Edgar Filing: ROYAL CARIBBEAN CRUISES LTD

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-11884

ROYAL CARIBBEAN CRUISES LTD.

(Exact name of registrant as specified in its charter)



Republic of Liberia		98-0081645
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1050 Caribbean Way, Miami, Florida 33132

(Address of principal executive offices) (zip code)

(305) 539-6000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically 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 ý No 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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

There were 219,995,391 shares of common stock outstanding as of October 16, 2015.

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ROYAL CARIBBEAN CRUISES LTD.

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	Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3. Quantitative and Qualitative Disclosures About Market Risk	41

Item 4. Controls and Procedures	41

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	42

Item 1A. Risk Factors	42

Item 6. Exhibits	43

SIGNATURES	44

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ROYAL CARIBBEAN CRUISES LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited; in thousands, except per share data)



	Quarter Ended September 30,
	2015			2014
Passenger ticket revenues	$	1,873,942		$	1,786,746
Onboard and other revenues	649,158			602,016
Total revenues	2,523,100			2,388,762
Cruise operating expenses:
Commissions, transportation and other	413,156			396,916
Onboard and other	175,214			182,658
Payroll and related	217,627			214,260
Food	122,124			120,908
Fuel	199,848			230,818
Other operating	259,057			281,322
Total cruise operating expenses	1,387,026			1,426,882
Marketing, selling and administrative expenses	256,060			239,662
Depreciation and amortization expenses	210,742			192,448
Impairment of Pullmantur related assets	411,267			—
Restructuring charges	—			308
Operating Income	258,005			529,462
Other income (expense):
Interest income	1,735			2,117
Interest expense, net of interest capitalized	(66,819		)	(60,100		)
Other income (including in 2015 a net deferred tax benefit of $12.0 million related to the Pullmantur impairment)	35,866			18,769
	(29,218		)	(39,214		)
Net Income	$	228,787		$	490,248
Earnings per Share:
Basic	$	1.04		$	2.20
Diluted	$	1.03		$	2.19
Weighted-Average Shares Outstanding:
Basic	219,963			222,523
Diluted	221,137			223,859
Comprehensive Income
Net Income	$	228,787		$	490,248
Other comprehensive (loss) income:
Foreign currency translation adjustments	(4,191		)	(18,482		)
Change in defined benefit plans	3,318			(1,451		)
Loss on cash flow derivative hedges	(222,492		)	(249,626		)
Total other comprehensive loss	(223,365		)	(269,559		)
Comprehensive Income	$	5,422		$	220,689

The accompanying notes are an integral part of these consolidated financial statements.

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ROYAL CARIBBEAN CRUISES LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited; in thousands, except per share data)



	Nine Months Ended September 30,
	2015			2014
Passenger ticket revenues	$	4,688,189		$	4,590,048
Onboard and other revenues	1,708,832			1,665,981
Total revenues	6,397,021			6,256,029
Cruise operating expenses:
Commissions, transportation and other	1,093,409			1,068,961
Onboard and other	438,558			456,296
Payroll and related	647,788			634,232
Food	361,317			358,172
Fuel	607,689			718,081
Other operating	777,291			825,794
Total cruise operating expenses	3,926,052			4,061,536
Marketing, selling and administrative expenses	817,040			790,957
Depreciation and amortization expenses	617,678			579,063
Impairment of Pullmantur related assets	411,267			—
Restructuring charges	—			1,958
Operating Income	624,984			822,515
Other income (expense):
Interest income	8,244			8,023
Interest expense, net of interest capitalized	(213,598		)	(193,931		)
Other income (including in 2015 a net deferred tax benefit of $12.0 million related to the Pullmantur impairment)	39,354			17,771
	(166,000		)	(168,137		)
Net Income	$	458,984		$	654,378
Earnings per Share:
Basic	$	2.09		$	2.95
Diluted	$	2.08		$	2.93
Weighted-Average Shares Outstanding:
Basic	219,835			222,007
Diluted	220,979			223,351
Comprehensive Income
Net Income	$	458,984		$	654,378
Other comprehensive (loss) income:
Foreign currency translation adjustments	(23,994		)	(17,845		)
Change in defined benefit plans	5,567			(5,536		)
Loss on cash flow derivative hedges	(280,968		)	(323,179		)
Total other comprehensive loss	(299,395		)	(346,560		)
Comprehensive Income	$	159,589		$	307,818

The accompanying notes are an integral part of these consolidated financial statements.

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ROYAL CARIBBEAN CRUISES LTD.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



	As of
	September 30,			December 31,
	2015			2014
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	147,419		$	189,241
Trade and other receivables, net	241,638			261,392
Inventories	131,108			123,490
Prepaid expenses and other assets	269,914			226,960
Derivative financial instruments	110,747			—
Total current assets	900,826			801,083
Property and equipment, net	18,776,782			18,193,627
Goodwill	286,707			420,542
Other assets	994,533			1,297,938
	$	20,958,848		$	20,713,190
Liabilities and Shareholders’ Equity
Current liabilities
Current portion of long-term debt	$	905,128		$	799,630
Accounts payable	305,747			331,505
Accrued interest	83,281			49,074
Accrued expenses and other liabilities	630,455			635,138
Derivative financial instruments	549,524			266,986
Customer deposits	1,886,356			1,766,914
Total current liabilities	4,360,491			3,849,247
Long-term debt	7,584,808			7,644,318
Other long-term liabilities	757,763			935,266
Commitments and contingencies (Note 7)
Shareholders’ equity
Preferred stock ($0.01 par value; 20,000,000 shares authorized; none outstanding)	—			—
Common stock ($0.01 par value; 500,000,000 shares authorized; 233,796,056 and 233,106,019 shares issued, September 30, 2015 and December 31, 2014, respectively)	2,338			2,331
Paid-in capital	3,279,806			3,253,552
Retained earnings	6,819,809			6,575,248
Accumulated other comprehensive loss	(1,196,389		)	(896,994		)
Treasury stock (13,808,683 common shares at cost, September 30, 2015 and December 31, 2014)	(649,778		)	(649,778		)
Total shareholders’ equity	8,255,786			8,284,359
	$	20,958,848		$	20,713,190

The accompanying notes are an integral part of these consolidated financial statements.

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ROYAL CARIBBEAN CRUISES LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)



	Nine Months Ended September 30,
	2015			2014
Operating Activities
Net income	$	458,984		$	654,378
Adjustments:
Depreciation and amortization	617,678			579,063
Impairment of Pullmantur related assets	411,267			—
Net deferred income tax (benefit) expense	(13,466		)	1,177
Loss on derivative instruments not designated as hedges	49,607			24,234
Loss on sale of property and equipment	—			17,401
Changes in operating assets and liabilities:
Decrease in trade and other receivables, net	24,130			69,833
(Increase) decrease in inventories	(8,377		)	13,900
Increase in prepaid expenses and other assets	(30,649		)	(3,596		)
Decrease in accounts payable	(22,915		)	(33,668		)
Increase (decrease) in accrued interest	34,207			(36,693		)
Increase in accrued expenses and other liabilities	11,558			48,600
Increase in customer deposits	65,511			104,211
Other, net	10,401			20,724
Net cash provided by operating activities	1,607,936			1,459,564
Investing Activities
Purchases of property and equipment	(1,360,637		)	(559,018		)
Cash paid on settlement of derivative financial instruments	(158,890		)	(14,808		)
Investments in and loans to unconsolidated affiliates	(54,250		)	(69,748		)
Cash received on loans to unconsolidated affiliates	122,710			76,167
Proceeds from sale of property and equipment	—			220,000
Other, net	(18,642		)	2,592
Net cash used in investing activities	(1,469,709		)	(344,815		)
Financing Activities
Debt proceeds	2,962,501			1,917,550
Debt issuance costs	(57,146		)	(49,641		)
Repayments of debt	(2,887,237		)	(2,958,427		)
Dividends paid	(197,718		)	(131,857		)
Proceeds from exercise of common stock options	6,902			65,885
Cash received on settlement of derivative financial instruments	—			22,835
Other, net	1,778			1,422
Net cash used in financing activities	(170,920		)	(1,132,233		)
Effect of exchange rate changes on cash	(9,129		)	(4,022		)
Net decrease in cash and cash equivalents	(41,822		)	(21,506		)
Cash and cash equivalents at beginning of period	189,241			204,687
Cash and cash equivalents at end of period	$	147,419		$	183,181
Supplemental Disclosure
Cash paid during the period for:
Interest, net of amount capitalized	$	151,661		$	208,311

The accompanying notes are an integral part of these consolidated financial statements.

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ROYAL CARIBBEAN CRUISES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

As used in this Quarterly Report on Form 10-Q, the terms “Royal Caribbean,” the “Company,” “we,” “our” and “us” refer to Royal Caribbean Cruises Ltd. and, 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 report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014, including the audited consolidated financial statements and related notes included therein.

This Quarterly Report on Form 10-Q also includes trademarks, trade names and service marks of other companies. Use or display by us of other parties’ trademarks, trade names or service marks is not intended to and does not imply a relationship with, or endorsement or sponsorship of us by, these other parties other than as described herein.

Note 1. General

Description of Business

We are a global cruise company. We own Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises, CDF Croisières de France and a 50% joint venture interest in TUI Cruises.

Basis for Preparation of Consolidated Financial Statements

The unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Estimates are required for the preparation of financial statements in accordance with these principles. Actual results could differ from these estimates. Refer to Note 2. Summary of Significant Accounting Policies in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2014 for a discussion of our significant accounting policies.

