potential liabilities related to any lawsuits or claims brought against us. While it is typically very difficult to determine the timing and ultimate outcome of such actions, we use our best judgment to determine if it is probable that we will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. In assessing probable losses, we take into consideration estimates of the amount of insurance recoveries, if any, which are recorded as assets when recoverability is probable. We accrue a liability when we believe a loss is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties related to the eventual outcome of litigation and potential insurance recoveries, it is possible that certain matters may be resolved for amounts materially different from any provisions or disclosures that we have previously made.
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Seasonality
Our revenues are seasonal based on demand for cruises. Demand is strongest for cruises during the Northern Hemisphere's summer months and holidays. In order to mitigate the impact of the winter weather in the Northern Hemisphere and to capitalize on the summer season in the Southern Hemisphere, our brands have focused on deployment to Australia and Latin America during that period.
Financial Presentation
Description of Certain Line Items
Revenues
Our revenues are comprised of the following:
• | Passenger ticket revenues, which consist of revenue recognized from the sale of passenger tickets and the sale of air transportation to and from our ships; and |
• | Onboard and other revenues, which consist primarily of revenues from the sale of goods and/or services onboard our ships not included in passenger ticket prices, cancellation fees, sales of vacation protection insurance, pre- and post-cruise tours, Pullmantur's travel agency network, land-based tours and air charter business to third parties. |
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.
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; |
• | 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 and storage costs, including 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 operating lease costs, costs associated with Pullmantur's travel agency network, land-based tours and air charter business to third parties, vessel related insurance and entertainment. |
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, which we believe provide useful information to investors as a supplement to our consolidated financial statements, which are prepared and presented in accordance with GAAP. The presentation of non-GAAP financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.
Adjusted Earnings per Share represents Adjusted Net Income divided by weighted average shares outstanding or by diluted weighted average shares outstanding, as applicable. We believe that this non-GAAP measure is meaningful when assessing our performance on a comparative basis.
Adjusted Net Income represents net income excluding certain items that we believe adjusting for is meaningful when assessing our performance on a comparative basis. In 2013 and 2012, these items include restructuring and related impairment charges and impairment of Pullmantur related assets, respectively. For comparability purposes, starting in 2014, we will exclude results of the divested Pullmantur non-core businesses from our Adjusted Net Income. In anticipation of the 2014 change, we have presented Adjusted Net Income excluding the estimated impact of the divested Pullmantur non-core businesses in the financial tables under Results of Operations. The estimated impact of the divested Pullmantur non-core businesses was arrived at by adjusting the net income (loss) of these businesses for the ownership percentage we will retain as well as for intercompany transactions that will no longer be eliminated in our consolidated statements of comprehensive income (loss).
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. 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.
Gross Cruise Costs represent the sum of total cruise operating expenses plus marketing, selling and administrative expenses.
Gross Yields represent total revenues per APCD.
Net Cruise Costs and Net Cruise Costs Excluding Fuel represent Gross Cruise Costs excluding commissions, transportation and other expenses and onboard and other expenses and, in the case of Net Cruise Costs Excluding Fuel, fuel expenses (each of which is described above under the Description of Certain Line Items heading). In measuring our ability to control costs in a manner that positively impacts net income, we believe changes in Net Cruise Costs and Net Cruise Costs Excluding Fuel to be the most relevant indicators of our performance. A reconciliation of historical Gross Cruise Costs to Net Cruise Costs and Net Cruise Costs Excluding Fuel is provided below under Results of Operations. We have not provided a quantitative reconciliation of projected Gross Cruise Costs to projected Net Cruise Costs and projected Net Cruise Costs Excluding Fuel due to the significant uncertainty in projecting the costs deducted to arrive at these measures. Accordingly, we do not believe that reconciling information for such projected figures would be meaningful. For comparability purposes, starting in 2014, we will exclude results of the divested Pullmantur non-core businesses from our Net Cruise Costs. In anticipation of the 2014 change, we have presented Net Cruise Costs excluding these Pullmantur non-core businesses in the financial tables under Results of Operations.
Net Debt-to-Capital is a ratio which represents total long-term debt, including current portion of long-term debt, less cash and cash equivalents ("Net Debt") divided by the sum of Net Debt and total shareholders' equity. We believe Net Debt and Net Debt-to-Capital, along with total long-term debt and shareholders' equity are useful measures of our capital structure. A reconciliation of historical Debt-to-Capital to Net Debt-to-Capital is provided below under Results of Operations.