All significant intercompany accounts and transactions are eliminated in consolidation. We consolidate entities over which we have control, usually evidenced by a direct ownership interest of greater than 50%, and variable interest entities where we are determined to be the primary beneficiary. Refer to Note 5. Other Assets for further information regarding our variable interest entities. For affiliates we do not control but over which we have significant influence on financial and operating policies, usually evidenced by a direct ownership interest from 20% to 50%, the investment is accounted for using the equity method. We consolidate the operating results of Pullmantur and CDF Croisières de France on a two-month lag to allow for more timely preparation of our consolidated financial statements. Except for the impairment of Pullmantur related assets, as described in Note 3. Impairment of Pullmantur Related Assets, no material events or transactions affecting Pullmantur or CDF Croisières de France have occurred during the two-month lag period of August and September 2015 that would require further disclosure or adjustment to our consolidated financial statements as of and for the quarter ended September 30, 2015.

We believe the accompanying unaudited consolidated financial statements contain all normal recurring adjustments necessary for a fair presentation. Our revenues are seasonal and results for interim periods are not necessarily indicative of results for the entire year.

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Note 2. Summary of Significant Accounting Policies

Revenues and Expenses

We recognize passenger ticket revenues, revenues from onboard and other goods and services and all associated cruise operating costs for all of our uncompleted voyages on a pro-rata basis. Prior to September 30, 2014, we recognized revenues and cruise operating costs for our shorter voyages (voyages of ten days or less) upon voyage completion while we recognized revenues and cruise operating costs for voyages in excess of ten days on a pro-rata basis.

The change to prorate all voyages as of September 30, 2014 forward was not retrospectively applied to prior periods, as the impact of prorating all voyages was immaterial to the respective periods presented.

Recent Accounting Pronouncements

In May 2014, amended GAAP guidance was issued to clarify the principles used to recognize revenue for all entities. The guidance is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not comprehensively addressed in the prior accounting guidance. This guidance must be applied using one of two retrospective application methods. In August 2015, the effective date of this guidance was deferred by one year and will now be effective for our annual reporting period beginning after December 15, 2017, including interim periods therein. Early adoption is permitted for our annual reporting period beginning after December 15, 2016, including interim periods therein. We are currently evaluating the impact, if any, of the adoption of this newly issued guidance to our consolidated financial statements.

In August 2014, GAAP guidance was issued requiring management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. This guidance will be effective for our annual reporting period ending after December 15, 2016 and for annual periods and interim periods thereafter. Early adoption is permitted. The adoption of this newly issued guidance is not expected to have an impact to our consolidated financial statements.

In January 2015, amended GAAP guidance was issued changing the requirements for reporting extraordinary and unusual items in the income statement. The update eliminates the concept of extraordinary items. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. A reporting entity may apply the amendments prospectively or retrospectively to all periods presented in the financial statements. The guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of this newly issued guidance is not expected to have an impact to our consolidated financial statements.

In February 2015, amended GAAP guidance was issued affecting current consolidation guidance. The guidance changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance must be applied using one of two retrospective application methods and will be effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in any interim period. The adoption of this newly issued guidance is not expected to have an impact to our consolidated financial statements.

In April 2015, amended GAAP guidance was issued simplifying the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by these amendments. Additionally, in August 2015, amended GAAP guidance was issued to clarify the presentation of debt issuance costs associated with line-of-credit arrangements. The amendments continue to allow an entity to present debt issuance costs as an asset with subsequent amortization over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This guidance should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The guidance will be effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The adoption of this newly issued guidance is not expected to have an impact to our consolidated financial statements, with the exception of reclassifying debt issuance costs from Other assets to be reflected as a reduction of our current and long-term liabilities.

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In April 2015, amended GAAP guidance was issued to provide a practical expedient for the measurement date of an employer's defined benefit obligation and plan assets. The guidance provides a practical expedient for entities with a fiscal year-end that does not coincide with a month-end and for contributions or significant events that occur between the month-end date and an entity's fiscal year end. The guidance will be effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Earlier application is permitted. The adoption of this newly issued guidance is not expected to have an impact to our consolidated financial statements.

In April 2015, amended GAAP guidance was issued to clarify a customer’s accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers about whether a cloud computing arrangement includes a software license or if the arrangement should be accounted for as a service contract. This guidance will impact the accounting of software licenses but will not change a customer’s accounting for service contracts. The guidance will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the amendments either prospectively or retrospectively. The adoption of this newly issued guidance is not expected to have a material impact to our consolidated financial statements.

In July 2015, amended GAAP guidance was issued to simplify the measurement of inventory for all entities. The amendments apply to all inventory that is measured using first-in, first-out or average cost. The guidance requires an entity to measure inventory at the lower of cost and net realizable value. The guidance must be applied prospectively and will be effective for our interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted as of the beginning of an interim or annual reporting period. The adoption of this newly issued guidance is not expected to have a material impact to our consolidated financial statements.

In September 2015, amended GAAP guidance was issued to simplify the accounting for measurement-period adjustments related to business combinations. The amendments require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined and eliminates the requirement to retroactively adjust the provisional amounts recognized at the acquisition date. The guidance will be effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to measurement period adjustments that occur after the effective date. Early adoption is permitted for financial statements that have not been issued. The adoption of this newly issued guidance is not expected to have a material impact to our consolidated financial statements.

Other

Revenues and expenses include port costs that vary with guest head counts. The amounts of such port costs included in Passenger ticket revenues on a gross basis were $156.8 million and $155.0 million for the third quarters of 2015 and 2014, respectively, and $425.6 million and $416.8 million for the nine months ended September 30, 2015 and 2014, respectively.

Reclassifications

On January 1, 2015, we adopted ASC 853, Service Concession Arrangements ("ASC 853"), using the modified retrospective approach. Due to the adoption of ASC 853, $41.9 million has been reclassified in the consolidated balance sheet, as of December 31, 2014, from Property and equipment, net to Other assets in order to conform to the current year presentation. The adoption of this guidance did not have a material impact to our consolidated financial statements as of and for the quarter and nine months ended September 30, 2015.

For the nine months ended September 30, 2014, $1.2 million has been reclassified in the consolidated statements of cash flows from Other, net to Net deferred income tax (benefit) expense within Net cash provided by operating activities in order to conform to the current year presentation.

Note 3. Impairment of Pullmantur Related Assets

Pullmantur is a brand targeted primarily at the Spanish and Latin American markets. These markets have experienced significant volatility and the brand has adopted various changes to its operating strategy as a result. Most recently, in response to favorable economic expectations in Latin America, especially Brazil, management undertook a positioning of the brand to increase sourcing of guests and to deliver deployment for Latin American consumers; transferring newer and more efficient capacity to the brand; and selling Pullmantur’s non-cruise businesses to allow the brand to focus on the core cruise business.

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However, the Latin American resurgence was short lived and the core Latin American economies, including Brazil, Mexico, Argentina and Venezuela, have regressed and their currencies have materially depreciated versus the US dollar. During the second quarter of 2015, as a result of the weakness in Latin America, we decided to defer the scheduled transfer of Royal Caribbean International’s Majesty of the Seas to the Pullmantur fleet. During our most recently completed quarter, the negative economic trends significantly deteriorated. Most notably, the Brazilian Real devalued by approximately 22% relative to the US dollar during the third quarter of 2015.

In light of the increased challenges facing Pullmantur’s Latin American strategy, we recently made a decision to significantly change that strategy from growing the brand through vessel transfers to a right-sizing strategy. This right-sizing strategy includes reducing our exposure to Latin America, refocusing on the brand’s core market of Spain and, consequently, reducing the size of Pullmantur’s fleet. This strategic change includes a decision to redeploy Pullmantur’s Empress to the Royal Caribbean International brand as well as a decision to cancel the intended transfer of the Majesty of the Seas to Pullmantur. As we previously disclosed, the planned growth of the Pullmantur fleet through the transfer of vessels into the brand has been the most significant assumption within Pullmantur's projected cash flows supporting the recoverability of the Pullmantur reporting unit’s goodwill and trademarks and trade names. Our decision to reduce the size of Pullmantur’s fleet significantly decreases the cash flow projections which have been the basis of our impairment analysis.

As a result of these developments, we performed an interim impairment evaluation of Pullmantur’s goodwill and trademarks and trade names in connection with the preparation of our financial statements for the quarter ended September 30, 2015. We estimated the fair value of the Pullmantur reporting unit using a probability-weighted discounted cash flow model. The estimation of future cash flows requires 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 and economic business conditions, among other factors.

Due to the previously described market conditions and our recent decision to reduce our exposure to Latin America, refocus on the brand’s core Spanish market and reduce the brand's overall capacity, we reviewed the two-step goodwill impairment test based on the updated cash flow projections. As a result of this analysis, we determined that the carrying value of the Pullmantur reporting unit exceeded its fair value. Similarly, we determined that the carrying value of Pullmantur’s trademarks and trade names exceeded their fair value as well. Accordingly, upon the completion of the two-step impairment test, we recognized an impairment charge of $123.8 million and $174.3 million for goodwill and trademark and trade names, respectively, during the quarter ended September 30, 2015. These charges reflect the full carrying amounts of the goodwill and trademark and trade names leaving Pullmantur with no intangible assets on its books.

Additionally, in conjunction with performing the two-step goodwill impairment test, we identified that the estimated fair value of certain long-lived assets, consisting of two ships and three aircraft were less than their carrying values. As a result of this determination, we evaluated these assets pursuant to our long-lived asset impairment test. The decision to significantly reduce our exposure to the Latin American market negatively impacted the expected undiscounted cash flows of these vessels and aircraft and resulted in an impairment charge of $113.2 million to write down these assets to their estimated fair values during the quarter ended September 30, 2015. The remaining assets for the Pullmantur reporting unit have fair values greater than or equal to their carrying amounts.

The carrying amounts of goodwill and intangible assets attributable to our Pullmantur reporting unit were as follows (in thousands):



	Goodwill			Intangibles
Balance at December 31, 2014	$	133,583		$	188,037
Impairment of Pullmantur related assets	(123,814		)	(174,285		)
Foreign currency translation adjustment	(9,769		)	(13,752		)
Balance at September 30, 2015	$	—		$	—

Intangible assets are reported within Other assets in our consolidated balance sheets.

Pullmantur had recognized a deferred tax liability of $43.4 million, which represented the tax effect of the basis difference between the tax and book values of Pullmantur’s trademarks and trade names. In addition, Pullmantur had recognized a net deferred tax asset relating to net operating losses with an unlimited carryforward period. The benefit of the deferred tax asset was previously assumed through the future realization of the deferred tax liability. A partial valuation allowance was previously established against the deferred tax asset since the utilization of the net operating losses is subject to a 70% annual limitation. As a result of the

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impairment of the trademarks and trade names, we reversed the deferred tax liability of $43.4 million and increased the valuation allowance by $31.4 million, or to 100% of the deferred tax asset balance, resulting in a $12.0 million deferred tax benefit recognized during the quarter ended September 30, 2015.

The combined impairment charge of $411.3 million related to Pullmantur’s goodwill, trademarks and trade names, vessels and aircraft was reported within Impairment of Pullmantur related assets and the net $12.0 million deferred tax benefit was reported within Other income (expense) in our statement of comprehensive income (loss), resulting in a net impairment loss of $399.3 million.

Note 4. Earnings Per Share

A reconciliation between basic and diluted earnings per share is as follows (in thousands, except per share data):



	Quarter Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Net income for basic and diluted earnings per share	$	228,787	$	490,248	$	458,984	$	654,378
Weighted-average common shares outstanding	219,963		222,523		219,835		222,007
Dilutive effect of stock options, performance share awards and restricted stock awards	1,174		1,336		1,144		1,344
Diluted weighted-average shares outstanding	221,137		223,859		220,979		223,351
Basic earnings per share	$	1.04	$	2.20	$	2.09	$	2.95
Diluted earnings per share	$	1.03	$	2.19	$	2.08	$	2.93

There were no antidilutive shares for the quarters and nine month periods ended September 30, 2015 and September 30, 2014, respectively.

Note 5. Other Assets

A Variable Interest Entity (“VIE”) is an entity in which the equity investors have not provided enough equity to finance the entity’s activities or the equity investors: (1) cannot directly or indirectly make decisions about the entity’s activities through their voting rights or similar rights; (2) do not have the obligation to absorb the expected losses of the entity; (3) do not have the right to receive the expected residual returns of the entity; or (4) have voting rights that are not proportionate to their economic interests and the entity’s activities involve or are conducted on behalf of an investor with a disproportionately small voting interest.

We have determined that TUI Cruises GmbH, our 50%-owned joint venture, which operates the brand TUI Cruises, is a VIE. As of September 30, 2015 and December 31, 2014, our investment, including equity and loans, in TUI Cruises was approximately $338.4 million and $370.1 million, respectively. As of September 30, 2015, this amount was included within Other assets in our consolidated balance sheets. In addition, we and TUI AG, our joint venture partner, have each guaranteed the repayment of 50% of a bank loan originally borrowed by TUI Cruises in 2011 and refinanced in May 2015. In connection with the refinancing, the principal amount of the loan was increased by €40.0 million. As of September 30, 2015, the outstanding principal amount of the loan was €142.7 million, or approximately $159.3 million based on the exchange rate at September 30, 2015. In addition the maturity date was extended from May 2016 to May 2022. Notwithstanding this, the lenders have agreed to release each shareholder's guarantee in 2018. The loan continues to amortize quarterly and to be secured by first mortgages on the Mein Schiff 1 and Mein Schiff 2 vessels. Based on current facts and circumstances, we do not believe potential obligations under our guarantee of this bank loan are probable.

The €40.0 million of additional proceeds received by TUI Cruises in connection with the refinancing of the bank loan discussed above were used during the second quarter of 2015 to repay in full the outstanding balance of the debt facility we originally provided to TUI Cruises in 2011 in connection with our sale of Celebrity Mercury.

Our investment amount and the potential obligations under this guarantee are substantially our maximum exposure to loss. We have determined that we are not the primary beneficiary of TUI Cruises. We believe that the power to direct the activities that most significantly impact TUI Cruises’ economic performance are shared between ourselves and TUI AG. All the significant operating and financial decisions of TUI Cruises require the consent of both parties, which we believe creates shared power over TUI Cruises. Accordingly, we do not consolidate this entity and account for this investment under the equity method of accounting.

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As of September 30, 2015, TUI Cruises has four newbuild ships on order with Meyer Turku scheduled to be delivered in each of 2016, 2017, 2018 and 2019. TUI Cruises has in place commitments for the financing of up to 80% of the contract price of each ship on order. The remaining portion of the contract price of the ships will be funded with a €150.0 million bank facility and TUI Cruises’ cash flows from operations. The various ship construction and credit agreements include certain restrictions on each of our and TUI AG’s ability to reduce our current ownership interest in TUI Cruises below 37.55% through 2021.

In March 2015, we announced the pending sale of Splendour of the Seas to TUI Cruises. The sale for €188.0 million is scheduled to be completed in April 2016 in order to retain the future revenues to be generated for sailings through that date. After the sale, TUI Cruises will lease the ship to Thomson Cruises, which will operate the ship. The purchase price will be financed by us under a secured credit agreement to be repaid over 10 years. The resulting term loan will be 50% guaranteed by TUI AG and will be secured by a first mortgage on the ship. Interest will accrue at the rate of 6.25% per annum. We executed certain forward contracts to lock in the sales price of the ship at approximately $213 million. We expect to recognize a gain on the sale, which we do not expect will have a material effect to our consolidated financial statements.

We have determined that Grand Bahama Shipyard Ltd. (“Grand Bahama”), a ship repair and maintenance facility in which we have a 40% noncontrolling interest, is a VIE. The facility serves cruise and cargo ships, oil and gas tankers and offshore units. We utilize this facility, among other ship repair facilities, for our regularly scheduled drydocks and certain emergency repairs as may be required. We have determined that we are not the primary beneficiary of this facility as we do not have the power to direct the activities that most significantly impact the facility’s economic performance. Accordingly, we do not consolidate this entity and we account for this investment under the equity method of accounting. As of September 30, 2015, the net book value of our investment in Grand Bahama was approximately $52.7 million, consisting of $12.5 million in equity and $40.2 million in loans. As of December 31, 2014, the net book value of our investment in Grand Bahama was approximately $53.8 million, consisting of $7.7 million in equity and $46.1 million in loans. These amounts represent our maximum exposure to loss. During the nine months ended September 30, 2015 and September 30, 2014, we received approximately $3.1 million and $3.6 million, respectively, in principal and interest payments related to a loan that is in accrual status from Grand Bahama, which was paid in full during the quarter ended June 30, 2015. The remaining amount of our loan to Grand Bahama is in non-accrual status and is included within Other assets in our consolidated balance sheets for which we received payments of approximately $2.8 million during the quarter ended September 30 , 2015. We monitor credit risk associated with this loan through our participation on Grand Bahama’s board of directors along with our review of Grand Bahama’s financial statements and projected cash flows. Based on this review, we believe the risk of loss associated with the outstanding loan is not probable as of September 30, 2015.

We have determined that Skysea Holding, in which we have a 35% noncontrolling interest, is a VIE for which we are not the primary beneficiary, as we do not have the power to direct the activities that most significantly impact the entity's economic performance. Accordingly, we do not consolidate this entity and we account for this investment under the equity method of accounting. In addition, we and Ctrip.com International Ltd, which also owns 35% of Skysea Holding, each provided a debt facility to a wholly owned subsidiary of Skysea Holding in the amount of $80.0 million. Interest under these facilities, which mature in January 2030, initially accrues at a rate of 3.0% per annum with an increase of at least 0.5% every two years through maturity. The facilities, which are pari passu to each other, are each 100% guaranteed by Skysea Holding and are secured by a first priority mortgage on the ship, Golden Era, formerly known as Celebrity Century, which we sold to a wholly owned subsidiary of Skysea Holding in September 2014. As of September 30, 2015 and December 31, 2014, our investment in Skysea Holding and its subsidiaries, including equity and loans, was approximately $101.6 million and $106.3 million, respectively. This amount was included within Other assets in our consolidated balance sheets. Our investment amount is substantially our maximum exposure to loss. During the quarter ended June 30, 2015, Skysea Holding and its subsidiaries commenced operations through the brand SkySea Cruises.

Our share of income from investments accounted for under the equity method of accounting, including the entities discussed above, was $38.4 million and $25.7 million for the quarters ended September 30, 2015 and September 30, 2014, respectively, and $62.2 million and $34.7 million for the nine months ended September 30, 2015 and September 30, 2014, respectively, and was recorded within Other income.

Note 6. Long-Term Debt

In April 2015, we took delivery of Anthem of the Seas. To finance the purchase, we borrowed $742.1 million under a previously committed unsecured term loan which is 95% guaranteed by Euler Hermes Deutschland AG ("Hermes"), the official export credit agency of Germany. The loan amortizes semi-annually over 12 years and bears interest at LIBOR plus a margin of 1.30%, totaling 1.71% as of September 30, 2015. Refer to Note 10. Fair Value Measurements and Derivative Instruments for information regarding interest rate swap agreements related to this loan.