Net Revenues represent total revenues less commissions, transportation and other expenses and onboard and other expenses (each of which is described above under the Description of Certain Line Items heading). For comparability purposes, starting in 2014, we will exclude results of the divested Pullmantur non-core businesses from our Net Revenues. In anticipation of the 2014 change, we have presented Net Revenues excluding these Pullmantur non-core businesses in the financial tables under Results of Operations.
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The estimated impact of the divested Pullmantur non-core businesses was arrived at by adjusting net loss of these businesses for the ownership percentage we will retain as well as intercompany transactions that will no longer be eliminated in our consolidated statements of comprehensive income (loss).
Net Yields represent Net Revenues per APCD. We utilize Net Revenues and Net Yields to manage our business on a day-to-day basis as we believe that it is the most relevant measure of our pricing performance because it reflects the cruise revenues earned by us net of our most significant variable costs, which are commissions, transportation and other expenses and onboard and other expenses. A reconciliation of historical Gross Yields to Net Yields is provided below under Results of Operations. We have not provided a quantitative reconciliation of projected Gross Yields to projected Net Yields due to the significant uncertainty in projecting the costs deducted to arrive at this measure. Accordingly, we do not believe that reconciling information for such projected figures would be meaningful. For comparability purposes, starting in 2014, we will exclude results of the divested Pullmantur non-core businesses from our Net Yields. In anticipation of the 2014 change, we have presented Net Yields excluding these Pullmantur non-core businesses in the financial tables under Results of Operations.
Occupancy, in accordance with cruise vacation industry practice, is calculated by dividing Passenger Cruise Days by APCD. A percentage in excess of 100% indicates that three or more passengers occupied some cabins.
Passenger Cruise Days represent the number of passengers carried for the period multiplied by the number of days of their respective cruises.
We believe Net Yields, Net Cruise Costs and Net Cruise Costs Excluding Fuel are our most relevant non-GAAP financial measures. However, a significant portion of our revenue and expenses are denominated in currencies other than the United States dollar. Because our reporting currency is the United States dollar, the value of these revenues and expenses can be affected by changes in currency exchange rates. Although such changes in local currency prices is just one of many elements impacting our revenues and expenses, it can be an important element. For this reason, we also monitor Net Yields, Net Cruise Costs and Net Cruise Costs Excluding Fuel as if the current period's currency exchange rates had remained constant with the comparable prior period's rates, or on a "Constant Currency" basis.
It should be emphasized that Constant Currency is primarily used for comparing short-term changes and/or projections. Over the longer term, changes in guest sourcing and shifting the amount of purchases between currencies can significantly change the impact of the purely currency-based fluctuations.
The use of certain significant non-GAAP measures, such as Net Yields, Net Cruise Costs and Net Cruise Costs Excluding Fuel, allow us to perform capacity and rate analysis to separate the impact of known capacity changes from other less predictable changes which affect our business. We believe these non-GAAP measures provide expanded insight to measure revenue and cost performance in addition to the standard United States GAAP based financial measures. There are no specific rules or regulations for determining non-GAAP and Constant Currency measures, and as such, there exists the possibility that they may not be comparable to other companies within the industry.
Executive Overview
We believe our results of operations for 2013 reinforce the resilience of our business and the strength of our brands. Despite the effect of last year’s negative industry media coverage and a slowly improving, but still challenging, global economy, we achieved diluted Adjusted Earnings per Share of $2.40 in 2013 as compared to $1.97 in 2012. Earnings per share was $2.14 in 2013 compared to $0.08 in 2012. Additionally, our net income and Adjusted Net Income for 2013 was $473.7 million and $530.6 million, respectively, and our Net Yields increased 2.7% and 3.2% on a Constant Currency basis.
Our ticket and onboard revenues grew in 2013 despite our capacity remaining relatively flat. Strong close-in demand for Europe and Asia drove 2013 improvement in passenger ticket revenue. Our global presence enables us to source guests from stronger markets in order to generate higher yields on an opportunistic basis with the ultimate goal of maximizing our long-term return on invested capital and shareholder value. Investments in ship revitalizations and other onboard enhancements led to onboard revenue growth in 2013.
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In 2014, we will continue to focus on the development of key markets in Asia and on sourcing guests and adding capacity to the markets where we expect significant growth and profitability. We will also continue to invest in ship revitalizations, technology and other onboard revenue initiatives which we believe will drive profitability and improve the guest experience.