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In June 2015, we amended and restated our $1.1 billion unsecured revolving credit facility due July 2016. The amendment reduced the applicable margin and facility fee and extended the termination date to June 2020. The applicable margin and facility fee vary with our debt rating and were 1.50% and 0.25%, respectively, as of September 30, 2015. We have the right to request an increase in the capacity of the amended facility by an additional $300 million, subject to the receipt of additional or increased lender commitments, and to extend the termination date by up to two years, subject to lender consent. Additionally, in July 2015, we amended our $1.2 billion unsecured revolving credit facility due August 2018 to reduce pricing in line with the amended pricing of the $1.1 billion unsecured revolving credit facility. These amendments did not result in the extinguishment of debt.

In July 2015, we also amended our $380.0 million, €365.0 million, $290.0 million and $65.0 million unsecured term loans due at various dates from 2016 through 2019 to reduce the applicable margins. The margins are currently 1.75% for each loan based on our debt rating as of September 30, 2015. The termination date of the $290 million unsecured term loan was extended from February 2016 to February 2018. None of these amendments resulted in the extinguishment of debt.

In October 2015, we received increased lender commitments for our unsecured revolving credit facility due June 2020 in the amount of $300 million, bringing our total capacity under this facility to $1.4 billion.

Note 7. Commitments and Contingencies

In January 2015, we entered into a financing arrangement for the US dollar financing of the fourth Oasis-class ship. Through the financing arrangement, we have the right, but not the obligation, to satisfy the obligations to be incurred upon delivery and acceptance of the vessel under the shipbuilding contract by assuming, at delivery and acceptance, the debt indirectly incurred by the shipbuilder during the construction of the ship. The amount assumed under this arrangement is not to exceed the US dollar equivalent of €931.2 million, or approximately $1.0 billion, based on the exchange rate at September 30, 2015. The loan, if we were to elect assumption at the date of actual delivery, will amortize semi-annually and will mature 12 years following delivery of the ship. At our election, interest on the loan will accrue either (1) at a fixed rate of 3.82% (inclusive of the applicable margin) or (2) at a floating rate equal to LIBOR plus 1.10%.

In June 2015, we entered into an agreement with Meyer Werft to build the fourth Quantum-class ship for Royal Caribbean International. We have also received a commitment for the unsecured financing of up to 80% of the ship’s contract price. Hermes has agreed to guarantee to the lenders payment of 95% of the financing. The ship will have a capacity of approximately 4,150 berths and is expected to enter service in the second quarter of 2019.

In October 2015, our conditional agreements with STX France to build two ships of a new generation of Celebrity Cruises ships, known as "Project Edge" became effective. We received commitments for the unsecured financing of the ships for up to 80% of the ship’s contract price through a facility to be guaranteed 100% by COFACE. The ships will each have a capacity of approximately 2,900 berths and are expected to enter service in the fourth quarter of 2018 and the first half of 2020, respectively.

As of September 30, 2015, the aggregate cost of our ships on order, not including the "Project Edge" ships and the TUI Cruises' ships on order, was approximately $5.0 billion, of which we had deposited $449.8 million as of such date. Approximately 43.7% of the aggregate cost was exposed to fluctuations in the Euro exchange rate at September 30, 2015. Refer to Note 10. Fair Value Measurements and Derivative Instruments for further information.

Litigation

As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2014, 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. The complaint alleged that the stateroom attendants were required to pay other crew members to help with their duties and that certain stateroom attendants were required to work back of house assignments without the ability to earn gratuities, in each case in violation of the U.S. Seaman’s Wage Act. In May 2012, the district 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 district court’s dismissal and denied the plaintiffs’ petition for re-hearing and re-hearing en banc. In October 2014, the United States Supreme Court denied the plaintiffs’ request to review the order compelling arbitration. Subsequently, approximately 575 crew members submitted demands for arbitration. The demands make substantially the same allegations as in the federal court complaint and are similarly seeking damages, wage penalties and interest in an indeterminate amount. Unlike the federal court complaint, the demands for arbitration are being brought individually by each of the crew members and not on behalf of a purported class of stateroom attendants. At this time, we are unable to estimate the possible impact of this matter on us. However, we believe the underlying claims made against us are without merit, and we intend to vigorously defend ourselves against them.

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In April 2015, the Alaska Department of Environmental Conservation issued Notices of Violation to Royal Caribbean International and Celebrity Cruises seeking monetary penalties for alleged violations of the Alaska Marine Visible Emission Standards that occurred over the past five years on certain of our vessels. We believe we have meritorious defenses to the allegations and we are cooperating with the state of Alaska. We do not believe that the ultimate outcome of these claims will have a material adverse impact on our financial condition or results of operations and cash flows.

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.

Other

If (i) any person other than A. Wilhelmsen AS. and Cruise Associates and their respective affiliates (the “Applicable Group”) acquires ownership of more than 33% of our common stock and the Applicable Group owns less of our common stock than such person, or (ii) subject to certain exceptions, during any 24-month period, a majority of the Board is no longer comprised of individuals who were members of the Board on the first day of such period, we may be obligated to prepay indebtedness outstanding under our ship financing facilities, which we may be unable to replace on similar terms. Our other debt agreements also contain change of control provisions that would be triggered by the acquisition of greater than 50% of our common stock by (i) any person or (ii) in the case of our public debt securities, by a person other than a member of the Applicable Group coupled with a ratings downgrade. If this were to occur, it would have an adverse impact on our liquidity and operations.

Note 8. Shareholders’ Equity

In September 2015, we declared a cash dividend on our common stock of $0.375 per share which was paid in the fourth quarter of 2015. During the first and second quarters of 2015, we declared and paid a cash dividend on our common stock of $0.30 per share. During the first quarter of 2015, we also paid a cash dividend on our common stock of $0.30 per share which was declared during the fourth quarter of 2014.

During the third quarter of 2014, we declared a cash dividend on our common stock of $0.30 per share which was paid in the fourth quarter of 2014. During the first and second quarters of 2014, we declared and paid a cash dividend on our common stock of $0.25 per share. During the first quarter of 2014, we also paid a cash dividend on our common stock of $0.25 per share which was declared during the fourth quarter of 2013.

In October 2015, our board of directors authorized a common stock repurchase program for up to $500 million. The timing and number of shares purchased will depend on a variety of factors including price and market conditions. Repurchases under the program are expected to be funded from available cash or borrowings under our revolving credit facilities. On October 23, 2015, we executed an agreement with an investment bank to purchase a total of $200 million, of the $500 million authorized amount, of our common stock under an accelerated stock repurchase (ASR) transaction. Under the terms of the ASR agreement, we will receive upfront the majority of the shares of our common stock to be repurchased based on current market prices in exchange for a prepayment of $200 million. The final number of shares to be repurchased will be determined upon settlement based on the average of the daily volume-weighted average prices of our common stock during the term of the transaction, less a discount (the "Final Repurchase Price"). Upon final settlement, which is expected no later than the end of January 2016, and depending on the Final Repurchase Price, the investment bank may be required to deliver additional shares of common stock to us or we may be required to deliver shares of common stock or to make a cash payment, at our election, to the investment bank. The initial shares received upon prepayment and incremental shares received at maturity, if any, will be recorded in Shareholders’ equity upon delivery, based on the current market price of our common stock. Future stock repurchase transactions could include open market purchases or additional accelerated share repurchases. We expect to complete the program by the end of 2016.

Note 9. Changes in Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) by component for the nine months ended September 30, 2015 and 2014 (in thousands):



	Accumulated Other Comprehensive Income (Loss) for the Nine Months Ended September 30, 2015												Accumulated Other Comprehensive Income (Loss) for the Nine Months Ended September 30, 2014
	Changes related to cash flow derivative hedges			Changes in defined benefit plans			Foreign currency translation adjustments			Accumulated other comprehensive loss			Changes related to cash flow derivative hedges			Changes in defined benefit plans			Foreign currency translation adjustments			Accumulated other comprehensive loss
Accumulated comprehensive (loss) income at beginning of the year	$	(826,026	)	$	(31,207	)	$	(39,761	)	$	(896,994	)	$	43,324		$	(23,994	)	$	(13,659	)	$	5,671
Other comprehensive (loss) income before reclassifications	(483,946		)	4,213			(23,994		)	(503,727		)	(339,415		)	(6,829		)	(19,842		)	(366,086		)
Amounts reclassified from accumulated other comprehensive (loss) income	202,978			1,354			—			204,332			16,236			1,293			1,997			19,526
Net current-period other comprehensive (loss) income	(280,968		)	5,567			(23,994		)	(299,395		)	(323,179		)	(5,536		)	(17,845		)	(346,560		)
Ending balance	$	(1,106,994	)	$	(25,640	)	$	(63,755	)	$	(1,196,389	)	$	(279,855	)	$	(29,530	)	$	(31,504	)	$	(340,889	)

The following table presents reclassifications out of accumulated other comprehensive income (loss) for the quarter and nine months ended September 30, 2015 and 2014 (in thousands):



	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
Details About Accumulated Other Comprehensive Income (Loss) Components	Quarter Ended September 30, 2015			Quarter Ended September 30, 2014			Nine Months Ended September 30, 2015			Nine Months Ended September 30, 2014			Affected Line Item in Statements of Comprehensive Income (Loss)
(Loss) gain on cash flow derivative hedges:
Cross currency swaps	$	—		$	—		$	—		$	(261	)	Interest expense, net of interest capitalized
Interest rate swaps	(10,276		)	(3,106		)	(27,024		)	(9,312		)	Interest expense, net of interest capitalized
Foreign currency forward contracts	(752		)	(450		)	(2,153		)	(1,348		)	Depreciation and amortization expenses
Foreign currency forward contracts	(239		)	(238		)	(715		)	(4,052		)	Other income
Foreign currency forward contracts	—			—			—			(57		)	Interest expense, net of interest capitalized
Foreign currency collar options	(568		)	—			(1,003		)	—			Depreciation and amortization expenses
Fuel swaps	(65,975		)	(1,996		)	(172,083		)	(1,206		)	Fuel
	(77,810		)	(5,790		)	(202,978		)	(16,236		)
Amortization of defined benefit plans:
Actuarial loss	(354		)	(222		)	(1,061		)	(666		)	Payroll and related
Prior service costs	—			(209		)	(293		)	(627		)	Payroll and related
	(354		)	(431		)	(1,354		)	(1,293		)
Release of foreign cumulative translation due to sale of Pullmantur's non-core businesses:
Foreign cumulative translation	—			—			—			(1,997		)	Other operating
Total reclassifications for the period	$	(78,164	)	$	(6,221	)	$	(204,332	)	$	(19,526	)

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Note 10. Fair Value Measurements and Derivative Instruments

Fair Value Measurements

The estimated fair value of our financial instruments that are not measured at fair value, categorized based upon the fair value hierarchy, are as follows (in thousands):



	Fair Value Measurements at September 30, 2015 Using										Fair Value Measurements at December 31, 2014 Using
Description	Total Carrying Amount		Total Fair Value		Level 1⁽¹⁾		Level 2⁽²⁾		Level 3⁽³⁾		Total Carrying Amount		Total Fair Value		Level 1⁽¹⁾		Level 2⁽²⁾		Level 3⁽³⁾
Assets:
Cash and cash equivalents⁽⁴⁾	$	147,419	$	147,419	$	147,419	$	—	$	—	$	189,241	$	189,241	$	189,241	$	—	$	—
Total Assets	$	147,419	$	147,419	$	147,419	$	—	$	—	$	189,241	$	189,241	$	189,241	$	—	$	—
Liabilities:
Long-term debt (including current portion of long-term debt)⁽⁵⁾	$	8,438,804	$	8,732,461	$	1,556,756	$	7,175,705	$	—	$	8,391,301	$	8,761,414	$	1,859,361	$	6,902,053	$	—
Total Liabilities	$	8,438,804	$	8,732,461	$	1,556,756	$	7,175,705	$	—	$	8,391,301	$	8,761,414	$	1,859,361	$	6,902,053	$	—

(1) Inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Valuation of these items does not entail a significant amount of judgment.

(2) Inputs other than quoted prices included within Level 1 that are observable for the liability, either directly or indirectly. For unsecured revolving credit facilities and unsecured term loans, fair value is determined utilizing the income valuation approach. This valuation model takes into account the contract terms of our debt such as the debt maturity and the interest rate on the debt. The valuation model also takes into account the creditworthiness of the Company.

(3) Inputs that are unobservable. The Company did not use any Level 3 inputs as of September 30, 2015 and December 31, 2014.

(4) Consists of cash and marketable securities with original maturities of less than 90 days.

(5) Consists of unsecured revolving credit facilities, senior notes, senior debentures and term loans. Does not include our capital lease obligations.

Other Financial Instruments

The carrying amounts of accounts receivable, accounts payable, accrued interest and accrued expenses approximate fair value at September 30, 2015 and December 31, 2014.

Assets and liabilities that are recorded at fair value have been categorized based upon the fair value hierarchy. The following table presents information about the Company’s financial instruments recorded at fair value on a recurring basis (in thousands):



	Fair Value Measurements at September 30, 2015 Using								Fair Value Measurements at December 31, 2014 Using
Description	Total		Level 1⁽¹⁾		Level 2⁽²⁾		Level 3⁽³⁾		Total		Level 1⁽¹⁾		Level 2⁽²⁾		Level 3⁽³⁾
Assets:
Derivative financial instruments⁽⁴⁾	$	113,279	$	—	$	113,279	$	—	$	63,981	$	—	$	63,981	$	—
Investments⁽⁵⁾	$	3,884	3,884		—		—		$	5,531	5,531		—		—
Total Assets	$	117,163	$	3,884	$	113,279	$	—	$	69,512	$	5,531	$	63,981	$	—
Liabilities:
Derivative financial instruments⁽⁶⁾	$	925,202	$	—	$	925,202	$	—	$	767,635	$	—	$	767,635	$	—
Total Liabilities	$	925,202	$	—	$	925,202	$	—	$	767,635	$	—	$	767,635	$	—

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(2) Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. For foreign currency forward contracts, interest rate swaps, cross currency swaps and fuel swaps, fair value is derived using valuation models that utilize the income valuation approach. These valuation models take into account the contract terms, such as maturity, as well as other inputs, such as foreign exchange rates and curves, fuel types, fuel curves and interest rate yield curves. Fair value for foreign currency collar options is determined by 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. All derivative instrument fair values take into account the creditworthiness of the counterparty and the Company.

(3) Inputs that are unobservable. The Company did not use any Level 3 inputs as of September 30, 2015 and December 31, 2014.

(4) Consists of foreign currency forward contracts, interest rate swaps and fuel swaps. Please refer to the “Fair Value of Derivative Instruments” table for breakdown by instrument type.

(5) Consists of exchange-traded equity securities and mutual funds.

(6) Consists of foreign currency forward contracts, foreign currency collar options, interest rate swaps and fuel swaps. Please refer to the “Fair Value of Derivative Instruments” table for breakdown by instrument type.

The reported fair values are based on a variety of factors and assumptions. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of September 30, 2015 or December 31, 2014, or that will be realized in the future, and do not include expenses that could be incurred in an actual sale or settlement.

The following table presents information about the Company’s goodwill, indefinite-life intangible assets and long-lived assets for our Pullmantur reporting unit recorded at fair value on a nonrecurring basis (in thousands):



	Fair Value Measurements at September 30, 2015 Using
Description	Total Carrying Amount	Total Fair Value	Level 3	Total Impairment
Pullmantur Goodwill ⁽¹⁾	—	—	—	123,814
Indefinite-life intangible asset—Pullmantur trademarks and trade names ⁽²⁾	—	—	—	174,285
Long-lived assets—Pullmantur aircraft and vessels ⁽³⁾	147,900	147,900	147,900	113,168
Total	147,900	147,900	147,900	411,267

(1) We estimated the fair value of the Pullmantur reporting unit using a probability-weighted discounted cash flow model. The principal assumptions used in the discounted cash flow model are projected operating results, weighted-average cost of capital and terminal value. Significantly impacting these assumptions was the decision to reduce the size of Pullmantur's fleet. The discounted cash flow model used our 2016 projected operating results as a base. To that base we added future years’ cash flows through 2020 assuming multiple revenue and expense scenarios that reflect the impact of different global economic environments for this period on Pullmantur’s reporting unit. We assigned a probability to each revenue and expense scenario. We discounted the projected cash flows using rates specific to Pullmantur’s reporting unit based on its weighted-average cost of capital, which was determined to be 11%.

(2) We estimated the fair value of our indefinite-life intangible asset using a discounted cash flow model and the relief-from-royalty method. These trademarks and trade names relate to Pullmantur and we have used a discount rate of 11.5%, comparable to the rate used in valuing the Pullmantur reporting unit.

(3) We estimated the fair value of our long-lived assets using the market approach for the aircraft and a blended indication from the cost and market approaches for the vessels. A significant input in performing the fair value assessments for these assets was comparable market transactions.

We have master International Swaps and Derivatives Association (“ISDA”) agreements in place with our derivative instrument counterparties. These ISDA agreements provide for final close out netting with our counterparties for all positions in the case of default or termination of the ISDA agreement. We have determined that our ISDA agreements provide us with rights of setoff on the fair value of derivative instruments in a gain position and those in a loss position with the same counterparty. We have elected not to offset such derivative instrument fair values in our consolidated balance sheets.

As of September 30, 2015 and December 31, 2014, no cash collateral was received or pledged under our ISDA agreements. See Credit Related Contingent Features for further discussion on contingent collateral requirements for our derivative instruments.

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The following table presents information about the Company’s offsetting of financial assets under master netting agreements with derivative counterparties:



	Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
	As of September 30, 2015									As of December 31, 2014
	Gross Amount of Derivative Assets Presented in the Consolidated Balance Sheet		Gross Amount of Eligible Offsetting Recognized Derivative Liabilities			Cash Collateral Received		Net Amount of Derivative Assets		Gross Amount of Derivative Assets Presented in the Consolidated Balance Sheet		Gross Amount of Eligible Offsetting Recognized Derivative Assets			Cash Collateral Received		Net Amount of Derivative Assets
(In thousands)
Derivatives subject to master netting agreements	$	113,279	$	(112,567	)	$	—	$	712	$	63,981	$	(63,981	)	$	—	$	—
Total	$	113,279	$	(112,567	)	$	—	$	712	$	63,981	$	(63,981	)	$	—	$	—

The following table presents information about the Company’s offsetting of financial liabilities under master netting agreements with derivative counterparties:



	Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
	As of September 30, 2015										As of December 31, 2014
	Gross Amount of Derivative Liabilities Presented in the Consolidated Balance Sheet			Gross Amount of Eligible Offsetting Recognized Derivative Assets		Cash Collateral Pledged		Net Amount of Derivative Liabilities			Gross Amount of Derivative Liabilities Presented in the Consolidated Balance Sheet			Gross Amount of Eligible Offsetting Recognized Derivative Liabilities		Cash Collateral Pledged		Net Amount of Derivative Liabilities
(In thousands)
Derivatives subject to master netting agreements	$	(925,202	)	$	112,567	$	—	$	(812,635	)	$	(767,635	)	$	63,981	$	—	$	(703,654	)
Total	$	(925,202	)	$	112,567	$	—	$	(812,635	)	$	(767,635	)	$	63,981	$	—	$	(703,654	)

Concentrations of Credit Risk

We monitor our credit risk associated with financial and other institutions with which we conduct significant business and, to minimize these risks, we select counterparties with credit risks acceptable to us and we seek to limit our exposure to an individual counterparty. Credit risk, including but not limited to counterparty nonperformance under derivative instruments, our credit facilities and new ship progress payment guarantees, is not considered significant, as we primarily conduct business with large, well-established financial institutions, insurance companies and export credit agencies many of which we have long-term relationships with and which have credit risks acceptable to us or where the credit risk is spread out among a large number of counterparties. As of September 30, 2015, our exposure under our derivative instruments was approximately $0.7 million. As of December 31, 2014, we did not have any exposure under our derivative instruments. We do not anticipate nonperformance by any of our significant counterparties. In addition, we have established guidelines we follow regarding credit ratings and instrument maturities to maintain safety and liquidity. We do not normally require collateral or other security to support credit relationships; however, in certain circumstances this option is available to us.