Our continued focus on cost control has helped us to maintain our profitability despite a tough operating environment. During 2013, we incurred $56.9 million in restructuring and related impairment charges associated with our profitability initiatives. Our first initiative relates to the restructuring and consolidation of our global sales, marketing, general and administrative structure, including the consolidation of most of our call centers located outside of the United States and the establishment of brand dedicated sales, marketing and revenue management teams in key priority markets. Our second initiative involves strategic changes to the Pullmantur brand which include the opening of a regional head office in Latin America to place operating management closer to the Latin American market, and the sale of Pullmantur’s non-cruise businesses to allow Pullmantur to focus on its core business. We anticipate benefits as a result of the Pullmantur changes to occur in 2015 and beyond. We expect to incur approximately $23 million in additional restructuring and other costs in connection to both profitability initiatives in 2014.
During 2013, we ordered a third Royal Caribbean International Quantum-class ship and the conditional agreement to construct the third Royal Caribbean International Oasis-class ship became effective. Both ships are scheduled for delivery in the second quarter of 2016. We also have a second Quantum-class ship on order which is expected to enter service in the second quarter of 2015 and two ships on order for our joint venture TUI Cruises which are scheduled for delivery in the second quarters of 2014 and 2015. Each of these ships has committed financing arrangements. In late 2014, we will accept delivery of the first of a new generation of Royal Caribbean International cruise ships, Quantum of the Seas.
As part of our vessel revitalization program, twelve ships were revitalized for the Royal Caribbean International brand from 2011 to 2013 to incorporate certain of the most popular features of the Oasis-class ships on certain Freedom-class, Radiance-class and Vision-class ships. An additional two ships are scheduled for revitalization in 2014. During 2010, the Celebrity Cruises brand began a revitalization program for all four Millenium-class ships to incorporate certain Solstice-class features. The Celebrity revitalization program was completed in 2013.
As of December 31, 2013, we had liquidity of $1.9 billion, consisting of approximately $204.7 million in cash and cash equivalents and $1.7 billion available under our unsecured credit facilities. In 2013, we implemented a number of actions in furtherance of our refinancing strategy for our maturities in 2013 and 2014. We anticipate funding our 2014 maturities and other obligations through our cash flows from operations and our current financing arrangements. In addition, we continue to be focused on our goal of returning to an investment grade credit rating. We have already made strides in this direction and further improvements are anticipated through increasing operating cash flow, a moderate capital expenditure program, retiring of debt and favorable financing programs.
Results of Operations
In addition to the items discussed above under "Executive Overview," significant items for 2013 include:
• | Total revenues increased 3.5% to $8.0 billion from $7.7 billion in 2012 primarily due to an increase in ticket prices and onboard spending. |
• | Cruise operating expenses increased 2.9% to $5.3 billion from $5.2 billion in 2012 primarily due to an increase in capacity, crew expenses and onboard and other expenses. |
• | We entered into a series of transactions to refinance our 2013 and 2014 bond maturities, reduce interest costs, improve financing terms and extend maturities. See Note 7. Long-Term Debt to our consolidated financial statements for further information. |
• | We entered into an agreement with STX France S.A. to build the third Oasis-class ship for Royal Caribbean International with approximately 5,400 berths which is expected to enter service in the second quarter of 2016. We have entered into a credit agreement to finance the purchase of the ship which includes a sovereign financing guarantee. Pullmantur's Atlantic Star, which has been out of operation since 2009, |
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was transferred to an affiliate of STX France S.A. as part of the consideration for the third Oasis-class ship. The transfer did not result in a gain or loss. See Note 5. Property and Equipment and Note 15. Commitments and Contingencies to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data for further information.
• | We entered into an agreement with Meyer Werft to build the third Quantum-class ship for Royal Caribbean International with approximately 4,150 berths which is expected to enter service in the second quarter of 2016. We have entered into a credit agreement to finance the purchase of the ship which includes a sovereign financing guarantee. See Note 15. Commitments and Contingencies to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data for further information. |
• | We incurred restructuring exit costs of $23.4 million related to our profitability initiatives. In addition, we recognized an impairment charge of $13.5 million to write down the aircraft owned and operated by Pullmantur Air to their fair value, and a $20.0 million charge to write down assets classified as held for sale as of December 31, 2013. These charges are classified as Restructuring and related impairment charges in our consolidated statements of comprehensive income (loss). Refer to Note 16. Restructuring and Related Impairment Charges to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data for further information on our profitability initiatives. |
For comparability purposes, starting in 2014, we will exclude results of the divested Pullmantur non-core businesses from our Adjusted Net Income. In anticipation of the 2014 change, we have presented the Adjusted Net Income excluding the estimated impact of the divested Pullmantur non-core businesses.