Derivative Instruments

We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We manage these risks through a combination of our normal operating and financing activities and through the use of derivative financial instruments pursuant to our

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hedging practices and policies. The financial impact of these hedging instruments is primarily offset by corresponding changes in the underlying exposures being hedged. We achieve this by closely matching the notional amount, term and conditions of the derivative instrument with the underlying risk being hedged. Although certain of our derivative financial instruments do not qualify or are not accounted for under hedge accounting, we do not hold or issue derivative financial instruments for trading or other speculative purposes. We monitor our derivative positions using techniques including market valuations and sensitivity analyses.

We enter into various forward, swap and option contracts to manage our interest rate exposure and to limit our exposure to fluctuations in foreign currency exchange rates and fuel prices. 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.

At inception of the hedge relationship, a derivative instrument that hedges the exposure to changes in the fair value of a firm commitment or a recognized asset or liability is designated as a fair value hedge. A derivative instrument that hedges a forecasted transaction or the variability of cash flows related to a recognized asset or liability is designated as a cash flow hedge.

Changes in the fair value of derivatives that are designated as fair value hedges are offset against changes in the fair value of the underlying hedged assets, liabilities or firm commitments. Gains and losses on derivatives that are designated as cash flow hedges are recorded as a component of Accumulated other comprehensive loss until the underlying hedged transactions are recognized in earnings. The foreign currency transaction gain or loss of our non-derivative financial instruments and the changes in the fair value of derivatives designated as hedges of our net investment in foreign operations and investments are recognized as a component of Accumulated other comprehensive loss along with the associated foreign currency translation adjustment of the foreign operation.

On an ongoing basis, we assess whether derivatives used in hedging transactions are “highly effective” in offsetting changes in the fair value or cash flow of hedged items. We use the long-haul method to assess hedge effectiveness using regression analysis for each hedge relationship under our interest rate, foreign currency and fuel hedging programs. We apply the same methodology on a consistent basis for assessing hedge effectiveness to all hedges within each hedging program (i.e. interest rate, foreign currency and fuel). We perform regression analyses over an observation period of up to three years, utilizing market data relevant to the hedge horizon of each hedge relationship. High effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the changes in the fair values of the derivative instrument and the hedged item. The determination of ineffectiveness is based on the amount of dollar offset between the change in fair value of the derivative instrument and the change in fair value of the hedged item at the end of the reporting period. If it is determined that a derivative is not highly effective as a hedge or hedge accounting is discontinued, any change in fair value of the derivative since the last date at which it was determined to be effective is recognized in earnings. In addition, the ineffective portion of our highly effective hedges is immediately recognized in earnings and reported in Other income in our consolidated statements of comprehensive income (loss).

Cash flows from derivative instruments that are designated as fair value or cash flow hedges are classified in the same category as the cash flows from the underlying hedged items. In the event that hedge accounting is discontinued, cash flows subsequent to the date of discontinuance are classified within investing activities. Cash flows from derivative instruments not designated as hedging instruments are classified as investing activities.

We consider the classification of the underlying hedged item’s cash flows in determining the classification for the designated derivative instrument’s cash flows. We classify derivative instrument cash flows from hedges of benchmark interest rate or hedges of fuel expense as operating activities due to the nature of the hedged item. Likewise, we classify derivative instrument cash flows from hedges of foreign currency risk on our newbuild ship payments as investing activities and derivative instrument cash flows from hedges of foreign currency risk on debt payments as financing activities.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates to our long-term debt obligations including future interest payments. At September 30, 2015, approximately 33.0% of our long-term debt was effectively fixed as compared to 28.5% as of December 31, 2014. We use interest rate swap agreements to modify our exposure to interest rate movements and to manage our interest expense.

Market risk associated with our long-term fixed rate debt is the potential increase in fair value resulting from a decrease in interest rates. We use interest rate swap agreements that effectively convert a portion of our fixed-rate debt to a floating-rate basis to manage this risk. At September 30, 2015 and December 31, 2014, we maintained interest rate swap agreements on the $420.0 million fixed rate portion of our Oasis of the Seas unsecured amortizing term loan and on the $650.0 million unsecured senior notes due 2022. The interest rate swap agreements on Oasis of the Seas debt effectively changed the interest rate on the balance of the unsecured term loan, which was $227.5 million as of September 30, 2015, from a fixed rate of 5.41% to a LIBOR-based floating rate equal to LIBOR plus 3.87%, currently approximately 4.28%. The interest rate swap agreements on the $650.0 million unsecured senior notes effectively changed the interest rate of the unsecured senior notes from a fixed rate of

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5.25% to a LIBOR-based floating rate equal to LIBOR plus 3.63%, currently approximately 3.95%. These interest rate swap agreements are accounted for as fair value hedges.

Market risk associated with our long-term floating rate debt is the potential increase in interest expense from an increase in interest rates. We use interest rate swap agreements that effectively convert a portion of our floating-rate debt to a fixed-rate basis to manage this risk. In May 2015, we entered into forward-starting interest rate swap agreements that hedge the anticipated unsecured amortizing term loan that will finance a portion of our purchase of Harmony of the Seas. Forward-starting interest rate swaps hedging the Harmony of the Seas loan will effectively convert the interest rate for €693.4 million, or approximately $774.2 million based on the exchange rate at September 30, 2015, of the anticipated loan balance from EURIBOR plus 1.15% to a fixed rate of 2.26% (inclusive of margin) beginning in May 2016. In September 2015, we entered into forward-starting interest rate swap agreements that hedge the anticipated unsecured amortizing term loan that will finance our purchase of Ovation of the Seas. Forward-starting interest rate swaps hedging the Ovation of the Seas loan will effectively convert the interest rate for $830.0 million of the anticipated loan balance from LIBOR plus 1.00% to a fixed rate of 3.16% (inclusive of margin) beginning in April 2016. These interest rate swap agreements are accounted for as cash flow hedges.

In addition, at September 30, 2015 and December 31, 2014, we maintained interest rate swap agreements on our Celebrity Reflection term loan. Our interest rate swap agreements effectively converted the interest rate on a portion of the Celebrity Reflection unsecured amortizing term loan balance of approximately $518.1 million from LIBOR plus 0.40% to a fixed rate (including applicable margin) of 2.85% through the term of the loan. Additionally, at September 30, 2015 and December 31, 2014, we maintained interest rate swap agreements on our Quantum of the Seas term loan. Our interest rate swap agreements effectively converted the interest rate on a portion of the Quantum of the Seas unsecured amortizing term loan balance of approximately $704.4 million from LIBOR plus 1.30% to a fixed rate of 3.74% (inclusive of margin) through the term of the loan. Furthermore, at September 30, 2015, we maintained interest rate swap agreements on our Anthem of the Seas term loan. Our interest rate swap agreements effectively converted the interest rate on a portion of the Anthem of the Seas unsecured amortizing term loan balance of approximately $725.0 million from LIBOR plus 1.30% to a fixed rate of 3.86% (inclusive of margin) through the term of the loan. These interest rate swap agreements are accounted for as cash flow hedges.

The notional amount of interest rate swap agreements related to outstanding debt and on our current unfunded financing arrangements as of September 30, 2015 and December 31, 2014 was $4.4 billion and $2.9 billion, respectively.

Foreign Currency Exchange Rate Risk

Derivative Instruments

Our primary exposure to foreign currency exchange rate risk relates to our ship construction contracts denominated in Euros, our foreign currency denominated debt and our international business operations. We enter into foreign currency forward contracts, collar options and cross currency swap agreements to manage portions of the exposure to movements in foreign currency exchange rates. As of September 30, 2015, the aggregate cost of our ships on order, not including the "Project Edge" ships and the TUI Cruises' ships on order, was approximately $5.0 billion, of which we had deposited $449.8 million as of such date. Approximately 43.7% and 28.8% of the aggregate cost of the ships under construction was exposed to fluctuations in the Euro exchange rate at September 30, 2015 and December 31, 2014, respectively. The majority of our foreign currency forward contracts, collar options and cross currency swap agreements are accounted for as cash flow, fair value or net investment hedges depending on the designation of the related hedge.

On a regular basis, we enter into foreign currency forward contracts and, from time to time, we utilize cross-currency swap agreements to minimize the volatility resulting from the remeasurement of net monetary assets and liabilities denominated in a currency other than our functional currency or the functional currencies of our foreign subsidiaries. During the third quarter of 2015, we maintained an average of approximately $517.2 million of these foreign currency forward contracts. These instruments are not designated as hedging instruments. Changes in the fair value of the foreign currency forward contracts resulted in a loss, of approximately $32.7 million and $35.1 million, respectively, during the quarters ended September 30, 2015 and September 30, 2014, respectively, and approximately $49.6 million and $24.2 million, during the nine months ended September 30, 2015 and September 30, 2014, respectively, that were recognized in earnings within Other income in our consolidated statements of comprehensive income (loss).

We consider our investments in our foreign operations to be denominated in relatively stable currencies and of a long-term nature. As of September 30, 2015, we maintained foreign currency forward contracts of €415.6 million, or approximately $464.0 million based on the exchange rate at September 30, 2015, and designated them as hedges of a portion of our net investments in Pullmantur and TUI Cruises. These forward currency contracts mature in April 2016.

The notional amount of outstanding foreign exchange contracts including our forward contracts and collar options as of September 30, 2015 and December 31, 2014 was $2.5 billion and $3.0 billion, respectively.

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Non-Derivative Instruments

We also address the exposure of our investments in foreign operations by denominating a portion of our debt in our subsidiaries’ and investments’ functional currencies and designating it as a hedge of these subsidiaries and investments. We had designated debt as a hedge of our net investments in Pullmantur and TUI Cruises of approximately €185.9 million and €139.4 million, or approximately $207.6 million and $168.7 million, as of September 30, 2015 and December 31, 2014, respectively.

Fuel Price Risk

Our exposure to market risk for changes in fuel prices relates primarily to the consumption of fuel on our ships. We use fuel swap agreements to mitigate the financial impact of fluctuations in fuel prices.

Our fuel swap agreements are accounted for as cash flow hedges. At September 30, 2015, we have hedged the variability in future cash flows for certain forecasted fuel transactions occurring through 2019. As of September 30, 2015 and December 31, 2014, we had the following outstanding fuel swap agreements:



	Fuel Swap Agreements
	As of September 30, 2015	As of December 31, 2014
	(metric tons)
2015	197,000	806,000
2016	930,000	802,000
2017	854,000	525,000
2018	583,000	226,000
2019	153,000	—



	Fuel Swap Agreements
	As of September 30, 2015		As of December 31, 2014
	(% hedged)
Projected fuel purchases:
2015	57	%	58	%
2016	65	%	55	%
2017	59	%	35	%
2018	40	%	15	%
2019	10	%	—

At September 30, 2015 and December 31, 2014, $252.0 million and $223.1 million, respectively, of estimated unrealized net loss associated with our cash flow hedges pertaining to fuel swap agreements were expected to be reclassified to earnings from Accumulated other comprehensive loss within the next twelve months. Reclassification is expected to occur as the result of fuel consumption associated with our hedged forecasted fuel purchases.

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The fair value and line item caption of derivative instruments recorded within our consolidated balance sheets were as follows:



	Fair Value of Derivative Instruments
	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	As of September 30, 2015		As of December 31, 2014		Balance Sheet Location	As of September 30, 2015		As of December 31, 2014
	Balance Sheet Location	Fair Value		Fair Value		Balance Sheet Location	Fair Value		Fair Value
(In thousands)
Derivatives designated as hedging instruments under ASC 815-20⁽¹⁾
Interest rate swaps	Other assets	$	1,691	$	—	Other long-term liabilities	$	93,807	$	65,768
Foreign currency forward contracts	Derivative financial instruments	107,668		—		Derivative financial instruments	292,372		17,619
Foreign currency forward contracts	Other assets	—		63,981		Other long-term liabilities	—		164,627
Foreign currency collar options	Derivative financial instruments	—		—		Derivative financial instruments	—		21,855
Fuel swaps	Derivative financial instruments	—		—		Derivative financial instruments	239,715		227,512
Fuel swaps	Other assets	—		—		Other long-term liabilities	277,158		270,254
Total derivatives designated as hedging instruments under 815-20		109,359		63,981			903,052		767,635
Derivatives not designated as hedging instruments under ASC 815-20
Fuel swaps	Derivative financial instruments	3,079		—		Derivative financial instruments	17,437		—
Fuel swaps	Other Assets	841		—		Other long-term liabilities	4,713		—
Total derivatives not designated as hedging instruments under 815-20		3,920		—			22,150		—
Total derivatives		$	113,279	$	63,981		$	925,202	$	767,635

(1) Accounting Standard Codification 815-20 “Derivatives and Hedging.”

The carrying value and line item caption of non-derivative instruments designated as hedging instruments recorded within our consolidated balance sheets were as follows:



		Carrying Value
Non-derivative instrument designated as hedging instrument under ASC 815-20	Balance Sheet Location	As of September 30, 2015		As of December 31, 2014
(In thousands)
Foreign currency debt	Long-term debt	$	207,585	$	168,718
		$	207,585	$	168,718

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The effect of derivative instruments qualifying and designated as hedging instruments and the related hedged items in fair value hedges on the consolidated statements of comprehensive income (loss) was as follows:



Derivatives and Related Hedged Items under ASC 815-20 Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income on Derivative and Hedged Item	Amount of Gain (Loss) Recognized in Income on Derivative									Amount of Gain (Loss) Recognized in Income on Hedged Item
		Quarter Ended September 30, 2015		Quarter Ended September 30, 2014			Nine Months Ended September 30, 2015		Nine Months Ended September 30, 2014		Quarter Ended September 30, 2015			Quarter Ended September 30, 2014		Nine Months Ended September 30, 2015			Nine Months Ended September 30, 2014
(In thousands)
Interest rate swaps	Interest expense, net of interest capitalized	$	2,793	$	3,063		$	8,640	$	9,199	$	3,968		$	3,968	$	11,775		$	13,435
Interest rate swaps	Other income	22,341		(3,010		)	21,780		24,431		(20,252		)	3,934		(18,245		)	(19,122		)
		$	25,134	$	53		$	30,420	$	33,630	$	(16,284	)	$	7,902	$	(6,470	)	$	(5,687	)

The effect of derivative instruments qualifying and designated as cash flow hedging instruments on the consolidated financial statements was as follows:



Derivatives under ASC 815-20 Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) on Derivative (Effective Portion)												Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Effective Portion)
	Quarter Ended September 30, 2015			Quarter Ended September 30, 2014			Nine Months Ended September 30, 2015			Nine Months Ended September 30, 2014				Quarter Ended September 30, 2015			Quarter Ended September 30, 2014			Nine Months Ended September 30, 2015			Nine Months Ended September 30, 2014
(In thousands)
Cross currency swaps	$	—		$	—		$	—		$	—		Interest expense, net of interest capitalized	$	—		$	—		$	—		$	(261	)
Interest rate swaps	(68,956		)	1,331			(75,104		)	(71,621		)	Interest expense, net of interest capitalized	(10,276		)	(3,106		)	(27,024		)	(9,312		)
Foreign currency forward contracts	(619		)	(163,387		)	(131,211		)	(172,629		)	Depreciation and amortization expenses	(752		)	(450		)	(2,153		)	(1,348		)
Foreign currency forward contracts	—			—			—			—			Other income	(239		)	(238		)	(715		)	(4,052		)
Foreign currency forward contracts	—			—			—			—			Interest expense, net of interest capitalized	—			—			—			(57		)
Foreign currency collar options	34			(21,904		)	(64,559		)	(30,638		)	Depreciation and amortization expenses	(568		)	—			(1,003		)	—
Fuel swaps	(230,761		)	(71,456		)	(213,072		)	(64,527		)	Fuel	(65,975		)	(1,996		)	(172,083		)	(1,206		)
	$	(300,302	)	$	(255,416	)	$	(483,946	)	$	(339,415	)		$	(77,810	)	$	(5,790	)	$	(202,978	)	$	(16,236	)

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Derivatives under ASC 815- 20 Cash Flow Hedging Relationships	Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
		Quarter Ended September 30, 2015			Quarter Ended September 30, 2014			Nine Months Ended September 30, 2015			Nine Months Ended September 30, 2014
(In thousands)
Interest rate swaps	Other income	(617		)	17			(395		)	(78		)
Foreign currency forward contracts	Other income	—			15			—			(12		)
Fuel swaps	Other income	(2,353		)	(8,069		)	(2,771		)	(7,607		)
		$	(2,970	)	$	(8,037	)	$	(3,166	)	$	(7,697	)

The effect of non-derivative instruments qualifying and designated as net investment hedging instruments on the consolidated financial statements was as follows:



	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)
Non-derivative instruments under ASC 815-20 Net Investment Hedging Relationships	Quarter Ended September 30, 2015			Quarter Ended September 30, 2014		Nine Months Ended September 30, 2015		Nine Months Ended September 30, 2014
(In thousands)
Foreign Currency Debt	$	(436	)	$	13,408	$	8,955	$	18,038
	$	(436	)	$	13,408	$	8,955	$	18,038

There was no amount recognized in income (ineffective portion and amount excluded from effectiveness testing) for the quarters and nine month periods ended September 30, 2015 and September 30, 2014, respectively.