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We reported total revenues, operating income, net income, Adjusted Net Income, earnings per share and Adjusted Earnings per Share as shown in the following table (in thousands, except per share data):
Year Ended December 31, | |||||||||||
2013 | 2012 | 2011 | |||||||||
Total revenues | $ | 7,959,894 | $ | 7,688,024 | $ | 7,537,263 | |||||
Operating income | $ | 798,148 | $ | 403,110 | $ | 931,628 | |||||
Net income | $ | 473,692 | $ | 18,287 | $ | 607,421 | |||||
Pullmantur impairment related charges (1) | — | 413,932 | — | ||||||||
Restructuring and related impairment charges | 56,946 | — | — | ||||||||
Adjusted Net Income | $ | 530,638 | $ | 432,219 | $ | 607,421 | |||||
Estimated impact of divesting businesses held for sale | 8,586 | 10,654 | (9,572 | ) | |||||||
Adjusted Net Income excluding estimated impact of businesses held for sale | $ | 539,224 | $ | 442,873 | $ | 597,849 | |||||
Weighted-Average Shares Outstanding: | |||||||||||
Basic | 219,638 | 217,930 | 216,983 | ||||||||
Diluted | 220,941 | 219,457 | 219,229 | ||||||||
Basic: | |||||||||||
Earnings per Share | $ | 2.16 | $ | 0.08 | $ | 2.80 | |||||
Adjusted Earnings per Share | $ | 2.42 | $ | 1.98 | $ | 2.80 | |||||
Estimated impact of divesting businesses held for sale | $ | 0.04 | $ | 0.05 | $ | (0.04 | ) | ||||
Adjusted Earnings per Share excluding estimated impact of businesses held for sale | $ | 2.46 | $ | 2.03 | $ | 2.76 | |||||
Diluted: | |||||||||||
Earnings per Share | $ | 2.14 | $ | 0.08 | $ | 2.77 | |||||
Adjusted Earnings per Share | $ | 2.40 | $ | 1.97 | $ | 2.77 | |||||
Estimated impact of divesting businesses held for sale | $ | 0.04 | $ | 0.05 | $ | (0.04 | ) | ||||
Adjusted Earnings per Share excluding estimated impact of businesses held for sale | $ | 2.44 | $ | 2.02 | $ | 2.73 | |||||
(1) Includes $28.5 million in net deferred tax expense related to the Pullmantur impairment | |||||||||||
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The following table presents operating results as a percentage of total revenues for the last three years:
Year Ended December 31, | ||||||||
2013 | 2012 | 2011 | ||||||
Passenger ticket revenues | 71.9 | % | 72.8 | % | 73.3 | % | ||
Onboard and other revenues | 28.1 | 27.2 | 26.7 | |||||
Total revenues | 100.0 | % | 100.0 | % | 100.0 | % | ||
Cruise operating expenses: | ||||||||
Commissions, transportation and other | 16.5 | % | 16.8 | % | 17.2 | % | ||
Onboard and other | 7.1 | 6.9 | 7.1 | |||||
Payroll and related | 10.6 | 10.8 | 11.0 | |||||
Food | 5.9 | 5.8 | 5.6 | |||||
Fuel | 11.6 | 11.8 | 10.1 | |||||
Other operating | 14.9 | 15.0 | 14.5 | |||||
Total cruise operating expenses | 66.7 | 67.1 | 65.6 | |||||
Marketing, selling and administrative expenses | 13.1 | 13.2 | 12.7 | |||||
Depreciation and amortization expenses | 9.5 | 9.5 | 9.3 | |||||
Impairment of Pullmantur related assets | — | 5.0 | — | |||||
Restructuring and related impairment charges | 0.7 | — | — | |||||
Operating income | 10.0 | 5.2 | 12.4 | |||||
Other expense | (4.1 | ) | (5.0 | ) | (4.3 | ) | ||
Net income | 6.0 | % | 0.2 | % | 8.1 | % | ||
Selected statistical information is shown in the following table:
Year Ended December 31, | ||||||||
2013 | 2012 | 2011 | ||||||
Passengers Carried | 4,884,763 | 4,852,079 | 4,850,010 | |||||
Passenger Cruise Days | 35,561,772 | 35,197,783 | 34,818,335 | |||||
APCD | 33,974,852 | 33,705,584 | 33,235,508 | |||||
Occupancy | 104.7 | % | 104.4 | % | 104.8 | % | ||
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For comparability purposes, starting in 2014, we will exclude results of the divested Pullmantur non-core businesses from our Net Yields and Net Cruise Costs. In anticipation of the 2014 change, we have presented Net Yields and Net Cruise Costs excluding these Pullmantur non-core businesses.