The effect of derivatives not designated as hedging instruments on the consolidated financial statements was as follows:



		Amount of Gain (Loss) Recognized in Income on Derivatives
Derivatives Not Designated as Hedging Instruments under ASC 815-20	Location of Gain (Loss) Recognized in Income on Derivatives	Quarter Ended September 30, 2015			Quarter Ended September 30, 2014			Nine Months Ended September 30, 2015			Nine Months Ended September 30, 2014
(In thousands)
Foreign currency forward contracts	Other income	$	(32,705	)	$	(35,175	)	$	(49,607	)	$	(24,405	)
Fuel swaps	Other income	(76		)	(220		)	(191		)	(1,157		)
		$	(32,781	)	$	(35,395	)	$	(49,798	)	$	(25,562	)

Credit Related Contingent Features

Our current interest rate derivative instruments may require us to post collateral if our Standard & Poor’s and Moody’s credit ratings remain below specified levels. Specifically, if on the fifth anniversary of entering into a derivative transaction or on any succeeding fifth-year anniversary our credit ratings for our senior unsecured debt were to be rated below BBB- by Standard & Poor’s and Baa3 by Moody’s, then each counterparty to such derivative transaction with whom we are in a net liability position that exceeds the applicable minimum call amount may demand that we post collateral in an amount equal to the net liability position. The amount of collateral required to be posted following such event will change each time our net liability position increases or decreases by more than the applicable minimum call amount. If our credit rating for our senior unsecured debt is subsequently equal to or above BBB- by Standard & Poor’s or Baa3 by Moody’s, then any collateral posted at such time will be released to us and we will no longer be required to post collateral unless we meet the collateral trigger requirement at the next fifth-year anniversary. Currently, our senior unsecured debt credit rating is BB+ with a stable outlook by Standard & Poor’s and Ba1 with a stable outlook by Moody’s. We currently have seven interest rate derivative hedges that have a term of at least five years. The aggregate fair values of all derivative instruments with such credit-related contingent features in net liability positions as of September 30, 2015 and December 31, 2014 were $93.8 million and $65.8 million, respectively, which do not include the impact of any such derivatives in net asset positions. The earliest that any of the seven interest rate derivative hedges will reach their fifth anniversary is November 2016. Therefore, as of September 30, 2015, we were not required to post collateral for any of our derivative transactions.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Concerning Forward-Looking Statements

The discussion under this caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this document 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 fourth quarter and full year of 2015 and our earnings and yield estimates for 2015 set forth under the heading "Outlook" below, expectations regarding the timing and results of our Double-Double Program and our plans with respect to share repurchases), business and industry prospects or future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking. Words such as "anticipate," "believe," "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 our Annual Report on Form 10-K for the year ended December 31, 2014 and, in particular, the risks discussed under the caption "Risk Factors" in Part I, Item 1A of that report.

All forward-looking statements made in this Quarterly Report on Form 10-Q speak only as of the date of this document. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

The discussion and analysis of our financial condition and results of operations has been organized to present the following:


•	a review of our financial presentation, including discussion of certain operational and financial metrics we utilize to assist us in managing our business;


•	a discussion of our results of operations for the quarter and nine months ended September 30, 2015 compared to the same periods in 2014;


•	a discussion of our business outlook, including our expectations for selected financial items for the fourth quarter and full year of 2015; and


•	a discussion of our liquidity and capital resources, including our future capital and contractual commitments and potential funding sources.

Critical Accounting Policies

Valuation of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets

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reducing our exposure to Latin America, refocusing on the brand’s core market of Spain and, consequently, reducing the size of Pullmantur’s fleet. This strategic change includes a decision to redeploy Pullmantur’s Empress to the Royal Caribbean International brand as well as a decision to cancel the intended transfer of the Majesty of the Seas to Pullmantur. As we previously disclosed, the planned growth of the Pullmantur fleet through the transfer of vessels into the brand has been the most significant assumption within Pullmantur's projected cash flows supporting the recoverability of the Pullmantur reporting unit’s goodwill and trademarks and trade names. Our decision to reduce the size of Pullmantur’s fleet significantly decreases the cash flow projections which have been the basis of our impairment analysis.

The combined impairment charge of $411.3 million related to Pullmantur’s goodwill, trademarks and trade names, vessels and aircraft was recognized in earnings during the quarter ended September 30, 2015 and is reported within Impairment of Pullmantur related assets within our consolidated statements of comprehensive income (loss). For further information on the fair value measurements used to estimate the fair value of these assets, refer to Note 10. Fair Value Measurements and Disclosures.

For a discussion of our critical accounting policies, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations within our Annual Report on Form 10-K for the year ended December 31, 2014.

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, Latin America and Asia 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

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•

Onboard and other revenues, which consist primarily of revenues from the sale of goods and/or services onboard our ships not included in passenger ticket prices, cancellation fees, sales of vacation protection insurance and pre- and post-cruise tours. Additionally, revenue related to Pullmantur’s travel agency network, land-based tours and air charter business to third parties are included in Onboard and other revenues through March 31, 2014, the date of the sale of Pullmantur's non-core businesses. Onboard and other revenues also includes revenues we receive from independent third party concessionaires that pay us a percentage of their revenues in exchange for the right to provide selected goods and/or services onboard our ships as well as revenues received for procurement and management related services we perform on behalf of our unconsolidated affiliates.

Cruise Operating Expenses

Our cruise operating expenses are comprised of the following:


•	Commissions, transportation and other expenses, which consist of those costs directly associated with passenger ticket revenues, including travel agent commissions, air and other transportation expenses, port costs that vary with passenger head counts and related credit card fees;

•

Onboard and other expenses, which consist of the direct costs associated with onboard and other revenues, including the costs of products sold onboard our ships, vacation protection insurance premiums, costs associated with pre- and post-cruise tours and related credit card fees as well as the minimal costs associated with concession revenues, as the costs are mostly incurred by third-party concessionaires and costs incurred for the procurement and management related services we perform on behalf of our unconsolidated affiliates;


•	Payroll and related expenses, which consist of costs for shipboard personnel (costs associated with our shoreside personnel are included in Marketing, selling and administrative expenses);

•Food expenses, which include food costs for both guests and crew;


•	Fuel expenses, which include fuel and related delivery 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 related insurance and entertainment. Additionally, costs associated with Pullmantur’s travel agency network, land-based tours and air charter business to third parties are included in Other operating expenses through March 31, 2014, the date of the sale of Pullmantur's non-core businesses.

We do not allocate payroll and related expenses, food expenses, fuel expenses or other operating expenses to the expense categories attributable to passenger ticket revenues or onboard and other revenues since they are incurred to provide the total cruise vacation experience.

Selected Operational and Financial Metrics

We utilize a variety of operational and financial metrics which are defined below to evaluate our performance and financial condition. As discussed in more detail herein, certain of these metrics are non-GAAP financial measures, 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. For the periods presented, these items included the impairment of the Pullmantur related assets, restructuring charges, other costs related to our profitability initiatives, the estimated impact of the divested Pullmantur non-core businesses for periods prior to the sales transaction, the loss recognized on the sale of Celebrity Century and the impact of the change in our voyage proration. The estimated impact of the divested Pullmantur non-core businesses was arrived at by adjusting the net income (loss) of these businesses for the ownership percentage we retained, as well as for intercompany transactions that are no longer eliminated in our consolidated statements of comprehensive income (loss) subsequent to the sales transaction.

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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 the periods prior to the sale of the Pullmantur non-core businesses, Net Cruise Costs excludes the estimated impact of these divested businesses. Net Cruise Costs also excludes initiative costs reported within Cruise operating expenses and Marketing, selling and administrative expenses, as well as the loss recognized on the sale of Celebrity Century included within Other Operating Expenses.

Net Revenues represent total revenues less commissions, transportation and other expenses and onboard and other expenses (each of which is described above under the Description of Certain Line Items heading). For the periods prior to the sale of the Pullmantur non-core businesses, we have presented Net Revenues excluding the estimated impact of these divested businesses.

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 the periods prior to the sale of the Pullmantur non-core businesses, Net Yields excludes the estimated impact of these divested businesses.

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 periods’ currency exchange rates had remained constant with the comparable prior periods’ rates, or on a “Constant Currency” basis.

It should be emphasized that Constant Currency is primarily used for comparing short-term changes and/or projections. Changes in guest sourcing and shifting the amount of purchases between currencies can change the impact of the purely currency-based fluctuations.

The use of certain significant non-GAAP measures, such as Net Yields, Net Cruise Costs and Net Cruise Costs Excluding Fuel, allows us to perform capacity and rate analysis to separate the impact of known capacity changes from other less predictable changes which affect our business. We believe these non-GAAP measures provide expanded insight to measure revenue and cost performance in addition to the standard United States GAAP based financial measures. There are no specific rules or regulations for determining non-GAAP and Constant Currency measures, and as such, there exists the possibility that they may not be comparable to other companies within the industry.

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Results of Operations

Summary

Our net income and Adjusted Net Income for the third quarter of 2015 was $228.8 million and $628.1 million, or $1.03 and $2.84 per share on a diluted basis, as compared to net income and Adjusted Net Income of $490.2 million and $492.9 million, or $2.19 and $2.20 per share on a diluted basis, respectively, for the third quarter of 2014.

Our net income and Adjusted Net Income for the nine months ended September 30, 2015 was $459.0 million and $858.3 million, or $2.08 and $3.88 per share on a diluted basis, as compared to net income and Adjusted Net Income of $654.4 million and $685.7 million, or $2.93 and $3.07 per share on a diluted basis, respectively, for the nine months ended September 30, 2014.

Significant items for the quarter and nine months ended September 30, 2015 include:


•	In September 2015, we recognized an impairment charge of $399.3 million, net of a $12.0 million deferred tax benefit, to write down Pullmantur's goodwill to its implied fair value and to write down trademarks and trade names and certain long-lived assets to their fair value. Refer to Note 3. Impairment of Pullmantur Related Assets for further discussion.

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The effect of changes in foreign currency exchange rates related to our passenger ticket and onboard and other revenue transactions and cruise operating expenses denominated in currencies other than the United States dollar, resulted in a decrease to total revenues of $126.5 million and $302.7 million for the quarter and nine months ended September 30, 2015, respectively, as compared to the same period in 2014 and a decrease to cruise operating expenses of $50.7 million and $131.5 million for the quarter and nine months ended September 30, 2015, respectively, as compared to the same period in 2014;


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