Gross Yields and Net Yields were calculated as follows (in thousands, except APCD and Yields):
Year Ended December 31, | |||||||||||||||
2013 | 2013 On a Constant Currency basis | 2012 | 2011 | ||||||||||||
Passenger ticket revenues | $ | 5,722,718 | $ | 5,756,849 | $ | 5,594,595 | $ | 5,525,904 | |||||||
Onboard and other revenues | 2,237,176 | 2,232,642 | 2,093,429 | 2,011,359 | |||||||||||
Total revenues | 7,959,894 | 7,989,491 | 7,688,024 | 7,537,263 | |||||||||||
Less: | |||||||||||||||
Commissions, transportation and other | 1,314,595 | 1,319,340 | 1,289,255 | 1,299,713 | |||||||||||
Onboard and other | 568,615 | 567,094 | 529,453 | 535,501 | |||||||||||
Net revenues | 6,076,684 | 6,103,057 | 5,869,316 | 5,702,049 | |||||||||||
Less: | |||||||||||||||
Net revenues related to businesses held for sale | 218,350 | 211,627 | 189,527 | 175,678 | |||||||||||
Net revenues excluding businesses held for sale | $ | 5,858,334 | $ | 5,891,430 | $ | 5,679,789 | $ | 5,526,371 | |||||||
APCD | 33,974,852 | 33,974,852 | 33,705,584 | 33,235,508 | |||||||||||
Gross Yields | $ | 234.29 | $ | 235.16 | $ | 228.09 | $ | 226.78 | |||||||
Net Yields | $ | 178.86 | $ | 179.63 | $ | 174.13 | $ | 171.56 | |||||||
Net Yields excluding businesses held for sale | $ | 172.43 | $ | 173.41 | $ | 168.51 | $ | 166.28 | |||||||
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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):
Year Ended December 31, | |||||||||||||||
2013 | 2013 On a Constant Currency basis | 2012 | 2011 | ||||||||||||
Total cruise operating expenses | $ | 5,305,270 | $ | 5,302,946 | $ | 5,157,434 | $ | 4,942,607 | |||||||
Marketing, selling and administrative expenses | 1,044,819 | 1,043,050 | 1,011,543 | 960,602 | |||||||||||
Gross Cruise Costs | $ | 6,350,089 | $ | 6,345,996 | $ | 6,168,977 | $ | 5,903,209 | |||||||
Less: | |||||||||||||||
Commissions, transportation and other | 1,314,595 | 1,319,340 | 1,289,255 | 1,299,713 | |||||||||||
Onboard and other | 568,615 | 567,094 | 529,453 | 535,501 | |||||||||||
Net Cruise Costs | $ | 4,466,879 | $ | 4,459,562 | $ | 4,350,269 | $ | 4,067,995 | |||||||
Less: | |||||||||||||||
Fuel | 924,414 | 927,572 | 909,691 | 764,758 | |||||||||||
Net Cruise Costs Excluding Fuel | $ | 3,542,465 | $ | 3,531,990 | $ | 3,440,578 | $ | 3,303,237 | |||||||
Net Cruise Costs | $ | 4,466,879 | $ | 4,459,562 | $ | 4,350,269 | $ | 4,067,995 | |||||||
Less: | |||||||||||||||
Net Cruise Costs related to businesses held for sale | 224,864 | 219,241 | 199,596 | 162,671 | |||||||||||
Net Cruise Costs excluding businesses held for sale | $ | 4,242,015 | $ | 4,240,321 | $ | 4,150,673 | $ | 3,905,324 | |||||||
Less: | |||||||||||||||
Fuel | 924,414 | 927,572 | 909,691 | 764,758 | |||||||||||
Net Cruise Costs Excluding Fuel and businesses held for sale | $ | 3,317,601 | $ | 3,312,749 | $ | 3,240,982 | $ | 3,140,566 | |||||||
APCD | 33,974,852 | 33,974,852 | 33,705,584 | 33,235,508 | |||||||||||
Gross Cruise Costs per APCD | $ | 186.91 | $ | 186.79 | $ | 183.03 | $ | 177.62 | |||||||
Net Cruise Costs per APCD | $ | 131.48 | $ | 131.26 | $ | 129.07 | $ | 122.40 | |||||||
Net Cruise Cost excluding businesses held for sale per APCD | $ | 124.86 | $ | 124.81 | $ | 123.14 | $ | 117.50 | |||||||
Net Cruise Cost Excluding Fuel per APCD | $ | 104.27 | $ | 103.96 | $ | 102.08 | $ | 99.39 | |||||||
Net Cruise Costs Excluding Fuel and businesses held for sale per APCD | $ | 97.65 | $ | 97.51 | $ | 96.16 | $ | 94.49 | |||||||
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In anticipation of the 2014 change noted above, in the tables below, we have presented our 2013 quarterly Net Yields and Net Cruise Costs excluding the Pullmantur non-core businesses.
Gross Yields and Net Yields were calculated as follows (in thousands, except APCD and Yields):
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year Ended December 31, 2013 | |||||||||||||||
Passenger ticket revenues | $ | 1,393,778 | $ | 1,366,713 | $ | 1,672,051 | $ | 1,290,176 | $ | 5,722,718 | |||||||||
Onboard and other revenues | 517,442 | 516,054 | 639,698 | 563,982 | 2,237,176 | ||||||||||||||
Total revenues | 1,911,220 | 1,882,767 | 2,311,749 | 1,854,158 | 7,959,894 | ||||||||||||||
Less: | |||||||||||||||||||
Commissions, transportation and other | 322,937 | 316,506 | 378,291 | 296,861 | 1,314,595 | ||||||||||||||
Onboard and other | 121,487 | 140,710 | 178,269 | 128,149 | 568,615 | ||||||||||||||
Net Revenues | 1,466,796 | 1,425,551 | 1,755,189 | 1,429,148 | 6,076,684 | ||||||||||||||
Less: | |||||||||||||||||||
Net Revenues related to businesses held for sale | 33,114 | 39,431 | 70,098 | 75,707 | 218,350 | ||||||||||||||
Net Revenues excluding businesses held for sale | $ | 1,433,682 | $ | 1,386,120 | $ | 1,685,091 | $ | 1,353,441 | $ | 5,858,334 | |||||||||
APCD | 8,428,110 | 8,238,182 | 8,667,948 | 8,640,612 | 33,974,852 | ||||||||||||||
Gross Yields | $ | 226.77 | $ | 228.54 | $ | 266.70 | $ | 214.59 | $ | 234.29 | |||||||||
Net Yields | $ | 174.04 | $ | 173.04 | $ | 202.49 | $ | 165.40 | $ | 178.86 | |||||||||
Net Yields excluding businesses held for sale | $ | 170.11 | $ | 168.26 | $ | 194.40 | $ | 156.64 | $ | 172.43 | |||||||||
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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):
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | December 31, 2013 | |||||||||||||||
Total cruise operating expenses | $ | 1,282,190 | $ | 1,323,619 | $ | 1,416,801 | $ | 1,282,660 | $ | 5,305,270 | |||||||||
Marketing, selling and administrative expenses (1) | 274,034 | 257,948 | 249,954 | 262,883 | 1,044,819 | ||||||||||||||
Gross Cruise Costs | 1,556,224 | 1,581,567 | 1,666,755 | 1,545,543 | 6,350,089 | ||||||||||||||
Less: | |||||||||||||||||||
Commissions, transportation and other | 322,937 | 316,506 | 378,291 | 296,861 | 1,314,595 | ||||||||||||||
Onboard and other | 121,487 | 140,710 | 178,269 | 128,149 | 568,615 | ||||||||||||||
Net Cruise Costs | $ | 1,111,800 | $ | 1,124,351 | $ | 1,110,195 | $ | 1,120,533 | $ | 4,466,879 | |||||||||
Less: | |||||||||||||||||||
Fuel | 241,652 | 232,471 | 215,686 | 234,605 | 924,414 | ||||||||||||||
Net Cruise Costs Excluding Fuel | $ | 870,148 | $ | 891,880 | $ | 894,509 | $ | 885,928 | $ | 3,542,465 | |||||||||
Net Cruise Costs | $ | 1,111,800 | $ | 1,124,351 | $ | 1,110,195 | $ | 1,120,533 | $ | 4,466,879 | |||||||||
Less: | |||||||||||||||||||
Net Cruise Costs related to businesses held for sale | 34,971 | 49,196 | 67,760 | 72,937 | 224,864 | ||||||||||||||
Net Cruise Costs excluding businesses held for sale | $ | 1,076,829 | $ | 1,075,155 | $ | 1,042,435 | $ | 1,047,596 | $ | 4,242,015 | |||||||||
Less: | |||||||||||||||||||
Fuel | 241,652 | 232,471 | 215,686 | 234,605 | 924,414 | ||||||||||||||
Net Cruise Costs Excluding Fuel and businesses held for sale | $ | 835,177 | $ | 842,684 | $ | 826,749 | $ | 812,991 | $ | 3,317,601 | |||||||||
APCD | 8,428,110 | 8,238,182 | 8,667,948 | 8,640,612 | 33,974,852 | ||||||||||||||
Gross Cruise Costs per APCD | $ | 184.65 | $ | 191.98 | $ | 192.29 | $ | 178.87 | $ | 186.91 | |||||||||
Net Cruise Costs per APCD | $ | 131.92 | $ | 136.48 | $ | 128.08 | $ | 129.68 | $ | 131.48 | |||||||||
Net Cruise Costs excluding businesses held for sale per APCD | $ | 127.77 | $ | 130.51 | $ | 120.26 | $ | 121.24 | $ | 124.86 | |||||||||
Net Cruise Costs Excluding Fuel per APCD | $ | 103.24 | $ | 108.26 | $ | 103.20 | $ | 102.53 | $ | 104.27 | |||||||||
Net Cruise Costs Excluding Fuel and businesses held for sale per APCD | $ | 99.09 | $ | 102.29 | $ | 95.38 | $ | 94.09 | $ | 97.65 | |||||||||
(1) For the three months ended June 30, 2013, $1.7 million has been reclassified in the consolidated statements of comprehensive income (loss) from Marketing selling and administrative expenses to Restructuring and related impairment charges in order to conform to the presentation in this Annual Report on Form 10-K impacting the Gross Cruise Costs, Net Cruise Costs and Net Cruise Costs Excluding Fuel calculations reported for the three months ended June 30, 2013.
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Net Debt-to-Capital was calculated as follows (in thousands):
As of December 31, | |||||||
2013 | 2012 | ||||||
Long-term debt, net of current portion | $ | 6,511,426 | $ | 6,970,464 | |||
Current portion of long-term debt | 1,563,378 | 1,519,483 | |||||
Total debt | 8,074,804 | 8,489,947 | |||||
Less: Cash and cash equivalents | 204,687 | 194,855 | |||||
Net Debt | $ | 7,870,117 | $ | 8,295,092 | |||
Total shareholders' equity | $ | 8,808,265 | $ | 8,308,749 | |||
Total debt | 8,074,804 | 8,489,947 | |||||
Total debt and shareholders' equity | 16,883,069 | 16,798,696 | |||||
Debt-to-Capital | 47.8 | % | 50.5 | % | |||
Net Debt | 7,870,117 | 8,295,092 | |||||
Net Debt and shareholders' equity | $ | 16,678,382 | $ | 16,603,841 | |||
Net Debt-to-Capital | 47.2 | % | 50.0 | % | |||
Outlook
We have presented the tables below excluding Pullmantur's non-core businesses.
On January 27, 2014, we announced the following initial first quarter and full year 2014 guidance, which remains essentially unchanged:
Full Year 2014
As Reported | Constant Currency | ||
Net Yields | Approx. 2% | 2% to 3% | |
Net Cruise Costs per APCD | Approx. Flat | Approx. Flat | |
Net Cruise Costs per APCD, excluding Fuel | Approx. Flat | Flat to slightly down | |
Capacity Increase | 1.7% | ||
Depreciation and Amortization | $780 to $790 million | ||
Interest Expense, net | $260 to $270 million | ||
Fuel Consumption (metric tons) | 1,352,000 | ||
Fuel Expenses | $944 million | ||
Percent Hedged (fwd consumption) | 55% | ||
Impact of 10% change in fuel prices | $41.4 million | ||
Adjusted Earnings per Share-Diluted* | $3.20 to $3.40 | ||